Cooperation instead of sub-optimization?

Ivana Milanovic.

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eCraft was invited to speak at STO's European Spring Seminar “LEAN - Instrumentation and Management” in Helsinki, Finland, May 21, 2015. Our speaker was Mikael Berg, Director of Lean Consulting at eCraft International.

The focus of his presentation was twofold. The first part was to highlight issues about how Lean, ERP and traditional financial controlling are not properly aligned. The second was to illustrate how these three fields can potentially work together to achieve significant benefit for your business.

The purpose of this article is not to cover the areas of Lean, ERP and controlling and their cooperation in detail, as this would be well beyond the scope of one article. We have instead chosen to focus on some of the fundamental issues and opportunities that we think will give you an understanding of what can be achieved through genuine cooperation.

The core issue – interaction with the financial control tools

Before we proceed further we want to emphasize that there are no legal or fiscal requirements or regulations that prevent the traditional financial control methods and tools from being complemented by additional components that will allow for better alignment and cooperation between Lean, financial controlling and ERP.

The traditional financial control tools fundamentally have two tasks and accompanying audiences. The first is external – to present the status of the company to external stakeholders and authorities in accordance with the current legal and fiscal requirements. This is done in the form of a balance sheet, a profit and loss statement and a consolidated management report. The second is internal – to provide tools for internal stakeholders with which they can direct and control operations through operational accounting, different types of calculations and so forth.

The first problem that these tools have caused is that the rules and cycles of the external tools have come to control the internal tools as well. The development of better internal tools and methods has not been achieved to the degree needed to support the requirements that Lean sets for real-time information on the concepts and measurements it uses. What this has resulted in can symbolically be compared to driving a car and only being allowed to look in the rear-view mirror. If the road ahead of you is a wide highway you will be fine, but as soon as curves or bumps in the road appear ahead of you there will be trouble for you and your business.

The second problem is that the financial control tools are not adapted to handle the transformation that businesses have undergone and are still going through to transition from a goods-based industrial society to an information society. Today more and more of the transformation from raw materials to a finished product is based on “soft” intangibles, like knowledge, skills and so forth. For a manufacturing process this manifests itself as growing overhead costs which are unusable from a Lean perspective because they cannot be allocated to their proper place in the value stream. These overhead costs and the use of methods like standard costing have resulted in product costing calculations that are completely misleading and therefore useless.

And finally, the third problem is that these financial control instruments look at people purely as cost, which is in conflict with how Lean focuses on engaging and involving people in a Lean culture.

Business impact and the path towards a solution

Without in any way marginalizing the problems described above, they have a somewhat limited impact while the usage of Lean is confined to individual manufacturing units or teams. However, this changes drastically as soon as the Lean initiative within an enterprise starts to focus on the whole end-to-end value stream from raw materials to finished products including any complementing services delivered; i.e. in other words when a true systems thinking approach, where the whole organization is considered, is introduced. The problems are magnified and may become unmanageable, and introduce a number of serious business risks.

This is not a new observation. The BRIS-concept (Business Related Information System), created and owned by one of our co-founders, Bert-Olov Bergstrand, already gained significant exposure in books and publications in the 1990s. BRIS presented how the problems we described earlier combined with an out-of-control development in the areas of IT and ERP without any measurements of how their costs relate to any business value that may have been created will have immediate business consequences. BRIS also introduced models for how you can connect the interaction between the financial control instruments, the investments in IT and ERP and the measurements used within TQM and in consequence also Lean while still maintaining the crucial capability for continuous improvement and change within the business. Finally, BRIS also highlighted the importance of improving the financial control tools and models to focus on people not just as a cost but also as an asset and an opportunity.

The consensus is that there are, in theory, no obstacles for using the financial control instruments to secure cooperation with Lean. However, for this to be possible change is required. Ground work needs to be done to complement the areas that shape the cooperation between Lean and financial controlling. In addition, what is today presented as the contemporary understanding of Lean Accounting as seen in Wikipedia and in literature needs to be revised in connection with certain aspects that are not aligned nor comply with basic business and financial realities.

With regard to ERP, there are problems that are more severe than issues related to Lean and Controlling, however, there are opportunities within ERP that Lean could gain from.

Lean foundations and conflicts with ERP

Almost without exception, the foundations and core logics of all ERP systems were built during the 80’s or even earlier, when mass-production was still the norm. This means that it is hard to apply many of the basic Lean foundations, including continuous improvement, the ability to focus on an individual product connected to the customer, a focus on the flows or value streams, building a people-oriented learning organization and finally to reduce waste to guarantee the competitive edge of a process.

Many of these ERP-related conflicts are so fundamental and deeply entrenched in the industry that a reboot of sorts is required, including how ERP systems are developed, how new versions are released and last but not least, how related consulting services are delivered.

Through our work we’ve found that with a fresh point of view and the right skills and tools it is possible to go a long way towards meeting the requirements of Lean with your existing ERP. This means that the perception that many Lean practitioners hold that ERP equals waste does not necessarily mean that your existing ERP should be ignored or replaced.

Another challenge for the traditional ERP industry is a lack of the necessary competence to run projects that unify Lean and ERP, and that the focus in the business model of the consultants that do ERP work oftentimes focus on maximizing their amount of billable hours instead of reducing waste.

ERP foundations and conflicts with Lean

The view of “ERP as waste” in combination with the lack of proper analysis on how ERP under the correct circumstances can assist Lean initiatives when the focus is moved up to the whole value stream and the complete system, can be the reason why some ERP foundations are viewed as conflicting with Lean instead of being seen as great potential for realizing Lean.

Below are four areas of ERP, that Lean, when properly utilized, can take advantage of.

1. Make use of your Structured business transactions

Literature on Lean Accounting views IT-related data oriented transactions as a cost, where these transactions cause unnecessary work. It is completely unacceptable that the Swedish police and doctors, for example, are spending too much time entering data into computer systems instead of working with the tasks they are supposed to. This is not purely a consequence of the IT systems as such, but rather a reflection of the fact that structured and coherent data transactions are a prerequisite for achieving the real-time tracking which is vital to Lean. A real-time overview that interacts with controlling is a prerequisite for working with Lean linked to the value stream and the system.

2. Adopt consumer technologies for enterprise applications

Modern consumer-grade technologies and user experiences as used in things like smartphone apps or in the gaming industry can and should be applied to business software as well. They have clearly illustrated that it is possible to create visually attractive and highly interactive real-time experiences that are easy to understand and use, even by non-IT users.

The ERP industry has not shown much interest in following and keeping up with these fields, mainly because of a lack of suitable tools connected to ERP, but also because of a lack of applicable competence and methodologies. However, as illustrated in our work, it is fully possible to apply these technologies and ways of thinking to ERP as well, and make them a powerful tool for supporting Lean initiatives when combined with your ERP.

3. Visibility through Controller Boards

With the help of IT you can create Controller Boards, an interactive version of score cards and box cards that are well aligned with the Lean concept of visual control. The boards give you both vertical and horizontal visibility. The vertical visibility adds transparence between the different units in the value stream, and can be aggregated all the way up to a global perspective on all levels. The horizontal visibility on the other hand is a key piece of the puzzle that enables you to work with Lean from the perspective of a system.

4. Warehouse as transmittance factor

In Eliyahu M. Goldratt’s book “Sifting Information Out of the Data Ocean”, reviewed by Bert-Olof Bergstrand and Christer Lundgren on behalf of the SIS Quality Forum in Sweden (New about 9000 No. 20 May 1990), the warehouse is used as transmittance factor in the value stream to create efficiency and flexibility. ERP linked to complementary tools is a very powerful instrument that from a tactical and strategic pull-perspective ensures that the customer’s specific needs are met. This leaves a gap from a Lean perspective but with an involvement from Lean to close the gap, it would result in very powerful tools to work with value streams and the system ensuring that the warehouse does not become a burden that drives costs.

A pull based on customer needs is the foundation of Lean. A foundation that the BRIS concept is based on and through symbols described as a staircase. A staircase where the customer is the top step and where they sweep the stairs (need) from the top to bottom.

Summary

Achieving a collaboration between Lean, financial controlling and ERP is business critical for enterprises. In this article we have recognized that there are challenges that need to be dealt with, but at the same time, in our experience, they are all manageable. We hope that this short overview of the opportunities available to you encourages you in initiating a dialogue within your own organization about the possibilities and hopefully brings about a closer cooperation between your experts in the three areas.

About eCraft International

eCraft International is a subsidiary of eCraft Oy Ab. Our headquarters are in Malmö, Sweden. We have fully embraced Lean in our business model, and to our customers we make this visible by constantly focusing on eliminating waste and increasing customer value in our deliveries. We have a strong track record in all three areas discussed in this article -  LEAN, ERP and Financial Controlling - and we bring a holistic model to the table for achieving true unity between these three elements. 

 

Nicklas Andersson
nicklas.andersson@ecraft.com
Co-founder and CEO
Responsible for implementing Lean within our company and for designing a customer-specific Lean ERP

Bert-Olov Bergstrand
bert-olov.bergstrand@ecraft.com
Co-founder and Director, Business Solutions
Creator and owner of the BRIS-concept

Mikael Berg
mikael.berg@ecraft.com
Director, Lean Consulting
Certified Lean Leader (Lean Competency System)

Jonas Antfolk
jonas.antfolk@ecraft.com
Director, Design
Responsible for implementing Lean within our company and for designing and implementing a customer-specific Lean ERP