Take an in-depth look at "lean" principles. Closely associated with flow manufacturing or demand-pull production, the lean movement is about more than eliminating waste. It's also about maintaining a razor-sharp customer focus— not just what the customer wants but also when, where, why, and how much. The article includes: A brief history of the lean philosophy A glossary of key terms How new technologies make lean possible Extending lean principles from manufacturing to the broader enterprise Real-world success stories

As Published In November 2004

Creating the Lean Enterprise
By David Baum

It's not just for manufacturers—every business can benefit from lean principles.

It began with a simple premise. Rather than producing standard products as rapidly and efficiently as possible, why not selectively build the products customers want, when they want them, in the precise configurations they require? Instead of boosting sheer capacity, why not boost responsiveness, so customer orders drive production activities up and down the supply chain?

These manufacturing methods—commonly referred to as flow manufacturing or demand-pull production—aren't particularly new. But they are currently animating the latest thinking among executives intent on adopting an even more far-reaching concept: the creation of a Lean enterprise.

At the root of the Lean effort is scrutiny of existing processes to remove waste and eliminate unnecessary effort—not just in the production lines but also throughout the organization. In a Lean manufacturing environment, materials are not purchased and goods are not produced until there is demand for a product—until they are "pulled" into production by customer orders. The idea has been around for decades, but the technology has evolved in step with wide-area networks, Web-based exchanges, and the ability of enterprise resource planning (ERP) software to plan for and respond to unique customer demands. As the examples in this article illustrate, innovative companies are using information technology to synchronize a dizzying array of activities related to production, supply, and distribution.

"Lean is often equated with the elimination of waste," notes Simon Pollard, vice president of the industrial sector for Oracle in Europe, the Middle East, and Africa. "But in its strict sense, Lean is really about gaining a critical understanding of what the customer values—and then tailoring everything in the process to produce, deliver, and service what that customer wants. Without this understanding, you may become very efficient at creating things that are unwanted or unnecessary."

Although the basic principles of Lean manufacturing are easy to grasp, this customer-oriented perspective is the antithesis of what many factories have practiced since assembly lines were first introduced, in the early part of the twentieth century. Even today, many factories continue to operate on the "push" principle: Goods are produced to meet a forecast demand—sometimes referred to as "just-in-case" manufacturing rather than "just-in-time," or "make-to-stock" rather than "make-to-order."

The Origin of Lean

Lean principles have their roots in the Toyota Production System (TPS) of the 1950s and the Shingijutsu consulting company created by Toyota in the 1970s. Much like Zen practitioners, who continually strive to improve their awareness and acceptance of life's circumstances, the TPS and its derivatives are marked by continuous learning and an unwavering focus on simplicity. Ultimately, the Lean way of thinking becomes pervasive throughout an entire company, just as Zen influences every single act in an individual's life.

"Although Lean grew up within manufacturing plants, it is now seen as an overriding principle that guides multiple activities within the enterprise," notes Pollard. "The most-advanced users extend the concept well beyond the manufacturing process and apply it to every corporate activity."

For example, there are many steps in the manufacturing process before a product is manufactured: design application engineering, purchasing, planning, order entry—the entire order-to-cash cycle. The process continues after the item is produced, when it is packaged, shipped, and distributed. Thus, smart companies see Lean in the context of a complete business transformation that encompasses the entire value chain.

5 Principles to Lean Lean principles offer a proven, structured means of reducing cycle times, increasing quality, cutting costs, reducing inventory investments, and improving asset performance. Peter Hines and David Taylor, of Cardiff Business School, Cardiff, Wales, advise companies to pay attention to the following five Lean principles: 1 Specify the value of your product to your customer in its totality, including branding and packaging. 2 Map the value stream by which you get the product into customers' hands. 3 Introduce flow, eliminating waste and moving to the smallest-possible batches. 4 Base your manufacturing on demand-pull. 5 Pursue perfection, not only in terms of total quality but also in getting as close as possible to your target cost. Source: Lean Enterprise Research Centre, Cardiff Business School

The potential benefits merit the effort. For example, thanks to its direct order-fulfillment model and nimble supply chain, Alcatel Network Infrastructure (NIBU), part of Alcatel's Enterprise Solution Division (ESD), has reduced its on-hand inventory by 50 percent. "By adopting Lean manufacturing concepts, we've changed from a push model to a pull model, where we carry only a prescribed amount of inventory," confirms Allen Fox, director of IT Applications at the Calabasas, California-based Alcatel NIBU. "We estimate that this will translate to about a 30-percent savings on inventory costs."

Alcatel ESD delivers standards-based IP communications solutions to a global customer base of more than 500,000 companies. As the worlds of voice and data come together, the company is taking the lead in providing reliable, secure telephony and network-infrastructure solutions from the edge to the core of an IP network, including popular wired and wireless LAN products, contact center applications, and a full range of unified communications capabilities.

In the past, this high-tech manufacturer performed assembly and testing for such complex products in-house. In 2002, after the company introduced a new line of switches, corporate officers determined that they could cut costs by outsourcing production and logistics activities—assuming that they could maintain the requisite visibility into the activities of their contract manufacturers.

"We wanted to gain a complete, real-time view of the virtual supply chain and enable demand-sensitive planning," sums up Alcatel NIBU vice president of Information Services Saeed Hosseiniyar. "Formerly, we determined inventory levels via demand forecasts and performed final product assembly, configuration, and shipment in our own facility. Now we have a demand-pull environment in which customer orders drive the production process."

Alcatel NIBU relies on Oracle E-Business Suite—including Oracle Costing, Oracle Financials, Oracle Manufacturing, Oracle Order Management, and Oracle Quality—to run its business. As part of its Lean initiative, it recently added Oracle Advanced Planning and Oracle Collaborative Planning as well. These applications rely on a single, integrated source of data to connect disparate business processes—not just within Alcatel NIBU's own factory but also throughout its entire supply chain, which encompasses about 10 contract manufacturers. When users make a change to one application, every other application is notified, initiating related workflow processes automatically.

The Road to ERP

Of course, an ERP application such as Oracle E-Business Suite is just a management tool that supports the operations of a manufacturing plant—flow, Lean, or otherwise. To successfully implement Lean manufacturing concepts, users must enforce the principles of Lean as the foundation. "An ERP package helps them use information more wisely, eliminate non-value-adding activities, and streamline core business processes," Pollard explains, "but it's the users who must guide the process."

At Westfield, Indiana-based IMMI (formerly known as Indiana Mills & Manufacturing, Inc.), a Lean perspective took hold in the late 1990s, when managers decided to reengineer their manufacturing processes and began looking to replace their manufacturing resource planning (MRP) system with an ERP solution. Support for flow manufacturing quickly became one of the top three requirements for selecting a suitable software package.

"We saw Oracle as the catalyst for lowering costs by improving our design-to-market, order-to-ship, invoicing, receiving, and internal manufacturing processes," says Randy Norman, director of information services for IMMI. "Oracle has top-notch people who understand our industry."

A pioneer in the automotive industry, where the Toyota Production System first gained traction, IMMI develops, tests, and manufactures occupant restraints for commercial vehicles, child and infant seats, and off-road machinery. It was one of the world's first seat belt manufacturers and has more than 40 years of experience in restraint safety systems. Among IMMI's recent products are school bus seats with integrated lap and shoulder belts, a rollover occupant protection system for heavy trucks, and cargo tie-downs for the power sport industry.

Glossary Talking Lean Balanced production—When all operations or cells produce simultaneously at the same cycle time. BTO—Build to order. ERP—Enterprise resource planning. ETO—Engineer to order. Flow manufacturing—Pulling items through a synchronized manufacturing process to construct the end product. Kaizen—Gradual, incremental, or iterative improvement. Kanban—Japanese for card or communication. In Lean manufacturing, this refers to using electronic cards or signals to communicate with production systems. MRP—Manufacturing resource planning. One-piece flow—Configuring and producing one unit at a time, as opposed to producing large, homogeneous lots. SCOR—Supply Chain Operations Reference, a set of process guidelines and performance measurements for Lean enterprises. Six Sigma—A process improvement management philosophy for achieving virtually zero defects. Takt—German for pace. Takt time defines the line speed and cycle times for assembly operations. TPS—Toyota Production System.

For IMMI, the manufacturing goal of producing only what is needed begins with a careful synthesis of data between the shop floor and several key back-office information systems. By using integrated data from the ERP applications, shop-floor personnel can quickly recognize production bottlenecks and more accurately meet customer demands. Norman says the improved visibility and flow have reduced work in progress (WIP) from two weeks to four hours. "We've been able to absorb at least 40 percent more business than we could have with the old system, and we've done it without increasing our office head count," he adds.

Improving Flow

According to Bob Parker, an analyst at Boston-based AMR Research who specializes in the discrete manufacturing industry, companies that are in the early stages of the Lean journey may see complex software systems as unnecessary baggage. Lean enterprises encourage a team-based structure with a high degree of work autonomy, and they nurture highly trained employees who are motivated to investigate problems and find solutions. Lean purists insist that simple spreadsheet algorithms are all that is required. Cell-based manufacturing, variable batch sizes, and demand-pull principles don't require ERP, they reason.

However, once companies begin to extend Lean concepts into multiple, overlapping corporate domains, they become very dependent on information—and that's where having an integrated suite of business applications becomes so valuable.

ERP vendors such as Oracle have introduced "enablers" that adapt their applications to a Lean environment, with inherent support for Kanban control, product configurators, and just-in-time materials procurement. According to IMMI, having this level of integration is precisely what allows it to compress the manufacturing process and streamline production. Ken Rice, IMMI's manager of manufacturing engineering, points out that information from IMMI's Oracle applications helps the company automate the processing of release schedules, which streamlines order management, shipping, and planning. "This reduces the time for the whole order-to-delivery cycle," Rice adds.

These techniques also make the company more nimble and responsive, by streamlining planning and scheduling activities. Electronic planning and shipping schedules are translated into flow schedules, which engineers use to sync production with customer orders. "We are now able to plan schedules for our largest customer on a daily, rather than weekly, basis, without increasing head count—something we could not have done without Oracle," Norman says. "Previously, it took a lot of custom programming to process requests for changes in the order fulfillment processes."

Norman says the tight integration between flow manufacturing and the assemble-to-order functionality within the Oracle applications has yielded additional productivity gains. "If you have your items set up as assemble-to-order and you're using the Oracle line scheduling workbench to associate sales order lines with flow schedules, there's a tremendous amount of integration taking place behind the scenes," he explains. "For example, a customer service rep or an inside salesperson can see the production status of each order: whether it's started on the line, whether it's completed, whether it's in shipping, and so forth."

This pervasive visibility saves IMMI's planning department 20 hours per week. "We handle spot business more efficiently and respond to last-minute changes more quickly and accurately," Norman adds.

IMMI anticipates additional cost reductions as it continues to roll out Oracle E-Business Suite applications such as Oracle Warehouse Management and deploy flow manufacturing techniques in other divisions. Norman believes that self-service applications such as Oracle iProcurement will further improve accuracy and reduce paperwork. IMMI also plans to use Oracle iSupplier Portal to improve communication with the companies that supply metal stampings, molded plastic components, natural straps, and other materials to its just-in-time production processes. "Our vision is to present our requirements and let our suppliers make changes online through the portal so we can get immediate feedback," explains Norman. "We're also in the process of moving all of our maintenance inventory onto Oracle, and I can see using iSupplier Portal for those partners as well."

New World Vision

As IMMI and other Oracle customers are demonstrating, the old world of mass production is giving way to a new world of mass customization, in which individual orders are configured and produced in response to unique customer demands. As Lean companies attempt to fulfill this vision on a broader and broader scale, they are turning to ERP systems for help.

"Mass customization is totally dependent on integrated information systems," stresses Pollard. "When you consider the immense potential for variability, the need for instantaneous communication with suppliers, and the sheer size of the problem of configuring and scheduling customized products, the enterprise can no longer be managed with diagrams and spreadsheets."

AMR's Parker echoes this sentiment. "Once you get out of industries such as automotive, in which the supply is very repetitive, and you get into a sector such as high-tech electronics, in which a lot of products are being manufactured in Asia, Europe, and North America simultaneously, you start to outstrip the ability of manual systems to keep the Lean systems in control."

ERP systems include scheduling and planning algorithms to govern resource use, takt cycles, line sequencing, and many other functions—both on and off the shop floor. As Lean principles take hold, innovative companies are extending these capabilities beyond the four walls of the factory—upstream into the supply side and downstream into fulfillment and customer service.

"Lean manufacturing has been widely adopted on a four-walls basis, with companies practicing some form of cell- or flow-based production within their own plants," continues Pollard. "But the full benefits come to fruition when manufacturers involve their suppliers and even their customers to achieve continuous improvement."

Indeed, building a more efficient supply chain was one of the primary motivations for Alcatel NIBU's Lean enterprise initiatives. "Being able to instantly share information about changes in demand or supply with our outsourcing partners gives us an accurate view of where bottlenecks might occur," says Gary Schliekelman, senior director of operations at Alcatel NIBU. "Because of the visibility we now have across our virtual supply chain, we have been able to significantly reduce inventory liability."

According to Richard Rodgers, product director for Oracle's manufacturing applications, Oracle's core manufacturing and planning applications have been enhanced to make it easier to design manufacturing lines and analyze output options. Oracle has also added sequencing enhancements—within lines, between lines, and between a production facility and its suppliers. "This brings suppliers closer in line with product assembly," he says.

For example, using the multiorganization functionality of Oracle E-Business Suite, Alcatel NIBU has created a supply chain system that accounts for all the activities of its major contract manufacturers—and will eventually include the suppliers' suppliers as well. EDI signals are sent directly from Alcatel NIBU's order management system to contractors, which then fulfill customer orders.

"We have improved communication and accuracy, both within the company and with our contract manufacturers," says Schliekelman. "All of the quality parametric data from the production process is remotely available here, so our technical operations folks can actually detect potential problems in the process before a contract manufacturer does. Everything gets stored in Oracle, which gives us full visibility even though the production processes are outsourced."

Extending the Value

Extending Lean principles from core manufacturing into the broader supply chain presents greater opportunities to manage customer value—an elusive target in many Lean projects, partly because of the potential disconnects between product design and customer delivery. Generally, manufacturers create product specifications and handle some level of assembly. Beyond that, the broad issues of fulfillment and customer care are often entrusted to partner firms.

"People have broadened their view of how they apply Lean and continuous improvement," says Parker. "Our research indicates that in the North American supply chain, there's between US$250 billion and US$400 billion of annual waste and maybe as much as US$1 trillion of waste worldwide. So people are looking beyond their own four walls at how they can eliminate the waste they encounter in the supply chain."

Rick Hassman, a project manager at Iowa-based Pella Corporation, agrees with Parker. "When you mention Lean, a lot of people think of manufacturing," he says. "Certainly we've used Lean to improve order management and improve our planning cycles—we are always looking for new ways to drive out waste and inactivity. But in our case, Lean concepts also influence how we handle invoicing, manage capital equipment, and communicate with our suppliers. Ultimately, Lean requires an enterprise view, not a specific functional view."

This far-reaching perspective has become progressively more important at Pella, a make-to-order company specializing in windows and doors. Whether orders originate from a third-party retailer such as Lowe's Home Improvement stores or directly from Pella, the information is captured in Oracle Configurator. From there, pertinent information automatically populates the Oracle planning and scheduling systems, enabling line managers to sequence each order correctly on the production line.

Continuous Improvement

Admittedly, this heightened level of awareness has been a gradual process, driven by better ways to analyze, store, and exchange information. Until May 2000, Pella was struggling to integrate new business processes with several legacy systems. As in many other large companies, each of Pella's information systems had been developed and implemented at different times, leading to duplicate work effort and difficulty obtaining a complete picture of the operation. As CIO Steve Printz reports, "We needed total integration to allow everyone to see the same up-to-the-minute information."

Pella began by removing waste from its production system, reducing lead times, and improving productivity with flow manufacturing techniques. Soon after, Lean concepts began to inform the business offices as well, where employees in order entry, customer service, and distribution learned to spot waste through greater insight into internal and external activities.

"With each kaizen [iteration], inventory, time, and people were taken out of processes and redeployed to new areas," says William Schwartz, vice president of business development at Durham, North Carolina-based TBM Consulting Group, a consulting firm that has worked closely with Pella on its Lean projects. "Inventory became cash for funding new products. Time was pushed downstream to customers in the form of shorter lead times. And people were put to work on building new products or accelerating the continuous improvement effort."

TBM began working with Pella in 1992. Since then, Pella has cut production-to-delivery lead times by 60 to 70 percent. "Formerly, deliveries took 12 to 14 weeks on average; now they take 4 weeks," says Schwartz. "Additionally, employees can see orders about 18 hours sooner than they could before."

Initially, Pella focused on Oracle Financials and Procurement applications. Soon after, the company adopted Oracle Manufacturing, Oracle Marketing, Oracle Order Management, and Oracle Sales. Today, the integration of these enterprise applications is driving significant operating efficiencies, allowing the company to be more competitive in the marketplace.

"Oracle software makes it easier to track orders; communicate material flows; monitor receipts; and streamline the movement of parts among lines, plants, and divisions," says Printz. "We've been able to take two days out of our visibility of orders for our operations team, and there's an opportunity there to reduce those lead times even further as we use information from the Oracle system to help our suppliers take waste out of the entire system."

"We look very systematically not just at what's good for Pella but also at what's good for our customers," adds Hassman, who served as the project manager for the Oracle implementation. "How do we take waste out of the entire chain—at a vendor, at Pella, and even down to a customer's level? How do we work together to create the best value proposition we can for our customers?"

A Balanced View

Parker believes that the next wave of technology investment will center on putting information produced by transaction backbones to use in improving productivity. "Continuous improvement in process control should ideally come from a combination of Lean, SCOR, and Six Sigma practices," he says.

Although the terminology is sometimes used interchangeably, there are distinct differences among these manufacturing disciplines. Lean tools focus on cycle times and waste, whereas Six Sigma tools aim to improve product quality and consistency by reducing the flaws that occur in manufacturing. SCOR—which stands for Supply Chain Operations Reference—provides a set of process guidelines and performance measurements, enabling companies to measure the flow of information and physical goods through the supply chain. "The SCOR foundation creates high-level measures that will ultimately determine success and can set priorities for Lean projects," Parker explains. "Ideally, these models work in a complementary fashion to deliver the desired results."

For Qatar Steel Company (QASCO), in Doha, Qatar, a major corporate expansion set the stage for enforcing the fundamental Lean principles. "Our marketing people are looking in both directions, east and west, to expand our operations," says Malek Hamdieh, IT manager at QASCO. "Once the expansion project is finished, our capacity is going to more than double, enabling us to service more mature markets not only throughout the Middle East but in Asia, Europe, and the United States as well."

Senior managers at QASCO are using a balanced scorecard methodology to direct this technology transformation. Conceived in the early 1990s as a framework for measuring overall corporate value, balanced scorecards help an enterprise align business and IT strategies—an essential tactic for companies carrying out complex change programs.

Hamdieh says the motivation in this case was obvious. "Formerly, we suffered from having incomplete information from our standalone business applications," he explains. "There were no good controls, and security was very weak. We wanted information to flow seamlessly throughout the manufacturing process."

About two years ago, QASCO implemented Oracle applications to govern financials, human resources, manufacturing, enterprise asset management, supply chain planning, procurement, and sales. "We went to our stakeholders and said, 'This is what you will face if you don't have integrated applications,'" Hamdieh recalls. "Can we really afford not to have integrated information when someone needs it? By revealing the shortcomings of our current operation, we made a case for the Oracle technology."

Today, the technology speaks for itself. For example, managers can call up purchase requisitions from their Web browsers and see all the transactions that are built on top of them, all the way to the payments made to iron ore suppliers. The same level of visibility applies to sales orders—from product specs to shipment details, including credit transactions and payments.

"Our on-hand inventory was reduced from US$33 million to about US$25 million, simply because we were able to quickly analyze material requirements against known levels of supply and demand," says Hamdieh. "As we complete our expansion, the Oracle planning engines will come in very handy for forecasting as well. We believe that production should be based on demand rather than supply. Oracle applications are helping us link our sales directly to manufacturing scheduling."

QASCO's back-office processes have improved dramatically as well. "We went from an 18-day financial close cycle to a 3-day close cycle," continues Hamdieh. "Our financial reporting is now virtually instantaneous."

Meanwhile, on the shop floor, QASCO is saving about half a million dollars each year through more-informed purchasing practices for raw materials such as ferro alloys and iron pellets. The pellets are turned into sponge iron and then melted in an electric furnace and cast to produce billets. From there, they are sold to other steel manufacturers further up the supply chain, which use the billets to produce their own steel products, or sent to QASCO's rolling mills to produce steel bars and other construction materials.

"Having a historic record of these supply-chain transactions enables our production engineers to determine the optimal raw material mix in advance," says Hamdieh. "It used to take us months and months to develop the correct planning algorithms, and as a consequence, we were sometimes using raw materials that were more expensive than they should have been. Now, thanks to the information maintained in the Oracle system, we always have a good handle on the raw materials we need within a day or two. This knowledge also enhances the product design process. We can sustain better analysis, because we have more data to work with."

Taking Off

Of course, having an efficient operation governed by Lean principles implies efficiency in the underlying IT infrastructure as well. For OGMA-Indústria Aeronáutica de Portugal, S.A., that meant replacing cumbersome mainframe systems with a cost-effective network of Intel servers running the Linux operating system, governed by Oracle Real Application Clusters (RAC) technology. Once this cost-effective infrastructure was in place, OGMA implemented Oracle E-Business Suite. It also replaced a dated asynchronous transfer mode (ATM) network with a more modern gigabit Ethernet network.

"[Oracle CEO] Larry Ellison said to us that we would spend 60 percent less on purchasing, maintaining, and upgrading our hardware with this infrastructure, and we have come very close to achieving this level of savings," reports Ant&ocaute;nio Sobral, executive director at OGMA.

OGMA handles the maintenance and repair of aircraft, engines, and structural components for the aviation industry. Core activities include assembly, maintenance, and engineering. The company also develops flight simulators and computer-based training modules for a worldwide customer base.

In the past, this European aviation pioneer, which has been in business since 1918, was dependent on expensive mainframe computer systems that were difficult to upgrade and maintain. This shortcoming became particularly obvious once OGMA embarked on a Lean program for service and repair with partner Lockheed Martin.

"We had a lot of waste in the way we used and exchanged information," Sobral says. "Now, thanks to our integrated software applications, we have been able to increase the speed, performance, and capabilities of the system." OGMA has significantly reduced turnaround time, in part due to improvements brought about by the Oracle ERP software. "Standard operations can be completed in about one-third of the time," says Sobral. In addition, information formerly displayed in several disparate applications is now combined into one integrated presentation, allowing for more efficient use of the system. "In one case, a key maintenance report that used to take 757 seconds to produce now takes just 27 seconds," says Sobral. "Everyone is working more efficiently."

OGMA also has greater potential for hardware scalability and fewer resources devoted to IT maintenance and support issues.

Driving Change

In a marketplace in which suppliers must continually drive down costs to stay competitive, manufacturers such as OGMA are often challenged to overhaul their technology and business processes. In some cases, direct monetary savings are associated with their efforts. In others, the intangible benefits tell the tale. "We have information for making business decisions faster," notes Sobral. "How can you put a dollar figure on that?"

Just as there are many paths to enlightenment, there are also many ways to build a Lean enterprise. "Lean refers to a distinct philosophy and set of principles, but each implementation varies with the nature and objectives of the business," says TBM's Schwartz. "There is no cookie-cutter approach, although there are industry models that can be used for guidance."

Pella's Printz cautions customers to keep a Lean mind-set with regard to ERP software as well. "The business has an appetite for data and information, so you have to be very careful not to turn on more transactions than you can possibly swallow."

In that sense, incremental improvement becomes a sort of Occam's razor, in which managers must "shave off" unnecessary processes to arrive at the simplest model. "There are always new frontiers for companies to pursue," continues Schwartz. "Lean is a journey whose destination you never quite reach."

"It's clearly not a quick fix," echoes Printz. "We're rolling out capabilities that will be valuable for the next 20 years."