Building a Profitable Engineer

Engineer-to-Order Business
ORACLE WHITE PAPER | JANUARY 2016
Executive Summary

In today’s product manufacturing sector, highly specialized engineer

engineer-to-order
order (ETO) projects are more
challenging than ever.

Manufacturers are under pressure to turnaround products and installation services in a shorter amount
time, margins are eroding and the current global economic environment leaves plenty of room for
market uncertainty. Even a small delay in delivery could cost manufacturers thousands – or even
millions of dollars. These late penalties
nalties impact the bottom line directly.

Manufacturers need visibility across their entire project portfolio so they can make changes quickly,
collaborate with stakeholders easily, understand where they are in the process, manage resources so
they’re ready when needed, and ultimately deliver the product on time and on budget. They also must
be able to communicate with financial leaders about a project’s progress and setbacks to allow them to
adjust for expenses and recognize revenue.

Engineer-To-Order – An
n Overview
Engineer-to-order
order manufacturing is a known practice in the industry where the manufacturer produces or assembles
one unit of a unique product. Every order is a project. The ETO process spans from the bidding phase until delivery
and even installation,
lation, and is often followed by a maintenance phase.

Characteristics of an ETO project typically include high customization with a unique bill of materials (BOM), small
volumes, lead times spanning months or years, and pricing determined by estimates, quo
quotes
tes and bids. These
complex projects often require highly skilled labor and commonly undergo many changes, even during the
manufacturing phase. Continuous communication between the manufacturer, customer and sub
sub-contractors
contractors is a
must. Comprehensive installation
lation services are often required on site.

Companies engaged in ETO manufacturing fall within a wide range of categories, including:

» Engine, turbine and power transmission equipment manufacturing

» Industrial machinery manufacturing
» Ventilation, heating, air-conditioning
conditioning and commercial refrigeration equipment manufacturing
» Oil and gas equipment
» Ship and boat building and repairing
» Communications equipment
» Construction, mining and materials handling machinery equipment

ETO Processes and Capabilities

The project management lifecycle of ETO projects has four critical steps. Throughout these steps, manufacturers
need to be able to provide the best, most complete information available to minimize risk and keep the project on

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schedule and on budget. However,
r, companies face many challenges in acquiring timely and accurate information in
each phase.

Bid management & project initiation

Project managers typically initiate bidding and project initiation phases independently. The pressure is on to deliver
the bid
d as soon as possible. Any estimates of the company’s ability to deliver might be based solely on a few critical
components due to compressed timelines to deliver the bid. Once the project is won, there are no assurances that
the project is doable within the timeframe allotted.

Design & manufacturing

During the build phase of the project, project managers struggle to determine the impact that any parts delays will
have on the overall project schedule and whether or not they can compensate for that in othe
otherr areas of the project.
Often, by the time they’re able to find out, it’s too late to react. Project leaders need the ability to perform what-if
what
scenarios to see the impact of changes. In addition, change and scope management is a difficult process that, ifi not
management properly, can negatively impact costs, margins, schedules and customer satisfaction.

Delivery & installation

In ETO projects, capital can be tied up for months with limited capability to predict or manage the schedule. If project
planners had better visibility into the processes that support the project, they could more accurately move and
replace components, optimize revenue and be able to better shape and manage cash flow.

Close out & lessons learned

Lessons learned from past projects can
n provide insights on how to improve. Documentation throughout the entire
ETO process can help manufacturers learn from past mistakes, improve processes to reduce the risk of repeat
offenses, and minimize the risk of losing competitive advantage. With larg
large
e quantities of data being generated each
day in ETO projects, input for post-change
change analysis and the generation of quantitative lessons learned are “free.”
Automating the lessons learned through quantifiable data is a way for management and project team m
members
embers to
expose and visualize pitfalls and difficult project stretches based on prior data rather than an individual’s experience.

Trends in ETO
Industry demand has shifted away from specific items of plant and toward more turnkey contracts and through-life
through
solutions. Likewise, ETO companies now provide turnkey solutions and engage in build
build-operate-transfer
transfer and build-
build
operate-own contracts.

The volatile nature of markets, coupled with the opportunity to source items from low
low-cost
cost countries, has encouraged
many ETO companies to focus on higher value--add processes, including design, systems
stems integration and services.

Some of the most successful industrial goods manufacturers are becoming world
world-class
class service providers—a
providers
strategy that can significantly increase revenue and, to an even larger extent, profit. Across a broad cross section of
industrial companies, services contributed 22% of total revenues and had an average gross margin of 39%, which is
significantly higher than margins on most manufactured products alone (27%), according to Bain & Company. On
average, the service business of these companies grew by 9% annually between 2010 and 2013, nearly double new
equipment sales (5%).

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Competitive Advantage
Competitive advantage is achieved through combining ser
services and products to provide high-value
value “integrated
solutions.” Leading ETO companies garner competitive advantage through their product and delivery performance,
capital, and low operating and lifecycle costs. Customers will consider suppliers’ performan
performance
ce on previous contracts
particularly with respect to meeting delivery and cost targets.

Competitive Killers
Delivery performance and lifecycle costs in an ETO company can be sabotaged by a lack of communication,
oversight and transparency, which leads to waste. A study of ETO companies identifies four common causes of
waste:

1. Overproduction
In multi-project
project management, lack of oversight and coordination across projects may lead to overproduction.
Production orders can exceed the real needed quantity becaus
because of a pre-defined
defined margin of safety set by the project
manager for most projects. Highly specialized, small volume ETO project
projects require a smaller margin of safety. What’s
more, when production orders start early to ensure they’re delivered on time, it also causes overproduction because
the goods aren’t required at that time.

2. Waiting
Searching or waiting for purchased parts to arrive, due to shipping snafus, changes in materials or unplanned
changes from the customer, negatively affects delivery performance
performance.

3. Rework and Failures

Lapses in transparency and communication between customers, partners and the manufacturer, inevitably lead to
changes in design and therefore the need for rework.

4. Unnecessary Inventory
ETO companies risk wasting space and capital when they have a high volume of work in progress. Unnecessary
inventory increases the working capital and, consequently, negatively impacts the cash
cash-flow
flow of a company.
Production should be in sync with the date when it is required at the site.

Building a Profitable
rofitable ETO Company

Determine optimal bid prices

Before drafting and presenting a bid, a company must evaluate the revenue potential of the project, the type of
contract to enter into, and its own capacity for executing the project. Each of these areas iis
s heavily impacted by
uncertainty. To create the best-possible
possible bid, it is important to link cost, schedule and risk.

Companies must determine their own confidence levels for a project’s success and develop an objective
contingency plan to account for cost and schedule uncertainty, as well as analyze the cost effectiveness of risk
response plans.

As part of the bid delivery, liability and risk exposure should drive the decision
decision-making
making process about the type of
contract to enter into—both
both between customer a
and ETO company and ETO company and subcontractors.

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A bid will include information on product performance, price, delivery and commercial terms. Typically, 85%
85%––90% of
cost is committed at the bidding stage. Research has revealed that the bidding success rat
ratee is often less than 30%,
in some case significantly below 30%, according to a report by the International Journal of Logistics. Some bids for
large, complex projects can cost several million U.S. dollars. Therefore, it is important to identify the bids that
th are
most promising. This can be achieved with a structured opportunity portfolio management process. Factors that
impact the decision-making
making process include the customer, process, technical contract, financing, planning and
country of origin.

Better estimate delivery dates

Delivery dates will become part of the contract in the sales phase, which is naturally characterized by a lot of of
uncertainty. Therefore, it’s crucial to manage them with a proper understanding of the associated risk and the
resulting
g impact. Schedules tend to be underestimated, since there is a feeling that if quoted too high, the project or
the tender will simply be snapped up by another company. Risk
Risk-based
based planning and scheduling can help since it
leverages the predictive power of simulation models to determine delivery dates associated with probabilities.

Reduce lead times

Customers are demanding shorter lead times, and the ability to provide them can differentiate an ETO company
from the competition. Lead time can be cut by red
reducing non-value-added
added activities, eliminating waste, and by
improving the processing of value-added
added activities. Synchronizing tasks can also dramatically reduce lead times.
Synchronization requires leveling the excess capacity and coordinating starting and ending times. It also reduces
inventory and increases resource utilization and throughput.

Critical path management (CPM) scheduling can provide the synchronization that is required for ETO projects and
serve as a central project control tool to show act
activities, resources, milestones and dependencies.

Increase agility in managing change orders

Although stakeholders and customers are involved in extensive ETO planning at an early stage, changes are
inevitable, and the final design is often not reached unti
untill the physical product is completed. When a change occurs in
the project execution stage, miscommunication can generate significant costs and delays.

Engineering changes have been found to account for 5%

5%-15%
15% of a project budget, which is the process of change
cha
itself and not the incurred cost of the physical change because changes often require significant administrative
effort. What’s more, change may lead to scheduling problems and even legal disputes between contract participants.

The number of changes can

n increase due to the duration of project, number of sub
sub-supplier
supplier layers, culture,
regulations, immature technology, lessons learned and interpretation of contracts and decisions. Proper change
management is one of the cornerstones of effective claim manag
management.

Ensure timely communication with clients and suppliers

Sharing knowledge and information with all stakeholders and involved parties is fundamental to all ETO projects.
Organizations that communicate effectively have more successful projects, accord
according
ing to a study by the Project
Management Institute.

Stakeholders need to share the rationale behind their decisions and document insights and conclusions drawn from
discussions. The information then must be aggregated to a distributed team.

As often mandated
ted by contract requirements, if the ETO company finds conflicts, errors or omissions, they are
required to notify the customer or the customer’s representative to seek clarification or interpretation. Such inquiries

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and their responses need to be documented
ed in the project records, ideally in context to other project artifacts like
meeting minutes, change requests, issues, risk or schedule.

The Consequences of Failed Projects

rojects
For companies involved with customer-specific
specific ETO projects, delivering these proje
projects
cts on time, on budget and within
scope is a business imperative and a key competitive differentiator. If ETO projects are failing, this can have a
significant impact on overall business results.

For example, ABB, the world's largest maker of power transfo

transformers,
rmers, issued a profit warning in the first quarter of
2014, saying its fourth-quarter
quarter results would be impacted by $260 million in charges for delays and operational
issues in its Power Systems division.
http://wbponline.com/Articles/View/24266/abb-q4-profit-to--be-hurt-by-260m-in-charges

Siemens announced in May 2014 that its Q2 energy sector profits dropped 5
54%
4% year over year largely due to project
charges for two high-voltage
voltage direct current (HVDC) transmission projects in Canada. Higher
Higher-than-planned
planned costs for
construction services were partly to blame, and project delays resulted in contract penalties.
http://www.reuters.com/article/2014/05/07/siemens-results
results-idUSF9N0NT02S20140507
http://seekingalpha.com/article/2200763-siemens-aktiengesellschafts
aktiengesellschafts-si-ceo-josef-kaeser-on-q2-2014-results-earnings-call-
transcript?part=single

Improve Delivery
elivery Capabilities with Primavera’s Engineer-To-Order Solution
Primavera’s Engineer-To-Order enterprise solution addresses the challenges of the ETO process.

Optimal bid price

Companies use Primavera’s ETO solution, including a full lifecycle risk analytics solution integrating cost
co and
schedule risk management, to create
e the best possible bid. Primavera’s ETO solution provides a comprehensive
means of determining confidence levels for project success together with quick and easy techniques for determining
contingency and risk response
ponse plans. These combined outputs form the basis of an industry standard, risk
risk-adjusted
adjusted
schedule.

Delivery dates
Primavera’s solution helps ETO organizations identify key risk drivers and pinpoint the task or risk events that may
prevent their schedules from performing as expected. It also provides capabilities to compare scenarios and
determine the cost/benefit ratio of mitigation plans, so mission
mission-critical projects come in on time.

Lead times
With Primavera’s solution, lead times can be reduced by impr
improving
oving project execution, increasing visibility and
gaining efficiency through automating processes.

» Project execution is improved by reducing non

non-productive time of critical resources through what-if
if analysis and
resource leveling.
» Visibility is increased with real-time
time availability of project status, burn
burn-down,
down, resource management, issues, risks,
resolutions and best practices.
» Efficiency is gained through process automation (workflow), including automated, system
system-enabled
enabled process best
practices (lean processes), real-time
time involvement of subject matter experts to review and approve changes,
quality check completion and audit status.

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Change orders
Change requests, change orders, daily progress reports, schedule and documents are the fabric that binds a project
pro
together. The ability to quickly record, access and review these elements often determines the successful outcome
of a project.

With Primavera’s solution, all project information and changes are stored in a single, secure place, enabling visibility
into
nto any potential issues or delays via business processes and alerts. The system also includes a robust document
management system with standard capabilities like search, versioning, check in/out, permission control and mark-up
mark
capabilities for drawings.

Timely, correct information from clients and suppliers

With Primavera’s solution, ETO companies can maximize control of the communication process, both to the
customers and to the suppliers, and mitigate the potential for inconsistent and late information. The platform allows
formal communication through structured, auditable and traceable processes.

Success Story
Manufacturers of fire protection, heating and cooling, ventilation and security systems all share something in
common. While the products they manufacture
nufacture are not unique, they all must customize how the products are
installed and integrated to meet the needs of each building owner and contractor.

The process of delivery and installation is very repeatable, yet many of these manufacturers lack consistency.
cons
Standardized processes will help them monitor activities, track deliverables and measure milestones that must be
met each and every time. Standardized processes will ensure on
on-time
time delivery when it comes to mobilizing
equipment crews on site and coordinating with other work being done on the premises.

Complicating matters further, these manufactures have many installation projects going on simultaneously, and each
of them has to deliver when they say they’re going to deliver. So promise dates are key, and in many cases,
companies will impose penalties for late delivery or for causing disruption to other ecosystems in the overall
construction process.

A global provider of heating, cooling and ventilation systems for commercial buildings was facing these challenges,
along with a host of contracting, business and financial inconsistencies. First, it used non
non-standard,
standard, manual
forecasting tools, which left a wide estimating variance for similar projects and no feedback process to challenge the
estimates.. Manual processes also left the manufacturer unable to properly schedule and sequence tasks on
projects or measure labor time per task. What’s more, subcontractor bidding tools were not integrated into its
system, which further slowed projects.

The manufacturer chose Primavera’s solution to bring consistency and transparency to all of its installation projects.
Today, all contracts are available in one place. The RFP process is automated and tracked by project. Submittals,
RFIs, change orders and purchase
e orders are all standardized. A cost worksheet captures actuals and tracks
payments. Correspondence, contract documents, bonds, insurance and daily reports are located in one central
repository for easy tracking.

Schedules and task management have also been automated. Project plans, schedules and monthly forecasts are
automatically created. Project managers approve costs before they hit the project financials. PMs also have a
complete, consistent view of project health from any web
web-enabled device.

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Resources
ces are better managed now that project managers have the ability to track resource assignments for all
projects. PMs have real-time
time access to resource availability, and can even communicate specific tasks to resources,
ensuring that the best people are available
ailable for critical projects, and the right skill set is available at the right time for
the right job. If conflicts arise, centralized resource planning allows project managers to communicate with one
another to find a resolution.

Manual reports have been

n replaced by project analytics. A role
role-based
based dashboard brings each project’s progress into
view. Information rolls up from project to strategic business units, and users can drill down into data for further
analysis.

The result: The manufacturer has reduced

duced average project delivery time (lead time) by 7%, increased project
managers’ productivity by 11% and a project team member’s productivity by 5%. In addition, annual claims
decreased by 10%. Integrated tools have improved the accuracy of cost and reve
revenue,
nue, improved pipeline and
backlog visibility and now provide a clearer scope and expectations for project costs.

Conclusion
ETO projects can yield great rewards, but they also come with serious risks. Primavera’s solution helps
manufacturers anticipate setbacks,
tbacks, develop workaround scenarios, avoid delays and penalties, and improve
communication. It also helps to reduce waste in the ETO project lifecycle.

Primavera addresses the process flow of the manufacturing process and delivers a solution for every ste
step -- from bid
management or project initiation, through design and engineering, manufacturing, delivery and installation, to billing
and revenue – all to increase customer satisfaction by delivering projects on time and on budget.

In highly specialized manufacturing,

ufacturing, customer satisfaction is key. Oracle
Oracle’s Primavera Engineer-To-Order
Order Solution
allows manufacturers to build tighter relationships through open transparency and repeatable success.

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ORDER BUSINESS

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BUILDING A PROFITABL
PROFITABLE ENGINEER-TO-ORDER BUSINESS
January 2016