1-Is a Materials Requirement Planning (MRP)
System the best approach for your company?
Of course an MRP system has to be an ideal
system for your organization after all most companies are using
it, right? Or is it? Let’s examine the facts surrounding how
effective an MRP system really is. …
system is used to plan and buy material to a forecast or to a
job order and virtually all of the manufacturing companies
within the United States are currently using some form of an MRP
system. An MRP system is perceived as a required system to
drive an organization. The actual procurement cost of an MRP
system can range from $50,000 to $3 Million plus the annual
ongoing software maintenance fees. The number of dedicated
the integrity and accuracy of the system is staggering. Your
organization should add up the staff required to maintain the
critical information within the system. You must consider the
Administrative Overhead required to support the constant
delivery dates of raw materials, the Engineering Overhead
required to accurately create Routings, the Production Planning
Staff maintaining the Master Schedule and scheduling the Jobs on
the production floor, the Operations Team tracking the movement
of jobs, posting to labor, to work centers and to completed
routing operations. Let’s account for the Stock Room personnel
required to perform inventory cycle counts and fill pick lists
for a build. Constant diligence is required by all these
departments to properly enter data to assure proper delivery of
raw materials at the time of build. Now consider the inevitable
“Rescheduling Event” and impact on the organization to move
in/out delivery dates of raw materials. Also the impact of
changes to the Mater Schedule requiring Production Planners to
change the Job Order priorities and reverse inventory
transactions. These are a few of the many requirements draining
your staff to maintain an MRP system.
The MRP system has become a huge
resource-draining monster whose data integrity is essential for
proper operation. Many companies have achieved a respectable On
Time Deliveries (OTD) of 95% or better with inventory turns of 8
times or more but it is the result of a very large highly
skilled staff diligently executing complex transactions.
Naturally with all the transactions required for the MRP system,
it is inevitable that a transaction error will occur and result
in a disruption of the system and missed ship dates. This is of
course not acceptable but the system is used as an
excuse and the scapegoat.
You should review the success of our world
competitor, the Japanese. They flooded our country with quality
products at an affordable price. The affordable prices are not
the result of cheap labor, they are the result of using a
different manufacturing method than the traditional MRP system.
Isn’t it time that we explore a different manufacturing method?
The typical MRP system pictured below in Figure 1 illustrates
the complexity and overhead required to maintain an MRP system.
There are 40 transactions in a typical MRP flow vs. 11
transactions in a Lean Purchasing and Planning flow as shown in
2- Does Lean Planning and Procurement
provide an alternative to MRP?
Lean Planning and Procurement (LP&P) is an alternative method to
the MRP system. LP&P is focused on eliminating non-value added
activities in the manufacturing processes resulting in a more
competitive and profitable position. LP&P replaces a computer
driven material planning & procurement system with a visually
oriented planning and procurement system. The flow chart below
illustrates the simplicity of lean flow.
3-The Opposition to Change: Get buy in
through a well planned Pilot Program
MRP knowledge, training and expertise is a
core competency many have based their careers on. How will these
people react to a system where the expertise they nurtured
throughout their careers is no longer critical, useful or
pertinent? How will they feel assessing their historical
activities largely as non-value added? This is why the lean
movement must be driven from the top down and training and
re-training are critical elements for success. It is recommended
that an introductory “Town Hall Meeting” is held for all
employees explaining the reason for the Lean Journey and the
direct benefits to the company and the employees. People must
realize this change is essential for the business to grow and is
in the long-term interest of a majority of the employees. It
should be made clear the goal of the Lean Journey is not
designed for staff reduction but to apply existing personnel and
resources directly to improving throughput. There should be a
clear message in the organization that the Lean Journey will be
successful, that those of you who join the effort will enjoy a
career path with the organization, those of you who elect to
impede progress won’t.
The LP&P concept is easy to understand but
difficult to get people to adopt because it is considered so
radical to established beliefs. Once it is properly
demonstrated, it is so simple that the change can be implemented
quickly. The most difficult concept to adopt is giving up
computer-assisted controls for visual controls. The best way to
sell the Lean Concept is to demonstrate the effectiveness to the
4-What is the Lean Implementation
Sequence that works?
Companies that have embarked on the Lean
Journey typically commence with a pilot
product cell to
demonstrate the effectiveness of Lean Manufacturing to the
organization. This cell should be trained on Lean Concepts and
the Operational Focus of 6S to organize the cell and see that
everything has a place and everything is in its place. They
concurrently drive cycle time reduction through cellular
re-layout, standardized work, and process value stream mapping.
There is also an effort to move to point of use storage and
implement kanban controls. These are the Phase I Lean Activities
or the Bronze Category as classified by many companies i.e.
United Technologies, Pratt & Whitney, etc.
5- Create an effective Lean Cell within
an MRP Environment-The Transition State
The commencement of phase 2 lean activities
typically is initiated with a Kanban controlled inventory
approach with a detachment from the existing MRP system.
A Lean Cell does not require an MRP System
to manage Kanban inventory and procurement but the Lean Cell can
reside in an MRP driven organization. In regards to material
procurement and replenishment within an MRP Environment, it is
best to allow the Lean cell to directly procure Kanban materials
unique to that cell and for those products that are shared with
the rest of the organization, replenish the Kanbans from
inventory. To protect the MRP System from “unexpected demands”
(non-MRP driven requirements) those items that are shared with
the rest of the organization should have the Safety Stock
adjusted to compensate for the off-the-system demand to supply
the Lean Cell. Of course once the Lean Cell demonstrates to the
organization it’s effectiveness, the MRP system can be
confidently disabled in lieu of the visual Kanban Inventory
6-The Lean Planning and Purchasing
The progressive approach would encompass
the following criteria:
No inventory balances, no forecasting, no
traditional blanket orders, no cycle counts, no issuing
inventory, no pick list, no traditional segregated stock room.
In LP&P, the material is moved to where it is needed
(Point-Of-Use), there are automated purchase orders and bar
coded order placement and receiving. LP&P also encompasses
Kanban quantities derived from actual usage and replenishment
lead-times, spike order risks identified driving incremental
replenishment orders to the Kanban to insure Customer on Time
Deliveries (OTD) are met. A system focused on customer
demand-pull driving the highest OTD metrics and inventory turns
for a maximized cash flow that frees up working capital.
7-Lean Purchasing And Supplier
Lean Purchasing and Supplier Consolidation
principals work together. Remember the charter of Lean is to
remove waste. In the typical purchasing procedure, the buyer
sends out three Request For Quotes (RFQ). After all three
quotes are received detailing the pricing, delivery and price
breaks; the buyer reviews the information and awards the
procurement to the appropriate supplier. Each time the same
product is purchased, this process is repeated. Consider all
the work and time required to execute a single Purchase Order.
What is the cost of that Purchase Order (PO) itself? Some
companies use $50 as a fixed cost per a PO generation.
Now, consider all the activities required
to execute a PO at your current purchasing frequency and then
imagine your boss telling you that we are not issuing blanket
orders anymore or having any scheduled deliveries, you have to
buy only what is needed and only when it is needed. You are
then directed to get quantity discount prices no matter how
little you buy. Can you anticipate the response from your buyer
when these constraints are imposed? This is an impossible
scenario unless certain tools are in place, Supplier
Consolidation and automated Kanban replenishment orders.
Now take the same scenario executing a PO
except that you know the exact price and quantity for every
order you place. RFQs are no longer needed, no evaluation is
required and your supplier is giving you their best price
regardless of quantity. The buyer can easily execute POs
without hesitation or delay as a result of Supplier
Consolidation. Supplier Consolidation is a movement to reduce
your supplier base and at the same time present your companies
total purchasing power and negotiate better pricing and
delivery. Instead of focusing on PO line item details, approach
your suppliers with your total companies annual purchasing
power. Simply put, explain to your suppliers that the company’s
annual purchase dollar amount is open for bid and they being one
of your premier suppliers have an opportunity to get a larger
piece. The increased sales dollars are dependant on their
ability to reduce lead time, reduce replenishment quantity and
reduce price. Your goal is to give them 100% of your business if
they meet your criteria. You make a commitment to develop a
win-win relationship and partnership to improve the
profitability of both companies.
Suppliers are aware of this new business
trend and will compete to capture your total business;
after all, supplier consolidation also leans out the suppliers.
Their sales force is no longer required to answer routine
repetitive RFQ’s. They can now focus on helping their existing
customers with designs, quality, cost reduction and cycle time
to help their existing customers grow their businesses.
8- Automated Visual
The next tool that the buyer will need is
to automate the visual procurement signals. A KanBan purchase
is equivalent to a Purchase Order Request (POR) because a Kanban
purchase is initiated outside of an MRP demand. Normally this
is done with Kanban Cards or a hand written request. Using
Automated Visual Procurement Signals, all products are Bar
coded, the reorder signals are visually triggered and those
items which require procurement are captured in a Personal Data
Acquisition (PDA) device and scanned. All items that require
replenishment are uploaded into the systems purchasing queue.
With each scanned item, the system knows how to manage those
items to be procured, who to buy them from, at what price and
quantity. With Lean Software, a visual reorder signal is
captured via a PDA, electronically converted into a purchase
order and electronically transmitted to the vendor via email.
This process is illustrated in Figure 3.
With this system, where visual reorder
signals are converted into instant POs emailed to the supplier,
and with Supplier Consolidation agreements, the buyer is capable
of handling many more transactions as they are now automated,
totally transparent, timely and value-added demand driven . POs
can be generated with virtually no cost impact to the
FIGURE 3 Automated Visual Procurement Signal
9 -Company Implementations
Lean Journey at
North Atlantic Industries (NAI), Inc.
located on Long Island, NY
North Atlantic Industries designs and
manufactures I/O Cards, Power Supplies and Instrumentation for
the Defense and Aerospace industries.
NAI has built its reputation over 50 years
as a provider of high quality COTS and Custom Products in either
Commercial, Extended Temp or Full-Mil versions.
NAI is committed to the Lean Journey and
has been focused on the continuous improvement of Key Metrics
including: Cycle time, Value Added Index, Quality and On Time
Delivery and the reduction of feet traveled. It is now moving
into Phase 2 of the journey focusing on LP&P to drive
improvements in Inventory Turns and Material Overhead.
NAI’s Lean Journey took the traditional
path using a pilot Lean cell within the organization to
demonstrate the effectiveness of the Lean Manufacturing method.
NAI has now moved from a process oriented operation to a product
focused cellular team based environment. All products have been
assigned to 1 of 3 major product families/cells. NAI has been
implementing lean principles focused on cellular manufacturing,
6S, Value Stream Mapping and Cellular Team Focus. The results
have been dramatic: 75% cycle time reductions, Improvements in
value added index from 25% to 50%, Millions of feet of travel
eliminated on an annual basis, Improvement in OTD from 82% to
92%, continued quality improvements and a more motivated,
empowered workforce. Focused training on team dynamics and
skills is a key going forward.
NAI is succeeding on the Lean Journey, the next challenge
pertinent to this article is to see the benefits of inventory
reduction without increasing the cost of material transactions.
As an immediate goal, NAI is focusing on automated Kanban
replenishment and Supplier Consolidation and anticipates
demonstrating significant progress within 6 months. This goal
includes increasing inventory turns, reduction of on-hand
inventory and significant reduction in the cost of executing
transactions. NAI will share in a future articles the many
insightful experiences as a result of their Lean Journey focused
on their implementation of a LP&P plan to automate Kanban
replenishment and execute supplier Consolidation.
Lean Journey at IFI:
Instruments For Industry, Inc (IFI)
located on Long Island, NY
IFI was founded in 1955 and is a
manufacturer of Wideband RF Amplifiers. They have three product
lines, Tetrode Tube Amplifiers, Solid State Amplifiers and
Traveling Wave Tube (TWT) Amplifiers which deliver up to 2500
watts of power. These amplifiers require up to a thousand
components to construct a single amplifier. IFI is a typical
model for a MRP based company benefiting from a Lean
IFI has enjoyed an established Lean System
for several years now and their achievement pertinent to this
article was their focus on inventory reduction through high
inventory turns and the automation of their Kanban procurement.
IFI has obtained the efficiencies detailed
below through Lean Software providing efficient Kanban material
management. Compare these statistics to your organization.
Review your current on hand inventory, purchasing volume and
staffing to IFI’s.
Of On Hand Kanban Inventory:
No. Of Kanban
Purchase Orders: 3808/Yr
Purchase Order Line Items:
Inventory turns: 20
Purchasing and Material Control:
Receiving and Shipping: One
Accounting Department: One
10 Summary &
Lean Purchasing and Planning is a viable
and superior alternative to an MRP based system. As
demonstrated in this article, the bottom line cost savings in
abandoning a MRP based system is staggering. The savings from
shedding the entire MRP administrative overhead goes right to
your companies bottom line profit. Abandoning Production
Scheduling for one-piece flow and abandoning a conventional
stockroom configuration for Kanban point-of-use inventory
provides your company with decreased cycle time, increased
inventory turns, significant net profit and working capital.
There is a mind-set that a company needs an
MRP system and these companies are reluctant to abandon it once
they have it. The general feeling is that they incurred the
initial expense in purchasing it plus the supporting staff made
a career out of using it. A cultural and psychological
commitment was established to keep an MRP system active despite
the availability of a profitable alternative. In actuality, a
company only needs an accounting system to manage Sales,
Accounts Receivables and Payables. Manufacturing is managed
“off-line” by a Lean Visual Manufacturing System.
In conclusion, making the psychological
divorce from an MRP System will increase your company’s
profitability, expand future business opportunities and for
those companies who are financially struggling…..it can make the
difference whether a company lives or dies.
What is Lean Manufacturing? -A
Definition of LEAN Manufacturing.
A LEAN Company – An established LEAN Company needed a
The LEAN approach – An article to support your LEAN
movement over MRP/ERP systems.
– A Case Study of a LEAN company and their Return On
About Robert Krause
Enterprise System (LES) Software
Why Do You Need LES?
– Rationale and a supporting article to use LEAN Manufacturing