1-Is a Materials Requirement Planning (MRP)
System the best approach for your company?
Of course an MRP system has to be an ideal system for your organization after all most companies are using it, right? Or is it? Let’s examine the facts surrounding how effective an MRP system really is....
system is used to plan and buy material to a forecast or to a
job order and virtually all of the manufacturing companies
within the United States are currently using some form of an MRP
system. An MRP system is perceived as a required system to drive an organization. The actual procurement cost of an MRP system can range from $50,000 to $3 Million plus the annual ongoing software maintenance fees. The number of dedicated staff required to maintain the integrity and accuracy of the system is staggering. Your organization should add up the staff required to maintain the critical information within the system. You must consider the Administrative Overhead required to support the constant communication to suppliers setting scheduled delivery dates of raw materials, the Engineering Overhead required to accurately create Routings, the Production Planning Staff maintaining the Master Schedule and scheduling the Jobs on the production floor, the Operations Team tracking the movement of jobs, posting to labor, to work centers and to completed routing operations. Let’s account for the Stock Room personnel required to perform inventory cycle counts and fill pick lists for a build. Constant diligence is required by all these departments to properly enter data to assure proper delivery of raw materials at the time of build. Now consider the inevitable “Rescheduling Event” and impact on the organization to move in/out delivery dates of raw materials. Also the impact of changes to the Master Schedule requiring Production Planners to change the Job Order priorities and reverse inventory transactions. These are a few of the many requirements draining your staff to maintain an MRP system.
The MRP system has become a huge resource-draining monster whose data integrity is essential for proper operation. Many companies have achieved a respectable On Time Deliveries (OTD) of 95% or better with inventory turns of 8 times or more but it is the result of a very large highly skilled staff diligently executing complex transactions. Naturally with all the transactions required for the MRP system, it is inevitable that a transaction error will occur and result in a disruption of the system and missed ship dates. This is of course not acceptable but the system is used as an excuse and the scapegoat.
Let’s review the success of our world competitor, the Japanese. They flooded our country with quality products at an affordable price. How did the Japanese, a small country with virtually little natural resource and high priced labor put our US manufacturers of cameras, TVs and stereos out-of business? What happened to Philco, Admiral, Philps, RCA and Zenith televisions that we all grew up with? Japan provided a cheaper and superior product which put these fine American staples into the history book of forgotten companies. Japan almost put our auto manufacturers out of business too if it wasn’t for loyal American consumers committed to support inferior US made automobiles. How did other countries like Japan take our manufacturing away from the US and create a downturn in our economy from the 1970s to today? Because the Japanese did not use a traditional MRP system, they used a different manufacturing method described in this article. Isn’t it time that we explore a different manufacturing method too?
The typical MRP system pictured below in Figure 1 illustrates
the complexity and overhead required to maintain an MRP system.
There are 40 transactions in a typical MRP flow vs. 11
transactions in a Lean Purchasing and Planning flow as shown in
2- Does Lean Planning and Procurement
provide an alternative to MRP?
Lean Planning and Procurement (LP&P) is an alternative method to
the MRP system. LP&P is focused on eliminating non-value added
activities in the manufacturing processes resulting in a more
competitive and profitable position. LP&P replaces a computer
driven material planning & procurement system with a visually
oriented planning and procurement system. The flow chart below
illustrates the simplicity of lean flow.
3-The Opposition to Change: Get buy in
through a well planned Pilot Program
MRP knowledge, training and expertise is a
core competency many have based their careers on. How will these
people react to a system where the expertise they nurtured
throughout their careers is no longer critical, useful or
pertinent? How will they feel assessing their historical
activities largely as non-value added? This is why the lean
movement must be driven from the top down and training and
re-training are critical elements for success. It is recommended
that an introductory “Town Hall Meeting” is held for all
employees explaining the reason for the Lean Journey and the
direct benefits to the company and the employees. People must
realize this change is essential for the business to grow and is
in the long-term interest of a majority of the employees. It
should be made clear the goal of the Lean Journey is not
designed for staff reduction but to apply existing personnel and
resources directly to improving throughput. There should be a
clear message in the organization that the Lean Journey will be
successful, that those of you who join the effort will enjoy a
career path with the organization, those of you who elect to
impede progress won’t.
The LP&P concept is easy to understand but
difficult to get people to adopt because it is considered so
radical to established beliefs. Once it is properly
demonstrated, it is so simple that the change can be implemented
quickly. The most difficult concept to adopt is giving up
computer-assisted controls for visual controls. The best way to
sell the Lean Concept is to demonstrate the effectiveness to the
4-What is the Lean Implementation
Sequence that works?
Companies that have embarked on the Lean
Journey typically commence with a pilot
product cell to
demonstrate the effectiveness of Lean Manufacturing to the
organization. This cell should be trained on Lean Concepts and
the Operational Focus of 5S to organize the cell and see that
everything has a place and everything is in its place. They
concurrently drive cycle time reduction through cellular
re-layout, standardized work, and process value stream mapping.
There is also an effort to move to point of use storage and
implement kanban controls. These are the Phase I Lean Activities
or the Bronze Category as classified by many companies i.e.
United Technologies, Pratt & Whitney, etc.
5- Create an effective Lean Cell within
an MRP Environment-The Transition State
The commencement of phase 2 lean activities
typically is initiated with a Kanban controlled inventory
approach with a detachment from the existing MRP system.
A Lean Cell does not require an MRP System
to manage Kanban inventory and procurement but the Lean Cell can
reside in an MRP driven organization. In regards to material
procurement and replenishment within an MRP Environment, it is
best to allow the Lean cell to directly procure Kanban materials
unique to that cell and for those products that are shared with
the rest of the organization, replenish the Kanbans from
inventory. To protect the MRP System from “unexpected demands”
(non-MRP driven requirements) those items that are shared with
the rest of the organization should have the Safety Stock
adjusted to compensate for the off-the-system demand to supply
the Lean Cell. Of course once the Lean Cell demonstrates to the
organization it’s effectiveness, the MRP system can be
confidently disabled in lieu of the visual Kanban Inventory
6-The Lean Planning and Purchasing
The progressive approach would encompass
the following criteria:
No inventory balances, no forecasting, no
traditional blanket orders, no cycle counts, no issuing
inventory, no pick list, no traditional segregated stock room.
In LP&P, the material is moved to where it is needed
(Point-Of-Use), there are automated purchase orders and bar
coded order placement and receiving. LP&P also encompasses
Kanban quantities derived from actual usage and replenishment
lead-times, spike order risks identified driving incremental
replenishment orders to the Kanban to insure Customer on Time
Deliveries (OTD) are met. A system focused on customer
demand-pull driving the highest OTD metrics and inventory turns
for a maximized cash flow that frees up working capital.
7-Lean Purchasing And Supplier
Lean Purchasing and Supplier Consolidation
principals work together. Remember the charter of Lean is to
remove waste. In the typical purchasing procedure, the buyer
sends out three Request For Quotes (RFQ). After all three
quotes are received detailing the pricing, delivery and price
breaks; the buyer reviews the information and awards the
procurement to the appropriate supplier. Each time the same
product is purchased, this process is repeated. Consider all
the work and time required to execute a single Purchase Order.
What is the cost of that Purchase Order (PO) itself? Some
companies use $50 as a fixed cost per a PO generation.
Now, consider all the activities required
to execute a PO at your current purchasing frequency and then
imagine your boss telling you that we are not issuing blanket
orders anymore or having any scheduled deliveries, you have to
buy only what is needed and only when it is needed. You are
then directed to get quantity discount prices no matter how
little you buy. Can you anticipate the response from your buyer
when these constraints are imposed? This is an impossible
scenario unless certain tools are in place, Supplier
Consolidation and automated Kanban replenishment orders.
Now take the same scenario executing a PO
except that you know the exact price and quantity for every
order you place. RFQs are no longer needed, no evaluation is
required and your supplier is giving you their best price
regardless of quantity. The buyer can easily execute POs
without hesitation or delay as a result of Supplier
Consolidation. Supplier Consolidation is a movement to reduce
your supplier base and at the same time present your companies
total purchasing power and negotiate better pricing and
delivery. Instead of focusing on PO line item details, approach
your suppliers with your total companies annual purchasing
power. Simply put, explain to your suppliers that the company’s
annual purchase dollar amount is open for bid and they being one
of your premier suppliers have an opportunity to get a larger
piece. The increased sales dollars are dependant on their
ability to reduce lead time, reduce replenishment quantity and
reduce price. Your goal is to give them 100% of your business if
they meet your criteria. You make a commitment to develop a
win-win relationship and partnership to improve the
profitability of both companies.
Suppliers are aware of this new business
trend and will compete to capture your total business;
after all, supplier consolidation also leans out the suppliers.
Their sales force is no longer required to answer routine
repetitive RFQ’s. They can now focus on helping their existing
customers with designs, quality, cost reduction and cycle time
to help their existing customers grow their businesses.
8- Automated Visual
The next tool that the buyer will need is
to automate the visual procurement signals. A KanBan purchase
is equivalent to a Purchase Order Request (POR) because a Kanban
purchase is initiated outside of an MRP demand. Normally this
is done with Kanban Cards or a hand written request. Using
Automated Visual Procurement Signals, all products are Bar
coded, the reorder signals are visually triggered and those
items which require procurement are captured in a Personal Data
Acquisition (PDA) device and scanned. All items that require
replenishment are uploaded into the systems purchasing queue.
With each scanned item, the system knows how to manage those
items to be procured, who to buy them from, at what price and
quantity. With Lean Software, a visual reorder signal is
captured via a PDA, electronically converted into a purchase
order and electronically transmitted to the vendor via email.
This process is illustrated in Figure 3.
With this system, where visual reorder
signals are converted into instant POs emailed to the supplier,
and with Supplier Consolidation agreements, the buyer is capable
of handling many more transactions as they are now automated,
totally transparent, timely and value-added demand driven . POs
can be generated with virtually no cost impact to the
FIGURE 3 Automated Visual Procurement Signal
9 Summary &
Lean Purchasing and Planning is a viable
and superior alternative to an MRP based system. As
demonstrated in this article, the bottom line cost savings in
abandoning a MRP based system is staggering. The savings from
shedding the entire MRP administrative overhead goes right to
your companies bottom line profit. Abandoning Production
Scheduling for one-piece flow and abandoning a conventional
stockroom configuration for Kanban point-of-use inventory
provides your company with decreased cycle time, increased
inventory turns, significant net profit and working capital.
There is a mind-set that a company needs an
MRP system and these companies are reluctant to abandon it once
they have it. The general feeling is that they incurred the
initial expense in purchasing it plus the supporting staff made
a career out of using it. A cultural and psychological
commitment was established to keep an MRP system active despite
the availability of a profitable alternative. In actuality, a
company only needs an accounting system to manage Sales,
Accounts Receivables and Payables. Manufacturing is managed
“off-line” by a Lean Visual Manufacturing System.
In conclusion, making the psychological
divorce from an MRP System will increase your company’s
profitability, expand future business opportunities and for
those companies who are financially struggling…..it can make the
difference whether a company lives or dies.
Robert W F Krause II
MRP/ERP/Lean Manufacturing Specialist
To Learn more
about the LEAN system, follow the links below:
What is Lean Manufacturing?
-A Definition of
Company – An established Lean Company needed a software
approach – An article to support your Lean movement over
ROI – A Case
Study of a Lean company and their Return On
Why Do You
Need Lean ERP Software? – Rationale and
a supporting article to use Lean Manufacturing