Configure-to-Order

What is Configure-to-Order?

Configure-to-order (CTO) is a production process where buyers customize products to their exact needs from an existing set of components. They first place an order with certain specifications and features. Then, the manufacturer builds the product based on the customer’s preferences.

CTO is different from the traditional make-to-stock (MTS) model in that it emphasizes customization over mass production. Rather than making large batches of identical products and storing them until they are sold, CTO allows for individual orders with unique needs.

That said, CTO is not the same as make-to-order (MTO). In MTO processes — such as job shops and contract manufacturing — manufacturers build the product from scratch after the customer configures the product and places an order. In CTO, the components needed to make the product already exist and are just being combined in different ways.

In that sense, configure-to-order is a hybrid between make-to-stock and make-to-order. It is designed to offer some of the benefits of both without the drawbacks. For example, CTO is faster than MTO since it does not require building each product from scratch, but still offers more customization than MTS (which offers none).

Synonyms

• CTO
• Configure-to-order manufacturing

How Configure-to-Order Works

In a CTO system, the manufacturer receives an order before building the product. This means that the product will be built only after the customer has designed and ordered it. The manufacturer will then customize its components before final assembly and delivery to the customer.

Here’s a breakdown of the CTO manufacturing process in-depth:

1. The customer chooses the desired product specifications, including components and features (e.g., size, color, premium add-ons).
2. The company receives orders from various channels, including website, internal sales, and POS systems.
3. The software automatically generates a bill of materials (BOM) for the product.
4. The vendor creates a production plan to establish how many units it can manufacture each hour/day and when parts will need to be delivered from suppliers.
5. If certain components aren’t available at the time of assembly, the vendor purchases or manufactures new inventory.
6. When components are available, they are assembled into the product according to customer requirements. Workers are instructed on how to build the product and where each component belongs.
7. Before sending the product, testers perform quality assurance checks.
8. The order fulfillment team packs and ships the product to the customer.
9. The buyer pays the remainder of what they owe (if anything) on a final invoice.

Advantages of Configure-to-Order Manufacturing

Generally, vendors using a CTO process leverage their existing supplier relationships and manufacturing capabilities to expand their product catalog. Adding new product features and configurations that way helps companies meet customer demand without the added complexities of bespoke manufacturing or the risk of stock-outs for MTS systems. When done properly, the result of meeting the needs of a wider pool of customers is higher sales revenue.

Other advantages of configure-to-order manufacturing include:

Easy Product Customization

Compared to basic make-to-stock production, the CTO approach to product configuration gives customers the opportunity to find a solution that fits their needs more closely. It’s ideal for industries where some level of customization is necessary, but all customers expect the same (or close to the same) user interface.

For instance, a laptop manufacturer offering just one product — let’s say, a 13-inch, 512 GB laptop — would meet the needs of most of its customers just fine. But what about the customer who needs more storage capacity?

It’s relatively easy for the manufacturer to produce a larger laptop with 1 TB HDD or a smaller one with 256 GB. They wouldn’t even have to change the design of the laptop, just the HDD and RAM. By doing so, they’re tapping into additional revenue streams that were already practically built into the infrastructure.

Efficient Production

When a manufacturer uses configure-to-order, they determine in advance what they can and can’t develop. They connect ERP, CPQ, and inventory management systems to keep track of how many of each component they have in stock. And they connect it to their website to automatically reflect availability and possible configurations in real-time.

When customers submit orders, the company doesn’t have to talk to engineers or designers before proceeding. They already know what components can be combined and produced.

Standardizing the process makes it far more efficient, which offers several benefits:

• Faster delivery time
• Accurate order tracking and real-time notifications for customers
• Lower costs due to production optimization
• Improved profitability from higher margins and lower overhead expenses.

Once companies begin to set configurations in advance, they discover another major benefit: improved interdepartmental collaboration. When engineering and production approve the configurations beforehand, sales reps only offer products that can actually be built. Upon receiving an order, the organization can instantly generate 3D models and bills of materials.

Lower Inventory Costs

Like other make-to-order models, CTO reduces the need to invest in and maintain stock. Rather than produce the entire product upfront, they can wait until an order has been placed. Then, they can produce the components based on customer demand.

Sourcing inventory as it’s ordered means fewer unsold products and less overhead. That translates directly to lower inventory costs and improved cash flow.

Better Customer Experience

Customers benefit from configurable products in the sense that they can get exactly (or closer to exactly) what they want.

The process is also easier for them because they don’t have to directly contact the manufacturer or wait long periods of time for a custom order. And, with a streamlined supply chain and standardized manufacturing process, customers don’t have to wait as long to receive what they ordered.

Technology Requirements for Configure-to-Order

Since configure-to-order requires such a high degree of accuracy in order processing and inventory management, companies need the right technology to support the process.

For configure-to-order to work, companies need the following six tools:

Enterprise Resource Planning (ERP)

In the manufacturing industry, companies use enterprise resource planning (ERP) software to support their manufacturing, procurement, supply chain, and finance processes. An ERP system helps companies plan and manage their resources, including materials, cash flow and demand projections, manufacturing processes, and employee skills.

For configure-to-order, one of the most important ERP modules is “material requirements planning” (MRP). MRP helps with production by managing the inventory levels in relation to customer demand and supplier delivery times.

Product Configurator

A product configurator is a software tool that allows customers to choose from available product configurations (e.g. size, color, accessories). Product configuration a primary function of CPQ software, which also handles the quoting, sale, and BOM generation processes associated with configure-to-order manufacturing.

On the backend, the user inputs specified product configurations, so the software knows precisely what’s possible. CPQ integrates with the organization’s ERP and inventory management systems, which contain information about stock, availability, and pricing.

With up-to-date product info and predetermined configuration rules, customers or sales reps see what’s available and get an accurate calculation of the total cost on the frontend.

3D Modeling

Companies selling highly complex or configurable products (such as automobiles) need a product configurator that generates 3D models of the customized product. That way, customers can see how different configurations look before purchasing.

In the design and engineering phases, companies also use 3D models to test products before building them. By doing so, they reduce the risks of producing an unusable configuration and having to refund the customer for it.

Materials Management

Having the right materials on-hand is essential for meeting customer expectations. Materials management software helps ensure that manufacturers have the right components available in order to build configurable products, as well as enough of them.

Materials management systems often include inventory replenishment capabilities that generate purchase orders when a certain stock threshold is reached or exceeded. By staying ahead of demand, companies can continue producing and shipping orders on schedule.

Inventory Management

Inventory management software is similar to materials management (and sometimes used interchangeably). The main difference is it has a greater focus on tracking inventory as it moves through the supply chain.

Inventory management tools enable companies to see how many products are in stock, where they are located, and when they will be delivered or shipped out. By having real-time insight into their inventory situation, they can avoid bottlenecks and keep production and delivery running smoothly.

Order Processing

Order processing tools comprise a set of rules and automated procedures that ensure orders are filled accurately. This includes:

• Verifying the product configuration
• Checking inventory levels
• Updating process status in ERP systems
• Generating invoices
• Sending automatic notifications to customers

Order processing tools also contain features like order history lookup and reporting capabilities, which make it easier for companies to manage their sales cycles and customers to see order statuses.

The Role of CPQ Software in the CTO Process

Configure, price, quote (CPQ) software is responsible for the entire configuration process, which is half of the configure-to-order process. It’s the link between the customer and the manufacturer, providing product data to customers, calculating prices, and generating bills of materials.

Let’s take a look at how CPQ comes into play in the CTO process:

1. Customers configure a product online using the website’s product configurator.
2. The configurator sends the product details to CPQ, which verifies that all options are valid and calculates the total cost.
3. They place an order.
4. CPQ then creates a BOM containing all the necessary components for production.
5. The BOM is sent to the manufacturer’s ERP system, which uses it to check inventory and manage production.
6. The manufacturer produces the configured product according to the BOM, ships it out, and notifies the customer of its delivery status.

or:

1. A sales rep takes an order over the phone or receives a PO/request to order.
2. The sales rep inputs the product configuration into CPQ to verify all options are valid and calculate the total cost.
3. They send the quote to the customer.
4. The customer accepts the quote, which becomes a PO/invoice.
5. CPQ then generates the BOM and sends it to the manufacturer’s ERP system.
6. The manufacturer produces the configured product according to the BOM, ships it out, and notifies the customer of its delivery status.

Whether it’s a self-service portal or a sales rep, CPQ is the bridge that connects customer orders with manufacturers.

CTO Manufacturing Examples

Configure-to-order isn’t for entirely custom-made products. It’s used for configurable products that can be assembled in multiple ways, according to customer specifications.

Examples of organizations using CTO manufacturing include:

• Computers and laptops — Customers can choose the color, size, processing capacity, amount of memory, hard drive size, screen resolution, and add-ons like photo/video editing packages and loaded software.
• Smartphones — Smartphone companies sell different colors, storage capacities, and models based on customer preferences.
• Automobile manufacturers — Automakers have hundreds of configurations based on dozens of factors, including make, model, color, engine type, and aftermarket configurations like wheels and tires.
• Furniture companies — where customers select materials (e.g., wood type), features (e.g., drawers & doors), and finishing touches (e.g., paint and sealant).
• Screenprinting and custom clothing vendors — Many t-shirt and apparel companies give customers the ability to add a custom design and choose the print location, size, font, color, and other add-ons while limiting the options to just a few designs or colors.
• Sports gear — Customers can customize sporting goods like golf clubs, tennis rackets, hockey sticks, skis, and snowboards with different shafts, grips, casings, colors, etc.

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