Especially in today’s globally competitive and recessionary environment it is imperative that companies further eliminate waste, become leaner, and become more agile to respond to customer’s demand. The ability to sense demand and become a demand-driven (responsive) business is more than just the catch-phrase du jour: it has become a recipe for survival. Everyone is on a quest to deliver on time and as quickly as necessary, with minimum inventory (and working capital), and highest necessary utilization.
It has always been particularly tough for manufacturers, but especially painful during the ever-changing and challenging times from the end of the past century. As an AMR Research’s alert from 2006 said,
“In today’s demand-driven economy, manufacturers are expected to turn on a dime and also to squeeze more order throughput out of aging manufacturing assets. They are facing shorter order lead times and increasing product mix while, at the same time, expected to reduce raw material, work-in process (WIP), finished goods inventory, and total manufacturing costs. And, by the way, targets for quality and regulatory compliance aren’t being relaxed.”
This verdict was handed out well before we even had an inkling of a looming global financial crisis and recession. While the Tea Party wave and sentiments of late might help corporations with the regulatory aspect (at least in the United States), all of the other aforementioned imperatives and challenges are not going to go away in this free market environment.
For a few decades, the providers of a multiplicity of by and large integrated manufacturing software solutions have been offering help for embattled manufacturers. From fully integrated business management systems such as Enterprise Resource Planning (ERP) down to more focused modular plant-level solutions including Manufacturing Execution Systems (MES), Shop Floor Data Collection (SFDC) systems, and Advanced Planning and Scheduling (APS) systems (whereby each of those systems ultimately exists to improve efficiency), manufacturers have been perplexed with how best to combine and deploy these options and islands of information. TEC’s recent blog post seconds the sentiment of how an abundance of touted solutions can only confuse prospective customers in the realm of supply chain management (SCM).
Yet the past decade or so has also seen a new school of thought enter the fray that has sought to undermine and reject much of this enterprise applications-based assistance. The so-called “lean purists” have been belittling the use of software and sole reliance on the concept of Visual Production Control (VPC). The VPC goal is to use common sense visual signals (i.e., Kanbans or supermarkets) to initiate (trigger) a new action (e.g., replenish an empty container or bin) rather than any technology tools. For more information on the topic, see TEC’s 2006 article entitled “Manual Versus Information Technology Enabled Lean Manufacturing.”
Excel: Far From Manufacturing Excellence
Bundled with this lean Luddite movement of a sort is the temptation to use inexpensive and pervasive tools such as Microsoft Excel, Access and/or Project to conduct sophisticated jobs such as integrated business planning (IBP), capacity requirements planning (CRP), and scheduling. But spreadsheets and other general tools do not provide the out-of-the-box features that many planners desire, and are thus often heavily customized by one person who invariably is the only member of staff to really understand how the modified file works.
In an even worse scenario, spreadsheets are modified by multiple persons, making it virtually impossible to know which version is the best “version of the truth.” Spreadsheets also don’t have the capability to effectively perform “what if” comparisons of alternative complex scenarios and assumptions, and hence foresee the impact of decisions before they are made. It is also a simple and inescapable fact that the abovementioned enterprise systems are at least capable of automating and working with volumes of data on a scale many times greater than can ever be handled on a manual or semi-automated basis.
For more information on Excel’s siren song entrapments in the realm of SCM, see TEC’s recent blog post. Having said all this, an Excel-like user interface (UI) in enterprise applications is desirable, as Kurt Chen discusses in his blog post. Yet, this cosmetic aspect should not be confused with using insecure and inconsistent Excel spreadsheets all over the enterprise.
ERP: Necessary But Not Sufficient
Thus, the first step forward for many manufacturers has been the deployment of an ERP system. Despite some pundits’ exaggerated claims of ERP’s demise at the turn of the century, ERP systems have proven themselves in costing, accounting, inventory control, order management, and transaction control for key business processes such as invoicing and producing financial statements.
But most traditional ERP systems have long-term planning capabilities that do not easily provide the functionality to manage production on a day-to-day (let alone hour-to-hour) basis. While many ERP systems have a scheduling module for manufacturing, they often do not have the capability to manage individual orders in real-time or provide the reactivity that matches the complexity and reality of the shop floor.
ERP systems typically do not have the data and business logic to model a system in enough detail to manage shop floor intricacies. They can perhaps model work centers based on assumed capacity availability, order priorities, and due dates. But they lack the capability to model the entire shop floor and improve flexibility through what-if scenario planning and quick (re)scheduling processes to accommodate unplanned events such as asset failures, manufacturing nonconformance runs (scrap and rework), engineering change orders (ECO), and rush jobs.
ERP: Lacking on Execution
As Demand Solutions’ white paper entitled “Is Advanced Planning and Scheduling Right for You?” describes, when the time comes for ERP to execute the production plan, all of the inefficiencies and disconnects between departments and their silo systems manifest on the shop floor. For example, while one machine becomes a bottleneck, another machine with the same capabilities stands idle, or instead of grouping jobs to minimize set-up time, excessive time is spent changing over repeatedly. (Along similar lines is the white paper by Preactor entitled “The Leanest Lean you have ever Seen.”)
Even if the schedule starts out as planned, whereby materials are available when needed, throughput is efficient, and customer orders are shipped on time, disruptions occur that require the planner’s attention. What happens if, say, a machine goes down, the plant has a “rush” order (for a very important customer), or it simply does not have the capacity to get two competing orders out at the same time?
The more waste that is introduced throughout the planning system, the higher the production costs are, which results in less profit (or even a loss). The more resources the company has to manage and the more jobs it has to schedule, the more complex the environment becomes. Managing disruptions can be more time consuming than creating an original plan in the ever-changing detail at the level of the shop floor.
Interactive tools are required to help the planner make more effective decisions via what-if scenarios to test the alternatives before the final decisions are made. Analyzing the impact of the planner’s scheduling decisions can be even more challenging. At times the objectives may appear to be conflicting: how does one, e.g., maximize profit and minimize setup time, while also meeting the delivery dates?
Some companies can get by using ERP to generate a list of orders and their due dates (or some other priorities) for manufacturing to prioritize and sequence these (often with manual intervention) if they have infinite (or lots of spare) capacity, low product mix, their customers’ tolerance for long order lead times, and low inventory holding costs. In addition to the inefficient use of resources, how many companies that can brag about the abovementioned luxuries can we think of in this cutthroat “global village” today?
In most manufacturing companies, combined planning and scheduling is critical to the successful execution of the production process. Successful execution requires purchasing, production, shipping, customer service, engineering, and management to be “on the same page”. The planning process needs to be connected so that capacity loads are efficiently and effectively managed, while detailed and actionable schedules are communicated to production, and material requirements are communicated to purchasing based on realistic schedules.
Lean ERP: “Lean & Mean” Enough?
Given that the aim of lean manufacturing concepts is on-time deliveries with minimum inventory, short lead times, and high needed utilization (as are the aforementioned current imperatives for most enterprises), the next logical question is whether Lean Manufacturing practices can alleviate the abovementioned ERP shortfalls. The lean theme has been a hot item of late due to the global pressure for companies to compete on agility, quick inventory turns, and on-time delivery, while reducing costs and inventory levels.
These requirements lead to smaller batch sizes, whereby sequencing becomes increasingly important to synchronize the materials’ flow and capacity (e.g., the assembly of car seats or dashboards). On a high level, lean manufacturing is all about eliminating waste (“muda” in Japanese), including excess production (and consequent inventory), unnecessary movements of people and/or materials, excess queue times, over processing, and scrap.
Typically, a lean project starts with a thorough Value Stream Mapping (VSM) exercise to identify and eliminate non-value-added processes and waste. The lean thinking revolves around the concepts of takt time (production rate or drumbeat), heijunka (load leveling and line balancing), and manufacturing process redesign to make it more agile (i.e., the ability to quickly change between product runs and reduce setups). For more information, see TEC’s previous article entitled “Lean Tools and Practices That Eliminate Manufacturing Waste.”
Many lean evangelists and consultants have been saying that 6 percent of products create 50 percent of the total manufacturing workload at most manufacturers. These products have been called “runners” in Preactor’s marketing collateral due to their supposed level demand that can grant the flow (cellular) manufacturing mode with dedicated resources. Thus, any company should make runner products exactly to-order or how much the company sells.
In contrast, according to these experts, ERP and APS systems force companies to make runners in economic order quantities (EOQs), and hence, the companies should not use them. Instead, these companies would be better served by implementing the abovementioned VPC concepts based on pull systems such as kanbans, combined with the company’s ability to make every part every interval (EPEI) in cyclical schedules (period batch control).
The next part of this series will analyze whether the lean concepts are the answer for every manufacturer. The findings and suggested solutions might surprise you (or not). In the meantime, please send us your comments, opinions, etc. We would certainly be interested in your experiences with these software categories and your best practices.
Great discussion PJ - we replace the 1913 EOQ model with economic value added to implement lean concepts. We use visual production control signals or color coded alerts relative to optimum econimic value adde to trigger decisions or actions. Economic value added is a much better metric than EOQ’s variable costs and we can combine benefits of information technology with VPC.
Interested in John Krech’s comment on using EVA instead of EOQ. How do you modify the EVA formula to use as a new “EOQ”?
I can see how you can use Lean as a shop floor alternative, but how do you take that into the front office operation?
Hi Geoff, we took the formula for EVA and factored in all the variables for inventory - such as ordering costs and storage costs. We also factored in the impact or safety stock, stock-outs, etc… This allows us to find the inventory level that maximizes EVA. The formula is more complicated than the EOQ and requires different techniques to solve for the best answer - techniques that are a good fit for the use of a computer. It is an innovative process that we are patent pending. Once you have determined the optimum inventory level, you can do all kinds of things, such as automating purchase orders and using VPC’s to communicate the current status relative to that level.
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