AS a former plant manager and manufac- turing and supply chain consultant, one issue I find that troubles a lot of manufac- turers is deciding the best way to plan their production to meet their customers’ needs. Through the 1990s a large number of companies invested heavily in ERP sys- tems to address this issue. These sys- tems had an aim of improving customer service, reducing inventory, reducing cost and providing better visibility of business performance. In the last five years, however, a new approach has taken over in many indus- tries. Lean manufacturing, based on the Toyota Production system, is focused on using simple, visual, shop floor level tools such as Kanban to control the flow of pro- duction. Lean emphasises the relentless elimination of waste in order to reduce lead time, improve flexibility and remove the need for forecasting and complex long range planning completely….well almost. To listen to the proponents of either philosophy is often like listening to reli- gious fundamentalists, so confident are they of the absolute rightness of their phi- losophy and so dismissive are they of any alternative. The reality, of course, is some- what more complex. All the great lean pioneering companies still run ERP sys- tems and many use sophisticated fore- casting. So how do they reconcile these supposedly irreconcilable approaches? To understand why, I like to make an analogy with weather forecasting. Lets say it is October and we are trying to fore- cast the weather in January. There is some information we would know. January is likely to be hotter and dryer than October. This is useful information as it might affect some long range decisions like what clothes we buy and when we plan to take our holidays. But what about the weather in Melbourne on January 26th? Even the bravest forecaster would hesi- tate to give anything more than a broad range of outcomes for the weather on a specific day. Even if we narrowed the time horizon to even a fortnight, providing an accurate forecast down to the day is almost impossible. The point here is that the value of fore- casts depends on the time horizon and the level of detail that you attempt to fore- cast. Using a forecast of limited accuracy to decide via an ERP system what products to make on a given week or, worse a given day, weeks or months in advance, is likely to mean that you will be making the wrong product in the wrong quantities at the wrong time to meet your customers needs. The ERP experts would then argue that to overcome this you need fixed and firm planning horizons and that you need to educate your customers in the need to forecast and then stick to their forecast. But what if your customers are not pre- pared to give you this certainty or your competitors don’t require it? You may find yourself at a competitive disadvantage. The Lean approach The lean “level pull” approach on the other hand effectively dispenses with forecasts. Production and procurement only occurs when it is triggered by down- stream demand (through, for example, a Kanban signal). Production rates are “lev- eled” throughout the operation at the average rate of customer demand, or Takt time. Inventory buffers or “supermarkets” , and “every part every interval” scheduling are used to dampen out variations in demand and supply to ensure that each process is synchronized with the next. This approach has had impressive results in many industries, particularly in the car industry. But what if your product is seasonal and summer demand is 30% higher than winter, or if your market is heavily promotion driven? The reality is, there is a place for both approaches in most businesses. Trying to manage the day to day, week to week cut and thrust of meeting customer orders using a forecast driven ERP is likely to be difficult, overhead intensive and tend to increase the level of variability in the sup- ply chain (the Bullwhip or Forrester Effect). Unless you have extremely well trained customers it is likely to lead to longer lead times, higher inventory and poorer service than the lean alternative. However there is still a place for forecasting at the monthly level and for the Sales and Operations Planning (S&OP) process. This process enables you to reconcile your forward demand including seasonali- ty, promotions and new products with your business’ capacity to produce (your rough cut capacity plan), enabling produc- tive resources (materials, people and machines) to be planned with sufficient lead time to meet major demand changes. The monthly forecast can also be used to generate a forecast for suppliers to enable them to plan their production (par- ticularly if they haven’t seen the lean “light” yet) and ensure that they are able to meet your short term “Kanban” requirements when they come. To summarise - lean tools are highly effective at enabling manufacturers to meet needs of their demanding market- places while driving inventory and cost out of their businesses. However, long term forward planning based on a month- ly high level forecast, a good capacity model and an effective sales and opera- tions planning process is necessary to ensure that the lean enterprise is ready to cope with long term changes in market demand. * Tim Mclean is principal of TXM Consulting, call 0404 480 517 or email [email protected]. TECHNOLOGYIT@MM 22 NOVEMBER 2006 MANUFACTURERS’ MONTHLY www.ferret.com.au Now we are Lean - why have ERP systems? While many of the promised benefits of ERP systems have not materialised, they are still useful tools to enable lean manufacturers to make longer range decisions about their operations. Tim Mclean* reports. ERP vs Lean – the reality is both have essential roles to play. MANM_NOV06_P22.PDF Page 1 10/17/06, 6:57 AM
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AS a former plant manager and manufac-turing and supply chain consultant, oneissue I find that troubles a lot of manufac-turers is deciding the best way to plantheir production to meet their customers’needs.
Through the 1990s a large number ofcompanies invested heavily in ERP sys-tems to address this issue. These sys-tems had an aim of improving customerservice, reducing inventory, reducing costand providing better visibility of businessperformance.
In the last five years, however, a newapproach has taken over in many indus-tries. Lean manufacturing, based on theToyota Production system, is focused onusing simple, visual, shop floor level toolssuch as Kanban to control the flow of pro-duction. Lean emphasises the relentlesselimination of waste in order to reducelead time, improve flexibility and removethe need for forecasting and complex longrange planning completely….well almost.
To listen to the proponents of eitherphilosophy is often like listening to reli-gious fundamentalists, so confident arethey of the absolute rightness of their phi-losophy and so dismissive are they of anyalternative. The reality, of course, is some-what more complex. All the great leanpioneering companies still run ERP sys-tems and many use sophisticated fore-casting. So how do they reconcile thesesupposedly irreconcilable approaches?
To understand why, I like to make ananalogy with weather forecasting. Letssay it is October and we are trying to fore-cast the weather in January. There issome information we would know.January is likely to be hotter and dryerthan October.
This is useful information as it mightaffect some long range decisions like
what clothes we buy and when we planto take our holidays. But what about theweather in Melbourne on January 26th?Even the bravest forecaster would hesi-tate to give anything more than a broadrange of outcomes for the weather on aspecific day. Even if we narrowed thetime horizon to even a fortnight, providingan accurate forecast down to the day isalmost impossible.
The point here is that the value of fore-casts depends on the time horizon andthe level of detail that you attempt to fore-cast.
Using a forecast of limited accuracy todecide via an ERP system what productsto make on a given week or, worse agiven day, weeks or months in advance, islikely to mean that you will be making thewrong product in the wrong quantities atthe wrong time to meet your customersneeds.
The ERP experts would then argue thatto overcome this you need fixed and firmplanning horizons and that you need toeducate your customers in the need toforecast and then stick to their forecast.
But what if your customers are not pre-pared to give you this certainty or yourcompetitors don’t require it? You may findyourself at a competitive disadvantage.
The Lean approachThe lean “level pull” approach on theother hand effectively dispenses withforecasts.
Production and procurement onlyoccurs when it is triggered by down-stream demand (through, for example, aKanban signal). Production rates are “lev-eled” throughout the operation at theaverage rate of customer demand, or Takttime. Inventory buffers or “supermarkets”,and “every part every interval” schedulingare used to dampen out variations indemand and supply to ensure that eachprocess is synchronized with the next.
This approach has had impressiveresults in many industries, particularly inthe car industry. But what if your productis seasonal and summer demand is 30%higher than winter, or if your market isheavily promotion driven?
The reality is, there is a place for both
approaches in most businesses. Trying tomanage the day to day, week to week cutand thrust of meeting customer ordersusing a forecast driven ERP is likely to bedifficult, overhead intensive and tend toincrease the level of variability in the sup-ply chain (the Bullwhip or Forrester Effect).
Unless you have extremely well trainedcustomers it is likely to lead to longer leadtimes, higher inventory and poorer servicethan the lean alternative. However thereis still a place for forecasting at themonthly level and for the Sales andOperations Planning (S&OP) process.
This process enables you to reconcileyour forward demand including seasonali-ty, promotions and new products withyour business’ capacity to produce (yourrough cut capacity plan), enabling produc-tive resources (materials, people andmachines) to be planned with sufficientlead time to meet major demand changes.
The monthly forecast can also be usedto generate a forecast for suppliers toenable them to plan their production (par-ticularly if they haven’t seen the lean“light” yet) and ensure that they are ableto meet your short term “Kanban”requirements when they come.
To summarise - lean tools are highlyeffective at enabling manufacturers tomeet needs of their demanding market-places while driving inventory and costout of their businesses. However, longterm forward planning based on a month-ly high level forecast, a good capacitymodel and an effective sales and opera-tions planning process is necessary toensure that the lean enterprise is ready tocope with long term changes in marketdemand.* Tim Mclean is principal of TXMConsulting, call 0404 480 517 or [email protected].
TECHNOLOGYIT@MM
22 NOVEMBER 2006 MANUFACTURERS’ MONTHLY www.ferret.com.au
Now we are Lean - why have ERP systems?While many of the promised benefits of ERP systems have not materialised, they are still useful tools toenable lean manufacturers to make longer range decisions about their operations. Tim Mclean* reports.
ERP vs Lean – the reality is both have essential roles to play.
MANM_NOV06_P22 Page 1 17/10/06 6:52 AMMANM_NOV06_P22.PDF Page 1 10/17/06, 6:57 AM
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