Engineer to Order (ETO) for NetSuite ERP: How to Take Your Rev Rec to The Next Level

By: Athen Bozoglu

How do we define an engineer to order business?

Let’s dive into fundamentals here. At its core, engineer to order is a type of manufacturing process where the product is designed, engineered and finished after the order has been received. The product itself is made according to specifications given by the client making the order, and requires many complex parts and labor-intensive processes that can be difficult to predict and even more difficult to manage.

Many engineer-to-order businesses, such as custom machine builders, construction companies and system integrators face common challenges when faced with ERP selection and implementation. At a surface level, ETO business models are similar to more common “fixed-bid project” models – however, engineering to order comes with complex requirements that can prove challenging for most ERP systems.

The 7 most common struggles of an ETO business are as follows:

  1. Miscommunication between your project management and financial teams can often lead to over-recognized revenue mid-way through a project – causing unnecessary backtracking near the end
  2. This can also lead to late invoicing when the finance team is unaware of a milestone completion
  3. Managing procurement for new parts and aligning that with current inventory
  4. Dealing with inventory build-up and over-procurement as Project Managers purchase in mass volume to reduce unit cost for their project
  5. Sub-optimal uses of global skilled resources due to intercompany complications
  6. Loss of Cost Control due to lack of granularity in budget vs actuals cost and multiple estimates at completion revisions
  7. Loss of inventory item required for project, resulting in double ordering

Revenue Recognition

Let’s talk about revenue recognition. The cost structure of an ETO project is complex, in that it combines both hardware/procurement and labor. Additionally, you have to factor in that the bill-of-material (BOM)  needed for a project is difficult to estimate in the early stages of the project (and can vary drastically over the course).
 
This can then have deep implications on how the revenue is recognized. At this point, the “cost-to-cost” method must be used when considering the most up-to-date estimate of the cost at completion (EAC).

This creates a tight coupling between procure-to-pay, order-to-cash and project management processes. In order to get full visibility across all these processes, your various teams will have to closely collaborate and have the right tools to centralize and update their information for streamlined communication throughout the company during the length of the project.

Inventory and Manufacturing

Businesses that handle engineer-to-order tend to be specialized towards a highly targeted industry need. Engineering-to-Order companies tends to be highly specialized in their area of expertise. So, although their deliverables are purpose-built for each customer, they tend to make heavy use of standard components. It is quite usual to procure or manufacture the most common components and store them in inventory to reduce project lead-time and to enable procurement and manufacturing economy of scale.

Although most ERP support inventory management, manufacturing process and project managements, these business processes typically lives in silos and are not connected to each other.

So, the issue becomes: How do I consolidate my inventory data for revenue recognition?

Before we think of an answer, here is another consideration:

The process of managing inventory with real-time procurement during the assembly of a part is not necessarily supported by most ERP systems. In terms of inventory management, manufacturing processes and business processes, each one of these will live in its own disparate silo.

Scale (Global Operations)

Most engineering-to-order organizations conduct business and operate on a global scale. To optimize labor and leverage available skills across your enterprise, many companies will look to acquire engineers and technicians across multiple locations and countries to collaborate on the same project(s). That means two things – 

  1. Design and assembly might be based in separate locations 
  2. Standard components might be sourced from various warehouses spread across multiple countries.

It is crucial that your ERP supports a seamless transfer of labor and components across the multiple locations and subsidiaries where your teams are based, all while adhering to different local regulations and without adding extra work to your finance team.

What it all comes down to…. (Coupling of Multiple Processes)

Separately, each business process of engineer-to-order is typically well covered by most ERP systems. However, most ERPs do not (or at least not without heavy customizations and workarounds) support the mix-and-match of the many processes mentioned above within the same project. And that’s where you run into a major struggle.

ETO companies have strong particularities that require a tight coupling of multiple processes and departmental data. For example, here is a high-level breakdown:

Coupling required between business sub-processes such as:

 Procure-to-Pay

 Rev. Rec.

 Billing

 Intercompany

 Manufacturing

 Inventory

Coupling required between generally disconnected teams such as:

 Finances

 Engineering.

 Procurement

 Operations

 Etc. (Differs depending on the ETO business and possible specialties)

Now, let’s look at the solution:

The Next-Gen Rev Rec Solution for
Engineer-to-Order

 

A Combined NetSuite / OpenAir ETO Foundation

In order to break the silos that are slowing down productivity for your engineer-to-order business, our team at Gurus leverage NetSuite’s dynamic ERP with OpenAir as a support foundation.

The key to handling the multi-faceted complexities of running an ETO business lies in enabling strong collaboration between all departments involved in the delivery of a given project.

Let’s start with project managers and OpenAir’s role in this combined solution.

OpenAir’s powerful and feature-rich project management system helps them with:
 
  • Optimizing resource allocations
  • Managing schedules and project dependencies
  • Monitoring actual cost
  • Revising project budgeting and estimates at completion
  • Monitoring, analyzing and forecasting project revenue, cost and profitability.

Where does NetSuite come into play?

Finance, project management, procurement, manufacturing, shipping/receiving and warehousing all share a single source of truth on everything directly or indirectly related to the delivery of most major complex projects that will go through your company. NetSuite allows smooth, seamless global operations among the various locations and subsidiaries of the organization. NetSuite will also support most business processes in tight collaboration with OpenAir.

The Gurus team has developed key components and best practices required to cope with the particularities of engineering-to-order, unleashing the potential of NetSuite and OpenAir for such organizations in a very targeted way.

Solution Overview (NetSuite & OpenAir)

Collaboration in NetSuite:
  • Finance
    • Reporting
    • Accounts Receivable
    • Accounts Payable
    • OneWorld & Interco
  • Procurement
  • Shipping / Receiving
  • Manufacturing
  • Warehousing
Project Management in OpenAir:
  • Optimizing resource allocations
  • Manage schedules and project dependencies
  • Monitor actual cost
  • Revise project budget and estimate at completion
  • Monitor, analyze and forecast project revenue, cost and profitability.

Where Gurus Comes in: Piecing it all Together:

Now that we have a solid foundation to address the obstacles of engineer-to-order, let’s look at where Gurus comes in and how our team has built the glue to piece it all together.

Revenue Recognition vs Budget Update

Estimate-at-Completion (EAC) is exactly that, just an estimate. Although you come up with a number at the beginning of a project, it’s crucial to note that this estimate is bound to change on a more or less daily basis. This can be a massive struggle for your finance team. And there is very little your ERP can do on its own to minimize the impact of this roller coaster process.

However, there might be a way to make your day to day much smoother and take away that pressure.

We’ve built a way to automate the update process for revenue recognition rules so that it always account for  the latest and most accurate project budget. This way, both your finance and project teams will be able to share the same data every month - and you can avoid unnecessary detriments to your business like over-recognition and other large variances.

Multifaceted Procurement Strategy

Efficient Engineering-to-Order businesses are champions at re-use, enabling them to reduce engineering cost, reduce lead-time and get scale efficiencies and volume discount.

  • Most common off-the-shelf items and sub-assemblies might be procured ahead of time and stored in inventory.

Significant amount of procurement of project specific (non-inventory) items must also be supported. discount.

GURUS' custom solution allows your Procurement team to decide and execute of the best procurement strategy for the project, including

  • Picking a standard item from local inventory 
  • Starting a Worker Order (WO) of standard sub-assemblies
  • Transferring items from other subsidiaries/locations (TO)
  • Direct project related procurement (PO)

Procurement Collaboration

  • Both your project managers and procurement team will be able to share a centralized hub, providing full visibility on the underlying procurement strategy execution in NetSuite.
  • Receiving an item or completing the required Work Order in NS
     
    • Automatically post-cost the appropriate OpenAir project and tasks.
    • Notify project managers of this important project activity

About Gurus Solutions

GURUS boasts a dynamic team of business and technical experts who set the standard for best practices in the implementation & customization of Oracle NetSuite’s cutting-edge ERP solutions. We work closely with our clientele to bring their business processes into the cloud – resulting in an unmatched level of productivity and efficiency.

How do we differentiate ourselves from the rest of the market? 

 

  • A specialized process for optimizing your daily operations with reduced risk 
  • 14+ years of experience working with
  • NetSuite and the Cloud 
  • 5-Star NetSuite Partner for 8 years in a row
  • A unique & collaborative approach to any project 
  • Experience with a vast number of industries
  • Over 2100 successful projects completed
  • Resources across all of North America

World-Class NetSuite Expertise!

Working with our GURUS ensures that your company’s implementation / customization needs are handled with world-class NetSuite expertise.

  • Assessment & Architecture
  • Implementation & Configuration
  • Data Migration
  • Assessment & Architecture
  • Implementation & Configuration
  • Data Migration

Why Choose GURUS Solutions?

  • GURUS Solutions has been a 5-star NetSuite partner for 8 years running. We only focus on NetSuite, offering our clients the best cloud management software paired with a leading approach to solidifying back-office infrastructures.
  • Our Sherpa Methodology allows real-time access to information from anywhere, anytime; users can access all their project information and updates from abroad as if they are working from the office. 
  • With a pro-active approach to account management and continuous improvement strategies, we forge long-term relationships with our clients by consistently optimizing their business operations.

 

Sherpa Methodology & Approach

By default, our GURUS propose a shared approach. The goal is for our experts to lead the way, while tightly collaborating with your team. If you already have skilled resources available and prefer to handle the project, we also support a coaching approach. Ultimately, GURUS will take on as much or as little work as you feel comfortable with. Our iterative approach accommodates for the most flexible mode of engagement!

SHERPA means that we guide you, in order to ensure you reach the peak of your company’s potential. For businesses that are making the transition into modern cloud technology, here are some of the steps that we will take you through; 

  • A sit-down to discuss the architecture of your current business processes
  • A prioritization of functionalities & discussion of customization needs
  • Evaluation of strategic initiatives for streamlining back-office operations
  • A collaborative selection of technology and change management.

Our Process

GURUS uses a stage/gate process, carefully placing quality measures at the beginning and end of each phase of the engagement, to ensure that strategic initiatives, technology, processes, change management requirements, and challenges are fully addressed.

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About Athen Bozoglu

Athen Bozoglu is a horror film fanatic, country music buff and a content marketer for Cloud ERP Solutions, in precisely that order. Not enough detail? Read more about him here.

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