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COM-14-2050 Research Note

B. Zrimsek, Y. Genovese, K. Brant 26 July 2001

Commentary

ERP II in Support of Lean Manufacturing in Automotive

Successful manufacturers in the auto industry will adopt both mass customization and
lean manufacturing techniques. These techniques will require the deeper application
capabilities and open architectures of ERP II.

To save themselves from an industry with too much capacity and inventory with too little demand,
manufacturers in the auto industry should embrace mass customization (or building to order). The steps
the industry has taken during the last decade, such as consolidation and fostering competition among
suppliers, will no longer be enough to reduce costs. Successful manufacturers will make their
manufacturing operations lean, yet also more aware of and responsive to the needs of individual
customers, suppliers and market changes. “Lean” manufacturing will require enterprise resource
planning (ERP) vendors to deliver lean technology capabilities as they become more vertical in their
evolution to ERP II.

Definition of Lean Production

The American Production and Inventory Control Society (APICS) defines “lean production” as a
philosophy of production that emphasizes the minimization of the amount of all the resources (including
time) used in the various activities of the enterprise. It involves identifying and eliminating non-value-
added activities in design, production, supply chain management and dealing with the customer. Lean
producers employ teams of multiskilled workers at all levels of the enterprise and use highly flexible,
increasingly automated machines to produce volumes of products in potentially enormous variety.

ERP in Lean Manufacturing: Push vs. Pull Production

Manufacturers typically take two approaches: push or pull production.

Push and Traditional ERP: Traditional push manufacturing uses traditional ERP to turn demand
forecasts into planning cycles for the factory (see Figure 1).

Gartner
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 Figure 1
Traditional ERP: Material and Orders Pushed to Shop Floor

Mfg. Production Order Shop

Rqmts. Floor
Demand MPS/
MRP
Purchase Supply
Rqmts.
Purchase Supplier
Order
Source: Gartner Research

The problem for build to order is that most automotive companies currently execute push strategies that
cannot effectively compete with pull strategies on either responsiveness or optimal use of resources.
Further, as order-to-delivery cycles shorten, the competitive disadvantage of push scheduling
compounds. The reason is that these push environments are driven from a forecast which must
accurately estimate the end item mix without visibility of actual customer demand.

Pull and Lean Production: To protect themselves from demand fluctuation, manufacturers that use
forecast-driven production resort to inventory buffers throughout the supply chain. A properly
implemented lean production environment that uses pull scheduling techniques does not require ERP to
tell it to produce what customers demand or order what materials are needed. The link between
customer demand and production is more direct and not reliant on a forecast. The lean environment only
needs a manufacturing resource planning (material requirements planning II) system to ensure that,
across a mid- to long-term horizon, adequate supplies of raw materials are planned and appropriate
capacity is available.

From ERP to ERP II: Mass customization will require combining the flexibility of a pull manufacturing
strategy with the information-gathering power of ERP — but extended to interact with the systems of
customers and suppliers. Therefore, ERP must adapt to support lean manufacturing, including
techniques and performance measures, and alternative material-planning methods (see Figure 2)
through more-robust manufacturing functionality and more-open architectures that support the extension
of enterprises processes into the supply chain. These two changes are at the heart of the transition from
ERP to ERP II.
Figure 2
ERP and Lean: Material and Orders Pulled to Shop Floor

Customer
Orders
Shop
Forecast MPS/ Floor
MRP Signal Signal
Forecast & Long
Lead Time
Supply
Supplier

Source: Gartner Research

The Lean Impact on Production Management: Pulling the Enterprise From Planning to Execution

The essence of a lean manufacturing strategy is the binding of customer orders (or actual aggregate
demand) to production operations so that the factory and its suppliers are working in harmony with

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market consumption. The manufacturer may choose to build the product to order or fulfill from a staging
depot for finished goods, depending on lead times and changeover costs on the line. Lean
manufacturing eliminates inventory buffers and remedial warehousing and logistics operations, linking
the factory’s actions directly to customer/market impulses and critical supplies. As such, the application
linkage from order management and supply chain management to shop-floor control becomes more
critical in a “lean-enterprise nervous system,” whereby demand stimuli directly triggers production and
consumption, in turn, triggers materials supply.

Looking backward in the supply chain, materials and component manufacturers must:

• Know the original equipment manufacturer’s consumption rate for their supplies
• Receive signals from the shop floor to provide just-in-time material replenishment
• Follow a shared concept of quality across the supply chain and pursue of continuous improvement
toward “perfect execution”
These lean principles cause the manufacturer and its entire supply chain to supplement a material
planning discipline with a shorter-cycle execution discipline, where shared analytical tools and
visualization techniques are critical for synchronization. Functions critical to lean manufacturing include:

• Networked kanban system to trigger production and regulate the just-in-time flow of material to the
shop floor/workstation
• Networked community-based quality definition and analytical tools
• Lot tracking and material-tracing capability (for joint regulatory controls and problem resolution)
ERP II in Lean Manufacturing

Most manufacturers today have ERP systems, but ERP planning systems are subject to the processes
and constraints defined by the material requirements planning paradigm — internally focused, push-
scheduled mass production of large lots with a focus on maximizing machine utilization and efficiency.
Enterprises should:

• Become more creative in their use of current planning engines to support a leaner environment
through the tighter linking of demand to supply, the reduction of lot sizes and increasing the
frequency of material planning runs.
• Plan to implement ERP II software that is designed specifically for tightly connected, lean
production environments. ERP II will provide the required integration of lean manufacturing
functionality and traditional ERP processes while further enabling supply chain processes for
interenterprise interactions.
• Carefully monitor vendor progress toward ERP II and the specific enablement of lean
manufacturing, a new initiative for many vendors, as this combination of functional depth and
interenterprise connectivity is currently achieved with custom integration of point solutions to ERP.
Moving to this new, order-based paradigm is not all about new advances in applications. Successful
enterprises will think differently about fundamental processes that have been entrenched for years. This
will be no easy task, because shifting from a productivity orientation to an agility orientation will be very
painful.

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Bottom Line: Automotive enterprises should employ ERP II strategies as they migrate to a build-to-
order model. The combination of lean manufacturing techniques (pull orientation) and mass
customization (customer orientation) will require the deeper functional capabilities and more-open
architectures of ERP II. Users, however, should not solely focus on technology changes, as process
changes toward lean manufacturing can provide significant business benefits while orienting the
enterprise toward customer-centric manufacturing.

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