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.
-
The systems ability
to manage efficiently
two different purchasing
disciplines: demand
purchasing and off-line
(Kanban) purchasing.
-
The system’s ability
to identify Kanban inventory
from Make, Buy or Stock.
-
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.
-
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.
-
The system should have
the ability to backflush,
preferably from the
primary bin.
-
The System should support
a dynamic two-bin system
for Kanban inventory.
-
Due to the increased
number of transactions
through Lean efficiency,
the following functional
groups should be reviewed
for streamlined activities
-
Purchasing – Purchase
orders should be
created fast and
efficiently designed
for high volume
purchasing activities.
(Lean Purchasing)
-
Receiving – The
receiving function
should be totally
bar coded and ideally
the ERP system will
support Point-Of-Use
(POU) put-away.
(Lean Receiving)
-
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.