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.
