May 2001

By Marianne Bradford, CPA, Tony Mayfield, 
and Chad Toney

For the past decade, organizations have spent billions of dollars and countless worker-hours installing huge integrated software packages known as enterprise resource planning (ERP) applications. Now many manufacturing companies are realizing that the infrastructure they spent years creating is deficient on their plant floor. The ERP systems of the 1990s have become a liability for many manufacturers because they perpetuate some of the legendary material requirements planning (MRP) problems such as complex bills of materials, inefficient workflows, and unnecessary data collection. A new manufacturing model has emerged that’s taking the place of the traditional MRP model. It’s called Lean, Flow, or Demand-Pull. 

Lean manufacturing, a concept with roots in the production processes of Toyota, aims at improving efficiency, eliminating product backlogs, and synchronizing production to customer demand rather than a long-term (often incorrect) forecast. According to a recent study by AMR research, companies are implementing Lean methodologies primarily to improve customer service, reduce procurement and plant-floor costs, and enter new markets. Tom Greenwood is director of the University of Tennessee’s Lean Enterprise Forum, which has conducted more than 40 implementations worldwide. He says, “The Lean enterprise methodology is essentially a growth strategy for increasing sales by trimming the company’s product delivery system into a competitive weapon. The primary goal is to make it easy for customers to get what they want, when they want it, by creating alignment across the business enterprise from customer through distribution, sales, engineering, production, and supply.”

Until recently, the major ERP vendors had all but turned their backs on client demands for support of this new model. Now that smaller, more agile software houses are tapping into niche areas like Lean manufacturing, the major ERP vendors are also beginning to offer solutions aimed at bridging the gap between the shop floor and ERP. These solutions come in the form of modules or add-on components that support Lean initiatives and include features such as design of flow lines, demand-smoothing logic, mathematical models for synchronizing daily production rate to demand, the ability to quickly address engineering changes on the line, Kanban replenishment calculations, graphical method sheets, and backflush and exception reporting. 

These new solutions are promising, but many companies are stuck with their current ERP system for the time being due to large investments in the technology and lack of top management support for Lean tools. In its present state, there’s a debate over whether ERP can exist with Lean in the same company. Some say the two concepts can coexist, while others view them as contradictory. Lean philosophy emphasizes the continual improvement of production processes, while ERP emphasizes planning. Also, ERP creates many nonvalue-added transactions by making companies track every activity and material price in the factory. This is counter to Lean philosophy, which aims at speeding up and smoothing production. 

Lean requires a significant change in conducting business that can run counter to the structure of the ERP system. Yet some companies that have invested in a massive ERP installation are trying to make the two work together on the plant floor. This is just what Cincinnati Machine, a global manufacturer of machining and turning centers, is doing. According to Roger Miller, director of materials at Cincinnati Machine, “Once we put our pull mechanisms in place, we had to systematically ‘turn off’ all of the logic and reports that ‘push’.” 

Many companies, however, don’t want to configure an ERP system to work with Lean. Instead, they’re demanding Lean functionality packages. Experts warn that numerous ERP vendors talk about Lean functionality, but few offer the full package. For some ERP vendors, Lean simply means their system supports a pseudo just-in-time (JIT) way of providing mass customization of products. A common mistake that companies make when they are implementing a Lean program is the same mistake software vendors make when marketing Lean packages—they pick one tool from the toolbox and assume they have developed a Lean software system. 

So what functionalities should a package have to support Lean thought, and what offerings are currently available from ERP vendors? We interviewed the directors of product management at some of the top ERP vendors to find out. We asked about manufacturing strategies, material and capacity planning, scheduling, Kanban, and supply chain. The results are shown in the chart on pp. 32 and 33.

Manufacturing Strategies 
To prepare for a Lean implementation, companies must understand and outline the nature of their manufacturing operations. This strategy defines the method or methods a manufacturing organization uses to build its products. These methods are divided into two broad categories—discrete and continuous. A discrete method also can include subcategories of assemble-to-order, build-to-stock, configure-to-order, and engineer-to-order. Continuous production methods can include make-to-order, make-to-stock, and configure-to-order. For example, an aluminum company might be defined as a continuous, make-to-order organization, while a car manufacturer would be defined as a discrete, assemble-to-order or build-to-stock organization. 

Discrete:
 Build-to-Stock is a strategy where customer orders are filled from existing finished-goods inventory (the orders are prepackaged).
 Configure-to-Order is a strategy where products are assembled to order from modules (constructed with prebuilt components and prebuilt modules).
 Assemble-to-Order is where a batch is formulated to 
fill a specific order (constructed from prebuilt 
components).
 Engineer-to-Order is a strategy in which each order is designed to customer specifications (no components, no modules, and no packages).

Continuous:
 Make-to-Stock is a strategy where customer orders are filled from existing inventory (the orders are preformulated and prepackaged).
 Configure-to-Order in continuous production is a strategy in which batches are mixed as a common formulation but are packaged and processed to fill specific orders (the orders are preformulated but not prepackaged).
 Make-to-Order is a strategy in which each batch is formulated to fill a specific order (the orders are neither preformulated nor prepackaged).

Not every company uses a single business strategy in its operations, so many modern ERP software systems allow users to configure more than one business strategy according to industry-specific standards. As shown in the Manufacturing Strategy Support portion of the vendor chart, there are seven strategies. Most ERP vendors can support six of the seven configuration strategies. The engineer-to-order strategy currently is supported by less than half the ERP vendors surveyed. 

Scheduling
A major concern of manufacturers is how ERP systems improve business processes within their plant. Companies must determine whether the ERP system uses actual demand, sales forecasts, or a combination of the two in order to populate and develop a master production schedule. And it’s important that managers understand how this schedule is developed. Interestingly, as companies implement Lean initiatives, they realize that MRP systems have an important purpose that should be used in conjunction with Lean methodologies. According to Paul Pfeiffenberger, director of manufacturing at Survivor Technologies, “MRP should be used for planning, while Lean should be used for executing the plan.” Once the schedule is developed, additional methods are needed to realize the plan. In order to maintain a constant quantity of work-in-process (WIP) while still preserving customer service levels, pull-production methods are employed to signal the replenishment of material rather than relying on MRP to develop a schedule of shop floor WIP.

Most of the ERP vendors we surveyed use some form of MRP to generate and execute the Master Production Schedule. Many also support an “auto-release” function for scheduling orders based on specific promise dates. It’s important that all packages have the capability to turn off this feature so that parts that are on pull aren’t part of an auto-release (push) system. Many of the vendors also provide some capability to develop mixed-model schedules, which is the ability of companies to make any item in any sequence in a lot size of one while simultaneously reducing cycle times and inventory. Mixed-model manufacturing is ideal for both middle-market companies and enterprises in all industries, and it reduces some of the risks of producing in large batches.

Kanban, PRODUCTION, AND LINE DESIGN
Using Kanbans can smooth the flow of production and parts through the manufacturing process. Kanbans also can improve efficiency by providing a simple and effective method of communicating to up-line workstations to begin the next process. Most of the ERP vendors we surveyed offer tools to assist in the use of Kanban replenishment. But if someone needs a special configuration, relatively few of the vendors are able to develop and/or update the Kanbans. Also missing from many of the vendors is any form of line-design tools, which are statistically based methods of designing production lines that will turn out a mix of products with maximum efficiency and minimum waste. Line design synchronizes work activities and the consumption of raw materials while eliminating queue time and work-in-process. It also helps manage a key aspect of customers’ continuous improvement efforts by interactively configuring a balanced manufacturing line.

Material and Capacity Planning
Lean manufacturing is a combination of many synchronized efforts trying to meet real-time demand. With a precise estimate of potential demand, companies not only can predict their production levels more accurately, but they can pass the information along to their suppliers to reduce the waste in the supply chain. With a better forecast of demand, organizations can make sure production lines don’t shut down because of a missing part.

To say that exact customer demand can be predicted months ahead is a fallacy. Nothing is that certain. Therefore, many ERP systems are employing heuristics, genetic algorithms, and even simulation to estimate the uncertainty in demand and effects of constraints on the shop floor. Understanding this variation allows organizations to place bounds (operating parameters) around material and capacity plans. These planning bounds have a higher variability months ahead of planned production, but, as the plan gets closer to execution, the bounds around the forecast get tighter. Modern ERP systems must understand this uncertainty in demand so they can help suppliers plan for the future. 

Most of the surveyed vendors provide some form of materials and capacity planning. The vendors that provide significant planning capabilities include Damgaard (now Navision), Demand Management, Inc., American Software, I2, Infinium, JD Edwards, PeopleSoft, SAP, QAD, and Oracle. Each of these vendors gives users options including flex bounds, variable boundaries for materials planning, and other flexible options. 

Supply Chain
Shop floor lead-time is only a small part of a product’s total lead-time. Even if companies decrease lead-time on the shop floor by a significant amount, this has only a negligible impact on the total lead-time. The objective of Lean is to reduce waste both on the shop floor and throughout the entire supply chain. This increased efficiency will help bolster a company’s competitiveness in the marketplace.

Businesses’ information systems must stretch through the supply chain to enable communication between every link in the chain. One weak link affects every supply chain partner. That means companies must integrate their ERP system throughout their complete value stream to meet customer demand and bring products and services to market in a timely manner. 

Vendors are addressing some of the challenges and issues surrounding the supply chain. Eight of the 14 vendors we surveyed can be configured to run as a distribution scheduler, which is integrated with the shipping and transportation planning of the organization. The scheduler permits synchronization of the transportation system and manufacturing floor to help ensure customer-requested delivery dates are met. All but four vendors can obtain demand data, explode it to share point-of-sale data with suppliers, and provide supplier forecasts.

Is There a Fit?
While the development of Lean tools is still in its infancy, a new paradigm has emerged that will replace the one-size-fits-all mentality imposed on businesses by many ERP vendors. The new paradigm consists of businesses picking and choosing best-of-breed applications suitable for their operations and either modifying or replacing their ERP system. These best-of-breed components can be integrated, resulting in a superior end-product. A new generation of easy-to-install enterprise extension applications are emerging that might even eliminate the need for full-scale conventional ERP. (See Gene Bylinsky’s “Industrial Management & Technology/ERP Challengers” in the November 22, 1999, issue of Fortune.)

However Lean functionality is implemented, the time has come for vendors to address real shop floor needs. It’s crucial for companies to pick the right solutions and implement them correctly. The benefits of a Lean implementation are real, and an ERP package doesn’t have to stand in the way. 

Marianne Bradford, CPA, Ph.D., is an assistant professor at Bryant College in Smithfield, Rhode Island.

Tony Mayfield is a Ph.D. candidate at Nova Southeastern University. He can be reached at tonym@techbriefings.com. 

Chad Toney is a Ph.D. candidate at the University of Tennessee.