IT needs to get lean on manufacturing

It's time for MRP to turn down its reliance on forecasting and get real

IT a roadblock to progress? Never, you say. How can that be when IT lives and breathes innovation? Who else but IT dared to usher open source, XML, SOA, and cloud computing out of the high-tech labs and into production systems?

Nevertheless, there is one aspect of technology where all of that daring doesn't seem to be in play.

Lean manufacturing systems, which turn traditional planning and forecasting -- as found in the MRP (manufacturing resource planning) components of SAP and Oracle ERP systems -- on its ear, is not something most IT people want to deal with, says Narayan Laksham, CEO, president, and founder of Ultriva. Ultriva, if you haven't guessed, offers a software solution, Lean Execution System, that enables lean.

Lean manufacturing's break from tradition

Manufacturing has traditionally been a push system. Up until lean, business analysts would forecast demand, and manufacturers would ship products to market based on those forecasts. Unsold goods would sit in the warehouse or distribution center either waiting to get into the pipeline or never to be sold due to a missed forecast.

"Unfortunately, there is a gap between planned orders versus actual demands from customers," Laksham says. "As the shop floor adjusts to real demand, the MRP schedules are no longer in synch. On every MRP run, these schedules are readjusted, and supplier orders are changed, causing whiplashes across the supply chain."

More than a decade ago, Toyota created Kanban, a system that builds to demand rather than forecast. It is a pull system based on what the market currently needs. Demand doesn't have to be just from a downstream customer; that is not the only "market" recognized by Kanban. If a product ships from a distribution center, the system recognizes that the center needs more of that product, as Kanban is continually sending pull signals to an upstream work center.

When done right, inventory can go from being held for a month down to a day, or it might never even see the inside of a warehouse, going instead from the manufacturing plant straight to the customer.

ERP's MRP components are outdated

Whereas traditional ERP MRP uses a min-max system, Kanban uses "consumption-driven replacement." Rather than trigger a maximum-replenishing order when the available inventory has slipped below a predetermined minimum, Kanban systems push out alerts when things like bins inside the factory or pallets coming from a supplier needs to be replenished (move one out, move one in). Traditional MRP systems are not built to work that way.

[ As a side note, you can see how typical offshoring doesn't work here, as it is counterproductive to true lean manufacturing. If your plant is 8,000 miles away, you need to plan even further out, building in as much as an extra month for transoceanic shipping. Manufacturers also need to carry a larger safety stock in case shipments do not arrive on time. Due to the high costs of shipping, especially with fuel costs rising, manufacturers typically order more than is needed in order to reduce per unit shipping costs, filling an entire container rather than ordering by the smaller palette size. ]

SAP or Oracle MRP are a problem because they cannot set up an "execution" system to perform based on lean principals.

Laksham doesn't say SAP and Oracle are irrelevant; both are good planning tools, he says, but planning is batched-based and does not involve real-time execution.

Ultriva customers typically trim back on their ERP systems. It is still the system of record, but they tend to turn off the MRP function.

"One of the things MRP does is to take a forecast into a consideration of how we order," says John Young, materials and supply chain leader at Trane Residential Systems, a manufacturer of HVAC systems and subsidiary of Ingersoll-Rand. "In a Kanban environment, we basically throw that away."

Young says that he still pays attention to the forecast as a planning tool, but because of Kanban, everything is "replenishment"-based.

In the last 120 days, the company has saved about $300,000 in parts held.

"Typically, we kept $600,000 of a particular part on hand," Young says. "Today, we can easily say we have under $300,000 of these same parts on hand."

Young describes Kanban this way: It's as if you lived 100 miles from the closest grocery store, and if you need to buy a container of milk, you would buy two gallons at a time. But now with Kanban, you only need to buy one gallon.

It is this new concept that is the biggest stumbling block for IT in terms of adopting lean manufacturing. Most major companies have invested multiple millions in their ERP system, and it's IT's job to run the system.

On top of that, these software-acquisition decisions for the major ERP systems are made by the CEO and CIO, who don't understand the shop floor.

If IT views itself as a cost center that just says, "Yes, sir, we can do it," then nothing changes. If, however, IT decides it has something of value to contribute and suggests there is a better way, someone upstream might just listen.

Bottom line, manufacturers are struggling, and all IT is saying right now is, "Don't worry, we're going to put an Oracle system in place, and in three years, all your problems will be solved."

Trouble is, the manufacturer may not be around in three years.

Think about it.