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  • This can be a toughie to get behind. People often ask how I avoid imploding when mentioning Lean and ERP in the same breath. Like the other tool sets, ERP has both strategic and tactical aspects. Tactically, ERP tools tend to emphasize software functionality to support the strategy. However, those tools are not confined to software packages. On the strategic level, all it really says is that I need to know: What I need to supply (my end-item demand) What I need to make or buy (my BOM – what I will buy and what I will make to create my end-item – and my inventory) What it takes to create my end item (processes and resources, including capabilities, capacities, availabilities) How long it should take A baseline plan for fulfilling the end-item demand THOSE FIVE PIECES OF INFORMATION are just as applicable to the design of a kanban or DBR system as they are to the coding requirements for a business data management software package!

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  • 1. Integrating Lean, TOC, Six Sigma and ERP: Tying Them Together Seattle Chapter APICS presentation October 22, 2008 Russell M. Field Orig. 8/08 rev IND1A
  • 2. DISCLAIMER
    • Although I am employed by The Boeing Company, the material contained in this presentation has not been sponsored or endorsed or by The Boeing Company. No association of this material with The Boeing Company, its policies or practices is expressed or implied.
    • The concepts and information herein are freely available from many sources, and their sharing and dissemination is highly encouraged. However, please do not use the slides themselves without my permission as their format and configuration are particularly identified with me. Thanks!
    • Russ Field, 10/22/08
  • 3. All together, now:
    • Profit = (Price – Cost) x Volume
  • 4. So … What is this session about?
      • It’s NOT about Lean Manufacturing, TOC, Six Sigma or ERP;
      • It IS about relating them functionally to each other;
      • It IS about synergy and interactions between these elements, and
      • It IS about their relationships to the rest of the business enterprise
  • 5. How much can we cram into 70 minutes?
    • We’ve got 70 minutes to develop an integrated view of these business elements:
      • Lean Manufacturing
      • Theory of Constraints (TOC)
      • Six Sigma
      • Enterprise Resource Planning (ERP)
      • Business strategy and management, including Finance
    • OF NECESSITY, this will be a very high-level overview of these elements, highlighting basic points regarding their integration at the enterprise level.
  • 6. Agenda
    • What’s all the hubub?
    • The puzzle
    • Deployment
    • Managing the event horizon
    • Minding the dollars (or how not to …)
  • 7.
    • What’s all the hubub?
  • 8. What are we trying to accomplish with these tools/approaches?
    • Improve competitive posture
    • Increase Profit
    • Manage the entire business
      • Leverage synergistic relationships between these concepts
      • Prevent Initiative conflicts
      • Avoid suboptimization
      • Maximize resource utilization and “bang for the buck”
  • 9. Is “Lean” all we have to do to be successful?
    • … or Six Sigma?
    Which should I choose? Are any of these “The Answer”?
    • … or TOC?
    • … or ERP?
    • … or [insert flavor]?
  • 10. FIRST, a little background … What does it take to run a business?
  • 11. Critical business functions …
    • Primary business functions must include:
    • Management – strategy/policy formulation, tactical execution oversight
    • Sales & Marketing – market niche identification, characterization
    • Finance – accounting and reporting
    • Additional functions may include:
    • Engineering
    • Manufacturing
    • Procurement/Materiel
    • Human Resources
  • 12. Sing a song of Delphi …
    • Who does “lean”, yet struggles as a business?
    • Delphi – Shingo Prize > 20 times
    • GM (parental relationship with Delphi, NUMMI* partnership with Toyota)
    • Ford (Shingo Prize)
    • Your unit/group/company?
    • Womack’s bicycle frame company
    • * New United Motor Manufacturing, Inc.
  • 13. James Womack and Merlin Metalworks: Setting the stage …
    • Time: 1995
    • Claim to fame
      • ~2 weeks from order placement to shipment
    • STAGE RIGHT
      • ~4 months inventory of titanium tube stock (big $$)
    • STAGE LEFT
      • ~4 months inventory of semi-finished bike frames (bigger $$)
    • CENTER STAGE
      • A conglomeration of equipment, processes and convoluted flows
  • 14. James Womack and Merlin Metalworks (1995)
    • Leaned out processes
      • Cellularized and simplified the manufacturing processes and resources
      • Drew down raw tube and semi-finished frame inventory (8 mo. to ~2 days)
      • Developed and built flexible, quick-changeover welding fixture
      • COD to reduce bookkeeping and improve cash flow
    • Problems?
      • Supplier not motivated to cut lot size or shipment frequency (Boeing, P&W, GE ---- Merlin)
      • Custom bicycle customer base equated longer flow time with quality and value
      • Bank wanted traditional collateral – inventory, equipment, receivables
    • Lessons
      • Don’t let the pursuit of conceptual purity (Lean or otherwise) blind you to what the customer wants
      • Changing supply chain mindsets, while critical, is harder than changing your own
      • Traditional financing sources may not understand “low-capital manufacturing”
    • Reference: http:// www.galganogroup.it/es/pressroom_view.asp?id =11
  • 15.
    • The problem is not the failure of specific concepts …
    • … but, rather, not understanding the entire supply chain and managing the business in a holistic manner!
    • There’s more to successfully managing a business than implementing “silver bullet” concepts!!!
  • 16.
    • The puzzle …
  • 17. So, what do Lean, TOC, 6 Sigma and ERP do?
    • Generally speaking, Lean, TOC, 6 Sigma and ERP do two things:
    • I. Provide strategic perspectives
      • The nature of “waste”
        • Excess inventory and flowtime as liabilities
        • Unnecessary resource activation
      • Role and source of quality
        • Engineering design vs. conformance
        • Built-in vs. inspected-in
        • Cost control vs. cost driver
      • Flow of money - parts, materials, information and other process outputs
      • Process management
        • Design, standardization, expression, evaluation (including metrics) and control
        • Improvement vs. stagnation and loss
  • 18. What do Lean, TOC, 6 Sigma and ERP do?
    • II. Provide tactical tools
      • Describe the current and future states
      • Quantify performance and conditions to help identify opportunities
      • Link Enterprise Vision/Enterprise business units/Current state/Future state
      • Support strategic decision-making processes
  • 19. What do Lean, TOC, 6 Sigma and ERP NOT do?
    • Frame the business
      • Formulate mission/vision/goals
      • Develop products/services
      • Identify target markets
      • Develop strategies
      • Set policies and procedures
    • Select processes
    • Identify resources
    • Manage daily performance or emergent situations
    WE must do these things!
  • 20.
    • The pieces …
  • 21. Lean Manufacturing …
    • Main objective: Remove waste (non-value-added activities)
    • Key question: “What should I be doing/not doing?”
        • Examples:
          • 5S
          • Value-stream mapping
          • Inventory and process control mechanisms (e.g. kanban and andons)
    Lean = Effectiveness
  • 22. Theory of Constraints …
    • Main objective: Relieve barriers to revenue flow
    • Key question: “Which processes/conditions should I target first/next?”
        • Examples:
          • Concept and definition of “constraint”
          • The Five Focusing Steps
          • Concept of shifting constraints
    TOC = Revenue Flow
  • 23. Six Sigma …
    • Main objective: Reduce variation/optimize value-added activities
    • Key question: “How can I mistake-proof those processes?”
          • Examples:
          • Design of Experiments
          • Statistical Process Control
          • Poka-yoke
    6 σ = Efficiency
  • 24. Enterprise Resource Planning …
    • Main objective: Manage business data
    • Key question: “What’s my baseline?”
          • Examples:
          • Record and maintain process, product and resource data
          • Help manage volume, variety and variation of business data
          • Support business processes and decision-making
    ERP = Business Data Management
  • 25. Putting the pieces together … TOC = Revenue Flow Leadership and management Lean = Effectiveness Continuous Process Improvement (CPI) ERP = Business Data Management Bottom-line performance Quality - COST - Delivery 6 σ = Efficiency … around a core of Continuous Improvement! 1
  • 26.
    • Deployment ...
  • 27. Common approach … Different organizations will implement strategies in different ways Strategy Formulation Lean TOC ERP 6 Sigma Tactical Execution Org 1 Org 3 Org N Org 2
  • 28. Deployment - like sands through the hourglass … Common, cohesive plan & goals with enterprise-level view Strategy Formulation Lean TOC ERP 6 Sigma Tactical Execution Org 1 Org 3 Org N Org 2 Coordination – Integration – Action planning 2 OPERATIONS PLANNING {
  • 29. Forging Forward ... Managing The Event Horizon …
  • 30.
    • Stable Performance
    • No Scrap/rework
    • No Excess Flowtime
    • No Excess Inventory
    • No Overtime
    • No Underutilized resources
    • Flowtime
    • Inventory
    • Excess Capacity
      • Equipment
      • Facilities
      • Personnel
    Baseline Costs & Capacity
    • Wastes
    • Scrap/rework
    • Excess Flowtime
    • Excess Inventory
    • Overtime
    • NVA activities
    My Business Add’l Cost & Resource Req’s “ BIG” Lean Lean TOC Six Sigma ERP 3
  • 31. What to do?
    • Once all waste excess to the baseline business plan is driven OUT (not just moved around), further improvement will yield only additional capacity (opportunity) in some sense.
    • If we don’t, aren’t prepared to or can’t leverage that additional capacity, are we really gaining anything from further Lean activity?
    • Remember Womack’s bicycles and the philanthropic shops …
  • 32. What to do?
    • Fill in the hole, or
    • Reduce the capacity
    • Stable Performance
    • No Scrap/rework
    • No Excess Flowtime
    • No Excess Inventory
    • No Overtime
    • No Underutilized resources
    • Flowtime
    • Inventory
    • Excess Capacity
      • Equipment
      • Facilities
      • Personnel
    Baseline Costs & Capacity My Business } These are NOT decisions the tools can make for us!!
  • 33. Cost Absorption Impacts on Lean Operations Decisions Minding the Dollars (or how not to …)
  • 34. We’re almost done ...
  • 35. Why are we going here?
    • Primary business functions must include:
    • Management
    • Sales & Marketing
    • Finance
    • Additional functions may include:
    • Engineering
    • Manufacturing
    • Procurement/Materiel
    • Human Resources
  • 36. Enterprise Relationships ... One “link” vs. another, or an external supplier Competitive comparison } Cost Accounting Policy External Supplier Internal Supplier
  • 37. Calculating Cost with Overhead Absorption
    • The ERP Operations Cost calculation (basic formula)
      • ((Setup Time/EOQ)+ Run) x Operations Rate
    • The Cost Absorption-based Operations Rate (simplified)
      • Budget/Forecast Standard Hours = $ per Std Hr
  • 38. Cost Absorption Issues
    • Seesaw
      • Three products – A, B & C - take 5, 3 and 2 standard hours respectively (total 10 std. hrs.)
      • $800/day total costs = $80/std. hr. (Operations Rate)
  • 39. Cost Absorption Issues Process Improvement A 5 $400 B 3 $80 240 C 2 160 Std Hrs. Rate ERP Cost B & C are now perceived as being more costly, though only change has been to A ... $800 10 hrs. Before A 3 $ 300 B 3 $ 100 300 C 2 200 Std Hrs. Rate ERP Cost $800 8 hrs. AFTER 4
  • 40. Cost Absorption Issues Process Improvement – Extended Supply Chain Impacts A $300 B 300 C 200 ERP Cost Tier II Tier I Part A is sold to Product Line ABC, while Parts B & C are sold to Product Line XYZ; XYZ’s inventory – both components and used-ons – increases because A was improved ... > Product ABC inventory Product XYZ inventory
  • 41. So …
    • Cost Absorption policy is not designed for competitive costing
      • estimated costs cannot be used for competitive decisions without additional manipulation
      • “ links” are treated as cost centers, wherein costs are allocated to sales
    • YET ... Cost data is used for many analyses and business decisions, especially at the “link” level.
    • AND ... “Links” are often held accountable for inventory costs as derived from system Cost data.
    • PLUS ... Cost absorption policies inhibit use of calculated costs for pursuing Lean Manufacturing opportunities
  • 42. The other end of the spectrum …
    • From “Cost Absorption” to “Materials-Only Costing”
  • 43. A little bit on Materials-Only Costing …
    • REFERENCE : “Who’s Counting?”
    • (winner of Shingo Prize for Manufacturing Excellence; Jerrold M. Solomon)
      • Two tiers: Lean Accounting (external reporting) and Accounting for Lean (internal management)
      • We’re going to focus on “materials-only costing” as an aspect of Accounting for Lean
  • 44. In short …
    • Many companies spend a lot of time, effort and money trying to capture labor and processing costs for Production orders.
    • “ Who’s Counting?” traces a hypothetical “lean” journey, starting with how the traditional cost gathering practices are cumbersome, costly and misrepresentative.
    • It describes how data and metrics should change to reflect the health of the business with higher accuracy, greater relevance, less effort and at lower cost as the Lean implementation progresses.
  • 45. The idea behind “materials-only costing” …
    • The traditional processes for gathering Production cost data are cumbersome, expensive and inaccurate.
    • Indirect costs are typically spread via some form of cost absorption ; between this and the inaccurate labor data, the only truly discrete cost we can know is purchased materials/components.
    • There has to be a better way to assess the labor cost contribution to a product.
    • O ne of the cost accounting concepts employed toward that end is referred to as “ materials-only costing ”.
  • 46. The starting point: key characteristics …
    • When the book begins:
    • Production work is done in a stereotypical job-shop environment with convoluted flows, craftsmanship skill sets and a variety of equipment (AKA “not Lean”; think “bicycle shop”);
    • Labor “actuals” are collected at the Production order/task (operation) level;
    • Cost absorption is used to allocate indirect costs at the individual Production order level;
    • Materials costs are a fairly stable portion (65% in the book (pg. 168)) of a part’s total cost (which, in reality, they may not be).
  • 47. Key concepts of “materials-only costing” …
    • On pages 167-168, the Lean champion says:
      • “… [in the initial, “non-Lean” environment] an individual part can have an [calculated] actual labor cost of anywhere from eight to twenty dollars …”.
      • “ [We need to] … standardize the process to consistently produce the part for eight dollars … A flow environment would not function with such variability . [emphasis added]”
    • This passage reveals some basic assumptions about what characteristics a business must exhibit for materials-only costing to work. Three things have to be in place:
      • The Production environment must be stable ;
        • Key sources of variability removed to enable a flow environment
      • Production processes must be standardized ;
        • Product moves - and the work is done - the same way each time
      • The direct labor force must be homogenous
        • Everyone must have the same essential skill sets and capabilities
  • 48. Key ideas in “materials-only costing” …
    • Materials-only costing is enabled by - as opposed to driving - certain conditions:
    • IF a task always takes the same amount of time , regardless who does it;
    • AND all the workforce is paid at the same rate ;
    • THEN I can apply a single hourly $$ rate to the product’s standard time, capturing the labor contribution quickly, easily and accurately.
    • There is no longer any value or justification for gathering “real-time”, actual labor expenditures.
    • Materials cost becomes the only variable I need to discretely capture and manage for item costing (thus the name).
    5
  • 49. Building the bridge …
    • Understanding that there’s overlap between the elements, let’s take each in turn:
    • 1) " IF a task takes the same amount of time regardless who does it …"
      • Standard work needs to be in place;
        • If everyone follows the same sequence of process steps, using the same types of equipment in the same ways, consistent results are much more likely and the process baseline is consistent.
      • The process has to be stable, reliable and repeatable ;
        • Driving out variability helps assure that the process can in fact be executed with the same cycle time and results time after time with fewer interruptions (e.g. TPM) and less frequent delay. It also means that the labor content to produce good product is more consistent.
      • The output must be of high quality ;
        • Rework and scrap are major sources of variability in resource requirements. Costs of secondary inspection, rework and scrap are minimized or eliminated with high “first time” quality. That also means (among other things) that forecast labor capacity and requirements are more stable.
      • Cross-training and multi-skilling promote the ability to interchange individual workers with assurance that each can meet the standard (planned) cycle time.
  • 50. Building the bridge (cont’d)…
    • 2) " AND all the workforce is paid the same … "
      • Cross-training and multi-skilling also help remove major skill distinctions that can drive differences in pay.
      • Simplification of processes and resources (e.g. table-top equipment and Engineering redesign) makes that cross-training easier to accomplish.
      • Stabilizing the overall demand - in part through level-loading and S&OP activities - helps control fluctuations in the size of the workforce population, which in turn stabilizes the overall cost of labor.
  • 51. Building the bridge (cont’d)…
    • 3) " THEN I can apply a single hourly $$ rate to the product's standard time. “
      • There’s no need to account for variation in order quantity, labor input or anything else because those variations have been driven out;
      • The labor content is known because of the standard work, stable processes and high reliability;
      • There's no rework to account for either in cost or capacity because of the high quality;
      • Worker profiles are interchangeable from both a skill set and pay standpoint due to cross training, multi-skilling, process standardization and equipment simplification; and,
      • The number of workers on the payroll is stabilized as a result of process stabilization and demand leveling; therefore the aggregate labor costs are stabilized over a period and a single hourly rate across all operations is feasible.
  • 52. Benefits …
    • Minimal or no cost, effort, compromise or confusion gathering and expressing labor contribution to item cost data
    • We don’t need to chase orders around the shop to collect labor contribution data
      • Who worked on it when
      • How long each operator worked on it
      • How much that operator costs the company per hour
      • Overtime vs. straight time
    • All the other benefits of “Lean” which enable materials-only costing:
      • Stable lead times
      • No scrap/rework
      • No excess inventory or flowtime
      • Etc.
  • 53. Notes …
    • Materials-only cost accounting is enabled by certain conditions, as opposed to driving those conditions.
    • High level of multi-skilling and cross-training
    • Standard work in place throughout
    • High process discipline
    • Stable workforce levels
    • Reasonable segregation of cost rates by product flows to high-cost resources
  • 54. What if those enabling conditions aren’t present?
    • It takes time to make the journey, and it must be made one step at a time
    • The Lean champion: “ We still have a business to run , and until we develop new procedures, we shouldn’t change a thing .” [pg. 165]
    • Get a vision, make a transition plan, understand the challenges and meet them as they emerge
  • 55. All together, now:
    • Profit = (Price – Cost) x Volume
  • 56. Contact Information and Q&A
    • Russ Field
    • (253) 931-9441