I have been privileged enough to have had a career spanning a significant number of years in operations within manufacturing and distribution—first in the motor industry and then into the fast-moving consumer goods (FMCG)— with multiple roles covering most aspects of the product supply chain. For a long time, I have been a strong advocate of maximizing a solution as far as possible to drive real operational improvements, thanks to my exposure to ERP solutions for over 20 years.
A significant step can be moving to an ERP solution-based approach to reduce the risk and increase standardization and information sharing. However, many companies face the question of whether ERP and Lean can go hand in hand. In this blog, we will be tunneling into this topic and finding the answers to your questions.
How do businesses work?
From my experience, many businesses run successfully through the knowledge contained within a handful of employees. Over the years, these key employees have become near experts on how to operate based on their knowledge and experience. As a result, they can usually sense when something is about to happen and act consequently.
However, this dependency carries a significant risk in scenarios when these key employees leave or aren't accessible. So it certainly isn't a workable approach to balance quickly changing business landscapes and a desire for growth.
Many Lean concepts are simultaneously embedded within the operations of businesses. The intention is to make continuous improvements to reduce costs, increase efficiencies and delivery success, and flush out waste.
Financial benefits are often the driver in adopting a leaner culture. However, increasing focus on continuous improvement is also about not 'standing still.' Rather, it is about working proactively to stay ahead of the competition.
The relationship between Lean and ERP
One of the biggest blockers in implementing ERP solutions is to assume that the implementation will counter any work done to streamline processes and reduce waste.
I've often read that Lean and ERP are quite the opposite; while ERP is a push process, Lean very much focuses on a pull process. The push process can increase inventory costs, overproduction and instances of potential flaws, which in Lean thinking, are considered as three of the seven wastes.
However, ERP has helped address some of the other kinds of wastes—instances that are based on my own experiences. These include wastes related to waiting/ delays that impact time, overprocessing due to excessive manual intervention, transportation and movement (especially when people have to engage with others to get relevant information or approval).
In a pure manufacturing process, the father of Lean manufacturing, Taiichi Ohno, argued that moving to more of a 'pull' approach is valuable, but it involves consideration of various factors including:
- Business Model - Make to Order/ Make to Stock/ Forecast
- How much can be decoupled from demand based on the variability
- The ability of the supply chain to factor in any demand changes
While there are benefits directly within manufacturing, many of the support areas using ERP solutions can help drive additional significant process improvements using the system rather than manual or offline approaches.
My view is that Lean and ERP are certainly not opposites and can support each other successfully if applied correctly. If used effectively, they can help drive improvements and reduce wastes. It isn't a case of 'one size fits all.' Instead, discovering the correct approach to fit the right scenarios is the way to success.
My business background was mostly in FMCG, where supply chain volatility and the need for fast and effective service were critical for success. It was a 'make to demand' profile, given that the lead time to supply was very short to enable customers to maximize their sales revenue to the end consumer.
The focus of the chosen strategies was on maintaining service while reducing inventory. Anything that impacted service was the most critical since it was a key selling point.
Given that the initial question was how ERP could complement Lean, let us look at some practical examples of how it was achieved.
With a comparatively large number of Stock Keeping Units (SKU), the actual process depended on the knowledge of the master planners. Especially because they inspected demand and prepared the monthly/ weekly build based on their knowledge and experience.
The production planners then implemented the plan through the relevant production areas. In turn, the production areas called out components to the shop floor to meet that monthly/ weekly plan.
The planning approach shifted to a weekly/ daily plan through an ERP application. Picklists were created every 24 hours as per the plan for the day, effectively 'pulling' components before they were consumed entirely (almost an electronic Kanban). All this had a significant impact on stock held on the shop floor.
Through further analysis, products were segmented into A, B and C categories based on size, value, key customer SKU, configuration and other factors so that planning parameters could be set accordingly.
This allowed the master planners to take on more responsibility for planning their product ranges, and allowed the system to generate suggestions based on agreed and refined parameters rather than doing everything manually.
Subsequently, the planning cycle was reduced to a weekly one which focused on the next week's horizon, and the plan was created within a day. This improved the overall service since the formalized plan was more flexible, given a shorter horizon. It also minimized inventory since any plans could be adjusted on a weekly basis, and stocking policies were reduced to weeks instead of months—particularly for high-value, larger-sized products.
This approach also enabled metrics to be introduced to assess conformance to plan. Although initial figures were 60%, these improved to a point where 90%+ conformance became the norm within a brief period.
This was still a 'push' approach, but the nature of the demand profile and capacity meant that a full 'pull' system couldn't work. However, leveraging ERP and applying intelligence parameters boosted customer service quality while reducing stock simultaneously.
The net result was a supply chain much closer to real demand with a shorter window, which meant it was a step nearer to a 'pull' methodology.
The original approach for scheduling material relied on creating the scheduling spreadsheets based on inputs from the legacy system and the knowledge of the scheduler. These were, later, sent out to suppliers for confirmation.
Given the time taken to create scheduling spreadsheets, materials had to be scheduled in advance to ensure supply continuity, resulting in a 'just in case' approach to ensure material shortages didn't affect production.
Production planning changes meant that there was a potential to shorten the material scheduling horizon and impact component supply chain success and inventory. Based on the timing of the material requirements update, schedules could be created and emailed from the ERP solution directly by applying the right parameters, including Minimum Order Quantities (MOQs) and delivery time tables.
In addition, by revising the window for scheduling, the system could then schedule what was required to match the production plan rather than a forecast. The net result was a weekly cycle where materials were delivered within 48 hours of the plan being set only to meet the following week's plan and supply confirmation.
This was a critical factor in both inventory reduction and plan conformance. On top of this, through analysis and categorization of components, there were several lower value, lower cube components that could impact build. Based on the categorization, several such components were transferred to a supplier Kanban model, where the supplier replenished them as per the agreed Kanban levels regularly rather than at a fixed schedule.
This enabled schedulers to focus on managing the higher value components, knowing that the lower value items were self-managed, which in turn, impacted overall inventory levels without impacting service. ERP still managed the transactions and gave certainty through the stock's visibility but didn't trigger auto-replenishment.
The size of the Kanbans was further refined and adjusted based on the annual cycle of demand and lowered out of season.
There were often changes made to products within the FMCG environment, usually as part of packaging updates or sourcing material improvements. Managing these historically had been a challenge since it depended on timely communication, and in the worst case, the planner/ scheduler forgot to reorder or build.
Given the fast-moving environment, it often meant that these changes weren't managed closely enough, which resulted in even six-figure write-offs. Leveraging the status codes within the ERP solution—which could control activities such as purchasing, planning and selling—enabled a more centralized control and removed reliance on verbal communication. This helped to control the phase in and out of any new products/ components.
All this had a considerable impact on obsolescence waste and enabled linking a single customer barcode to an alternative product by date, ensuring that the service didn't get impacted.
Summary: So can Lean and ERP get along?
The approaches recognized here don't represent a full move to a 'pull' process, even though ERP can support this. However, it does describe some of the significant steps to address certain waste areas associated with Lean.
The scale with which you can move towards a 'pull' process depends on several factors:
- The type of business model you have
- Lead time to customer
- Capacity to respond
- Supply chain predictability
If you are in a 'make to stock' business and can leverage the capabilities of an appropriate ERP solution, you can significantly improve the planning cycle time and efforts required. You can also considerably reduce inventory, both of which can dramatically impact many of the seven wastes.
So to answer my original question: Are ERP and Lean the perfect match? The answer is most definitely 'YES'—if applied effectively.