Why ERP/MRP Fails as a Shop and Purchasing Scheduling Sub-System

Computerization has it become too much of a good thing? I think so!

The MRP evolution took us down the road of computer sophistication. It was to be the panacea for solving all manufacturing problems. Little did we know that when we finally arrived at the final phaseERPthat we would still be facing daily part shortages, shop floor disasters and end-of-the-month chaos.
Computerization has it become too much of a good thing? I think so! In the 50s we took off the green shades and started to explode BOM by computer, we named it MRP - Material Requirement Planning. In the 70s we added shop floor control and capacity planning to MRP module we called it closing the loop. In the 80s we added cost accounting although for manufacturing the data was too confusing and way too late! We called it MRPII In the 90s we introduced ERP - Enterprise Resource Planning. ERP combined sales, engineering, human resource and customer relationship management and manufacturing into one all encompassing software package. The MRP evolution took us down the road of computer sophistication. It was to be the panacea for solving all manufacturing problems. Little did we know that when we finally arrived at the final phaseERPthat we would still be facing daily part shortages, shop floor disasters and endof-the-month chaos. What happened to all those salesmens' promises? During the MRP crusade, I was a disciple of MRP guru, Ollie Wight. In those days, as an operations manager, I designed and directed successful MRPII/ERP implementations and taught Materials Management at SDSU. Today, a Schonberger - Costanza - convert, I write, teach and coach on the design, development and implementation of Kaizen Based Lean Manufacturing... it's based on my real-world experiences and successful implementations. Its intended for companies that want to improve the effectiveness of their MRPII and ERP systems by transform their ineffective MRP shop and purchasing sub-systems with kaizen and sequential production.

Let's do a review of the Material Management Planning (MRP) process:

MRP at first look is not a complicated system. We input a master schedule that uses bills of material, part lead times, and lot size algorithms to calculate gross requirements. These requirements are then balanced against the aggregate of on-hand inventory, work-in-process and open purchase orders to determine coverage. The MRP system then does a gross to net requirements explosion to establish time phased net requirements. The resultant output is notification to planners in the form of take actions to either reschedule, reorder or cancel shop and/or purchase orders. Vince Guess is the creator of the graphics in this slide. Vince is an expert at communicating complex processes through the design of effective graphics. Vince taught me the importance of using this type of graphic to educate and enlighten. Vince is the President of the Configuration Management Institute and is a recognized guru in configuration management. If you ever need help in the creation and control of engineering documentation, Vinces company offers a certification course on the subject. It is cosponsored by Arizona State University and offers professional certification upon successful completion. Check them out on the Web: CMI

If we dig deeper into what is happening in the gross to net requirement process, we discover that many calculations are made based on the data and systems parameters supplied by planners. Before computers these calculation were done by hand calculators but only for the high costs or as we called them the A items. B and C items were purchased on a min-max or two bin system. When the computer came on the scene many planners got carried away and started doing these gross to net calculations for all material items. In reality, the computer is flawless in its ability to calculate the gross to net calculations, however, the data supplied by the planner is not. Consequently, the results are subject to human error. The typical MRP/ERP system generates more take action exception messages than planners can handle effectively, we call it a nervous system! My experience is that the exception message selection parameters for most MRP systems are setup to detect and report far too many non-essential take actions. If your planners cant get to all their take actions in a timely manner, then its time to readjust the selection parameters by replacing theoretical instructions with practical know-how and common sense!

This chart displays the inputs required to generate a master schedule and then feeds that master schedule into the MRP module along with the other required inputs to calculate net requirements and generate take actions. Lets fill in the blanks with percentages that are pretty common in industry today. One thing we know about SALES FORCASTS is that they are always wrong that said let use 95% accuracy. A sales configurator is used to define a highly engineered product. They are usually very accurate so lets give them a 99%. Finish goods inventory lets use 97%. Product design, if its new its low if old its high so lets use 92%. Order entry is usually good so well use 99%. To arrive at the percent integrity of the master schedule you must multiply each of its decimal inputs (it is not the averaging of the decimals, as most people think). In this case it calculates to .83 or 83%. This resultant decimal is the input to the MRP module based on the other inputs we can then calculate the shop order launch and control accuracy. Lets take a look at these inputs. Production Bills of Materials usually have problems lets give it 95%. Production inventory lets say 98%. Purchase order status lets say 96% and shop order status well give it 94%. So what do we have? Our order launch and control accuracy is 70%. In a typical case the purchasing and shop floor activities are being driven by system error of 30 percent. Is there any wonder why MRP and ERP are not the panacea we once thought them to be! As an exercise, pause the presentation and mentally fill in the blanks with what you know or think the percent accuracy of the your companys data input to be. Then calculate your company's order launch and control accuracy. An effective method for evaluating how well a company is doing in managing their MRP database data is to ask questions as to how accurate are their bills of materials, how accurate is their purchase order and shop order status, how accurate are their inventory records, etc. If the answers you get are pretty vague, likegood, OK, not too badthen you know that this is a company that needs help in stepping up to the problems of poor information integrity. Believe this---If were not measuring your companys data and documentation integrity, nor in pursuit of continuous improvement, our manufacturing performance will always be marginal.

The first lesson of this introduction to lean manufacturing is to get MRP off the shop floor and move to real-time and visual processes for controlling production and purchasing schedules. For a measure of MRP/ERP shortcomings, we need only to spend some time in a manufacturing facility especially during the last weeks of the final financial quarter. In a typical company, well find that converting the quarterly financial forecast into reality still requires overtime, internal/ external expediting, last minute on-the-run product changes and even a little smoke and mirrors. Results are scrap, rework and warranty costs that negatively impact profitability. In addition, relevant quality and shipment problems deliver less than acceptable customer satisfaction. Companies that have spent thousands of dollars in pursuing MRP/ERP and ISO-9000 certification, are devastated when they experience their business decline due to uncontrolled operating costs that caused non-competitive pricing. Other companies have won the Malcolm Baldrige Award for Quality and Business Excellence and subsequently fell far short of achieving growth and earnings expectations. Kaizen Based Lean Manufacturing involves arranging and defining manufacturing resources so that products flow most efficiently through the manufacturing process. Today, most manufacturing companies are still organized for functional manufacturingmechanical assemblies, electronic boards, cables, machined components and purchased parts are produced or purchased in lot sizes and received, inspected and moved to stockrooms. This process includes the picking-of-parts to fill shop orders and the movement of shop orders to the production area to build assemblies, modules that are usually returned to the stockroom. Finally the end product is assembled, tested and accepted. Ollie Wight would be turning over in his grave if he knew that in spite of his 1970s MRP crusadethe shop order launch and expedite syndrome is still

alive and kicking. Why? Because the realities of information integrity and statistical probability reduce the effectiveness of MRPII/ERP shop floor control systems. No matter how much sophistication is added to our computerized shop floor control systems, if we fail to master the basics of visual controls, we will never eliminate the chaos that grips our shop floor day-to-day activities!

Changing factory floor realities is a focus of Kaizen Based Lean Manufacturing. We need to shift from the order launch and expedite system to a lean and linear manufacturing, I call it sequential production. We need to convert stockrooms into production space and move the materials to point of use, I cal it Point-of-use-logistics. Its time to eliminate the end-of-the-month crunch and focus on linear production. We need to design our manufacturing system to be flexible and agile so that we can contend with inside-of-lead-time orders. Lets get rid of the old management structures and get to self-directed teams. The worst sin in supply chain management is that many manufacturers still treat their suppliers as adversaries instead of focusing on supplier partnerships. If its not a core strength lets considering it for outsourcing. And, finally lets get rid of the annual goal setting and establish a performance measurement system based on balanced scorecards. The realities of today find most manufacturers still bogged down applying old computer systems for controlling shop floor operations. To survive in the 21st century these companies will need to provide lean leadership to make the transition from MRPII/ERP to the hands-on application of Kaizen Based Lean Manufacturing.

During my 30-year business career as a supervisor, manager, director and chief executive, I participated in four successful financial turnarounds. At Solar Turbines we grew the business from $50 to $500 million while turning losses into profits in the first year of a four-year period. At Pagaso, a Spanish truck company, we turned a $100 million annual loss into an annual profit achieving our three-year turnaround target. Leading Eaton Leonard out of bankruptcy, we turned a profit in the first-year of reorganization. At Palomar Systems, over a period of four years, we increased our gross profit margin from 34% to 55% while growing the company from $17 to $225 million. Throughout these experiences, I continuously researched and tested business ideas, practices, processes and systems relative to their growth and profit margin contribution. As the years passed, it became clear to me that there were a number of tools, techniques and processes that were crucial to establishing a solid foundation for growth and profits. Because of their importance, I now write, teach and counsel on the development and implementation of what I have come to call the 8-Basics of Kaizen Based Lean Manufacturing