Lean manufacturing: not a complete solution without information technology

I've been making the point recently that lean manufacturing is not primarily a software initiative (see my posts on Nov. 3 and Nov. 19). However, Bob Gilson, Strativa's practice director for Operational Excellence, has another perspective. Bob worked as a consultant extensively in Japan and Korea and has seen lean manufacturing up close at some of its most successful implementations. I'm going to let Bob speak for himself:

My comments following do not apply to the clearly positive aspects of lean manufacturing, but rather to the zealots who seemingly prefer lean to the exclusion of modern information and planning systems. Having worked on-site at a few of the lean success stories in Asia I can point out several negative outcomes from practicing lean manufacturing without adequate information systems to support it.

1. The lack of transparency in the financial and inventory systems is well documented and I think under-appreciated here in the USA. The accounting disciplines and integrity of our numbers, in large part forced and enabled by our information systems, cannot be overstated.



2. The inflexibility, or stated in the positive, the static nature of "lean companies products" (infrequent engineering change) and rates of production, allow for a much less demanding manufacturing environment than most American manufacturers are willing to accept. I can still recall the unsold Lexus automobiles filling up parking lots in Japan to be subsequently dumped in the USA for the cost of interest rates because production rates could not be modified without the system collapsing entirely.



3. Inventory and many of the quality problems are simply buried in the supplier community.



4. Finally, and I think most importantly, many lean manufacturing companies in Asia are only marginally profitable. Again, because of the lack of financial transparency it is difficult to ascertain what long term value has been created for those companies.

I completely agree that our systems are made better with an appropriate application of lean techniques. However, I would not trade our total scope of systems in the U.S. for any other in the world.

Clearly then, lean thinking and enterprise systems are complementary elements of a complete solution. As lean thinking is becoming popular in industries beyond manufacturing, such as financial services, its advocates will do well to heed this lesson learned.

Oracle questioning PeopleSoft's revenue recognition policy

Back on June 25, I wrote a short post where I wondered why no one was questioning PeopleSoft's "Customer Assurance Plan" from a revenue recognition perspective. As a tactic against Oracle's takeover bid, PeopleSoft has been writing into new license contracts a contingency that PeopleSoft will rebate two to five times the license cost in the event that PeopleSoft is acquired and support for PeopleSoft products is reduced. But accounting standards generally do not allow you to recognize a sale if the customer has the right to rescind the purchase. At a minimum a company is required to fund a reserve to cover the contingency. So I questioned how PeopleSoft could legitimately recognize 100% of the revenue from new license sales that carried the promise of a rebate.

Now Oracle is raising the same question. And PeopleSoft is refusing to comment on whether the SEC is investigating the matter. CBS Marketwatch, in analyzing the situation, quotes Parveen Gupta, an accounting professor at Lehigh University, "Conceptually, the rules are simple. It's OK for you to recognize a sale in case there is the possibility of a refund, as long as you estimate and recognize it as a deduction."

On the other hand, PeopleSoft might be on solid ground. The San Jose Mercury News sought out the two accounting experts that Oracle named to substantiate its position and couldn't get them to support Oracle's position. One declined to be quoted, saying he had not been fully informed of the details of the PeopleSoft's rebate offer. The other, Fin Most, a partner with Ernst & Young, would not comment because Oracle is a client. But his general comment on the accounting treatment of revenue recognition and rebates was somewhat less than a ringing endorsement of Oracle's position: "It is an incredibly complex assessment of what literature to use,'' he said. "And then it's quite subjective and open to interpretation.''

Epicor merging with Scala--hope for Epicor's future?

Epicor announced this week that it is merging with Netherlands-based ERP vendor Scala Business Solutions. Scala had about $70M in revenue last year, compared to Epicor's $143M for the trailing 12 months. The parties expect the merger to be effective in the first quarter of 2004. More details are on the Epicor press release.

Because Scala's installed base is primarily in Europe and the Far East, Scala is not a household name in the US. Scala has had notable success in penetrating the Eastern European, Russian, and Chinese markets. Therefore, Scala gives Epicor its first serious market expansion beyond North America, Australia, and the UK. Scala is particularly strong in multi-currency and multi-language functionality as a fundamental attribute of its development architecture. Scala also gives Epicor presence in a few key industries, such as construction equipment, pharmaceuticals, and food and beverage. From a technology perspective, both Epicor and Scala are Microsoft-centric, with both on record as intending to comply with Microsoft's .NET architecture. Scala has gone so far as to incorporate Microsoft's new CRM offering into its own CRM product.

Nevertheless, it's hard to get excited about this merger or Epicor's prospects in general. Epicor just acquired ROI Systems a couple of months ago, adding another ERP product to its already crowded portfolio built from other acquisitions. Now Scala joins the mix. On the surface Epicor looks like a Tier III equivalent of SSA Global, which has been rolling up Tier II vendors such as Baan and Infinium. But in SSA's case, one senses some serious money at work and a well-articulated plan that includes complementary products and cross-selling across the multiple customer bases. (See my posts on Sep. 25 and Sep. 26). Maybe Epicor has a similar plan. If so, I haven't heard of it. In speaking with SSA clients, one senses hope that SSA's commitment might extend the life of their existing system investment. In contrast, in the past week, two ROI clients have indicated to me that they are nervous about ROI's future under Epicor.

Am I missing something here? If anyone can sound a positive note on Epicor's prospects, I'd love to hear it.

Lean thinking is still more than software

Enrico Camerinelli of Meta Group contacted me recently about my post earlier this month on lean manufacturing. It seems that Enrico, a research analyst at Meta, has been writing along the same lines. In a Meta Group research note he writes:

Companies have rightfully become increasingly skeptical of the "next great technology," and nowhere is this more obvious than in manufacturing, where cost containment and control remain at center stage. Lean manufacturing software is now being hyped by enterprise software vendors as the salvation for all manufacturing problems. However, companies must blend technology with best practices and training programs, while realistically evaluating organizational change, before claiming true implementation of lean manufacturing.

Enrico also points out that while US manufacturers were focusing on technology (MRP and MRP II in the 1970's, followed by ERP in the 80's and 90's), Japanese manufacturers such as Toyota were implementing lean manufacturing concepts with virtually no support from information technology. Today it is generally accepted that the Japanese attained superior performance with their low-tech approach. Today, many lean practitioners remain skeptical of the need to implement information technology as part of a lean initiative.

Nevertheless, Enrico highlights several elements of lean manufacturing that can be enriched by software, such as simulation software (e.g. Tecnomatix) to assist in setup reduction, computerized maintenance management systems (e.g. Indus, MRO Software) to support total productive maintenance, and supplier performance evaluation systems (e.g. SAP, Oracle, QAD) to support quality at the source. Software can play an important role in implementing lean manufacturing, but it is a supporting role. As Enrico points out,

The adoption of lean manufacturing software applications must take place in conjunction with the use of practices that actually enable lean concepts....Clearly, software alone cannot address all the requirements of implementing a thorough lean manufacturing strategy. Companies must focus on best practices and training programs as well as the organizational and infrastructural changes needed to support lean business processes.

I'm interested in continuing this discussion. Has your company had success with implementing lean? How much of a role did software play in the lean initiative?

SAP looks to Sybase as alternative to Microsoft

The Wall Street Journal this morning is reporting that SAP will announce a partnership with Sybase to package its database with SAP's Business One offering to small businesses. SAP Business One is an ERP package that SAP offers separately form its mySAP suite. With Microsoft competing directly for applications sales to small business, SAP clearly is not comfortable relying on Microsoft's SQL Server database as part of its offerings. There's no such problem with Sybase. "Since I never will compete with SAP, this partnership will be pretty tight," says Sybase CEO John Chen. "I never will do applications."

I've been saying for over a year now that Microsoft's aggressive push into the enterprise applications space would have this unintended consequence: motivating the large enterprise application vendors to look for alternatives to Microsoft technology. By partnering with Sybase, SAP not only gets an alternative database but alternative operating systems as well, because Sybase's database runs on Unix and Linux as well as on Microsoft platforms.

The Wall Street Journal (subscription required) has details on the SAP/Sybase partnership. A joint press release on the SAP web site gives additional details, if you read past the marketing fluff.

SAP scores big win at Medtronic

SAP is announcing a major sale at Medtronic, a Fortune 500 medical devices manufacturer. The deal includes mySAP Financials, Supply Chain Management, Business Intelligence, Advanced Planning & Optimization (SAP APO), and Compliance Management.

This is not good news for PeopleSoft. Medtronic is a long time J.D. Edwards account, and I'm sure PeopleSoft, which acquired JDE earlier this year, was hoping to keep Medtronic in the fold. Medtronic's decision does not necessarily mean that JDE is being replaced at all levels in all operating divisions. Things rarely move that quickly at companies the size of Medtronic. On the other hand, the SAP press release says that, "the solution will allow Medtronic to migrate its existing legacy enterprise resource systems onto a single SAP platform." It certainly sounds like Medtronic is moving away from JDE.

I'd like to find out more about what was behind Medtronic's decision. If any readers have any insight, please let me know.

New California law on data privacy is unclear in the details

California Senate Bill 1386, effective July 1, requires companies to notify California consumers of computer security incidents where their personal data is compromised, specifically, their names in combination with Social Security, driver's license, or credit card numbers. The law is enforceable whenever California consumers are affected, regardless of where the system provider is located. (The law exempts companies that encrypt consumer data, which is a windfall for providers of encryption technology.)

Companies that maintain consumer data have been generally well aware of SB 1386. However, according to Computerworld, the law is ambiguous in several details. For example, the law is not clear about when disclosure is required, saying only that it is needed when "it is reasonably believed" that personal data has been accessed without authorization. The problem is that even when a system is cracked, it is not at all clear what data may have been compromised. Furthermore, although encryption gives companies a safe harbor, the law does not specify what level of encryption is sufficient or whether stored data as well as data in transit need to be encrypted.

The impact of SB 1386 is being felt in industries where consumer data is maintained, such as financial services, health care, retail, and information services firms such as credit bureaus. Until the ambiguities of the law are clarified through case law, companies in these industries are wise to implement a variety of measures to protect personal data, including multi-level network security, encryption, and use of identifiers to substitute for personal information. In other cases, when personal data is not absolutely required, companies may want to simply not store such information.

Details on Wal-Mart's RFID specifications

The ARC Advisory Group has a good summary on what came out of Walmart's supplier meeting last week. In short, Walmart wants both pallet and case-level tags, and suppliers should include the Electronic Product Code (EPC) on the tag as well on any EDI Advanced Ship Notices (ASN) sent to Walmart.

ARC gives good details on the specific RFI technologies that Walmart is adopting and potential vendors:

In the short term, Wal-Mart will support 96 bit Class 0 and Class 1 tags. In the longer term, Class 1/Version 2 tags will be supported. Class 0 tags are built by Matrics and are programmed in the factory. Suppliers then would need to match the tag to the right product before shipping. Class 1 tags are made by Alien, Texas Instruments, Phillips, and Intermec, they are one-time write/read tags.

Suppliers were cautioned about tag readers. Companies were advised to buy "agile" readers with an upgrade of software that could adapt to new tag protocals, like Class 1/Version 2. This is an endorsement of readers by ThingMagic and AWID (Advanced Wireless Integrated Design). Wal-Mart also advised the use of readers with an integrated design that do not use cables that can be damaged by fork lifts.

Fortunately for suppliers, Walmart is taking a phased approach to the rollout of RFID. According to Greg Gilbert at Manhattan Associates, which provides RFID support in its warehouse management offerings, Walmart's program will start with three Walmart distribution centers in Texas and will expand to other DCs through 2005. Quoted in Information Week, Gilbert says, "If you look at the way Wal-Mart has rolled out any supply chain or compliance initiative in the past, it has always been a very pragmatic, tactical, phased approach as opposed to trying to do it all in a big bang."

Update, Nov. 17: Kara Romanow at AMR gives her take on Walmart's supplier meeting. In a nutshell, "Wal-Mart did not recommend any specific solutions, mentioned no preferred vendors, and did not provide the promised implementation guide. And Wal-Mart executives were adamant about suppliers finding the ROI themselves and not increasing cost of goods."

RFID spreading to the auto industry, but competing standards threaten adoption

At a wireless conference in Las Vegas last week, Tony Scott, CTO at General Motors Corp., predicted that the auto industry will adopt radio frequency identification (RFID) technology for supply chain applications. "It will happen," Scott said, after his keynote speech. He predicted adoption in the automotive supply chain by 2008, a little less aggressive than the schedule laid out by Wal-Mart and the US Department of Defense (DoD) for similar applications.

But there might be one problem. Scott indicated that GM is working on a new RFID standard with MIT's Auto-ID Center. At the same time, according to Computerworld the US DoD's standard will be based on a specification from the International Standards Organization (ISO), while Walmart will adopt the standard being developed by EPCglobal, a group within UCC. So, if we end up with three competing standards, it could pretty much kill the economies of scale needed to drive RFID tag prices down to where widescale adoption is cost-effective.

For more information on RFID and initiatives by DoD and Walmart, see my post on October 11.

Update, Nov 5: Wal-Mart is meeting this week with its largest 100 suppliers to plan implementation of RFID. Suppliers attending include Kraft Foods, Procter & Gamble, Tyson Foods, and Unilever. Technology providers will also be there, including IBM, Intel, Microsoft, Philips Semiconductor, and SAP. CNET has the story.

Update, Nov. 8: Forrester identifies some of the obstacles in Wal-Mart's RFID initiative in this CNET article.

Update, Nov 9: I've just learned that MIT's Auto-ID Center has licensed its RFID technology to EPCglobal and is turning over future development to that group. Therefore, there should be few if any standards conflicts between Walmart's program and that of the auto industry. ARC Advisory Group has a short research note on the subject. But, the potential conflict with DoD's adoption of ISO standards still remains.

Lean manufacturing doesn't really need software, but software can help

One mistake that companies make is thinking that every business improvement initiative requires software. Lean manufacturing is focused on inventory reduction and elimination of waste so that process variability can be reduced, lead times can be shortened, and productivity can be increased. None of this at its core requires new software. In fact, advocates of lean manufacturing sometime try not to make significant changes to software, to avoid the risk of turning the effort into an IT project. You can accomplish lean manufacturing without software, but you can't do it without lean thinking.

Nevertheless, software can play a role in support of lean manufacturing. For example, automated systems can:

1. Provide process modeling tools to map the value stream and simulate changes before they are implemented.


2. Calculate key metrics and drivers for lean, such as kanban sizes and takt time.


3. Enable rapid collection of process data, such as statistical process control data and yield data.


4. Establish and maintain repetitive schedules, which are often used when implementing lean, in place of traditional order-based scheduling systems.


5. Eliminate wasted motion associated with managing and distributing paperwork, through electronic document management systems.


6. Provide an "electronic kanban" between trading partners--a electronic demand-pull notification that a downstream node in the supply chain requires replenishment.


7. Support a corrective action system, to record defects and other anomalies, analyze root causes, and track corrective and preventive actions to improve the overall performance of the quality system.

There are a number of software vendors that provide functionality in support of lean manufacturing. As I noted on October 8, PeopleSoft is acquiring JCIT's Demand Flow system, an early innovator in lean manufacturing. Oracle and QAD have also introduced functionality specifically in support of lean. In addition, there are several niche software vendors that, similar to JCIT, provide point solutions in support of lean. These include CellFusion, Exemplary, Factory Logic, Invistics, and Softbrand's DemandStream offering.