"His idea is to use an on-demand water system for strike water, mash in the lauter then recirc to clear before pumping to the kettle." Would work great for small system- might want 2 units in series. Id go with this, it would provide good hot water for all brewery uses independent of brewhouse operations.
"I'd rather mash in the kettle for better temp control (direct fire)" I think you would see allot of scorching of the grain w direct fire even with good mixing.
"and step mashing then move to the lauter for vorlauf, then back to the kettle for the boil." You would need a expensive pump on a vfd, preferably reversible, for this to work because your pumping solids. Also larger diameter piping. it can be done though- I had a DME system like this
" but I want some flexibility to do step mashing in the kettle when I want to." Why? Are you going to make allot of wheat/rye beers? Alot of dry lagers? -the process determines the product and the product determines the process...
Brewmaster, Figer's Brewhouse
"Your results may vary"