Lean Supply Chain and Logistics Management, page 14
ERP systems can be very costly and need much customization, but, in terms of waste reduction potential, they can reduce transactional costs and increase the speed and accuracy of information. They can also enable JIT systems, another key Lean element.
ERP systems can also be integrated with other internal systems, such as warehouse management systems (WMS), forecasting, distribution requirement planning (DRP), and quality systems (in some cases, these modules may be included/available in an ERP system).
An IFS software white paper from 2009 by Jakob Bjorklund entitled “10 Ways to Use ERP to Lean the Manufacturing Supply Chain” pointed out some ideas that are very relevant to this discussion. [Bjorklund, 2009] Besides using various methods and tools to “Lean” out your supply chain processes as we’ve pointed out earlier in the book, the white paper points out some technology tools to look for in an ERP system.
While there isn’t really one “silver bullet” to have in an ERP system, in terms of helping you on the Lean journey, there are some specific things to look for. Of course the system should be integrated company-wide, which is pretty basic to ERP systems these days.
It is critical it is to have an integrated quality management system to record and analyze quality performance, so you can “do it right the first time,” as they say.
Demand forecasting, which we will discuss in more detail later in this chapter, is important for not only reducing waste by having more accurate forecasts to drive production, purchasing, and deployment of inventory, but it is an important communication and collaboration tool. So it is important that you consider a “best in breed” type of forecasting system, which may not be the case with what may come with an ERP system. In addition, if it is an external addon system, make sure it is integrated with your ERP system. [Bjorklund, 2009]
The IFS software white paper also points out that:
It is important that your ERP system “supports multiple modes, including make-to-order (MTO), engineer to order (ETO), configure to order (CTO), and others.” This helps you to consider producing in batches when necessary (e.g., make-to-stock or MTS) or when the opportunity presents itself, in a more customized, small lot manufacturing mode.
The application should be capable of being “demand-pull” based, minimizing raw, WIP, and finished goods inventory and maximizing customer service using tools such as distribution requirement planning (DRP) and quick response (QR)/collaborative planning, forecasting, and replenishment (CPFR), both of which will be discussed in Chap. 13.
The ERP system should be capable of providing for multiple sites, not just your own, but distributors, wholesalers, and customers, in order to execute some of the technology just mentioned.
Master data management is key to companies having multiple divisions that might also have multiple part numbers for the same items. Without this capability, visibility and integration can be severely impaired. [Bjorklund, 2009]
Demand Forecasting
As we all know, all forecasts are wrong. It is really a matter of having a collaborative process in place, which is a blend of “art and science” (or in other words, a mix of qualitative and quantitative methods) to make it as accurate as possible. As mentioned earlier, inventory is one of the eight wastes and covers up variability in a process, one of which is demand variability.
In Chap. 4, we discussed how it is critical to have a good planning process in place to minimize this variability and to minimize the bullwhip effect. Once this process is established, it is critical to have the right technology available to enable it.
According to an article in SAScom Magazine, entitled “The Future of Forecasting Software,” “significant progress is taking place in the areas of automation, scalability, and the incorporation of structured judgment.” [www.sas.com/news/sascom, 2006]
Trends Driving the Use of Technology to Reduce Waste
The article points out that there are trends in forecasting that are driving the need for increased use of technology including:
The range of business forecasting problems is increasing—other areas of business require forecasts, such as warranty claims, returns, staffing, and maintenance, which can dramatically affect profits. So the more accurate and detailed the forecasts, the less waste there is in these and other processes.
The scale of business forecasting problems is increasing—this has forced the use of more “automated” methods for forecasting and replenishment in places like retailing, for example, as a result of the proliferation of SKUs.
It is crucial to distinguish the “high-value” forecasts for special attention while automating the “not-as-valuable” forecasts—this relates to previous discussion of using the Pareto method (ABC) to distinguish between your A or revenue/profit producing items and your slow-moving, less profitable C items. The A items require more time and effort in planning, whereas the C items, which are less important, can rely more on an automated forecast.
There is a need to handle the “continuously evolving product”—as technology enables ever shortening product life cycles, there is less demand history available, and therefore there is a need for technology to intelligently look at the history of similar items to develop new forecasts (along with a tool that allows for collaboration).
Quantity and quality of data will continue to increase—technology has made it easier to capture greater amounts of more detailed information using technology such as POS (point of sale), RF (radio frequency) bar code scanning, RFID (radio frequency identification) and the Internet, creating huge “data warehouses” of information. Therefore, there is a need for more automated forecasting systems to compile and interpret this information.
Use of structured judgment enhances collaboration—with techniques such as CPFR and VMI, there are more sources of data input from more participants, including remote sales, customers, and suppliers. [www.sas.com/news/sascom, 2006]
The article concludes that with the use of better forecasting tools and methods, forecast error (a source of waste) will be reduced, but demand will become more erratic due to SKU proliferation, shorter life cycles, etc. This takes us back to previous comments where we pointed out that the optimal way to handle this, besides the use of technology to improve forecast accuracy, is through more flexible, Lean Manufacturing and supply chain processes.
Distribution Requirement Planning (DRP)
DRP, similar to MRP, is time-phased planning, except in this case it is used to manage finished goods in your distribution network. DRP is ideal for businesses with complex distribution networks, but also effective in managing inventory in simpler ones. DRP enables businesses to go from a demand push, to a pull environment, thereby reducing waste in the form of inventory, transportation, and warehouse costs, as well as time by triggering replenishment based upon the pull of the customer order.
DRP and Demand Pull
As shown in Fig. 12.1, typical DRP software reviews on-hand inventory levels, which are netted against open customer orders, forecasts, work/purchase orders, and pending transfers and determines if replenishments are needed (when the net inventory drops below a targeted safety stock or safety time level).
Figure 12.1 Sample DRP screen and description.
By pulling inventory through in this way, inventory is minimized (and customer service levels maximized) and product is delivered more “just in time” instead of “just in case.” DRP also helps to improve supply chain visibility so that companies can plan rather than react.
For example, imagine an item or SKU that has very seasonal demand such as snow shovels. If you use a tool such as DRP, it will pick up seasonal demand (planned, actual, or some kind of combination) in advance based upon the lead time for that item. The lead time can represent the transit time to the distribution center or the manufacturing or procurement lead time, or both as DRP is “hierarchical” (i.e., multiple levels of demand). DRP allows you to react quicker to changes in demand at the retail level, as well as to improve your production and distribution planning process through more accurate, pull-based replenishment forecasts.
This type of tool, along with a forecasting system, can also be extended to include customer locations (e.g., customer distribution center and retail locations) to reduce waste even further by improved forecasts and visibility downstream in your demand chain. We will discuss in more detail in the next chapter when exploring CPFR systems.
Advanced Planning and Scheduling Systems
We will just speak briefly about advanced planning and scheduling systems (APS) since they actually fall more under the heading of manufacturing as they are typically used for planning or scheduling production. However, when integrated in an S&OP process, they can have a direct and powerful impact on the supply chain and logistics process.
APS systems can include an array of software used in the manufacturing management process where raw materials and production capacity are optimally allocated to meet demand. They are typically used in situations where there are complex trade-offs, sequencing optimization, and competing priorities, all of which are constantly changing. The systems can assist the planning process starting at the capacity or aggregate planning level, master production scheduling (MPS), and even detailed finite capacity scheduling (FCS) or short-term scheduling levels.
Benefits of Advanced Planning and Scheduling Systems
A robust S&OP process can help to drive a Lean process from a management perspective, but in order to do so, it takes the support of some pretty heavy-duty detailed, complex planning and scheduling systems.
A good APS system can contribute to a Lean process in the following ways:
Reduce cycle time as a result of decreased waiting time and WIP inventory between manufacturing operations.
Reduce raw material carrying costs.
Reduce finished goods material storage by using storage space as a critical resource.
Improve on-time delivery by showing precisely when jobs will finish.
Improve accuracy of order promise dates.
Increase utilization of key resources.
Streamline and standardize the schedule process by storing all of the rules in one system.
Centralize information to improve communications between functions.
Warehouse Management System (WMS) Software and Radio Frequency Identification (RFID)
WMS is a software tool for managing inventory within the four walls of a distribution center. It typically is integrated with a company’s ERP system, which can be updated in batch or in some cases “real time.” WMS software typically covers planning and movement of inventory from receipt to shipment (i.e., receiving, put away, picking, staging, and shipping). The functionality typically found in a WMS includes: inventory control, storage location management, quality control interfacing, order picking, automated inventory replenishment, receiving, shipping, operator productivity, and report generation.
Data can be manually entered into a WMS, or more optimally electronically via RF devices (or more advanced RFID).
Warehouse Management Systems in Waste Reduction
WMS can reduce waste in many ways. The reduction of errors, especially when using bar code scanning equipment, improves the accuracy of inventory, including the accurate receipt, shipment, and location of items in the DC. It directs activities from incoming material processing to manufacturing and through order fulfillment, making sure that the correct materials are getting to the right place, at the right time, in the proper quantities to satisfy customer orders. Labor, the productivity of which is critical to controlling cost in a DC (e.g., cases/hour), is system-directed in an optimal manner and based upon general or customer-specific business rules. So features such as directed put away, wave/batch picking, velocity slotting, and pick to light help to improve both accuracy and productivity.
Radio frequency identification (RFID) is a lot more than just a small improvement from bar-code technology. Bar codes gave us a status report at a certain point in time and are an automated form of data entry, whereas RFID, in the long term, will potentially provide complete and continuous visibility throughout manufacture, shipping, warehousing, and sales of a pallet, a case, or a single item. The information will be received much faster than with just bar codes and offer much more information about the item (and use less labor!). As the RFID chips become more sophisticated, less expensive and the data more standardized, there will be even more efficiencies.
Transportation Management Systems (TMS)
In its simplest terms, a TMS is a software system that helps to manage a company’s transportation operations. They can help to select the most cost-effective mode and routes that match inventory and delivery objectives.
The functions that this type of system can offer include:
Planning and optimization of transportation routes
Transportation mode and carrier selection
Management of carriers
Real-time vehicles tracking
Service quality control
Vehicle load and delivery route optimization
Transport costs (including rating, pre- and post-audit)
Shipment batching of orders
General cost and performance control measuring key performance indicators (KPIs) with reports and statistics
Benefits of Transportation Management Systems
The benefits of TMS in conjunction with Lean can include decreases in transportation costs, inventory levels, and carrying costs, as well as increases in asset utilization, supplier fill rates, and customer service.
According to a 2006 Aberdeen Group survey “The Transportation Benchmark—The New Spotlight on Transportation Management and How Best in Class Companies Are Responding,” “transportation management is moving out of the shadows and into a strategic role in driving supply chain excellence. In recognition of this, most companies are actively reevaluating their transportation management processes, organizational structure, and technology.” [www.aberdeen.com, 2006]
The survey found that the most important actions were really waste reduction—focused as they included getting accurate online status and cost information, gaining visibility into shipments and orders, and collaborating with carriers, suppliers, and customers to create more economical transportation processes.
TMS software can increase efficiency across the company through better shared arrival status (inbound and outbound), and visibility for more employees and customers, for example. More timely, accurate information leads to less uncertainty and more accuracy financially, as well as by not only reducing transportation costs, but also by reducing inventory holding costs and having more predictable lead times.
The Aberdeen Group survey also goes on to say that on-demand, Web-based solutions can be implemented faster and cheaper and gives quick and easy access to real-time information to all shareholders (internal and external). This reduces waste in many ways, including substituting real-time information for excess inventory and reduces operational costs as well through better efficiency, but there are always advantages and disadvantages to going with this type of solution so a lot of time should be spent researching it before jumping in.
It is the opinion of Kelly Thomas, senior vice president of manufacturing at JDA Software Group, Inc., that no matter which specific technology you go with, in general, it “will play a critical role in the ability of companies to adapt to constantly changing business conditions. Companies that fail to leverage technology—or to leverage it properly in the context of people and process—will fail to maintain their competitive edge. Dramatic shifts are occurring in many industries—retail, high-tech electronics, high-tech semiconductor, automotive and metals, to name a few. Companies that fail to recognize these shifts will get caught behind the change curve. Many of those that fail to recognize the shift will be left behind. The current shift requires demand-driven, lean SCM.” [Thomas, 2011]
CHAPTER 13
Beyond the Four Walls: I Can See Clearly Now
In Chap. 12, we discussed various technologies that can be used to reduce internal waste in a business. However, if we do not look at the entire supply chain network, we run the risk of passing off our inefficiencies to customers and suppliers, resulting in them becoming less efficient. For example, by just reducing our lot size on orders from a supplier without other communications, the supplier does not really get the necessary visibility into our schedule to determine the most efficient action to take when producing the material for our order.
In many cases, we must also interface with partners to improve overall supply chain efficiency and flexibility. As the term supply “chain” indicates (actually more like a “web”), we are all a network of entities that affect each other’s performance as well as impact the final customer. So the more visibility we have into each other’s operations (our supply and demand chain), the more waste we can eliminate.
This is easier said than done, especially if we do not have the proper tools to enable this visibility and communicate it properly. That is where technology comes in. Some of it, like electronic data interchange (EDI), has been around for a long time, whereas tools such as software as a service (SaaS—the “on-demand” rental of software that is installed at a remote, dedicated, secure server) are relatively new. Thanks to the almost exponential improvements in technological capabilities and capacity combined with decreasing costs for such technology, even small- to medium-sized companies can now take advantage (much of this can be attributed to Moore’s law, which states that the number of transistors on a chip will double about every 2 years).
