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Over the years, ERP systems have been continually developed to meet the needs of most types of manufacturing; from MTS (Make-to-stock), through MTO (Make-to-order) to ETO (Engineer-to-order), but one area, ATO (Assemble-to-order) barely gets a mention. This may be because there are fewer ATO companies, or because such companies have been prepared to work around the problems that most standard ERP packages cause them. However, some companies that previously have not adopted ATO ways of working are starting to see the benefits of doing so; and perhaps this is an opportune time to consider their particular needs and to consider what good ERP systems need to offer them.

ATO can reduce costs for MTS companies by reducing finished goods inventories but, for MTO companies, the big benefit is usually a reduction in production lead times that, in turn, leads to a reduction in delivery lead times. In some industries, delivery lead time reductions of a few days might not be significant but, for others, they can be game changing. One manufacturer of PCs and servers was able to offer next-day dispatch of customer orders without having to hold stocks of the large range of products that they offered (PCs may be relatively standardized but their servers were highly configurable).

Companies in industries other than electronics can benefit from being able to offer shorter delivery lead times without holding extensive, and expensive, stocks of product or raw materials and, of course, in many industries sub-assemblies take up less storage space than the products that they become, and that can be an additional saving. Imagine a company that makes bedroom furniture such as wardrobes which can, in fact be viewed as being large wooden containers full of air. Anyone who has bought ‘flat-pack’ furniture knows the difference, in terms of volume, between the panels and the finished items.

Furniture, in fact, frequently lends itself to ATO operations because, taking wardrobes as an example many companies introduce a new range simply by adding new doors to an existing carcase (top, sides base etc.) so there is a high degree of commonality at that level, whilst, if looking at another example, that of office filing cabinets, the drawers for 2, 3 and 4 drawer cabinets will be identical.

Key to a successful ATO operation is knowing the best place on the bill of material to hold stocks, as holding at every level would be wasteful and too expensive for most companies. Exceptions would be companies that have very low materials costs or very high turnover of items and can therefore use kanbans at every level. The most obvious place to hold stocks is at the common sub-assembly level; i.e. the point immediately before assemblies become unique (for example, a filing cabinet drawer is a common sub-assembly until it is put into a filing cabinet). That ensures maximum flexibility but there is an additional benefit: because demand for common sub-assemblies will be higher than demand for the individual products that they go into, it is likely that demand will, for them, be more stable and easier to predict. For example; in the previous example of a company manufacturing wardrobes, it might well be that demand at the ‘carcase’ level (i.e. excluding doors) leads to that being the best storage level rather than at the individual panel level. Inevitable, there will be items that are best stocked at the purchased item level but these will generally be few (handles, perhaps).

When companies want to offer short delivery lead times whilst simultaneously minimizing stocks at every level (raw materials, work in progress and finished items), they usually need to drive purchasing and, indeed, sub-assembly by using demand forecasts. Good ERP systems help forecasting in several ways. At the simplest level, they provide historical usage data, although this is only really useful if demand is relatively stable or growth is predictable. As previously mentioned, demand can be often be more stable at the sub-assembly level and at the raw material level (meaning that these are the levels where ATO demand should be calculated) but, when demand fluctuates, ERP can still help through the use of ‘planning bills of material’.

Planning bills of material allow all options on a product to be included in the bill. Along with their predicted percentage usage. A useful example would be a planning bill for an automobile. Let’s imagine that an automobile has:

3 choices of bodyshell (2-door, 4-door and station wagon),
3 choices of engine size (1 litre, 1.5 litre and 2 litre),
2 choices of gearbox (manual or automatic),
along with other options, such as trim levels etc.

The company will probably not feel confident in forecasting how many station wagons, with 1.5 litre engines and automatic gearboxes it is likely to sell in any particular week, but they may feel able to forecast to overall sales of, say 10,000 automobiles, and experience may tell them that 15% of sales are of the 2-door, 20% are of the station wagon and 65% are of the 4-door. And that 20% of sales use the 1-litre engine, 45% use the 1.5-litre engine, and 35% use the 2-litre engine. So these percentages are entered to the planning bill and, when the weekly forecast of 10,000 automobiles is entered, MRP (Materials Requirements Planning) will recognize a need for:

10,000 x 15% = 1,500 2-door bodyshells,
10,000 x 20% = 2,000 station wagon bodyshells,
10,000 x 65% = 6,500 4-door bodyshells, etc.

It doesn’t matter, from a provisioning point of view, which options go together for a particular car. It is only important that the options are available, in stock, when they are needed and, although companies will want to hold small buffer stocks to cope with fluctuations, planning bills can be a very useful option when having to buy materials (and manufacture sub-assemblies) against a forecast.

When stocking sub-assemblies, it is essential for the target quantities to be reviewed frequently in case typical demand changes over time but, on a day-to-day basis, as finished product is assembled, and sub-assemblies consumed, the system will generate replenishment orders. This is, in effect, a version of kanbans that has been tuned for an ATO environment.

This article has to end with a warning. It discusses functionality that many or most ATO manufacturers need; but that is not to say that it describes functionality that many or most ERP systems actually have. ATO companies, indeed all companies, need to review and evaluate competing systems very carefully and remember that no functionality exists unless the suppler guarantees in writing that it does. Verbal claims such as, 'Our system does all that you need' are meaningless; both in the real world and in the courtroom.

Have the challenges of implementing ERP changed?

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Are you interested in ERP at small companies?

Are you interested in ERP at small companies?

Is Assemble-to order (ATO) and option for you?

Has the challenge of implementing ERP systems changed?