For engineer-to-order businesses that manufacture products designed by their customers, the traditional CPQ process does not work. By its very nature, the CPQ process collects a set of pre-defined product options or features (Configure), then sums up the prices for each item selected (Price), and then presents the final pricing to the customer (Quote).
Traditional CPQ applications presume that every possible option or feature for a new product is already invented, costed, and priced. In an engineer-to-order world, this presumption falls apart. Successfully quoting new business requires inventing, costing, and pricing the product before a quote is sent to the customer.
The Cost-Based Quoting Process
Cost-Based Quoting (CBQ) is a process that differs from CPQ by supporting three phases: the invention of the product, full costing of the product, pricing of the product, and presenting of the quote. In addition, the CBQ process is accompanied by an overarching management and control system that provides workflow, approval, oversight, and analysis of the process. Ultimately, a properly executed CBQ process brings consistency, accuracy, and speed to the effort.
In an engineer-to-order business, inventing the product starts when a customer presents a concept for a new product. The product details are shared by the customer through drawings, specifications, or other descriptive documents, and the relevant data is captured to move forward. The compiled customer information is structured and passed to product engineers who establish the product specifications, bill-of-materials, and process routing for the new product.
The next phase of activities focuses on calculating product cost and price answers. The associated costs and margins are typically calculated in three steps to determine the final selling price to the customer:
1. The material, production labor, and overhead costs are computed.
2. Specific equipment, tooling, engineering, design, or other required non-recurring costs are summed, amortized, and added.
3. Freight and distribution costs, SG&A coverages, royalties, required profit margin, and other monies are assigned to the product.
Lastly, the price is approved and presented to the customer in the form of a completed quotation. Along the way, the internal team provides the necessary approvals, analyzes the quote performance, and monitors the opportunities and risks of all active quotes. If needed, quote details can be automatically shared with downstream systems and processes.
The three phases of CBQ described below – inventing the product, calculating costs and profits, and sharing and analyzing results – are the road map to improved profits for engineer-to-order and custom manufacturing companies challenged by an ineffective quoting process.
Phase 1: Invent the Product
Collecting product data from customers is unique for every company and industry, with information coming from spreadsheets, emails, CAD drawings, CRM systems, PLM tools, or any combination. Streamlined data collection process with options to collect, organize, and validate the data are needed.
Next, the list of materials is needed for the invented product. To create the new bill-of-materials, two things are required – access to historical BOM information and a straightforward way to add new materials and pricing. After the new BOM is established, the production routings are defined with similar capabilities to browse for plants and processes, choose from routings of similar products, or manually enter the process steps, labor rates, and machine times.
Engineer-to-order companies who use product lifecycle management (PLM) systems to often struggle to invent BOMs and process routings. They are limited because PLM rules are too structured and require a level of detail that is often not available during the quoting process. As an example, PLM applications often insist that all raw materials or purchased components used in a new product must already exist in the system with a valid purchase price. Or, the new product must have a valid finished good ID, documented ECO or ECN process for multiple versions, or even complete product master data in the ERP system. While these requirements and compliance processes are certainly relevant – and required – for production, they hinder the flexibility needed to generate quotes when the products or their materials do not exist.
Phase 2: Calculate Costs + Prices
Determining which cost center and machine rate data to use when costing the process routing often depends on the company structure. For companies with subcontractors, just substitute the calculated rates with the agreed contract rates to calculate the routing cost. Cost comparisons between production locations or blended production costs from multiple locations are also available options when costing the routing.
The centralized costing rules include calculating costs for freight, distribution, SG&A, cost of capital, and any other relevant costs. Like materials and routings, users have the option to override default values for each cost category to both drive consistent costing processes and provide the flexibility required to generate accurate, realistic quotes.
With the costs calculated, apply the desired profit margins to calculate recommended selling prices and analyze different scenarios for the quote – like order quantity breaks, payment terms, and pricing conditions – to determine the true profits.
Phase 3: Share Quotes + Analyze Results
Time to transform to Cost-Based Quoting
Companies that build products based on unique customer requirements need consistent, efficient, thorough quoting processes that eliminate under- or over-quoting, reduces errors, and provides one place to manage materials and routings, calculate costs, apply margins, and analyze results. And one thing is certain, traditional CPQ applications don’t fit the bill.
by Matthew Smith