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Lean and ERP software


Andy Pratico

Lean experts sometimes think Lean and ERP cannot co-exist.

When most envision LEAN Manufacturing, a picture of Kanban cards may pop into your mind. But did you know that Theory of Constraints (TOC) can also support a lean philosophy, especially in complex environments? In fact, LEAN and TOC may well walk hand in hand after all.
LEAN increases factory value, by separating dedicated resources sized to the same capacity. TOC escalates this concept by exposing bottlenecks that hinder production, and by elevating (increasing capacity) these constraints. TOC can be seen as similar to LEAN in that both kanban, and drum-buffer-rope (DBR), represent pull signal approaches.

Most organizations require a hybrid planning approach. For example, an enterprise might use electronic kanbans to pull material through the supply chain, TOC production planning to schedule manufacturing of complex parts, and at the same time forecasting capacity as well as scheduling the supplier purchase agreements.

With volatile demands and different product lines share the same resources, bottlenecks occur. In these environments, TOC can enable Business Performance Improvements in lead time/cycle time reductions, increased throughput and sales, service level improvements, and inventory level reductions.

Although many ERPs claim LEAN functionality, most still support pseudo-MRP capability. Some ERPS are better suited to traditional MRP planning methods, while others are more adaptable to LEAN/TOC techniques. Such advanced functionality has placed these TOC centric ERP systems in the center of many LEAN initiatives today.

Let’s take a look at commonalities and differences of these previously conflicting techniques:
Theory of Constraints (TOC)
LEAN Manufacturing
Throughput is the rate the system generates revenue through sales (production that can be invoiced). The ‘Drum’ pull signal.
LEAN Tact Time is the time to finish a part that will meet Customer demand. Again the ‘Drum’ pull signal.
To finish TOC inventory includes all investments in procuring materials to meet customer demand, such as raw materials, work-in-process (WIP), finished goods, and scrap. According to TOC, inventory is a liability and not an asset.
LEAN focuses on eliminating waste (eg minimizing inventory)
TOC wants all resources to turn inventory into throughput, eg employee time, depreciation, etc. TOC focuses on increasing throughput, while reducing inventory and lowering operating expenses.
LEAN Line Balancing or Cellular manufacturing, groups tasks into a ‘cell’ so work activities take equal time, keeping production moving at a steady pace. Lot size reduction accelerates product through production, and aligns with Takt Time.
TOC optimizes the factory by planning the bottleneck takt flow only.
Whereas LEAN targets the factory flow takt.
Elevating a constraint will stop it from being a constraint, but a new constraint will rise to elevate.
LEAN’s continuous improvement
DBR’s rope is the constraint signal to the gating operation that limits material released into the system supporting the constraint.
Similar to LEAN’s pull system and Kanban signals.
It is a cash flow concept of income than legacy accounting systems, TOC accounting provides a more accurate form of direct costing, by subtracting true variable costs. The primary focus of TOC accounting is to elevate constraints, increasing the bottom line. According to Goldratt’s1984 novel, The Goal, "an hour lost on the bottleneck is lost forever and an hour saved on a non-bottleneck is a mirage."
Sounds like LEAN’s activity-based costing (ABC)
Color coded signals replenishing buffers
Kanban signals for material replenishment

VISUAL ERP supports Takt Time: VISUAL Workorder/Engineering Master contains the takt time required to produce a single part. VISUAL Scheduling and/or EasyLean identifies the capacity of the constrained resource or cell (time available to produce parts in a given resource). Together, the Takt Time for the producing the part in that particular cell or resource is calculated and displayed online or on any production dispatch report.

VISUAL supports Kanban: VISUAL supports Kanban by using a replenishment algorithm that triggers a new workorder (for finished goods or subassy’s) and/or purchase order (for component or raw materials) based upon an inventory value dropping below the Kanban quantity. The benefit of using VISUAL for Kanban is that you will have Kanban “performance” history, showing where and when the Kanban quantities were too scarce or too rich. This identifies opportunities to reduce inventory, and shows when the Kanban quantity needs to be raised.

VISUAL supports Line Balancing: VISUAL’s Scheduling Window immediately identifies current and future potential bottlenecks. At the same time, it shows a graphical representation of whether a line is balanced or not by displaying each operation’s overall time relative to other operations in the production sequence. “Overlapping” of operations is also supported which will move a partial quantity (one in a LEAN environment) as soon as it is finished. In heavily custom manufacturing environments where the production routing is widely varied, it rarely makes sense to reconfigure machinery into specific “cells”. Therefore, VISUAL also supports the idea of overall “Shop Balancing” in the sense that material release into WIP is controlled so that bottleneck resources are always sufficiently utilized, but never over loaded which would likely create other “false” bottlenecks in the production flow.

VISUAL supports Lot Size: VISUAL supports the concept of “overlapping” sequential operations, which allows the Finite Scheduler to recognize that production will move in batches of a “Minimum Move Quantity”. In a pure LEAN environment, where one-piece flow is achieved, this value would be set to 1.

VISUAL supports Supermarkets: VISUAL supports this concept with the use of a very unique feature in the VISUAL Manufacturing Window called “Legs”. Legs are subassemblies that are consumed immediately by a higher level demand within WIP – no receipt into inventory and re-issue back out to the higher level is needed. Legs can have part-numbers – so any excess produced can be received into its designated Supermarket location – but are not required to have a part number in the case of a unique build. The Lot Size of a leg will automatically match exactly what is required to supply the upper level demand and no more. Legs also have the advantage of being scheduled for completion exactly when the upper level requires it, so the amount of time any material sits in a Supermarket location would be minimized. Also, all the costs of legs are directly allocated to the upper level without the need of any supporting inventory transactions, thus reducing the number of inventory transactions required.

VISUAL supports Backflushing: VISUAL supports both material and labor backflushing minimizing the number of material and/or labor transactions needed to provide accurate production reporting. Material can be backflushed at the operation or overall workorder level. When quantities of the end item are reported complete at any particular operation, or at the last operation triggering the use of backflushed material, and optionally, the automatic receipt of the end item into FGI. Labor can be backflushed by identifying an operation that when reported against, all previous operations will also be reported as having completed the same quantity.

VISUAL supports LEAN Accounting: VISUAL supports LEAN Accounting by showing Direct Cost and Contribution Margin of quoted, ordered (backlog) and/or production jobs and parts. The system will identify future bottleneck resources and show the added Contribution Margin resulting from a what-if scenario that would increase the capacity of or alleviate the bottleneck altogether. This allows manufacturers to broaden their value stream and realize higher profits. In quoting/estimating, the Contribution Margin of the quoted price compared to the amortized cost of various quantities being quoted is shown so the Estimator can determine which quantity would yield the greatest profit to the company. Further, resources can be analyzed showing the “Contribution Margin per Hour” of any product produced on any cell, thus from a financial standpoint, shows which product or product line to run now so as to yield the greatest profit to the company.

VISUAL supports Waste (Muda) Reduction: ERP systems based on traditional MRP concepts such as forecasting, Master Production Scheduling, and then “pushing” planned orders generated by an MRP run into production, create an environment where waste, or “Muda”, abounds in violation of LEAN principles. “Pushing” material on the shop floor to keep resources (people, machines, work centers, cells) busy to make sure “Efficiencies” and “Utilization” is maximized will create a lot of LEAN’s “Seven Deadly Wastes” (TIMWOOD - listed below).
-Defects (rework)
Some ERP systems have a field on each routing step called “Queue Time” where the user is expected to tell the system how long she expects the material to WAIT at that particular operation. Queue time is a blatant violation of LEAN principles. In VISUAL, MUDA is built into this process!
VISUAL’s EasyLean, on the other hand, eliminates all the wastes listed above by implementing a “Pull” system that pulls only what is needed to supply customer orders or replenishment quantities in FGI. This limits the amount of material released to WIP, thereby lowering the amount of material in WIP. Per Little’s Law, less material in WIP means that whatever is in WIP will flow much faster.
The end result is less WIP – freeing a lot of cash and increasing cash flow, shorter leadtimes, better on-time delivery performance, and happier customers.

VISUAL Easy Lean
As there will be a single critical bottleneck, Easy Lean focuses on maximizing throughput on that bottleneck only. The single bottleneck can be either internal or external. Most Synergy Resources’ customers who have implemented VISUAL Easy Lean have discovered, in fact the market is their constraint.

The DBR acronym stands for Drum-Buffer-Rope. The Drum is the pace of production set by the system's constraint. The Buffers ensure against uncertainty (e.g., unplanned occurrences). The Rope is the constraint signal to the material, limiting operation releasing into the constraint (i.e., a pull system which is yet another similarity with lean).

First Easy Lean identifies the critical bottleneck (the Drum). Material is released at the rate which the drum can consume. This rate (the ‘Rope’), ensures that non-constraint resources are not misallocated. Material is then released to the buffers supporting the planned system throughput. In fact, material release should occur a set buffer time ahead of demand, so that some buffer inventory is at the Drum resource for unplanned events.

Implementation of TOC only requires Five Simple Steps:
1. Identify the constraint. Huge piles of WIP make it obvious where the bottleneck is.
2. Exploit the constraint. Make sure there is an uninterrupted resource flow feeding the constraint, so that it never is starved (i.e., an inventory buffer in front of the bottleneck).
3. Subordinate everything else to the constraint. There is zero value in upstream work centers producing more than the constraint can consume. The utilization of non-bottlenecks is determined by the critical bottleneck flow.
4. Elevate the constraint. Increase the constrained capacity by finding alternatives such as, subcontracting work, adding more capacity (overtime, adding another shift, etc.), and so on.
5. Repeat for continuous improvement (another LEAN similarity). It is likely that by elevating the constraint, a new constraint will come to light. Exploit, subordinate, and elevate this new constraint.
Select ERPs impart themselves to TOC
's Easy Lean manages internal constraints, time buffers, and replenishment (Kanban) buffers. As with kanbans, the rule is to start with a large buffer size and keep reducing it until one has a smooth flow. The smaller the buffer sizes, the shorter the lead times and the faster the production flow.

Similar to Kanban signals, Easy Lean’s Buffer Dashboard uses color coded signals:
- Red = the highest priority tasks that should be focused on
- Yellow = less critical tasks
- Green = tasks that are in the buffer and thus still in "good shape".

Instead of a defined order sequence and specific times (as in MRP or Finite scheduling systems), Operators execute according to the priority level. This helps with ‘which task to execute next’ decisions, increasing lean philosophy's employee empowerment mantra.
Since inventory only buffers in front of the critical bottleneck, significantly less inventory in a TOC system is common (than when using MRP). Also WIP is often lower than those of kanban systems because aggregating the buffers offers the same protection overall, while simultaneously reducing the amount of protection required.
As it is easier scheduling one constraint than to schedule all, VISUAL Easy Lean is also easier to maintain.

Actual Case Study
Meet Val Zanchuck, president of Graphicast (a 29 employee foundry/machine shop in Jaffery, New Hampshire). Val was able to make his TOC dream a reality by adopting the LEAN philosophy along with VISUAL Easy Lean.
Zanchuck started by implementing LEAN throughout his accounting, office and the factory floor. Among the methods implemented were 5S (sorting, straightening, shining, standardizing and sustaining), Kaizen events and SMED set-up reductions.
Even after implementing LEAN, his most extraordinary results came from the implementation of VISUAL’s Easy Lean module. ‘As our business grew, lead times were getting longer,’ said Zanchuck. ‘Our schedule was booked solid, two shifts a day, for two months out.’ The finite scheduler used previously, did not tolerate disruptions well and required frequent human interventions.

VISUAL Easy Lean changed all that with Throughput accounting and applying TOC. Synergy discussed the potential of a 50% reduction in their 16 week planned lead time. However after Graphicast was comfortable with the shorter lead time, they reduced it to a microscopic 4 weeks.
It was incredible to think that we were booked solid for 16 weeks and we couldn’t expand without adding people and machinery,” noted Zanchuck. “And a month after installation, we were running a 4 week lead time. Capacity doubled, and WIP was cut in half. It also is saving us $100K/year in overtime.”
Now the schedule automatically re-defines itself every morning (based on the 4 week lead time), and the shop machinists can now decide which machines work best for which jobs. Not only do the machinists have more control, but the staff who were previously scheduling were freed up to work on activities more suited to their skills.

However the challenge is that VISUAL Easy Lean is Counter-Intuitive

Easy Lean’s biggest challenge—and one deeply engrained for decades in Management’s DNA—is traditional cost accounting, (all machine and labor resources should be utilized to the maximum). Easy Lean counter-intuitively paces a plant to a key bottleneck, even if that means under-utilizing non-bottlenecks.

Easy Lean will determine and monitor the bottleneck; set and manage the buffers; time to release work maintaining a smooth flow maximizing plant throughput; and analyze resources for continuous improvement.

However software alone cannot convert a traditional mindset to an Easy Lean transformation of continuous improvement. Easy Lean, (as LEAN), is more about business practices than about software. What has to change is the company culture. Therefore new measures and disciplines need to be implemented and accepted; the software only reinforces these new procedures and measurements.
As occasionally equipment will stand idle with Easy Lean, only with strict restraint will management maintain this transformation.

Another mind-set-based hurdle against Easy Lean is that it is logical to accept a system that appears to do everything (eg finite schedulers optimizing dozens of resources), than a TOC-based solution that focuses on only one resource.
When planning productivity improvements, Manufacturers need to assess their operations for waste reduction and balancing increased customer value. One challenge to address is how to buffer operations against unexpected and therefore keeping level production.
Outside expertise often helps with both the mindset change and the more technical aspects of TOC. Thus, it is recommended that system experts and TOC experts are not one and the same.

Results such as realised at Graphicast are possible only when top management drives the effort personally as Zanchuck did, and makes the LEAN philosophy a priority.
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