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Lean in the ERP World

Lean and ERP together is an oxymoron in the minds of many people

– and this is no surprise when you examine where these two camps are coming from.  Take the viewpoint of the ERP gurus who say, “just give me an accurate bill of material, routings, forecast, inventory and open order status – and I’ll give you the ultimate plan.  We can achieve control through the efforts of a handful of skilled users and then let production just worry about making what is needed when it’s needed.”

On the other hand, the Lean gurus take the position that “if we simply level-off our processes and demand, we can execute with low levels of waste, with simple, visual tools.  Achieving control and success comes by involving everyone in the execution process – including the planning and replenishment of materials throughout the value stream.”

Well, in my opinion, they are both right.  There are literally a thousand ways to leverage your ERP system with your Lean strategies that tap into the best of both lines of thinking.  I have compiled a considerable listing of different ways to do this and a methodology to do it that you can read about in the conference proceedings from the October 2004 APICS Intentional Conference Proceedings – “Lean Thinking Companies, Don’t Throw Away Your Computers Just Yet . . .”

The fact is there are merits to both ERP and Lean that can and should place nice together.  To make a difference they do not have to be fancy, showy or even particularly complex.  The key is that we find ways to “take Lean execution to the next level” in a fashion that average folks can understand and use to their advantage.  The emphasis should be on simple, not elegant – one of the hallmarks of a Lean operating approach that suggests continuous improvement and “mistake proofing” all processes.

Let me share with you some of my personal experiences in implementing an ERP system in a company that has devoted itself to Lean ideas.  Back before the Y2K crisis I was a manager with Grant Thornton’s Detroit practice in 1998 and was asked to become the project manager for implementing a new ERP system with Lean-enabling tools.  At the time De-Sta-Co (www.destaco.com), a division of Dover Resources, had selected Oracle’s Flow Manufacturing software as part of an entire suite of applications including MRP and Supply Chain Management applications.

Their mission was to beat the Y2K deadline by consolidating their ERP operations around the USA (and ultimately globally) into a single, Y2K compliant system.  They had acquired over the years and through acquisition various divisions with MRP/ERP systems that were not state of the art nor easily integrated.  The decision was made to migrate the databases of three separate MRP/ERP systems to a single platform.  They selected the Oracle applications, in part, because they seemed to have the right applications to help take “Lean” to the next level in their operations.

The Original Approach to Leveraging ERP and Lean at De-Sta-Co

De-Sta-Co has several divisions that make highly customizable products including toggle clamps (for which they are best known) and various hydraulic and pneumatic clamping, robotics and many other work automation devices.  They have been on the Lean journey for many years and have extensively adopted cellular manufacturing and assembly as well as extensive applications of Kanbans to control inventories.  Some of the Lean execution problems they wanted to attack with these new applications centered around Kanban planning and execution as well as tools to do line balancing, mixed model scheduling and monitoring sales forecast consumption against their plans.

Keeping it Simple in Kanban Planning and Execution

Because of the ability to build a wide range of toggle clamp products on single cells and a highly volatile product mix, De-Sta-Co was looking for tools to be able to dynamically plan, manage, re-size, issue and control Kanbans.  The manual system they had in place was extremely time-consuming and subject to human errors.  Manually trying to keep adjusting Kanban quantities working from their legacy system inputs and working with spreadsheets was too slow to respond in a timely manner to the rapidly changing realities of the market.

Our plan was to use the standard Oracle applications to automate the setup and control of the Kanban cards and move toward better control and accountability of the Kanbans.  We found out quickly that while the Oracle tools make it possible to establish a forecast that was continually updated with actual orders, we had better results working off an explosion of a forecast based on historical usages.  This, in turn, enabled the planners to generate Kanban plans that suggested the quantity for each component item and either the number of containers required at a standard quantity or the quantity for a suggested ‘one-bin’ Kanban.  The system then would recommend Kanban to be created.  The process requires a manual interface to accept or change and accept a suggested Kanban and then a bar-coded Kanban card was generated.  This then would be matched-up with the physical product on the shop floor and converted to “full” status.

Electronic Work Flow

With the Kanban cards in place, they next created an interface that would allow them to scan-in or key-in the cards on the shop floor when they went empty.  This sets up an action interface that sends a notification to the buyer/planner for the parts.  Though our suppliers could not support electronic advanced shipping notices, it is possible to receive a notice that the Kanban is in transit.  Upon arrival, the scanning or entry of the Kanban automatically moves the status from “in-process” to “received,” or if incoming inspection is not specified in the workflow it transfers to “full” status.  Having the status of all the Kanbans available online is helpful because exceptions can be highlighted and managed easily because all transactions are time-stamped.  Monitoring and reacting to exceptions is much more manageable.  With the recent upgrade in Oracle to 11i, the system will auto create a new PO release and auto-fax the Kanban without human intervention after a Kanban is recorded as empty on the shop floor.

Automating the Replenishment Cycle with a Sister Stamping Facility Running with Discrete Work Orders and Traditional MRP

One time-consuming problem was how to handle the Kanban signals going into a sister stamping facility several miles away from the main assembly plant.  Within the Oracle applications, we were able to set up an electronic workflow that significantly streamlined the whole process to take consumption-based Kanban triggers and set them up in the discrete MRP/work order based system used in the stamping facility.

First, the decision was made to match the Kanban quantity from the assembly plant to match-up with the desired work-order quantity for the stamping plant.  When a Kanban went ‘empty,’ this set up a batch interface trigger to auto-create a master schedule demand at the stamping plant for a release order to make more stampings, with a due date.  Within the system, this auto-updated the Kanban status from “empty” to “in-process” with an estimated delivery date.  Another interface at the discrete stamping operation auto-generated and scheduled a work order to be released to production.

When the discrete work order was ultimately keyed-in as complete and a shipping document was created, the system automatically updates the Kanban record as being “in-transit” with the exact quantity produced.  The act of processing the receipt at the assembly plant serves the function of both updating the Kanban record to “received” and updated the accounting system to record the sale between the divisions.

There are many benefits to this approach.  With an electronic status being maintained it was easy to keep track of, and if necessary, follow up on open Kanbans between the plants.  The human effort and delays associated with creating demand in the stamping plant’s discrete system were automated.  The effort to create, schedule and dispatch the work order in the stamping plant was essentially automated.  Keying-in transactions for the product as it was moved from the stamping facility into the assembly plant was automated by way of recording the bar-code on the incoming Kanban.  All of these measures reduced human effort and the potential for human error as well – both hallmarks of a Lean approach.

Improving Transaction Timeliness and Reduced Waste and Errors for Production Reporting and Kanban Transactions – Both In-process and Finished Goods

Using the ERP system’s back-flushing capability and empowering planners to capture and record completions many times a day provided some excellent benefits by reducing human effort and the potential for error, while at the same time speeding-up the timeliness of transactions.  For example, the system has the capability to automatically update inventories of components and finished goods at the time each completed box of product is recorded in the system.  Since some 35% of the products made in the main assembly plant are “specials” – clamps from basic family groups with custom, to-order features, this ability is very helpful.

For example, a special component (a custom-length pin or special plunger) will be associated with the customer’s order with the common components used.  As this order is recorded as “available for pick” in shipping, it relieves the system, while at the same time updating order availability for shipment to the customer.  Because of the sequentially numbered bar-code labels that are human readable, the problem of double-counting or miscounting the many different assemblies coming off the assembly cells was eliminated – as each bar code/box combination is unique.  The system “checks” for double counts and at the same time keeps track of the boxes in the system.  This proves useful to help with FIFO rotation and triggers an action if a particular box identifier is “missing.”  Other benefits are providing real-time visibility for customers on availability of both standard and custom products, visibility hour-by-hour on the status of production (feeding electronic production progress boards is now possible), and building a history of performance for future problem-solving activities.

These features are extremely “Lean” in nature as it is providing the function of an in-process, 100% inspection of the transactional data, alerting the material handler if an abnormal process occurs.  Because it’s an electronic notification all errors are captured – which leads to a robust problem-solving system.  Why?  At Toyota, a defect is considered a “treasure” – an opportunity to identify a place where the process has broken down.  All too often in manual execution situations the errors and mistakes are simply corrected, on-the-fly, by the operators, effectively hiding this information and inadvertently preventing corrective action to get to the true root cause.

You may be wondering why I am focusing on something this fundamental . . . if so, the reason is this: I have learned the hard way that if you really want Six Sigma capable execution systems you must sweat the details.  If you can’t be 100% sure that what is happening on the floor is right in your key value-adding operations, you are operating with faulty information – and risk a non-competitive position in serving your customers.

An Epilogue – Fast Forward to May 2005

I called and talked with two of the key players as I was writing this article – Mike Bouthillet, who runs the assembly operations, and Ron Finch, their materials manager.  Since their initial implementation, they have upgraded their applications (to Oracle 11i) and made a number of significant changes that make their applications “Leaner” than we even imagined at the onset of the project.

Further Refinement of Kanbans

Even with all the benefits of the implementation of Kanbans described earlier, they discovered that there was still too much-wasted effort managing all the transactions.  For example, it was very time-consuming to run through the process of auto-generating PO updates for supporting the electronic workflows.  They learned that even a two-bin Kanban was often still way too much inventory due to the size of the buffers required in the calculations to compensate for the wild swings in monthly demand they encounter for specific components.  Too much of the product today is assembled-to-order, and shipping within days of the order is required to meet the demands of the marketplace.  Even using non-replenishable Kanbans to take up some of the slack proved time-consuming and confusing.

What they have since developed and implemented is an elegantly simple re-order approach that leverages the best of Lean execution with ERP . . . a dynamic re-order point system.  By using the Kanban management approach for all inventories, they have been able to achieve extremely accurate perpetual inventory balances (see the Lean Culture, April, 2004 – “Cycle Counting in Lean Environments”) and their order management system “looks ahead” on a daily basis and predicts when the on-hand inventory is likely to be exhausted for all components.  This then sets up an auto-release that updates the PO record and faxes the requirement directly to the external supplier.  This then follows the electronic workflow as being “in-process” for the Kanban to the supplier and tracks it through to replenishment, as described before.

For the aforementioned sister stamping plant, they changed the inventory “organization” in the ERP system to, in effect, make the sister stamping facility another “sub-inventory.”  The benefits of this are increased visibility without sacrificing the automation of the work order generation and release described before.  Better yet, they are able to use either the dynamic order point or physical Kanbans to trigger the process.

There are many benefits of this approach.  The amount of Kanban transactions has been dramatically reduced for suppliers (single-bin approach versus multi-bin/signal approach).  Rather than putting large buffers into the Kanban quantities required in a traditional approach to cover weekly variation, they now can manage ‘special’ and ‘high variation’ components with visible Kanban execution while in effect using MRP in the background to initiate Kanban releases.  This has resulted in reducing the average inventory far beyond what they were able to accomplish with the former approach by some 30%.  This may not seem important, but if you consider that a majority of components used do not have a stable demand pattern from week to week and they represent a majority of the material costs . . . well, I think you get the picture.  De-Sta-Co is mastering what I teach as a “multi-mode” approach to managing their inventories – using traditional Kanbans to replenish parts with stable demand patterns and an MRP-ish approach to minimize waste.

Hearing the Voice of the Customer – Improved Visibility – Globally

Recently the decision was made to find a way to provide better visibility to customers and salespeople, to allow for placement of orders at a location in the company for products produced.  Customers need to be able to select work automation products from multiple De-Sta-Co locations, sometimes internationally, without having to work with multiple points of sale.  For example, in the past, if there were three different products needed for a project the customer would need to place orders with three different order entry functions at the company – or someone at the company would have to perform this function in the background with a lot of wasted effort.

By re-thinking how inventories are organized in the Oracle applications it is now possible to “see” products in any De-Sta-Co division from a single point of order entry.  What this means is now, from a customer or a distributor perspective, they need only place a single order at any of De-Sta-co’s locations that accept orders and be able to get a quick answer to availability and delivery dates.  Within the company, this visibility and automation will eliminate a ton of non-value-add work (sounds Lean, huh?) transferring information and worrying about the internal (and non-value adding) transactions.

Other Companies Reporting Some Neat Stuff

For those who are wondering if this story is an isolated case study, I would like to assure you many others are on the quest – and successful.  One of my clients is a mid-sized ERP solutions provider that provides applications to support a Lean thinking approach.  One of their clients, Stanley Aviation, has reported some outstanding Lean impacts with their ERP applications.  Some of these include the following in a presentation made at their user’s group meeting last year:

  • User-friendly operator interfaces.
  • Information at the operator’s fingertips.
  • Single integrated point of entry for operators (paper elimination).
  • Maintenance of quality traceability and records during part manufacture (automated vs. paper techniques).
  • Built-in electronic ‘Poke-Yokes’ (a.k.a. error proofing).
  • Electronic visibility end-to-end from vendors to our customers by exploiting web technologies.
  • Fully integrated with CNC Machines.
  • Point of use/supermarket material and sub-assembly issues supported electronically.
  • In other words – Elimination of Wastes!

Their future strategy includes these measures:

  • RFID of totes.
  • Picking and kitting.
    • Intelligence built in.
    • Wireless kitting.
  • Shop floor status screens.
  • Integrated Document Management System.
    • Enterprise-class document management (the one best “Lean” method!).
  • Configuration support with automation of work instructions to the floor.
  • SPC data collection.

Summary Thoughts About Leveraging Lean and ERP Together . . .

Clearly, Stanley has the wherewithal and the need to expand the application of their “Lean ERP” system far beyond what I shared with you in the earlier story about De-Sta-Co.  The reason I shared the Stanley list at the end of an article is to drive home a point: you must make your own decisions on how to leverage your ERP systems with your implementation of Lean.  The possibilities are limitless.  The real trick is to focus on what you can do and commit to continuous improvement and integration where it makes sense going forward.  By making sense, I mean eliminating wastes that our customers care about – doing things faster, more accurately and at a competitive cost.

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