Integrating Lean, TOC, Six Sigma and Integrating Lean, TOC, Six Sigma and ERP: Tying Them TogetherERP: Tying Them Together

Seattle Chapter APICS presentationSeattle Chapter APICS presentationOctober 22, 2008October 22, 2008

Russell M. FieldOrig. 8/08 rev IND1A

DISCLAIMERDISCLAIMER• 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

All together, now:All together, now:

Profit = (Price – Cost) x VolumeProfit = (Price – Cost) x Volume

So … What is this session about?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

How much can we cram into 70 minutes?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.

AgendaAgenda• What’s all the hubub?What’s all the hubub?• The puzzleThe puzzle• Deployment Deployment • Managing the event horizonManaging the event horizon• Minding the dollars (or how not to …)Minding the dollars (or how not to …)

What’s all the hubub?What’s all the hubub?

What are we trying to accomplish with these tools/approaches?What are we trying to accomplish with these tools/approaches?

• Improve competitive postureImprove competitive posture• Increase ProfitIncrease Profit• Manage the entire businessManage the entire business

– Leverage synergistic relationships between these concepts– Prevent Initiative conflicts– Avoid suboptimization – Maximize resource utilization and “bang for the buck”

Is “Lean” all we have to do to be successful?Is “Lean” all we have to do to be successful?

• … or Six Sigma?

Which should I choose?Which should I choose?

Are any of these “The Answer”?Are any of these “The Answer”?

• … or TOC?

• … or ERP?

• … or [insert flavor]?

FIRST, a little background …FIRST, a little background …

What does it take to run a business?What does it take to run a business?

Critical business functions …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

Sing a song of Delphi …Sing a song of Delphi …

Who does “lean”, yet struggles as a business?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.

James Womack and Merlin Metalworks: Setting the stage …James Womack and Merlin Metalworks: Setting the stage …

• Time: 1995Time: 1995• Claim to fameClaim to fame

– ~2 weeks from order placement to shipment

• STAGE RIGHTSTAGE RIGHT– ~4 months inventory of titanium tube stock (big $$)

• STAGE LEFTSTAGE LEFT– ~4 months inventory of semi-finished bike frames (bigger $$)

• CENTER STAGECENTER STAGE– A conglomeration of equipment, processes and convoluted flows

James Womack and Merlin Metalworks (1995)James Womack and Merlin Metalworks (1995)

• Leaned out processesLeaned 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?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

• LessonsLessons– 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

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 There’s more to successfully managing a business than implementing “silver bullet” concepts!!!than implementing “silver bullet” concepts!!!

The puzzle …The puzzle …

So, what do Lean, TOC, 6 Sigma and ERP do?So, what do Lean, TOC, 6 Sigma and ERP do?

Generally speaking, Lean, TOC, 6 Sigma and ERP do two things:

I. Provide strategic perspectivesI. 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 moneyFlow of money - parts, materials, information and other process outputs– Process management

• Design, standardization, expression, evaluation (including metrics) and control

• Improvement vs. stagnation and loss

What do Lean, TOC, 6 Sigma and ERP do?What do Lean, TOC, 6 Sigma and ERP do?

II. Provide tactical toolsII. 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

What do Lean, TOC, 6 Sigma and ERP What do Lean, TOC, 6 Sigma and ERP NOTNOT do? do?

• Frame Frame the business– Formulate mission/vision/goals – Develop products/services– Identify target markets– Develop strategies– Set policies and procedures

• SelectSelect processes• IdentifyIdentify resources• ManageManage daily performance or emergent

situations

WE must do these things!WE must do these things!

The pieces …The pieces …

Lean Manufacturing …Lean Manufacturing …

Main objective: Remove waste (non-value-added activities)Main objective: Remove waste (non-value-added activities)

Key question: “What should I be doing/not doing?”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

Theory of Constraints …Theory of Constraints …

Main objective: Relieve barriers to revenue flowMain objective: Relieve barriers to revenue flowKey question: “Which processes/conditions should I target first/next?”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

Six Sigma …Six Sigma …

Main objective: Reduce variation/optimize value-added activitiesMain objective: Reduce variation/optimize value-added activitiesKey question: “How can I mistake-proof those processes?”Key question: “How can I mistake-proof those processes?”

Examples:– Design of Experiments– Statistical Process Control– Poka-yoke

6 σ = Efficiency

Enterprise Resource Planning …Enterprise Resource Planning …

Main objective: Manage business dataMain objective: Manage business data

Key question: “What’s my baseline?”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

Putting the pieces together …Putting the pieces together …

TOC = Revenue Flow

Leadership and managementLeadership and management

Lean = Effectiveness

Continuous ProcessImprovement

(CPI)

ERP = Business Data Management

Bottom-line performanceQuality - COSTCOST - DeliveryDelivery

6 σ = Efficiency

… … around a core of Continuous Improvement!around a core of Continuous Improvement!

1

Deployment ...Deployment ...

Common approach …Common approach …

Strategy Formulation LeanLean TOCTOC ERPERP6 Sigma6 Sigma

Tactical Execution Org 1Org 1 Org 3Org 3 Org NOrg NOrg 2Org 2

Different organizations will implement strategies in different waysDifferent organizations will implement strategies in different ways

DeploymentDeployment - - like sands through the hourglass …like sands through the hourglass …

Common, cohesive plan & goals with enterprise-level viewCommon, cohesive plan & goals with enterprise-level view

Strategy Formulation LeanLean TOCTOC ERPERP6 Sigma6 Sigma

Tactical Execution Org 1Org 1 Org 3Org 3 Org NOrg NOrg 2Org 2

Coordination – Integration – Action planning

2

OPERATIONSPLANNING

{

Forging Forward ...Forging Forward ...

Managing The Event Horizon …Managing The Event Horizon …

Stable Performance• No Scrap/rework • No Excess Flowtime• No Excess Inventory• No Overtime• No Underutilized resources

• Flowtime• Inventory

Baseline Costs & CapacityBaseline Costs & Capacity

Wastes • Scrap/rework• Excess Flowtime • Excess Inventory • Overtime• NVA activities

My Business

Add’l Cost & Resource Req’s

Add’l Cost & Resource Req’s

Excess Capacity• Equipment • Facilities• Personnel

““BIG” LeanBIG” Lean Lean Lean TOC TOC

Six Sigma ERPSix Sigma ERP

3

What to do?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 …

What to do?What to do?

Stable Performance• No Scrap/rework • No Excess Flowtime• No Excess Inventory• No Overtime• No Underutilized resources

• Flowtime• Inventory

Baseline Costs & CapacityBaseline Costs & Capacity

My Business

Excess Capacity• Equipment • Facilities• Personnel

• Fill in the hole, Fill in the hole, oror• Reduce the capacityReduce the capacity }} These are NOT decisions theThese are NOT decisions the

tools can make for us!!tools can make for us!!

Cost Absorption Impacts on Lean Operations DecisionsCost Absorption Impacts on Lean Operations Decisions

Minding the Dollars Minding the Dollars (or how not to …)(or how not to …)

We’re almost done ...We’re almost done ...

Why are we going here?Why are we going here?

Primary business functions must include:• Management

• Sales & Marketing

• FinanceFinance

Additional functions may include:• Engineering• Manufacturing• Procurement/Materiel• Human Resources

EnterpriseEnterprise

Relationships ...Relationships ...

CompetitiveCompetitivecomparisoncomparison}

Cos

t Acc

ount

ing

Cos

t Acc

ount

ing

Polic

yPo

licy

External Supplier

Internal Supplier

One “link” vs. another, One “link” vs. another, or an external supplieror an external supplier

Calculating Cost with Overhead AbsorptionCalculating 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

Cost Absorption IssuesCost 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)

Cost Absorption IssuesProcess ImprovementProcess Improvement

A 55 $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 ...

$80010 hrs.

Before

A 3 $300300

B 3 $100100 300300

C 2 200200

Std Hrs. Rate ERP Cost

$80088 hrs.

AFTER

4

Cost Absorption IssuesProcess 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 toProduct Line XYZ; XYZ’s inventory – both components and used-ons –

increases because A was improved ...

>

Product ABC inventory

Product XYZ inventory

So …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

The other end of the spectrum …The other end of the spectrum …

From “Cost Absorption” to From “Cost Absorption” to “Materials-Only Costing”“Materials-Only Costing”

A little bit on Materials-Only Costing …A little bit on Materials-Only Costing …

REFERENCEREFERENCE: “Who’s Counting?”“Who’s Counting?” (winner of Shingo Prize for Manufacturing Excellence; Jerrold M. Solomon)

– Two tiers: Lean AccountingLean Accounting (external reporting) and Accounting for LeanAccounting for Lean (internal management)

– We’re going to focus on “materials-only “materials-only costing”costing” as an aspect of Accounting for LeanAccounting for Lean

In short …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?”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 as the Lean implementation progresses. progresses.

The idea behind “materials-only costing” …The idea behind “materials-only costing” …• The traditional processes for gathering Production cost

data are cumbersome, expensive and inaccurate.cumbersome, expensive and inaccurate.

• Indirect costs are typically spread via some form of cost cost absorptionabsorption; 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.

One of the cost accounting concepts employed toward that end is referred to as “materials-only costingmaterials-only costing”.

The starting point: key characteristics …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).

Key concepts of “materials-only costing” …Key concepts of “materials-only costing” …• On pages 167-168, the Lean champion says:

– “… [in the initial, “non-Lean” environment] an individual part can an individual part can have anhave an [calculated] actual labor cost of anywhere from eight to actual labor cost of anywhere from eight to twenty dollarstwenty dollars …”.

– “[We need to] … standardize the processstandardize the process to consistently produce the part for eight dollars … A flow environment would not function with not function with such such variabilityvariability. [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 stableThe Production environment must be stable;• Key sources of variability removed to enable a flow environment

– Production processes must be standardizedProduction processes must be standardized;• Product moves - and the work is done - the same way each time

– The direct labor force must be homogenousThe direct labor force must be homogenous• Everyone must have the same essential skill sets and capabilities

Key ideas in “materials-only costing” …Key ideas in “materials-only costing” …Materials-only costing is Materials-only costing is enabledenabled by - as opposed to by - as opposed to

driving driving - certain conditions:- certain conditions:

IFIF a task always takes the same amount of timethe same amount of time, regardless who does it;

ANDAND all the workforce is paid at the same ratethe same rate;

THENTHEN I can apply a singlesingle hourly $$ ratehourly $$ 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 There is no longer any value or justification for gathering “real-time”, actual labor expenditures.“real-time”, actual labor expenditures.

Materials costMaterials cost becomes the onlyonly variable I need to discretely capture and manage for item costing (thus the name).

5

Building the bridge …Building the bridge …Understanding that there’s overlap between the elements, let’s take each in turn:Understanding that there’s overlap between the elements, let’s take each in turn:

1) "IFIF a task takes the same amount of time regardless who does it …"– Standard workStandard 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 repeatablestable, 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 qualityhigh 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 Cross-training and multi-skilling multi-skilling promote the ability to interchange individual workers with assurance that each can meet the standard (planned) cycle time.

Building the bridge (cont’d)…Building the bridge (cont’d)…

2) "ANDAND all the workforce is paid the same …"– Cross-training Cross-training and multi-skillingmulti-skilling also help remove major skill

distinctions that can drive differences in pay.

– Simplification of processes and resourcesSimplification of processes and resources (e.g. table-top equipment and Engineering redesign) makes that cross-training easier to accomplish.

– Stabilizing the overall demandStabilizing 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.

Building the bridge (cont’d)…Building the bridge (cont’d)…

3) "THENTHEN I can apply a single hourly $$ rate to the product's standard time.“

– There’s no need to account for variationno need to account for variation in order quantity, labor input or anything else because those variations have been driven out;

– The labor content is knownlabor content is known because of the standard work, stable processes and high reliability;

– There's no rework to account forno 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 interchangeable from both a skill set and pay standpointstandpoint due to cross training, multi-skilling, process standardization and equipment simplification; and,

– The number of workers on the payroll is stabilizednumber of workers on the payroll is stabilized as a result of process stabilization and demand leveling; therefore the aggregateaggregate labor costs are stabilized over a period and a single hourly rate across all operations is feasible.

Benefits …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.

Notes …Notes …

• Materials-only cost accounting is enabledenabled by certain conditions, as opposed to driving those conditions.

• High level of multi-skillingmulti-skilling and cross-trainingcross-training• Standard workStandard work in place throughout • High process disciplineprocess discipline• Stable workforceStable workforce levels • Reasonable segregation of cost ratessegregation of cost rates by

product flows to high-cost resources

What if those enabling conditions What if those enabling conditions aren’t present?aren’t present?

• It takes timeIt takes time to make the journey, and it must be made one step at a time

• The Lean champion: “We still have a We still have a business to runbusiness 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 challengesunderstand the challenges and meet them as they emerge

All together, now:All together, now:

Profit = (Price – Cost) x VolumeProfit = (Price – Cost) x Volume

Contact Information and Q&AContact Information and Q&A

Russ Field

(253) 931-9441