The first in a series of articles following the implementation of Lean Manufacturing for Microsoft Dynamics AX to a Medical Equipment Manufacturer

Roll With Lean: New ERP Systems Work With Lean Principles, Not Against Them

Part 1 Synopsys: Lean transformations require transformation of IT systems to reflect the new realities of operation with pull systems, kanbans and the requirement to respond immediately to changes in customer demand.

It's all very well leaning-out your manufacturing and supply chain processes but if your ERP systems aren't up to the job, then all that might happen is that balancing production gets progressively more difficult as your supply chain backs up in a maze of spreadsheets, guesswork and finger-pointing.

The nice part of my job is playing a direct role in helping my customers move their businesses from MRP-driven platforms, usually backed-up with an acre of spreadsheets, to something that closer-reflects how to operate in a Lean environment: Kanbans and all.

I have a customer in the UK who manufactures medical equipment. Over the past five years, they have embodied some of the best aspects of a Lean transformation: not only have they implemented all the best aspects of cellular manufacturing, but their product range has been rationalised in an extremely intelligent manner, combining a simplified range of common product families with a broad market reach for both domestic and export markets. In some cases, product variation can be controlled through a software change alone, such has been the extent of Lean product design.

Unfortunately, the supply chain was creaking and causing a familiar pattern of shortages, expedited deliveries and stock obsolescence, especially for component parts. What had happened was that as the manufacturing areas moved toward cellular production, the MRP system could not adapt. The traditional structure of production orders and MRP had gradually diverged from how the production processes were evolving, while the hard-pressed purchasing manager needed to maintain an alternative set of inventory and demand figures for much of his portfolio.

A significant part of the problem lay in the MRP system's structure. The traditional MRP model of forecast-based demand generating a range of production orders throughout the bill-of-materials didn't match a kanban-based environment where replenishment of finished products, components and key subassemblies was now managed by physical kanban cards. MRP was retained to generate production orders, as much as to generate documentation for the shop floor, as to use the system to consume inventory through backflushing.

The problem was that the generated orders simply did not match what they were making. Orders were created to reflect batch quantities far in excess of the daily capacity and this led to a backlog in system bookings: physical inventory would routinely diverge from system inventory and not only would this lead to problems with the despatch of finished goods, but component and subassembly inventories would diverge far from reality.

Now let's look at purchasing and stores. Here, system inventory could not be relied-upon and this led to the purchasing manager having to initiate regular physical checks of inventory which then had to be loaded into his own spreadsheets which were used to control the supply of key raw materials and components.

This pattern of operation is familiar to many of us. Slowly but inexorably, traditional MRP and production order-based systems fall out of synch with reality and gradually the number of spreadsheets and workarounds increases. System transactions are processed merely in an attempt to keep on-hand values in line with physical inventory and they become increasingly irrelevant as they fail to provide worthwhile information that helps people do their jobs. Meanwhile, as the transactions often fail to reflect the sequence of activities in the shop floor, it becomes increasingly difficult to post the transactions and so the cycle becomes progressively worse.

Some Lean practitioners have an easy solution for this: pull the plug on the MRP system and run things manually either fully or by "phantoming" out parts of the process! Great in theory and for the purist, but not much use in the Real World where we want to manage our business. ERP systems happen to be rather convenient for keeping track of where the business is, not to mention managing the cash and other key assets. What a pity to have a huge black hole in the middle of the whole process!

A better solution might be to implement an ERP system that works with Lean principles rather than against them. The system being implemented by my customer uses electronic kanbans to control the entire internal supply chain, from generating pull-to-order instructions directly from customer orders, through to launching replenishment kanbans to restock inventory throughout the internal supply chain from major subassemblies right down to withdrawing components from the stores.

The benefits of this approach are twofold: first of all, electronic kanban tickets can be set-up to reflect the physical layout of the production area and second, these tickets become transactional documents which can be used to provide feedback immediately they have been satisfied: the pull-to-order tickets for the top-level items can be scanned to perform a real-time update of inventory status, while triggering backflushing transactions if they are required. Similarly, those backflushing transactions can trigger the kanban replenishment of components and subassemblies; again, real-time and ensuring accuracy throughout the internal supply chain.

The key thing is to roll with lean and support it, not fight against it. Lean works and we know it, but traditional ERP systems generally don't get it. There is -shock, horror - still a place for MRP in this process; many companies acknowledge the value of extending the Lean supply chain externally, but often suppliers have to be coaxed to operate within a kanban environment and it may often be a better interim strategy to use traditional reorder management processes to keep the shelves of the main store stocked. It might not be true Lean as the theorists know it, but then again many of them haven't had to deal with your day to day issues, and it is pragmatic. Similarly, MRP can still provide a medium-to-long-term view of requirements to give suppliers an indication of where the market is heading.

My customer will be going live later this summer. Stage One will be to create a manual kanban board so we can schedule the shop floor, allowing us to mix products and level the cells in a visual and intuitive manner. Electronic kanbans still work in the physical world; they give us a traveller to accompany the work and, by carrying barcodes, allows receipts to be booked with minimal effort, thus ensuring that the ERP system maintains an accurate picture of what is going on. We are also developing the Plan For Every Part (PFEP) to ensure we have a clear and easily understood course of action for the supply of materials to the shop floor, while the first preparatory steps towards the generation of purchase kanbans for a pilot group of suppliers are underway.

Our customers have operated ERP with a Lean core for over many years and have succeeded in enhancing their own Lean transformations by operating in an environment where ERP supports Lean and does not work against it. Very soon, one more British manufacturer will join this select group and allow their systems to catch-up with the superb progress they have made with their physical processes.

Please follow this story through the coming months:- It will also be published on the eBECS blog, the eBECS Customer Update, and the Lean eZine.

Neil Ferguson-Lee

NB - Lean Manufacturing for Microsoft Dynamics and additional Lean functionality provided by eBECS will be generally available on August 1st 2009. To find out more please visit www.leancoe.com