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The Problem with Batch Logic

by Ian Glenday
January 30, 2014

The Problem with Batch Logic

by Ian Glenday
January 30, 2014 | Comments (5)

Every now and then I want to remind people: Enterprise Resource Planning (ERP) systems and Lean are NOT compatible.

ERP planning processes use economic order quantities (=EOQ), also known as batch logic, to calculate what is required. It is the logic at the center of Material Requirements Planning (MRP) based systems. Nearly all companies’ planning systems are based on this logic, so it must be right... Right?

Unfortunately, no. It has not one, not two, but three fundamental faults.

The first is well recognized and documented. It even has a name! The bull whip effect. EOQ logic rounds up order quantities to an “economic” size (more than required and hardly lean).

The second is a direct result of this “rounding up,” as at some point inventory will be too high so the order has to be rounded down to less than the required amount. (Again, not lean). And this is only part of the problem. The bigger issue is that every time the plan is issued, it is a different plan. Lean is about having standards for how things are done. It’s incredibly difficult to maintain standards across shifts when there’s a different plan every week. For example, different changeovers each week will also happen at different times of the day and night. It’s not even possible to maintain the same level of people available to do the changeovers in this situation! This doesn’t help create or sustain standards.

Then there's the worst flaw of all. Batch logic uses a target inventory level to calculate what is needed to be made or ordered. If the underlying data has changed since the last plan was calculated, one will get a different result. Let’s take a look at the underlying data:

  • The sales forecast
  • Actual production outputs versus the previous plan
  • Material inventory levels

Ask yourself these questions. In your company:

  • Are actual sales ever different to forecast?
  • Does production ever make a bit more or less than the plan?
  • Is the physical inventory ever different to what the computer shows?

Of course the data changes so every time the plan is calculated one gets a different result. When we look at the real world, the chances of the underlying data remaining unchanged from one plan to the next is ZERO. For the plan not to change would require all the underlying data to be 100% accurate all the time. This is NEVER going to happen. Sales will be different to forecast, production will make more or less than the plan, and inventory inaccuracies in the warehouse will occur.

Over the last few years planning systems have become faster which some people would see as a good thing. However, this means the plan is calculated much more frequently nowadays, and every time a different plan is issued. The result? FIRE FIGHTING! And fire fighting is certainly not conducive to implementing and sustaining lean principles and practices.

In your own company, are weekly or daily plans ever changed after they have been issued? Would fire fighting be a term to describe how things are often done? Do you find it hard to sustain Lean?

How did Toyota, the company we associate with Lean, overcome these issues? To start, they didn’t use EOQ logic as the basis of their planning. The foundation of TPS was a planning process called leveled production. It was a progressive five step process and probably the least understood aspect of the Toyota Production System by most. Does your lean journey include the five steps of leveling? Do you know what they are?

To find out more about leveled production and how to apply it read, “The magic of leveled scheduling.” It's also explained in more detail in the 2014 Shingo publication Award winning book Lean RFS: Putting The Pieces Together.

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
Keywords:  flow,  manufacturing
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Ken Hunt January 30, 2014
1 Person AGREES with this comment
Ian,

Very well written. I have stood on this soap box for years, and have posted in the LRI Forums several times some of the same thoughts. I realize there are those that swear by ERP, but Lean requires us to open our eyes and see what really is going on. As one of my Sensei's has stated many times "Think like a 12 year old".

 Thanks for an easy to understand, accurate, and down to earth article.

Ke


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Ian Glenday January 30, 2014

Hi Ken

 

thanks for your positive comments - appreciated. I just do not know why more people can't see how it is the EOQ logic in planning systems that is causing the endemic plan changes - not customer demand. But the ERP sellers are big powerful players so they do not want to admit their planning systems have a fault - actually 3 faults!

Cheers

Ian 

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Piotr Mazurczyk February 03, 2014
Dear Ian. there is one more answer to Your question - why still ERP systems rules planning departments. Knowledge on lean in companies. I have posibility to worked in Toyota as well as few european companies. If you ask in europe any lean specialist, production engineer or manager, do they know lean, they will shoot you with all definition of flow, pull, kaizen, 5s. Probably most of them have been implemented in their companies. Problem is, They do not analize it as full stream from suppliers to customers, and focuse only on small victories rather winning war. I do not know if same issue drive US market, but i'm only guessing that this global proble

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Eric REINHARD February 03, 2014
Dear Ian,
As a Supply Chain Manager for a healthcare company producer and a Lean Expert, I am constantly trying to rethink the way we manage our operations strategy. We are in fact using mainly the Make-to-stock strategy to produce our wound care products. I haven't found yet any best solution to be able to deliver On Time In Full our products to surgeons, physiciens, nurses, patients. We are for sure not car producers. I do not know if you would have any solution to replace this EOQ logic for my business? But what is clear to me, is that I can do Lean with a Make-to-Stock strategy too.
Thanks in advance for your help!

Eri


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Ian Glenday February 04, 2014

Hi Eric

 

thanks for your comments - certainly lean and make to stock are compatable as - despite what some say - Toyota's original "levelled production" was a make to stock approach. I cover what this was in my latest 2014 Shingo award winning book as well as many practical examples from FMCG companies look up "Lean RFS: putting the pieces together" on Amazon. I also intend to wirte more Lean Posts on this subject.

Ian

 

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