Lean and Erp - Can They Co-exist?

This article is also available on our website: PROACTION - Generating Best Practices. It is an excerpt of a paper originally written by George Miller, Founder of PROACTION. It has been modified and updated by Paul Deis, PROACTION CEO.

Introduction

Some pundits have opined that ERP (Enterprise Resource Planning) or ERM (Enterprise Resource Management) is dead and that Lean replaces it. That's like saying that the car chassis is replaced by the new engine. ERP is the backbone system of a modern enterprise. Lean is a management philosophy, with supporting tools and techniques to run a business much faster, cheaper—better. They are NOT mutually exclusive, but Lean ERP must differ from the traditional approach. The chassis needs some design changes.

Is ERP Obsolete? Points to be Made:

• ERP has evolved considerably and has almost ceased to exist as we knew it years ago
• Lean and newer ERP can coexist
• Lean still needs an IT infrastructure- ERP can help provide it
• ERP is compatible with Lean, but software vendors need to improve lean features
• Industry needs to learn to use ERP better to support Lean

Contents
• Lean ERP: Not an Oxymoron
• ERP Definitions and Evolution
• EPADSIG Body of Knowledge Areas
• Lean Definitions
• What are Customers Looking For?
• Lean Aerospace Initiative
• Lean Principles
• ERP Weaknesses
• ERP/Lean Enterprise
• Summary Functional Requirements
• Conclusions

DEFINITIONS

The evolving definition of ERP ...

"An accounting-oriented information system for identifying and planning the enterprise-wide resources to take, make, ship and account for customer orders. An ERP system differs from the typical MRP II system in technical requirements such as graphical user interface, relational database, use of fourth-generation language, and computer-aided software engineering tools in development, client/server architecture, and open system portability." - APICS Dictionary 8th Ed

I always thought that was a very poor definition. Don Frank agreed with me and offered a better one at an EPADSIG (APICS Engineered Products and Aerospace/Defense Specific Interest Group) presentation. It was subsequently adopted in newer APICS dictionaries.

APICS newer definition of ERP:

A method for the effective planning and controlling of all the resources needed to take, make, ship and account for customer orders in a manufacturing, distribution or service company. - APICS Dictionary 10th Ed.

That definition is very valid for a Lean environment. What isn't valid is the design of most ERP software and management systems to utilize it.

Lean Definition 1:
Lean Production—A philosophy of production that emphasizes the minimization of the amount of all the resources (including time) used in the various activities of the enterprise. It involves identifying and eliminating non-value-adding activities in design, production, supply chain management, and dealing with the customers. Lean producers employ teams of multiskilled workers at all levels of the organization and use highly flexible, increasingly automated machines to produce volumes of products in potentially enormous variety. It contains a set of principles and practices to reduce cost through the relentless removal of waste and through the simplification of all manufacturing and support processes. Syn: lean, lean manufacturing. - APICS Dictionary, 9th Ed.

Lean Definition 2:
A systematic approach to identifying and eliminating waste (non-value-added activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of perfection. - The MEP Lean Network

Lean Definition 3:
Perform in the Optimum Value-Added Manner Each Step of the Delivery Process for a Product or a Service to Optimize the Total Value Chain." - Dr. Dan Shunk, ASU

Lean Definition 4:
Set Up and Run Processes to Minimize Defects, Time, Cost/Investment, While Optimally and Profitably Serving Target Markets. - George Miller, PROACTION

Lean is a business philosophy, not just techniques. Lean means doing things as simply and cheaply as possible, while providing superior quality and very quick service. An old joke about this is that you can pick any two. But, that's no longer acceptable. The organization needs to absorb thinking Lean to be Lean. It needs to embed it in its culture, metrics, policies, procedures and finally, its tools.

Some worry that Lean can't be built upon ERP. The real problem is that the vast majority of companies have not even successfully embraced ERP yet, so they would be building on very shaky foundations. I smile to myself after visiting some company claiming to have a "certified Class A ERP system." Then I talk to the workers and start hearing the real story, namely that the Emperor isn't wearing any clothes at most of these companies. Some companies may try to leapfrog ERP, but they will first need to master the basic disciplines of an organized system. No shortcuts there.

LEAN CHANGES TO ERP

While our fathers' ancient MRP-centric ERP is largely obsolete, an evolving Enterprise System approach definitely lives on, mutating and adapting to a new world of shrinking: cycle times, budgets, non-value-added activities and headcounts.

Some companies are implementing Lean tools manually. Some are modifying ERP software, or incorporating third party Lean add-on software/systems to enhance functionality. An isolated few are still trying to do homegrown applications. Cultural change, education and leadership are also needed to help alter how organizations are run. Lean tools are gradually being incorporated into standard ERP offerings, but are lagging behind the pace of the overall Lean movement. Some ERP vendors are now addressing it more through white papers than product development. As mentioned previously, third party vendors are helping to fill the gap. Some of these may be ultimately acquired by the enterprise software vendors.

Some vendors, to differentiate themselves (and confuse us all) are now referring to themselves as "Supply Chain," "eBusiness" or even ERPII suppliers.

Major things needing to be incorporated into most current ERP systems to improve Lean support:

• Rapid system implementation
• Flexible business modeling and system configuration
• Very simple operation
• Built in process mapping, help and training
• Very rapid response processes, from marketing, proposals and design, through order processing, planning, procurement, production and shipping.
• Strong quality assurance support
• Tools to slash administrative, material and production costs
• Facilitate integration with other systems- internal and external
• Fast and simple information visibility
• True built-in constraint management
• Integrated product and process design management tools
• Lean accounting and administration

Some Lean tools needed by many businesses:

• Flow scheduling
• Cellular/focus factory support
• KanBan, consignment, point-of-use inventory
• Rapid supply chain management
• Supplier management, VMI,
• Near real time, flexible scheduling
• Six-sigma tools for quality planning, monitoring, improvement
• Standardization/group technology
• Project management for production, capital and development projects
• "Control panel" metrics

Although some of these can be supported by software, these approaches first need to be built into an organization's overall management system. Even if software was ready for Lean, we still need to get most companies' management, employees and implementation support ready for it. The rarest and most important resource needed for changes of this magnitude is still executive leadership and management support—it's not really about software.

LEAN OBJECTIVES

To understand what Lean is about, we first need to fathom what it is supposed to accomplish.
To understand what Lean attributes we need or don't need in ERP, first start with stakeholder expectations ....

What Are Customers Looking For?

• Fast Turnaround, for inquiries, order processing and delivery, changes, information requests, new designs, engineering changes and other great customer service.
• High Quality- very low defects in product, process and administrative activities.
• Good Price- Not just low unit price, but low total cost, considering unit price, other landed cost factors, cost of quality, cost of development, changes, maintenance, support, procurement-related costs.
• Easy to Work With- Simple, straightforward service, no endless waiting on hold and convoluted voice mail menus, no runaround,

What Are Stockholders Looking For?

• Profits- Competitive return on investment.
• Equity Growth- Short/Long term.
• Security of Principal
• No Legal, Ethical Hassles- No "Enrons."

What are Employees Looking for?

• Security of employment, income, benefits
• Interesting, worthwhile work, sense of purpose

Lean Aerospace Initiative Objectives, as promoted by The Lean Aerospace Initiative:

• Promote a lean leadership at all levels
• Continuously focus on the customer
• Development relationships based on mutual trust/commitment
• Optimize capability and utilization of people
• Make decisions at lowest possible level
• Nurture a learning environment
• Implement Integrated Product/Process Development (IPPD)
• Identify and optimize enterprise flow
• Ensure process capability and maturation
• Maintain the challenge of existing processes
• Assure seamless information flow
• Maximize stability in a changing environment

Lean Principles (Generic):

We put these together based on experience and exposure to Lean thinking:

• Identify Product Value Stream
• Rapid Response to Customer Needs, Competition, New Tools and Technology
• Flow- Single Piece
• Pull
• Eliminate Waste
• Lean Product and Process Design
• Responsiveness to Change
• Continuous Improvement
• Elimination of Defects
• Standardize- Eliminate Process Variation
• Visual Management/Control Systems

WHAT'S WRONG

What "They" Hate About Traditional ERP

Those who badmouth ERP raise some valid points which must be addressed. Here are the most common complaints we have heard.

• Proliferation of Screens, Transactions
• Cumbersome Transactions/Release Procedures
• Batch Process Orientation
• Fixed Lead Times, In Day or Longer Increments
• Poor Constraint Planning/Management- Set-Piece MRP, with Disconnected Resource Planning for Multiple Constraints
• Failure to Manage Non-Recurring & Non-Production Activities
• Weak Document Management
• Hard to Extract Information
• Weak, Inflexible Workflows
• Lack of Lean tools such as KanBan, VMI, etc

Earlier ERP approaches had additional problems, somewhat better addressed now, such as:

• Lack of financial systems integration
• Lack of support features, such as maintenance, QA
• Lack of project management integration

What Have Vendors Done About This?

In our experience, software usually lags the development of new business philosophies and techniques by a number of years. It took an infuriatingly long time for even very basic JIT concepts to percolate down into business software and corporate practices. The job still isn't complete. Newer Lean concept implementation is still lagging. It takes years for new ideas to be understood and accepted. Then companies need to insist on their adoption and organize planning and implementation activities. Software companies need to discern customer requirements, even anticipate them, then provide software tools and support services for them. Finally, industry needs to learn and effectively implement the new tools.

WHAT TO DO ABOUT IT

More proactive companies aren't waiting for software vendors. They're devising manual approaches or writing their own software. Some are advising their software vendors on what they need. A new sub-industry of dedicated Lean software tools has also emerged.

Don't wait for the ideal software. Move ahead to develop and implement cost effective approaches early. Your ERP system can be extended by manual procedures, interfaces with other systems, home-grown software, third party add-on software and/or enhanced functionality from ERP suppliers. Early attempts can serve as prototypes for more elegant ERP enhancements later on. Try to develop add-ons and modifications in a way that will not harm maintainability and upgradeability of ERP software later on. Some of the add-on application vendors will ultimately be swallowed up by the enterprise software suppliers, when they finally see how important these applications are becoming.

In selecting ERP software, add-on software or undertaking your own projects, look for the following .....

What to Look For (High Level):

• Embedded Business Philosophies (Lean, Six Sigma, TOC, JIT, etc.)
• Flexible, Rapid
• Technology/Platforms (Open, flexible, low cost)
• E-Business/Web-Enabled
• Ease of Integration
• Support Lean Operations
• Support Lean Finance/Costing
• Support Lean Product/Process Development
• Support Industry Oriented Application Savvy

What to Look For (General):

• Easy to Set Up, Flexible to Change
• Basic Structure/Discipline
• Simple to Extract, Process Data
• Able to Define and Control Straightforward Processes
• Supports Needed (and Required) Business Processes
• Simple as Possible to Learn and Use
• High Quality Software, Documentation, Support
• Strong Future Product Plan to Stay Competitive
• Best and Better Practices

What to Look For (Set-Up, Implementation):

• Rapid Implementation Tools
• Guided, Template Set-Ups
• Vertical Market (A&D) Versions
• Model Implementation Plans/Set-Ups
• Simple Table/Parameter Setups
• Template Data Maintenance
• Simple, Flexible Report/Inquiry Writing
• On-Line, Context-Sensitive Help, Tutor
• Easily Customized Workflow, Screens, Options

What to Look For (Operations):

• Flow Manufacturing
• Cellular/Line Support/Line Balancing
• Kanban/Pull
• VMI (Vendor-Managed Inventory)
• Minimal Transactions Needed, Simple Data Entry
• Near Real Time Scheduling
• Cycle Time Management
• Exception Management
• Quality/Process Management
• Constraint Management
• Cross-Contract Planning (with Soft Pegging/Allocation)
• Non-Recurring and Recurring Activities
• Rapid/Efficient Transaction Input, Defaults, Automation
• Interface/Integration With Process Control Systems

What to Look for (in More Detail):

Engineering/BOM/Routing:
• Coding to Promote Group Technology/Sourcing
• Model the Manufacturing/Service Process
• Facilitate Alternate Config.'s, Process Def.'s
• Reduce Defects Through Accurate, Timely Configuration and Process Spec.'s, Release and Change Management.
• Manage Documents, Workflow

Program/Contract Management:
• Support Timely, Accurate Estimates
• Support Competitive, Profitable Pricing
• Record, Flow Down, Contractual Commitments
• Tight Tie-in To Program Schedules
• Operations, Finance Integration
• Comprehensive Budget Definition and Tracking
• Timely Identification/Correction of Problems
• Ensure that Proper Configuration Used
• Efficient Transaction Processing for High Volume Environments

Planning:
• Group Requirements- Same, Similar
• Consume Excess, Alternates, Substitutes
• Time-Phase—Granular
• Optimize Constraints- Time, Material, Labor, Equipment, Manpower, Technical
• Respond, Adapt Quickly
• Reduce Related Administrative/Indirect Costs
• Ensure Proper Configuration Used
• Help Manage Inventory, Production Resource Usage and Disposition

Procurement:
• Improve Sourcing
• VMI, POU (Point Of Use), KanBan, E-Business
• Speed Up Procurement Process
• Highlight Requirements, Specs.
• Facilitate Competitive Pricing
• Reduce Defects Through Sourcing, Requirements, Metrics, Communication
• Administer PO's, Contracts, Releases, Outsourcing, Processing
• Reduce Related Administrative Costs
• Help Manage Supplier Partnerships, Including Supplier Certification/Evaluation

Quality Management:
• Define/Deploy Quality Requirements, Quality Plan
• Support/Track Certs., Inspection
• Track all Defects, Reduce Process Variation
• Quickly Identify and Highlight Actionable Exceptions, Highlight Corrective Action
• Ensure that Tooling, Personnel Qualifications, Documentation, Materials, Processes, are Correct
• Maintain Traceability, Accountability

Operations:
• Schedule, Control Activities
• Accurately, Efficiently, Track Material Movement, Storage, Usage- VMI, POU, KanBan, E-Business
• Help Ensure That Proper Items/Configuration are Used
• Help Manage Release, Issue, Staging, Management of Work Flow and Needed Resources (Material, Labor, Equipment, Tooling, Documentation/Specs./Instructions)
• Record Work Performed, Configuration, Processes Used.
• Record Costs, Variances

Financial/HR:
• Manage Funding, Billing, Collection, Disbursement
• Keep Timely, Accurate Books—Enterprise, Business Unit, Cost Center, Program, Project, Part, Cost Element, for Budget and Actual
• Quickly, Efficiently, Track Costs and Variances for Products and Processes
• Manage Assets, Cash, Investments—Improve Cash Flow
• Manage Human Resources- Skills, Benefits, Payroll- Improve Employee ROI, Employee Satisfaction

Universal Requirements:
• Effective Leadership, Commitment
• Effective Plan
• Data Integrity
• Excellent Education, Training, Support, for Qualified, Motivated People
• Effective "Upstream" Systems: Forecasting, Engineering, Sales
• Streamlined, Flexible Processes
• Metrics

IMPLEMENTATION CONSIDERATIONS

Software is maybe 20% of the equation. A "system" is an organized way of accomplishing and objectives and may consist of:

• Mission
• Leadership
• Goals, Objectives
• Metrics
• Organization/people
• Policies
• Procedures
• Education
• Training
• Tools, such as software, hardware and other technologies

Successful Lean implementation often requires all of the above for success, although some success can result with only some of it. Many Lean improvements can be accomplished without any software and computers, but these are required for best results and integration with other systems in more complex environments. In the meantime, significant improvements can be made through adoption of Lean philosophies and techniques, with manual or semi manual systems. But if a company's competitor already has Lean IT systems and the company doesn't, it's like knives vs. guns. An outstanding knife fighter may prevail over an inept gunslinger, but why risk it?

Other Points

The sun does not rise and set on Lean. Although its principles are widely applicable, they tend to revolve around operational matters. Marketing, Development, CRM and Human Resources are equally pressing areas needed for success.

Lean is simplicity. It is much less complicated than almost any other philosophy of running a business. Yet some people, more specifically, certain vendors, consultants and academics, are trying to make it more complicated. They are developing complex new algorithms, new terms and techniques at a dizzying rate, in a frantic attempt to gain "traction" and visibility. Resist this. Keep it SIMPLE, keep it LEAN.

This article is based upon a presentation first given at Tools For Business Survival- St. Louis MO, APICS SIG Conference, April, 2002 (www.apics.org)