The Just-in-Time paradigm offers opportunities for leveraging MRP, when used in conjunction with cost based comparative measurements, which reveal the tactical strengths and weaknesses of both MRP and Lean. A description of the affect Lean/Flow has on the MRP applications hierarchy will be provided, and best practice alternatives will be described and recommended for maximizing the return on your ERP systems investment.

INTRODUCTION

Consider this not so distant future scenario. Manufacturers join virtual market places only to find buyers holding the threat of alternative sources of supply over their heads in order to cut prices. Margins begin to drop, and although demand for some vendors has increased, buyers are now requesting faster and more frequent re-supply over a broader product mix. Many attempt to meet the challenge by increasing finished goods. Some will also increase capacity. Both efforts expend tremendous amounts of working capital, and over time these companies find that this environment, instead of facilitating their ability to evolve, has sapped their capacity for change, jeopardizing long-term survivability. Lean manufacturers on the other hand exploit these vulnerabilities, by cutting work in process and finished goods inventory, dramatically reducing investments in working capital. Margins are maintained or improved, even while prices are being cut. Lot size optimization production techniques are used as the engine, while Lean and Six Sigma methodologies seamlessly drive and manage demand by bridging the SCM/CRM gap.

Thomas Vollmann states that “as the manufacturing world moves toward the ‘zero everything’, zero inventory, zero lead-time, zero defects, zero waste, vision of the future, fundamental changes will take place in the factory. These changes will necessitate changes in Manufacturing, Planning and Control (MPC) systems as well.”¹ Where productive processes have been reconfigured under Lean imperatives, shorter lead times now offer an opportunity for manufacturers to fulfill a greater proportion of daily demand directly from the factory floor, thereby de-emphasizing inventory in support of unanticipated swings in demand. Many U.S. manufacturers though still need to be weaned from the idea that the Master Production Schedule (MPS), as mandated by forecast based order management imperatives, is the sole method for managing demand. “There’s a flaw in the premise that technology can synchronize every party in the product chain by providing a transparent view of supply and demand: the forecasts driving the entire flow of work are still concocted by people… No matter how mechanized the system becomes, sales managers and CEO’s still shoot for the moon...”² When Production Managers misuse forecast based supply chain management tools to plan ATP, the advantages offered by Lean oriented systems are nullified. It is this misunderstanding of the strategic inventory alternatives that are available under a Lean reorganized productive process that cause misguided fulfillment strategies.³ (see Figure 1)

Supply chain applications providers claim paradigm shifts in inventory pipeline visibility and control. Why then does the Grail of enhanced competitiveness elude many of America’s best fabricators and assemblers? The answer can be found in an interpretation of the strengths of Lean manufacturing, assessed in terms of forecast based productive paradigms.

THE GENESIS OF LEAN MANUFACTURING

Lean manufacturing obtained its genesis through the efforts of Edward Deming and his development of the concept of Total Quality Management or SPC/TQM. Ignored by post World War II U.S. manufacturers, it took Taiichi Ohno to gel these concepts into what we now know today as TPS and JIT. This was followed by the development of Flow manufacturing, a concept brilliantly brought to life by John Costanza in Denver, Colorado as DFT, as a way to resolve some of the limitations inherent within JIT through changes to the way in which lot size configurations are handled. The limitations of JIT can be found in the following loose description of what Just in Time is all about. Just in Time “drastically cuts machine setup times, so that it is economical to run very small batches. The ideal is to make one piece just in time for the next operation. In management terms, the economic order quantity has been cut down to approach one.”⁴ (Italics provided by author) The limitation of JIT is its inability to overcome the inefficiencies of a batch process control of materials. Instead plant managers accept small incremental improvements within a revised manufacturing format that never fully breaks free from the constraints and limitations of MRP. “JIT is a very eclectic approach, (but) first and foremost, it is pragmatic. …This pragmatism causes the manufacturing process and its environment to be viewed as a research laboratory, …in that the primary task is to learn how to do it better the next time.”⁵

Flow manufacturing on the other hand uses a seemingly innocuous but critically important reversal of this equation. Flow starts with operational calculations based on single piece lot sizes, only re-calculating when constrained resource imbalances require Work in Process buffers. By default this approach optimizes productive processes to meet demand challenges utilizing the lowest possible level of WIP. WIP reductions then translate into reduced lead time, which further enable lower levels of finished goods. While customers, suppliers and manufacturers all stand to benefit from this technique, Lean/Flow manufacturing it isn’t always the best choice for planning productive processes. It is critical then, that as a first step, manufacturers assess the primary cost drivers within their organization. (see Figure 2)

Where cost of capital drives all other cash flow considerations, Lean will reveal weaknesses from a benefits perspective. This is because efficiency and utilization drivers, keys strengths under MRP, can be used to drive down costs, and enhance an organization’s competitiveness. Rarely though is any one factory dominated by any one way of manufacturing. Where materials drive a larger share costs, this represents a strong signal that Flow manufacturing can engender significant benefits. This requires an assessment of cost in terms of potential Work in Process and Finish Goods Inventory reductions. Both areas are impacted when the factory is reorganized under Lean, but each area of improvement must be assessed separately, in that WIP savings are realized via lot size reductions, and FGI reductions are affected by shortened lead times.

In order to maximize your ERP investment, a way for integrating Lean with MRP must be found, a way that does not replace or slave Lean functionality to legacy systems, but rather augments and supplements MRP, so that the two work in concert to optimize customer response and maximize profit. Assessments to be made prior to deciding which areas will be targeted for Lean are:

1. A strategic determination of how you wish to compete:
   • Stock
   • Backlog
   • Engineer or Configure to Order

2. 1.Production tactics:
   • WIP reductions
   • FGI reductions
   • Quality
   • Throughput
   • On time delivery (fulfillment)
   • Effectivity and Utilization

You will notice that price was not mentioned among the above parameters. Although certainly relevant, using price as a basis from which to compete should be managed as a realizable consequence of the productive process. There are real world examples too numerous to count that demonstrate that retroactively manipulating demand in terms of price is fatally flawed from a strategic perspective, unless the factory has been proactively reorganized to meet changes in demand patterns affected by changes in price.

THE MRP TO FLOW RELATIONSHIP

W. Edwards Deming had said that the biggest problems companies face are self inflicted, created right here at home by managers who are off course in today’s competitive world. These individuals, Deming says, fail to recognize that making a distinction between stable and unstable systems is vital for the future of their organization.⁶ Many managers today continue to make improper distinctions between areas where MRP ends, and where Lean begins. The result often times is a productive process reorganized under Lean, which uses MRP concepts of capacity management to plan operations. Lean suffers under this management technique because Flow resource calculations (see figure 3) are based on the premise that enough capacity will be available to build ideally any mix of any product on any day, thereby accommodating a wide a variation in daily demand.

What’s important to note here is that both the numerator, Actual Time Weighted, and the denominator, Takt, are both fully entrenched in the idea that the sum of independent demand is based on an anticipated level of demand at capacity or Dc. Because we build more resources into our line than we need, we no longer need to manage or measure to efficiency. This can be represented by looking at the relationship of Lean to MRP, using an APICS defined MRP hierarchy. Under MRP, iterative reviews of capacity are mandated based on the number of times MPS and MRP are regenerated. (see figure 4)

Ideally resources configured at anticipated rates of demand (Dc), render obsolete the need to perform regular assessments of capacity for the purpose of running machinery and labor at high utilization rates. The net affect is a rolling up and replacement of Resource Requirements Planning (RRP), Rough Cut Capacity Planning (RCCP), and Capacity Requirements Planning (CRP), previously part of an iterative closed loop MRP II review process. Flow lines on the other hand use anticipated levels of independent demand, building flexibility into resource configurations, in order to build customer responsiveness into the productive process. It is this approach to demand and resources, which allow operational groupings of work content that enable optimized lot sizes. Shop-Floor Control, and all of the attendant Production Activity Control imperatives normally associated with work orders - such as capacity, priority, and input/output control, are also de-emphasized in these self regulating pull environments. Materials move “so quickly through the factory that the shop-floor systems (required) to track them are not needed.”⁷ This is the manner in which Lean, based on capacity matched to pull based replenishment techniques, is able to achieve dramatic reductions in Lead Time and WIP, instantly freeing up tremendous (and competitively critical) amounts of working capital.

It is the challenge of integrating assembly lines based on single piece flow, to setup constrained machining cells that often creates problems for manufacturers faced with a strict mandate for using Lean. The confusion stems from a belief that one method needs to be used to exclusion of another on the factory floor. Although Lean techniques exist for integrating machining centers, it must be recognized, that where lead times require offsets, and the cost of capital requires an emphasis on utilization, such issues might be best handled using MRP. This is usually due to lot size and run time imperatives in areas that are characterized by the following:

1. saving your erp investment
2. Lot size constraints
3. Unplanned downtime
4. Long cues
5. Long lead times
6. Inflexible supermarket placement
7. Alternate routings
8. Automated processes

The problem is that if integration issues remain unresolved, these upstream areas will create imbalances and bottlenecks downstream, which have the potential to nullify the benefits that induced the attempt to implement Lean in the first place. Typically machining oriented value streams with long lead times are the most suitable candidates. What is important to remember is that although MRP can be used in conjunction with Lean lines, a mix and match approach to operational configuration and management cannot be used. Proper separation must be achieved via a judicious placement of marketplaces. Contiguous configurations of resources that are rearranged using one technique (MRP or Lean/Flow) must be maintained to the greatest extent possible in order to preserve the benefits of Lean. Lean Techniques do also exist to seamlessly connect setup constrained resources to Lean lines, but this topic will be addressed as part of next month’s discussion regarding Lean to MRP integration issues for materials.

CHALLENGES IN MRP TO LEAN INTEGRATIONS

An understanding of how shortened lead times offer an unparalleled strategic competitive advantage is perhaps the most compelling reason to use Lean in your factory. Sadly, it is also the most misunderstood and misused competitive strength in today’s Just in Time environment. (see Figure 1, above) Where MRP uses forecasted demand to accommodate lengthy lead times, under Lean, manufacturers now have an opportunity to adjust finished goods levels based on an approximate one to one reduction in the lead time that it takes to build product. (see Figure 5) Theoretically under this scenario, finished goods inventories become unnecessary. Realistically, FGI reductions become possible based on customer lead time reductions. If deliveries are made from stock, FGI reductions become possible in terms of the ratio of Lean to MRP reductions in manufacturing lead-time. In addition, backlogs, which are after all unrealized revenues, can also be reduced based on this same ratio of improvement, leading to improved order to cash cycles.

It is resource configurations under Lean that holds the key to the success of this strategy. Under Lean, the decision isn’t so much about what stock out limits to maintain, but rather what percentage of order fulfillment will originate from the line versus stock. Once a Lean production line is in place, total product cycle time drops so dramatically that companies now have the luxury of reducing customer quoted lead times, in order to increase market share, or command higher prices, or both - marketing tactics which can be pursued with no increase in finished goods stocking levels. MRP to Lean integration options should be considered as a balance between actual and forecasted orders, and BTO versus BTS, with an emphasis given to actual orders under BTS, provided the lead time quoted to customers is greater than the lead time of the product itself. When Order Management is handled via MRP, MPS has the potential to create whip saw planning affects, rendering unworkable FGI reduction strategies, which then limit all material benefits under Flow to reductions in WIP.

CONCLUSION

Any modification of current systems may be a hard pill to swallow, but MRP, when used properly, can boost the benefits offered under Lean. MRP no longer needs to be abandoned, or Lean forced onto planning processes which use forecasted lead time offset scheduling techniques. It is a recognition of the advantages offered by MRP, and a judicious application of its strengths, that allows manufacturers the opportunity to fine tune their facilities using both methodologies, based on the way in which costs interact with productive structure and process. Finally, Managers need to remember that it is the production worker who is the ultimate source of wealth creation in this country. By adding value to the products they build, production workers enhance, maintain and protect a company’s bottom line. Skilled employees educated in the ways of Lean, take a stake in the process, in their jobs, and in the products they build. Companies here in the US, and abroad, that have chosen to reorganize around the principles of Lean, find they can compete and win against the best this planet has to offer. No longer will it be necessary to look for nebulous supply chain panaceas, and off shore cost savings. The Lean/Flow focus on customers, materials, and on the people responsible for the productive process, creates an unbeatable combination for longevity and success in the marketplace.

By: John Szemler, CPIM, CIRM, MCSE+I
IBM Global Business Services, SCM/Lean
John.Szemler@us.ibm.com
Tel 303-884-0139

Next month: MRP to Lean Materials Integration Issues

¹Vollmann, Berry, and Wybark, “Manufacturing, Planning and Control Systems” (Chicago: Irwin, 1992) pp. v - vi
²Pete Engardio, “Why the Supply Chain Broke Down” (Business Week, March 19, 2001) p. 41
³Cory Johnson, “Just-in-Time” (The Industry Standard, Feb. 26, 2001) p. 51
⁴Richard J. Schonberger, “Japanese Manufacturing Techniques” (New York: The Free Press, 1982) p. 1
⁵Fogarty, Blackstone, and Hoffman, “Production and Inventory Management” (Cincinnati: College Division, South Western Publishing, 1991) p. 568
⁶Mary Walter, “The Deming Management Method” (New York: Perigee Books, 1986) p. xii ⁷Vollmann, Berry, Wybark, ibid. p. 11