Hi Buddy !!!
I would like to answer your question in a rather simple manner, The whole design and development cycle , i.e. clause no 7.3 is done majorly in two manners:
1. The organization carries out some design and development activities with present and future market demand for a particular product and publishes abrochure or catalogue after taking the patent.
2. The customer provides some inputs regarding the intended final output he/they wants to achieve and based on that the design cycle takes place.
for #1 Following of design activity is a must.
Now for #2 we need to understand whether the customer representative is taking active part in all the design stages or not, if yes, then design can be excluded if no, then 7.3 needs to be addressed.
Again customers can either be external or internal in nature. In your case the engineer no. 1 is fulfilling the requirement of the internal customer "Production / Manufacturing" so you have to analyze how adequately the inputs are received from the internal customer before taking a final decision.