man wearing orange hard hat

ETO vs CTO

Lionel Grealou Modularity Strategy 4 minutes

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Image Credit: PEXEL

Product configuration typically covers how products are architected, maturing, changed, and structured for optimum reuse and economies of scale and scope. It is core to manufacturing organizations as they define their product portfolio, with associated product development, sourcing and go-to-market strategies.

In turn, these strategies link to how OEMs engage with their supplier chains and their customers, especially in defining and managing:

  • Product and component standardisation
  • Generic product structures and BOMs
  • Standard parts and modules
  • Standards products and variants

As customers place order products, they typically select or identify parameters to meet their requirements. Based on product complexity, there is typically a decoupling point between standard product configuration (specification created during the development process, then filtered per customer selection, a.k.a. configuration-to-order) and personalisation (customer order specification created as part of the variant specification process, a.k.a. engineering-to-order).

The physical nature of the product typically determines whether an organization is ETO or CTO driven.

Engineer-to-order (ETO)

On the one hand, ETO refers to highly customized products tailored for a given customer order; such products are typically unique and bespoke to specific requirements. Such requirements directly feed into the design process which is to be approved by the customer to trigger purchase, sourcing, build and assembly of the product.

This process is often time consuming and costly as it relies on unique, hence not scalable, delivery methods and models. ETO strategies are often dedicated to unique or small series of customised products. They might yet align to a certain level of standard components and norms for compliance or serviceability.

ETO companies typically combine a mix of standards, bespoke or customized components based on customer driven requirements. ETO typically requires more complex product rules than CTO as involves the creation of new part numbers either at the sub-assembly or end part levels to meet customer-driven specification or one-off variations.

Configure-to-order (CTO)

On the other hand, CTO refers to assembled or kitted products on receipt of the sales order; such products include assemble-to-order approaches with product built based on customer specifications based on standards components and module variations, assembled from a stock or catalogue of existing subcomponents. CTO is similar to make-to-order (MTO), an approach in which pre-defined production configuration starts once a customer order is received.

CTO relies on ability to translate features and options into a BOM; this is the foundation for a product and product family configurator. Based on complexity, the product configurator might be more or less sophisticated, with the ability to capture complex BOM business rules—generating multi-level BOM views, with both engineering and manufacturing / production BOM views, governed by a product configurator.

Product configuration engines typically integrate with ERP, PLM and CRM platforms, in order to align multiple perspectives and BOM views across the enterprise (engineering, manufacturing and assembly, sales and marking views):

  • Product configuration: compatibility rules to drive product definition and data alignment (across BOM, CAD models, documents, and drawings, extending from requirements to product ranges, manufacturing BOM process simulation and planning) (typically mastered in PLM platforms with core elements structured based on product engineering).
  • Manufacturing execution configuration: compatibility rules to drive manufacturing processes, scheduling, and resource allocation, combining inventory and logistic management (typically in ERP and / or MRP systems).
  • Sales configuration: compatibility rules to enable pricing, with the creation of quotes and customer orders (typically leveraging customer data from CRM, and order management capabilities on the ERP side).

Assemble-to-order (ATO)

ATO can be seen as a variation of CTO, with predefined standards and modules, with product assembly only initiating once the customer order is received. ATO is a common approach for small series of complex and / or premium products; whereas CTO is common for mass-produced product lines.

Both CTO and ATO approaches typically refer to product modularity and advanced configuration management.

Across several manufacturing sectors (such as automotive, aerospace and defence, shipbuilding, etc.), product configuration strategies combine both modularity (CTO / ATO) and personalization options based customer requirements (ETO).

Transitioning from ETO to CTO (and ATO)

Introducing product modularity is a typical driver for organizations to transition from a ETO to CTO strategy, especially as they aim to:

  • Enhance product portfolio strategy
  • Manage growing product complexity
  • Develop a robust platform for product configuration (and change management)
  • Improve / increase reuse across component, resources, data, etc.
  • Reduce product development time to market
  • Improve operational efficiency, through economies of scale and scope
  • Consolidate supply chain and sourcing strategies
  • Focus on product innovation and new technologies
  • Drive design for manufacture and design for assembly
  • Improve change management and the ability to penetrate new markets
  • Transform from a project-driven to product-driven organization

Transforming towards more product modularity implies moving from ETO to CTO: it requires building a product model that clearly represents both functionalities and interactions / interfaces. This can initially be drafted on “paper” before deciding on specific enterprise apps; organizations often wrongly assume that it is first about adopting a configuration tools that will bring the required answers (…).

Organizations must identify functions representing value options for customers, and implement improvements to streamline their products family toward a modular structure without compromising the required flexibility to make customized options when required. This will of course vary based on the product, expected volume and target market segment.

It is important to assess previous ETO customisation requirements to identify and select standard components, including candidates for modularization from both past options and future predicted customizations and evolutions (e.g. based on foreseen new technologies, forewarned legislation changes, etc.).

Furthermore, for OEMs to gain and retain competitive advantage, they must consider modularity based on an evolutionary product strategy, with the view to continuously optimize modularity based on increasing reuse, usage frequency, baseline, flexibility, physical product alignment, sourcing strategies, obsolescence, etc.

What are your thoughts?


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About the Author

Lionel Grealou

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Lio is independent consultant and founder with Xlifecycle Ltd—driving business transformation and helping organizations make the most from their digital enterprise strategies and manage the 'Lifecycle of Things' across PLM, MES, ERP, IOT, SCM platforms.

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