An ERP system tracks and orders raw materials ?#8364;“ but you need a good process in place.

Many repetitive manufacturing operations struggle with inventory problems in their factories. Physical inventories (or stock-outs) show that actual inventory levels differ greatly from the book inventory. This can lead to large inventory write-offs that can affect the plant?#8364;™s financial performance.

A common response is to throw resources at the problem, by adding additional human resources or upgrading the software or hardware used. Sometimes the response is to institute frequent cycle counts, or to place greater emphasis on tracking transactions to find out who is not reporting information correctly. Many times, the response is to blame the manager in charge of materials.

This response is driven by a fundamental misunderstanding of the problem. The problem is not an issue of execution, it is an issue of complexity. In a repetitive manufacturing environment, the ordering of raw materials shouldn?#8364;™t be complex. But by relying on ERP systems, which are driven by bills-of-materials, routers and production and scrap reporting, it has become a very exacting science. Instead of trying to shore up inherently problematic systems, why not replace them with simpler "pull" systems?

Problems with ERP systems

In a back-flushing MRP/ERP system, raw material requirements are calculated by exploding finished goods production down into their raw material components, adding scrap, and deducting this from the beginning inventory level. This information is used to formulate new raw materials orders, which are then transmitted to vendors.

There are several weaknesses with these systems. Raw materials orders are based on a calculated inventory level, not on actual inventory figures. Errors in any of the figures used in the inventory calculation result in an inaccurate inventory status and, consequently, inaccurate raw materials orders.

Errors frequently occur in scrap reporting, yields, finished goods production reporting and bill-of-material calculations. Even small errors will accumulate over time, leading to inventory disasters. The only way to reconcile the calculated inventory number with the actual inventory is through costly and labour-intensive physical inventories. Even if companies expend large amounts of valuable expertise to keep the data as accurate as possible, errors will be made. And at the time of physical inventories, large accounting adjustments will need to be made to match actual inventory dollars to book value.

To minimize the effects of inventory errors (in particular stock-outs), companies begin to increase their inventory levels. While most companies monitor inventory levels and place pressure on their materials departments to minimize inventory levels, even the most conscientious employees understand that their main responsibility is to avoid stock-outs, and that is the direction they will take.

Thus, this type of system inevitably leads to a cycle of over-ordering, constant schedule adjustments to vendors, stock-outs, freight expedites, cycle counts and inventory adjustments. Confidence in the inventory system erodes (justifiably) and people begin developing secret backup systems that become the true inventory system. And since the people most affected by the inventory problems are usually the same ones that argued for the large expenditures in training and equipment required to implement the system, these errors are generally covered up.

Transition to a pull system

An alternative approach is to switch to a pull system, where materials are ordered based on actual usage, not on projections from an inventory system.

The problem with switching from a traditional push system (ERP) to a pull system is resistance. Since pull systems are so different from the way most Americans are used to operating, skepticism and fear often sabotage pull systems before they are given a chance to succeed. Employees often see pull systems as a "program of the month" and will imply ignore it until it goes away. Even among the management ranks, some may view such a change as a threat to the status quo (and thus their power), and thus do everything in their power to ensure the system fails.

The solution to this problem is to make the move from pull system to push system in two steps. Step one is to set up a raw material supermarket in a central location in the plant. Users will pull their own raw materials directly from the warehouse, using a bar-code reader to scan the materials out of the warehouse (raw material inventory) and into work-in-process (WIP). During this phase, the purchasing department will still monitor inventory levels, and the ERP system will be used to generate orders. After the supermarket has been accepted, it can later dismantled and the raw materials moved directly to their point-of-use. This will allow you to implement a variety of pull systems, depending on the situation. Now, the production associates will be accustomed to pulling their own raw materials from the supermarket, and more prepared to make the leap to a full-fledged pull-system.

To set up the supermarket, a warehouse location needs to be set up in the inventory control system. When materials are received, they are transported to the supermarket and stored in a manner that will allow FIFO (first-in-first-out) rotation.

This is important, because production operators will be pulling their own raw materials from the supermarket, and they will have neither the time nor the inclination to ensure they are pulling the oldest stock first. When the load is received into inventory, it is stored in the warehouse location supermarket.

Most companies will need to make several changes to their systems for this to work. First, materials will need to be ordered in small containers so that production can remove inventory from the supermarket in small quantities, as they need it. This is necessary, as the system will lose visibility of the material after it is removed from supermarket. This will also help condition the plant to run on lower inventory levels.

Additionally, all raw materials will need to arrive with a standard bar code listing your part number, the quantity of parts in the container, and a serial number. If items arrive with multiple containers on a pallet, each container on the pallet will need to have its own bar code label. To help with receiving raw materials, you can develop a master label containing the quantity of the entire pallet. This lets your receiving department make one transaction to transfer the entire pallet of containers into the supermarket.

As production associates pull material from the supermarket, they use a bar code scanner located in the supermarket to scan their containers out of the warehouse. This reduces the inventory level of raw materials accordingly. When the next ERP run is made, it will use the inventory levels in the supermarket warehouse location to calculate the new orders.

To ensure that the inventory levels remain accurate, physical counts can be taken prior to any ERP runs. While inventories are time consuming, the central location of all raw materials allows the inventories to be taken quickly. And since only materials located in the supermarket are counted, the count can be taken accurately while the plant is in full production.

Thus, we have evolved to a system that increases inventory accuracy, reduces stock-outs, reduces reliance on high inventory levels, while still utilizing the ERP system to plan raw orders.

Transition to kanban system

The final step in the transition to a pull system is to break down the supermarket and move material storage directly to the point-of-use. The ERP system will no longer be used to order raw materials. Instead, a Kanban system is used. The production employees maintain the system and are responsible for placing the orders. The purchasing department?#8364;™s role has been changed to training and adjusting the size of the Kanban loop.

A two-card Kanban system can be used effectively to order raw materials. Each part gets its own two-part Kanban card that includes part description, quantity, serial number and vendor. A Kanban board is set up with three coloured zones: red, yellow and green. The zones are sized by purchasing professionals based on usage and delivery lead times. The red zone means that production is about to run out of material, and needs immediate attention. The yellow zone means that material needs to be ordered soon. The green zone means that there is no need to order material. If an order is placed, the quantity is limited to the number of cards on the Kanban board. If no cards are on the board, then no material can be ordered.

When a container of material is received, the two-part Kanban card is removed from the board. It is removed from the lowest priority zone on the board that contains a card. For example, if the green zone is empty, the next card in the yellow zone is removed. One copy of the card is placed on the container of material. The storage location of the material is written on the second half of the card. It is then placed into the top of a card storage box. The storage box has a bin for each part number.

When production needs a container of material, they pull a Kanban card from the bottom of the card storage box. This will ensure that this is the oldest stock, since cards are fed into the box from the top. The storage location of the material is written on the card.

The production operator goes to the indicated location, matches the Kanban numbers, and pulls the material. He then joins the two halves of the card together, and places the card in the next open slot on the Kanban board.

By reducing the complexity of the material ordering system, we have addressed the major problems of an ERP system while reducing inventory, cost and minimizing non-value added activity.

Ken McInnis, Six Sigma Greenbelt, is a materials manager at GenCorp, a Tier-One automotive industry supplier based in Berger, Missouri. He wrote this article after looking for ways to support small business units within his plant that would allow work teams to order their own raw materials and control their inventory levels. You can reach him by email at kmcinni@attglobal.net.