Lean vs ERP

Dec. 21, 2004
As Briatico of Maytag puts it, "Superior execution of lean will lead to superior competitive advantage." So long as ERP doesn't get in the way

Who would have imagined that enterprise resource planning and its forerunner, manufacturing resource planning -- the core of manufacturing information systems for the last three decades -- would one day be viewed as the enemy of streamlined production? It's true. Pitted against each other in a battle on the plant floor today are:

  • Enterprise-resource-planning (ERP) software -- installed at tens of thousands of manufacturing companies during the last decade.
  • Lean manufacturing -- an increasingly popular concept pioneered in Japan by Toyota Motor Corp. and since embraced in the U.S. by thousands of firms.

With traditional manufacturing resource planning (MRP II, the planning engine in most ERP systems today), manufacturers base production levels on sales forecasts.

In contrast, lean manufacturing -- also called flow -- ties production levels to actual customer demand. Nor does the conflict end with production levels. Lean emphasizes getting the manufacturing process right and then continually improving it; with ERP the emphasis is on planning.

The former has the goal of eliminating all wasted time, movement, and materials; the latter seeks to track every activity and every piece of material on the plant floor. Lean is action-oriented; ERP is data-dependent. One has workers doing only things that add value to the product; the other has them recording data and bar-coding to keep track of inventory and labor.

"ERP gives information, but it does not necessarily add value to the bottom line of a company," says Stephen McMahon, director of the lean-manufacturing business unit at Coleman Consulting Group, San Francisco. "You can spend more time bar-coding than manufacturing products."

Adds senior manufacturing analyst Tom Grace of AMR Research Inc., "Companies get no shop-floor productivity out of ERP." Adding fuel to the ERP bonfire is skepticism on the plant floor and in corporate offices about the reliability of MRP data.

"Most people don't even believe the reports they get," says Stacy Alexander, process manager at Greencastle Metal Works Inc., which scrapped MRP to adopt a lean approach. "When we did MRP, we'd find 30 transactions that were incorrect."

For these reasons, many manufacturing plants often have trouble swallowing the corporate IS dictum that they will use ERP. "It's no surprise plants resist implementing ERP; one step forward for IT may overturn years of streamlining operations," Grace writes in a February 1999 report entitled, "ERP and Flow: The Status Quo Meets Its Replacement."

Some say the two concepts can coexist in the same plant; others disagree, viewing them as oil and water.

"Sales-forecast systems are a waste of time and are usually wrong," says Tom Briatico, vice president and general manager of Maytag Co.'s Cleveland Cooking Products division in Cleveland, Tenn. "I think ERP is a waste of money. We're staying away from ERP. We want to eliminate MRP because it doesn't work. You want to fix the process -- spend all your time there."

Adds consultant McMahon, "To do both ERP and lean jeopardizes the success rate of either."

The Problem with ERP

On the plant floor, ERP often becomes a liability. The problems it introduces -- or perpetuates from the days of MRP -- include complex bills of material, inefficient workflows, and unnecessary data collection. The introduction of lean to a plant suffering from these MRP-induced ailments offers a much-needed antidote.

"Flow replaces ERP on the shop floor and also cures IT headaches that ERP inspired in factories," writes Grace in his report. That's because some manufacturers spent millions of dollars putting in company-wide ERP systems without first redesigning their manufacturing processes. It would be the same as putting the sled in front of the dog team, experts say.

By contrast, says McMahon, "I'd attack lean first, and then, once you've removed all the wasteful processes, you can standardize it with ERP." A classic example is streamlined line design, which is especially important for lean manufacturing to work. Why rush to institutionalize a wasteful process by laying an ERP system over it? Yet many manufacturers did -- and are still doing -- just that, consultants say.

Asked how many clients bothered to redesign their processes before installing ERP systems, Roger Sherrard, marketing and communications manager with IBM Global Services, responds, "None. Not a one."

Some companies that have fully embraced lean-manufacturing precepts have found it beneficial simply to disconnect MRP altogether.

"We were using MRP before, but we turned it off because it creates a lot of non-value-added transactions," explains Greencastle's Alexander. "We do no inventory transactions or labor reporting -- nothing. We use no software except Microsoft Excel for the bill of materials to keep parts going to the floor."

The Chambersburg, Pa., manufacturer of continuous-production-line equipment has gone to a complete demand-flow operation.

"If you have your process correct, there's nothing to track -- it's moving too fast."

One way to get the process right is to use one of the simulation products on the market today that help companies figure out how to optimize their manufacturing lines. Tecnomatix Technologies Ltd., with U.S. offices in Novi, Mich., offers a family of sophisticated computer-aided production engineering systems. These include its AnyPlan module, a workplace- and layout-design system that simulates the effect of redesigned or new assembly lines.

"We have a number of customers that do lean manufacturing and use our tools," says Gadi Becker, vice president of marketing at the Herzeliya, Israel-based software firm. Greencastle's improvements as a result of the shift to flow manufacturing are remarkable yet typical for lean converts.

"We had two facilities before, and we're now in one," Alexander recounts. The company has about the same sales with less than half the square-footage of production area, 31,000 sq ft today versus 75,000 sq ft two years ago. The work area was completely redesigned. For example, one work cell that used to take up 1,128 sq ft today fits into 484 sq ft. Parts now flow in a U-shaped pattern, instead of back and forth several times among the same areas.

"Extra space means there's a place to lay a part down," Alexander says, sounding like the proselytizer she has become for the flow concept. "You can bet it's going to get laid down if there's space, and if someone is laying it down, it's waste -- it's not adding value."

Most dramatically, Greencastle is getting set to remove the biggest symbol of the old inventory-laden days: the racks and shelves that used to contain parts.

"We're getting ready to pull all the racks and shelves on the floor out," she says triumphantly. Instead, production workers in each weld cell now are responsible for ordering the parts they need.

"The ownership and control of these operations are spread to everybody," Alexander explains. As a result, inventory was reduced by $1 million to $170,000, with a further reduction expected this year, she adds. The order-to-ship cycle, formerly three to four weeks, today is down to five days. Last year's sales were up almost 7% as the company operated in the black once again. "And we're looking better for 1999," she adds.

Leans Impact on Workers

Perhaps the most difficult part of the transformation to lean is the impact on workers. At Greencastle, for instance, the workforce was reduced, from 150 in May 1998 to 109 a year later. And those who remained had to be retrained in the new lean culture.

"You're asking these people out on the floor to run your system," Alexander says. "The labor employees are handling the customer orders. The planners and others whose positions were not needed anymore were offered a chance to go into labor or to overhead positions."

Some took the labor route, others went to the office, and some were laid off, she says.

"Ultimately we ended up with a leaner workforce."

Her own department of master schedulers and planners, which had 22 people to start, now has two employees. Since the workforce was trimmed, employee turnover plunged, from about 40% in 1997 when the company lost money, to 4% as of May. The dramatic shift to lean, Alexander says, was prompted by a loss the company incurred in 1997.

"It became real clear that if we were losing money, as a $12 million-a-year privately owned company we couldn't go too many years. . . . Keeping jobs was a big incentive to change." Part of the problem is that ERP is top-down and lean is bottom-up. The solution, says one consultant, is compromise at the management level.

"Companies almost always put a stone wall between the two initiatives," says Edward Frey, vice president in consultant Booz, Allen & Hamilton Inc.'s San Francisco office. "People in management are the only ones with the authority and perspective to bridge the gap."

Both parties within a company -- its lean proponents and those sponsoring ERP -- should articulate their needs better. "They can work together," Frey adds.

Booz Allen offers its clients an eight-point plan to help them integrate ERP with lean. Certainly, in many companies lean and ERP do coexist, if only out of necessity. On one hand, ERP has been implemented away from the plant floor, primarily to manage accounting, human resources, and corporate-level planning. Meanwhile, factories have been able to continue to implement lean concepts under the same corporate roof. Some companies that have tried to use both, though, lament the fact that most ERP software companies have all but turned their backs on the lean concept.

"Baan, J.D. Edwards, Oracle, and SAP are going to have to recognize that, while their traditional tools served people, they are going to have to move on to the next paradigm," says Eric Kulikowski, general manager of the Westminster, Colo., operations of Pittsburgh-based Respironics Inc., a manufacturer of life-support equipment. "The market is completely untapped a this point." ERP software companies generally have been slow to connect their systems with those inside the plant.

"There isn't really standard software for lean manufacturing," says analyst Grace. "ERP vendors have refused to acknowledge that users need additional flow-related functionality. Standard tools could institutionalize consistent flow-manufacturing practices across the entire business, but such products are just hitting the market."

In the U.S., the flow-manufacturing concept was pioneered by the John Costanza Institute of Technology Inc. (JCIT), Englewood, Colo., which is one of the few organizations to offer software that supports it. Others include American Software Inc. and Oracle Corp. Respironics, for instance, has been using JCIT's Flow Power system for a year and a half.

"We use Flow Power to run the manufacturing elements of our Pittsburgh plant, and the rest of the business is run with SAP's ERP system," says Kulikowski of Respironics. American Saw & Mfg. Co., East Longmeadow, Mass., is installing Oracle's Release 11 ERP applications, which contain support for a number of flow concepts.

"Part of the reason we chose Oracle was because they did have flow functionality," says Tom Demers, project manager at the manufacturer of blades for band saws and hand tools. For its part, Oracle made an effort to integrate flow principles into its latest manufacturing software release.

"We have more than two dozen companies represented on our customer advisory board that have contributed to the design or have been implementing Oracle Flow Manufacturing," says Thomas Chang, product-marketing manager for manufacturing applications at the Redwood Shores, Calif., software giant.

Continous Flow Production on the Rise

But the rest of the ERP software community remains asleep when it comes to lean, despite the fact that demand-flow concepts are sweeping the manufacturing community as companies see the stunning benefits to be had in terms of plant-floor productivity -- something ERP doesn't even begin to deliver even on a good day.

Nearly half the 500 largest industrial firms are deploying continuous-flow production strategies, reports Industry Directions Inc., an IT research firm in Newburyport, Mass. Despite the conflict between ERP and lean, some manufacturers say they haven't encountered any major difficulties integrating the two. Hay & Forage Industries, a Hesston, Kans., manufacturer of hay balers and harvesters, is in the early stages of using both MRP and flow.

"People say MRP and flow don't go together, but we haven't found that conflict," says Terry McCloud, manufacturing-flow manager. "We've been getting into flow manufacturing for better than a year, and we've had some successes. But we're doing it step-by-step, and it's a slow process."

One software vendor that is advanced in supporting flow concepts with its systems is American Software. American's Flow Manufacturing module helps plant managers to model new production-line designs, simulating capabilities and aiding in setting up the daily production plan.

"We found it necessary to develop a complete flow-oriented application because the transactions are so different," says Karin Bursa, vice president of marketing at the Atlanta software firm. "For instance, our product supports kanbans so that triggers for a kanban go from the line to suppliers automatically."

The software's graphical line-design feature also can be used to model changes and their effects "to see if they create any kinks or bottlenecks," Bursa adds. As if to prove that oil and water can mix, American Software has integrated the Flow module with its ERP system, as well as with that of another ERP software firm, JBA International Inc. The idea, Bursa says, is to facilitate the necessary points of connection between the two.

"Some critical information has to be shared," she explains. This includes inventory data, demand information (customer orders or forecasts), supplier information on material availability and procurement, cost data, and the item master.

Four out of five of American Software's 55 installation sites at 15 companies using its Flow Manufacturing module are integrated with other ERP systems.

"The bottom line is that enterprise information such as inventory, financials, and customer orders is critical whether you're in a lean environment or not," Bursa says. Although some lean manufacturers have done away with MRP, it's true that most still need some mechanism for long-term planning.

"We do look out at least six months for sales," says Alexander. "We grab a forecast from our customers by fax or e-mail weekly or monthly. We use those to project capacity, and we have contingency plans to handle extra workloads."

Regardless, the main thing is, she says, "You only produce something if there's a demand for it."

Another thing lean has in common with ERP is that both require a major commitment on the part of employees -- and management. "This is a major culture change for U.S. manufacturing," says Maytag's Briatico. Alexander of Greencastle Metal Works agrees: "It's a whole change in the culture and philosophy of the company." And it's not just retraining the workers, but getting everyone -- including management -- behind the new plan, she points out.

"You run into managers who can't make that change." A recent AMR Research survey of 20 companies that adopted lean manufacturing reveals that 19 had to change the factory management, Grace says. Clearly, though, for the vast numbers of manufacturing companies that have committed to the lean concept, it's almost a religion, with each convert becoming a true believer.

As Briatico of Maytag puts it, "Superior execution of lean will lead to superior competitive advantage." So long as ERP doesn't get in the way.

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