Manufacturing Insights

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ERP Use Concepts to Manage Your Supply Chain

Posted by Rick Elder on Oct 16, 2016 11:00:00 AM
Three Philosophies You Need to Know

erp-use-concepts.pngWhile there are many different philosophies in operations management today, the most significant stem from one of three predominant schools of thought.

Those three schools are:

  1. Enterprise Resource Planning (ERP)
  2. Lean Manufacturing (LM)
  3. Theory of Constraints (TOC)

As foundations for ways of thinking, the above three philosophies offer implications for how your supply chain is managed and how your manufacturing business operates. Let's take a look at the key components of ERP, LM and TOC and explore how you can leverege each one, to create a truly agile manufacturing business. 

1. ERP is a bottom up feedback, push system.

It began in the sixties as MRP, an alternative approach to Re-order Point (ROP) theory. The decade of the seventies is known as the era of MRP. During that time, the name was changed to Manufacturing Resource Planning (MRP II). MRP II was MRP with added financial integration and simulation capabilities. MRP II continued to grow in scope and in the 1990’s it became known as ERP. ERP covered more of the enterprise than MRP II including human resources. Graphical user interfaces were also introduced in ERP. 

ERP is a top-down planning, bottom up feedback, push system. The main goal of the MRP
component, which is still found in today’s ERP, is to stack work in front of each work center so that that work center can be efficient. Efficiency of all work centers is the main goal of ERP.

2. LM is an execution system, based on pull.

LM began in the late seventies as America began to study Japanese management. LM began to appear in America in the early 1980’s known as Just in Time (JIT).  JIT was comprised of three intersecting areas:

  • Japanese Manufacturing Techniques
  • Total Quality Control
  • Total Employee Involvement

All three are still found in LM today.

The basis of LM is the Toyota Production System.  The name JIT, or zero inventories, had negative connotations in the US and actually harmed its early adoption. Jim Womack helped change that with his books “The Machine that Changed the World” (based upon the Ford production system) and “Lean Manufacturing” where the name was originated. Simply speaking, LM is an execution system based on the pull concept. Don’t produce an item until it is needed and then only produce what is needed. The main goal of LM is to reduce waste, including inventory.  LM presmumes inventory is a waste and hides real problems in manufacturing systems.


3. TOC is concerned with flow of material.

TOC began in the late 1980’s when Israeli physicist Eli Goldratt began to use physics principles to solve flow problems. TOC first appeared in America in “The Goal”, a story of a fictitious manufacturing organization that was being beat in the market and how, with the help of an old professor, they fixed the situation.

TOC is focused on constraint management and based upon the concept of drum – buffer – rope. Simply put, the constraint (i.e., bottleneck) is the limiting factor for throughput, thus it should be managed closely. The rate of the constraint is the rate of output for the system. The rate of the constraint is therefore called the “drum.” A” buffer” is put in front of the constraint in order to keep the constraint efficient. This is much like MRP efficiency thinking. The “rope” then pulls material into the buffer at the rate of the drum, or what the constraint can produce. Once downstream work centers have produced what the buffer has completed, they are shut down. They have no effect on throughput. This is where TOC and ERP differ. ERP tries to maximize the efficiency of all work centers where TOC is only concerned with the efficiency of the constraint.

In recent years, LM and TOC have been combined into one group, which is concerned with
throughput management. There are many similarities between the two. Quality programs like Six Sigma (started at Motorola) are also lumped into this group. Today you find different sub-groups of throughput management like LM, Six Sigma, Lean Six Sigma, etc. A major part of all these throughput-based philosophies is continuous improvement. Never stop searching for ways to make things better. Fix something every day. Continuously!


So, which philosophy is the best?

In industry, you will find purists from all three philosophies (ERP, LM, and TOC). The purists
insist that their method is the only method. I have seen many manufacturing companies start a LM process with LM purists and totally disable ERP as a transactional accounting system. Once the transactional accounting breaks down, planning quickly follows. I have also seen some very successful organizations apply concepts from all these areas.

Each of us has to adopt our own belief system. How we know what we know makes us
individuals. My belief is more of a “best of breed” from these areas, thus I am not a purist in any one. That may surprise you coming from a person who has made a living in the ERP world. ERP is an excellent planning tool, but provides limited results in execution. LM is a brilliant execution system, but needs help planning. TOC, with its buffer control provides helpful tactics for specific locations within your process flow. Six Sigma provides guidance for quality control, which is necessary in every environment.


Best of Breed

All of these concepts can be applied within the four walls of your plant. They can also be applied outward to your customers and backward to your suppliers. The former (inside your four walls) is known as the internal supply chain. The latter is known as the external supply chain. When extended all the way from minerals to the end user, it is known as the extended supply chain.

Supply Chain Management (SCM) is therefore the overall discourse in today’s manufacturing or operations management world. Many of the principles considered in designing a MCS within the four walls of your organization can be applied to the overall supply chain. For example, at what level should inventory be stocked in the chain?

Many authors I read in the trade publications agree that you rarely find these philosophies
independent of each other. The fact is that all of them co-exist together. Most of the firms that I participate in are too complex for any one of them. Best practices suggest that ERP exists for planning within the cumulative manufacturing lead-time and then other philosophies are used to make ERP execution easier. If you agree, then you too may appreciate the “best of breed” philosophy.


We hope this Key to ERP gives you insight into some of the foundational principles on which MAX is built.  We truly believe that if you understand and apply the topics covered in this series, you'll get better use out of your ERP system. Find the first Key to Success here.

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