Lean Manufacturing and ERP Technology

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When considering the deployment of a strong and reliable strategic plan, it’s important to have a solid understanding as to which method of analysis – traditional enterprise resource planning (ERP) or lean manufacturing – will effectively benefit your company the most.  While at the surface these two systems seem different, synergy still exists between the two, and when used together can be highly beneficial for an organization. Traditional ERP is a hierarchical system that works top-down beginning with long-term planning, through mid- and short-term scheduling, ending with execution. Lean manufacturing is an execution initiative that aims to eliminate “waste” from a process and has a strong diminishing impact on long-term planning.   When used in conjunction, these strategic techniques have been demonstrated to deliver a robust lean strategy.

Lean manufacturing as a business practice is not directly dependent on the implementation of an ERP system, but the latest generation of ERP systems offer support for lean initiatives. For example, traditional ERP was weak in providing a useful output that supported management decision making. It had limited analytical information and statistical data. Current ERP systems have many analytical features that naturally support lean initiatives. There is a lean manufacturing module in all mainstream ERP systems that provide specific support for electronic Kanban* and value stream costing**.

A dated controversy: push versus pull

Let’s take a moment to consider the classical “push/pull” terminology, usually used to contrast the Kanban approach with traditional ERP. In ERP systems, there is a planning module (MPS/MRP) that is representing the “push” approach to material planning, while Kanban represents the desired “pull” approach to minimize inventory levels and create a lean production flow. Kanban is not about planning, but about execution. “I don’t plan to do anything. I execute based on triggers. I only fabricate/assemble/manufacture/replenish anything when I get a signal that this inventory is needed. That is my pull signal.” This signal should only come from the real world, not from a software system, according to the Kanban principle. It is a visual pull signal that guarantees there is an actual demand right now. Only then is it authorized to go ahead and supply a certain Kanban quantity of that item. Then one should stop and wait until the next visual pull signal is received.

In today’s reality, the situation is not as black and white as a devoted Kanban adherent would make it appear. Traditional ERP systems were built for mass production; configure-to-order, make-to-order (MTO) and engineer-to-order (ETO) business models were not supported. But it is very different now. ERP planning modules today are set up to deal equally well with make-to-stock as with make-to-order scenarios. Generating planned production and purchase orders in an MTO scenario cannot be called “push” as there is true demand (the sales order) that we respond to. In the same MTO scenario there is an identical pull mechanism on a lower bill of materials (BOM) levels. The Kanban approach states that the very existence of a production order with a planned start date is an example of the undesirable “push” approach because this production order is not responding to a visual pull signal. The pull signal is electronic and has the same urgency as a visual pull signal; it has a direct link to true demand (a sales order). This production order, and all the others that make up the fulfillment of a sales order was created in response to a pull signal.

We are finding out that instead of a controversy, there is a synergy between ERP and lean. It is beneficial to investigate which features in ERP systems today support lean manufacturing.

A list of typical lean initiatives is shown below along with the role an ERP system should play in supporting it:

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Lean Manufacturing InitiativeERP Contribution
Reduce Work in Progress (WIP)ERP systems provide information to control the release of work to the floor, thereby reducing WIP. In addition, ERP systems can provide WIP reports and by using the business intelligence features, produce more informative (i.e., detect and show trends, improvements).
Reduce InventoryERP systems provide inventory reports to monitor progress, supporting this process redesign effort. Business Intelligence is of great use here to detect and present inventory turns by product group, including trends and seasonality.
Increase Product Quality/Reduce ScrapERP systems provide scrap statistics with reason codes, allowing for root cause analysis of the scrap problem. The actual effort is an engineering design and process redesign activity.
Reduce Set up TimesERP can easily provide statistics of actual set up times versus planned. The actual effort is a Kaizen event and ERP’s actual data gathering allows tracking of progress towards the goal.
Simplify product flow through the shop, reducing un-necessary transfersThis is a business redesign effort; some ERP systems may have a process design tool.
For MTO/ETO: Switch to modular design, use product configurationAn ERP system provides a configuration tool, redesigned BOMs and modularization of product offerings in a business improvement effort that requires close cooperation between marketing and engineering.
Introduce Kanban “pull” mechanism for inventory replenishment The ERP system provides immediate value by offering electronic Kanban with embedded performance metrics for each work cell.
Throughout accounting, lean accountingThe ERP system can provide added value directly by providing the value stream definition and value stream costing, as well as simplified accounting to support lean. This means moving away form traditional management level financial reporting and offering simple financial metrics directly linked to daily operations that support lean improvements.

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The strength of electronic Kanban in ERP systems

The traditional Kanban method is unrelated to software technology, however, the appearance of ERP systems has opened new, exciting possibilities to implement electronic Kanban in manufacturing businesses.

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ERP System Contribution to KanbanExplanation
1. (Re)design of the Kanban replenishment loopsCalculations is required to determine average demand per day for items, based on forecasts or historic demand, and determining the number of circulating Kanbans that is required to support that average demand. This is a typical ERP task: ERP systems have the data and can do massive calculations easily. The most attractive and crucial feature that ERP systems can offer to support Kanban is the regular recalculation of the number of circulating cards that are needed, to remain in sync with changing forecasts. This real-time aspect is of great importance as demand patterns can change quickly.
2.  Provide a visual image of Kanban statusThe Heijunka board and the Kanban status board can be easily recreated as ERP screens, providing global visibility as opposed to local visibility.

(Example of a Heijunka board)

(A Heijunka board in an ERP system (Dynamics AX 2012))

3. All transactions scannedWith electronic Kanban, we have very limited user interaction with the ERP system and this interaction can all be barcode-supported, making the process very lean from the end user perspective. The user can focus on the real work user and should only have to deal with two events:

When a Kanban is full or completed and when a Kanban is empty. No other updates to the system are necessary.  When needed, more steps can be built in, for example the registration of a serial number.

4. Electronic and paper-based Kanban can be combinedThe ERP system will provide printed Kanban cards, either one time only for permanent use (laminated) or a new card printed each time a Kanban returns empty. Different companies will make different choices here, including running a paper-less Kanban.
5. Electronic Kanban is more secureKanban cards can get lost and lost cards immediately disrupt the product flow. With electronic Kanbans this cannot happen and lost cards can be easily reprinted.
6. Electronic Kanban at a distanceBecause physical proximity is not an issue, one can set up Kanban loops with other production sites that can be miles away or one can set up a Kanban loop with vendors. With physical Kanban, this is not possible.
7. Instant Kanban metricsElectronically managed Kanbans can provide instant metrics per work cell or for a value stream. For example, actual production speed, scrap percentage, etc. This allows production management to quickly respond to any issues.
8. Non-traditional Kanbans can be conceived and implemented, for example, an “event Kanban” for configured productsUsing an ERP system, it is very easy to include business processes that are normally not considered suited for Kanban: sale and production of low volume, sporadic demand and sale of specially designed products. Using an event like a sales order, the system can create a one-time-only Kanban card and trigger an MTO value stream using one or more event reducing administrative overhead greatly. (Event Kanban’s can cascade down an entire BOM structure!)
 9. Lean accounting: summary costing of a value stream The typical ERP accounting function can be simplified using a lean manufacturing module. Only receipt of raw materials and shipment of finished product is recorded. This reduces the number of transactions in the system significantly, warranting the name “lean accounting” or “throughput accounting”.  Although the ERP system withdraws itself from its usual financial integration transactions, it is precisely by using this ERP feature of lean accounting that we can support Kanban-managed production. The ERP system can capture only the essential transactions and leaves the rest literally “unaccounted for.” A highly tuned and predictable production process is the prerequisite for responsible use of lean accounting and no real information gets lost.
 10. Hybrid scenarios are possible. The ERP system also supports traditional a combination of production order-based manufacturing and electronic Kanban. A Kanban feeder cell can support a traditional assembly area where production orders are used.  Because of this, the system also supports a gradual introduction of lean manufacturing.

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Contemporary ERP systems have fully embraced the lean philosophy, including the Kanban method, for controlling production and replenishment. Both lean manufacturing practices and the ERP systems themselves, have greatly benefitted from this cross-pollination. This is good news for businesses implementing ERP systems as they now have many functionality options to get the best of both worlds for their company.

*Kanban: scheduling system for lean manufacturing and just-in-time manufacturing.

**Value stream: all actions required to bring a product through the main flows, from product concept to product launch, and from raw material purchasing to final assembly and the customer’s receiving dock.
Term used regularly in Lean Manufacturing to emphasize the big picture approach in process improvement.

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This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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