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Wanted: Lean ERP and what to do about it.

November 16, 2007

Selecting an ERP (Enterprise Resource Planning) software to support and manage a Lean Campaign can be a difficult task. Although many companies have accepted and endorsed Lean Concepts for greater profits or, in some cases, corporate survival itself, the available ERP software systems are lagging far behind in their ability to support Lean functionality.

Lean Manufacturing is not a new concept. It has been promoted since the 1980’s, but only within the last 10 years have the principles of Lean Manufacturing gained momentum with numerous documented success stories. Although approximately 8% of US companies have adapted to Lean Manufacturing practices, the unfortunate fact is that the remaining 92% of US manufacturers are not Lean. These non-Lean companies adhere and support the traditional computer-controlled manufacturing system that the ERP software was designed to accommodate.

By definition, an ERP system is an integrated software system that overlays the entire organization and manages all functional groups of the company, including sales, accounting, purchasing, manufacturing, inventory, planning, scheduling, shipping and receiving. A basic component of an ERP system is MRP (Material Requirements Planning), which is a non-Lean activity focused on recommending procurement of materials based on a time-phased demand to a job or to a forecast. The MRP system will inform the purchasing professional what to buy and when it needs to be delivered. The MRP system will dictate through the MPS (Master Production Schedule) what jobs the Planning Department should schedule, and it provides the expected ship dates based on capacity of each work center. The MRP will also adjust the ship dates or material requirements based on the fluctuating capacity of the work centers.

Needless to say, the MRP component of an ERP system becomes a huge, resource-draining monster whose data integrity is essential for proper operation. This is precisely why Lean Manufacturing is gaining popularity. Lean Manufacturing circumvents the MRP function by providing the efficiency of a “Pull System” and Kanban inventory control, without the administrative overhead. The desirable by-products of Lean Manufacturing are on-time delivery, improved quality and reduced inventory levels. The question becomes how well will Lean Manufacturing practices integrate with the host ERP system? And if it doesn’t integrate well, how do we find an appropriate ERP system?

There are two answers: the short term solution and the long term solution. The short term solution is that Lean Manufacturing is so simple that it will work within virtually any ERP system by disconnecting the MRP function, and driving production and purchasing with visual signals or triggers. Since MRP is disconnected, manual interfaces are created to communicate to the system, such as Kanban Cards with procurement information. These are utilized to convert an MRP System-generated purchasing requirement to an essentially off-line purchasing requirement. There are many such manual links to the host system allowing Lean Manufacturing systems to function. The benefits of this manual interface process far exceed the negatives.

To better understand the relationship between a typical ERP system and a Lean System, review the level of complexity of an ERP System pictured below in Figure 1.


Figure 1

Note the overhead required to maintain 40 transactions in a typical ERP flow, verses 11 transactions in a Lean Manufacturing flow as Figure 2 illustrates.


Figure 2

In short, for a Lean Company, all that is required is an average accounting package to manage the companies financials with the details of manufacturing and procurement handled off-line.

For the long term solution, this is another story. Almost all ERP systems were designed for control, and not for transaction efficiency. ERP systems were spawned from accounting logic to control all functions of the organization and provide an audit trail to assure accurate cost accounting to the owner of the organization, Chief Executive Officers, or the Board Of Directors. As a result, the logic imbedded in the software is focused on monitoring and providing predictable and accountable cost impacting information from all functional groups within the organization, regardless of the overhead required to achieve this objective. This becomes the dominant philosophy of the entire ERP system, which includes the MRP component.

The basic creed of the Lean Charter is to reduce waste. The primary focus is on reducing waste in the manufacturing process by short- cutting the labor-intensive MRP component of the ERP software system. Thus Lean Manufacturing is validated as a cost-effective alternative to MRP, and there are measurable issues that result from the Lean Campaign outside of MRP and within the ERP environment. A successful Lean Campaign makes manufacturing efficient. Perpetual inventory is reduced by 80% and the inventory turns increase from four to twenty, freeing up working capital. These are actual obtainable goals of a successful Lean Campaign as reported in success stories.

After a successful Lean Campaign, inventory turns are now five times higher and the company is enjoying improved cash flow. How is the host ERP system going to manage five times more transactions in key areas such as purchasing, receiving and AP invoicing? The ERP system is now impacted with five times more transactions. Since the system is designed for control, and not throughput, the existing staff in these departments become burdened with the additional work load.

There is a total disconnect between the two philosophies. “Balancing the line” means all elements within a manufacturing process are in balance for maximum throughput. In such a case, shouldn’t the ERP Software be balanced for the net throughput of a company; in others words, Lean?

Getting back to the long term solution, the appropriate ERP Software package should be evaluated and selected based on its net corporate throughput and capability to balance the additional transactions incurred through the Lean Campaign. This would result in a true win-win scenario. The ideal ERP System would be designed for a Lean Company to assure that Lean Concepts and net throughput were integral to the system’s design consideration. For example, a Lean ERP System would absorb all the additional transactions resulting from efficiencies gained in improved cash flow and freeing up working capital. A Lean MRP system will convert those manual interfaces between Lean Manufacturing and ERP back into an integrated auto procurement system with Lean terminology and functionality. Ideally, the ERP system should still support MRP functionality. Although MRP is a non-Lean function, it still has value because it will manage procurement of customer specific, or non-Kanban, material based on actual demand. A perfect system would be a hybrid of Lean Principles for Kanban-controlled inventory and management of non-Kanban material to be procured based on actual demand and customer ship dates.

To properly evaluate an ERP System for Lean compatibility, or find one that is most suitable, review the following guidelines.

GENERAL ERP SYSTEM METRICS:

The metrics below will assist in determining the next throughput of an ERP System. Evaluate each ERP candidate on how well they perform under each metric defined below.

Minimized Clicks – This is an important unit of measure. Minimized clicks are directly correlated with the workload of the user. Clicks are defined as the number of mouse clicks or key strokes required to perform daily functions or taking the user from a starting point to a finishing point.

Navigation Time - Navigation time is directly correlated with the workload of the user. The time required for the user to find the necessary functions to perform daily tasks.

Processing Time – The amount of time waiting for the software to perform a function, also known as waiting time.

Net Throughput Amount – The amount of output for a typical function in all functional groups in a given workday. In actuality, the net throughput is a combination of clicks, navigation time and processing time.

LEAN CAPABILITY CHECK LIST:

The software’s flexibility to adapt to Lean functionality.

  1. The systems ability to manage efficiently two different purchasing disciplines: demand purchasing and off-line (Kanban) purchasing.
  2. The system’s ability to identify Kanban inventory from Make, Buy or Stock.
  3. The system’s ability to identify the primary vendor for a product and store the established reorder quantity and price for replenishment for that product.
  4. The system’s ability to effectively short-cut the MRP component of the ERP System for Kanban inventory while continuing to function for procurement of non-Kanban material.
  5. The system should have the ability to back flush, preferably from the primary bin.
  6. The System should support a dynamic two-bin system for Kanban inventory.
  7. Due to the increased number of transactions through Lean efficiency, the following functional groups should be reviewed for streamlined activities
    1. Purchasing – Purchase orders should be created fast and efficiently designed for high volume purchasing activities. (Lean Purchasing)
    2. Receiving – The receiving function should be totally bar coded and ideally the ERP system will support Point-Of-Use (POU) put-away. (Lean Receiving)
    3. AP Invoicing – Processing the vendor invoices should be an efficient streamlined process designed for high volume receipts without compromising accuracy. (Lean Invoicing)

Finding an ERP system that will adapt to a Lean Campaign will be a difficult task. ERP systems were designed for control and not efficiency, which is what the U.S. manufacturing industry desired for many decades until Lean Concepts started to gain a degree of popularity. The majority of the U.S. manufacturing companies still function within the MRP environment and maintain the philosophy that goes along with it. Although Lean companies are a growing minority, the established ERP systems would have to undergo a costly overhaul to incorporate actual Lean Concepts into global function that is not cost effective for a relatively small demand. For this reason, Lean Functionality is lagging behind in established ERP Systems.

Some ERP systems have added bolt-on attempts for Lean functionality, but any efficiency gained from these attempts could be negated by the inefficiencies inherent in the overall design of the system. Review the ERP Systems for efficiency in the key areas identified within this article and select the best candidate that obtained the highest score.


Author’s Bio:
Robert W. F. Krause II
Manufacturing/ERP/LEAN Specialist
Cell: (516) 983-8095
Email: rwfk2@optonline.net
www.lean-manufacturing-inventory.com
Lean ERP Systems

Robert Krause is a graduate of the University of Texas with a BS in Management Information Systems (MIS) and over 30 years experience in the design and management of ERP/MRP computer systems. Responsibilities include; Operations, Material Control and Information Technology (IT) for various industries such as Pharmaceutical, Aerospace, Electronics and Metal Fabrications.

 


 
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