Lean Extended Enterprise

© 2004. Contents may be reproduced for internal use with permission from CEO. For additional information visit our web site at www.ceobreakthrough.com.

Special Research ReportSpecial Research ReportSpecial Research ReportThe Center forExcellence inOperations, Inc.15 Constitution Drive, Suite 128Bedford, New Hampshire 03110Tel.: (603) 471-0300Fax: (603) 471-1897

Building the Lean ExtendedEnterprise Through AdaptiveSupply Chain Networks

By:

Terence T. BurtonPresident

The Center for Excellence in Operations, Inc. (CEO)

Bedford, New Hampshire

www.ceobreakthrough.com

and

Thomas E. ShawExecutive Committee

Government Electronics and Information Technology Association,

A Sector of the Electronic Industries Alliance

In this issue:

Forward: 3

Executive Summary 3

The Lean Landscape 5

Lean Potential 9

Lean Enablers 10

Conclusions andRecommendations 13

About the Authors 14

www.ceobreakthrough.com S U M M E R 2 0 0 4 3

Special Research Report

Forward:

The most pervasive influence and

driver of US productivity during

the 1990’s and the economic

upsurge thru 2003 has been the

ubiquitous role of Information Technology.

This has been recognized by Federal

Reserve Board Chairman Alan Greenspan

in his testimony to Congress and in the

central bank’s interest rate actions.

Particularly significant has been the

contribution of integrated enterprise

systems such as the SAP business suite

of enterprise application solutions.

Concurrently, the recognition of the

contribution of the Toyota Production

System (TPS) towards significantly leaner

processes throughout the enterprise has

provided the tools and techniques to

refine the processes organic to these

integrated IT systems with a resultant

major gain in enterprise operational

performance.

We have observed the importance of

these developments through our personal

involvement with many companies’

Transformation to Lean process and have

recognized the value of embedding Lean

processes in enterprise systems.

Burton, in his book “The Lean Extended

Enterprise: Moving Beyond the Four

Walls to Value Stream Excellence”

highlights the role of ERP systems in

a Transformation to Lean undertaking;

Shaw, who chaired a major study by US

industry spotlighting the degree of Lean

implementations within the US

Aerospace and Defense Industry,

observed this firsthand. The findings

noted the critical role of IT systems in the

report to the industry and government.

The concepts presented in the book were

based on a research collaboration with

SAP in which many feature/functionality

tests were evaluated in support of the

Lean Extended Enterprise. This white

paper provides our view of the specific

actions that an organization can undertake

to achieve the benefits of the Lean

Extended Enterprise. In this white paper,

we showcase the SAP business suite of

products as a test case for the Lean

Extended Enterprise.

Terence T. Burton,President,

The Center for Excellence

in Operations, Inc. (CEO),

Bedford, New Hampshire

www.ceobreakthrough.com

Thomas E. Shaw,Executive Committee,

Government Electronics and

Information Technology Association,

a Sector of the Electronic Industries Alliance

The book, The Lean ExtendedEnterprise: Moving Beyond the FourWalls to Value Stream Excellenceby Terence T. Burton and Steven

L. Boeder (2003) is available from

J. Ross Publishing (jrosspub.com)

Executive SummaryOutstanding strategic, operational,

financial and market position gains have

been achieved by manufacturing industry

companies that have embedded the Lean

philosophy, principals, practices, tools

and methods of the Toyota Production

System (TPS) into their integrated

enterprise IT systems. Gains ranging

from factors of three or more in sales per

employee, profitability, free cash flow

and a superior market position, among

other performance indicators, have been

acknowledged in companies with revenues

from tens of millions to billions of dollars.

Companies such as Lockheed Martin

Commercial Space Systems, Goodrich,

Rockwell-Collins, Delphi, Honeywell

and LSI among others have achieved

and institutionalized these results

by extending Lean across the Total

Value Stream and by integrating

Lean and IT through one or more of

the components of the SAP Business

Suite solutions.

A significant enabler of this success

is the application of fully integrated

enterprise IT systems from SAP that

form the backbone for all interfaced

application programs. These systems

embed the results of Lean Value Stream

mapping actions which are the

fundamental component of Lean

transformation. The critical role of IT

systems assumes much greater significance

in the collaborative company relationships

demonstrated as a primary element of

today’s most competitive and aggressive

organizations. This ranges from highly

integrated supplier networks of both a

local and global nature to finely tuned,

internationally supported engineer-to-

order product development organizations.

As stated by Burton and Boeder in

“The Lean Extended Enterprise” (2003),

the objectives and goals of the Lean

Extended Enterprise cannot be realized

with the current state of information

typically interfaced with enterprise

systems; The further you migrate

Lean, Six Sigma, or any other strategic

improvement initiative beyond the four

walls, the more IT plays an enabling

role. A much higher level of agility and

adaptability is necessary to address the

realities of shortfalls even when working

with the best suppliers. The ability to

adjust literally in real time to changes

in supply is critical.

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Such enterprise system adaptability

is now available with SAP Enterprise

Services Architecture, which includes

SAP NetWeaver as the key application

platform. SAP NetWeaver pulls data

from diverse applications and the mySAP

Business Suite. It is a complete, integrated

solution featuring web based portals and

applications for all size companies.

Demonstrations of its viability by diverse

companies such as Sasol, Zeiss, BG Group,

CheckPoint Software, and Goodrich have

established its significant advantage

over non-integrated, non-real time

operational data systems.

This white paper provides background

on the status of Lean implementations;

the empirical, academic and operational

status of Lean processes, and the specific

contribution of SAP business solutions to

the institutionalization of Lean processes.

It includes a summary of the key

characteristics, capabilities, management

actions and enablers of the salient Lean

entities viewed as representative of

the states of Lean implementation by

industry. Namely, it addresses Lean

Manufacturing, Lean Enterprise, Lean

Extended Enterprise and how they are

enabled with an adaptive Supply Chain

Networking Tool (Figure 1). This

summary is mapped to the technology

advancements and industry requirements

associated with each Lean entity definition.

This white paper also provides a forecast

of future improvements in adaptive IT

system technology, without which

management of the global operational

functions necessary for a company’s

market leading position are difficult

and/or non-competitive. It includes a

summary of steps and actions companies

can take to quickly and methodically

progress to a “state of the industry”

Lean and adaptive enterprise.

Figure 1. The Adaptive Supply Chain Network enables Lean

Lean Extended Enterprise

Lean Enterprise

LeanManufacturing

2nd TierSuppliers

2nd TierSuppliers

SAP ADAPTIVE SUPPLYCHAIN NETWORK

TODAY’S SEQUENTIALSUPPLY CHAIN SAP

TRANSFORMS

1st TierSupplier

1st TierSupplier

Manufacturer

Manufacturer

Distributor

Distributor

Enterprise

Retailer

Retailer

EndCustomer

EndCustomer



Technology Advancements

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Adaptive Supply Chain- Coordinate Collaborative Adaptive Vision and Objectives- Require Network Lean Assessment (Internal/External)- Establish Network Lean Requirements Capability- Select Primery and Alternate Network Entities- Implement Collaborative Adaptive System- Architecture and Systems

Lean Extended Enterprise

Lean Enterprise

Lean Manufacturing

Adaptive Supply Chain

Technology advancements to meet these

growing and ever more demanding

customer requirements are summarized

in the graphic to the right (Figure 2).

These advancements are made possible

by SAP’s high (greater than 20 percent of

annual revenue) investment in IT systems

research and development and by the

intimate involvement of the multiple

SAP industry user groups.

The Lean Landscape“The Machine That Changed the World”

by Womack et al, (1990) was a landmark

assessment of the product development

and manufacturing processes of the

global automotive industry. The book

focuses on the “Toyota Production

System” (TPS), which is seen as the gold

standard of efficiency and quality. The

TPS philosophy, principles, practices,

tools and methods have increasingly

come under the “Lean” umbrella domain,

signifying continuous improvement, high

levels of process and product quality

(six sigma levels), and aggressive action

on eliminating waste of all forms.

By now a significant number of books,

workshops, conferences and consultancies

depicting all aspects of an organization’s

transformation to Lean have emerged

to encourage implementation of Lean

principles and practices to a broad

range of companies, with particular

emphasis on engineer-to-order discrete

manufacturing companies and their

supply networks. “Lean Thinking”

by Womack et al (1996 & updated in

2003) focuses primarily on the Lean

Manufacturing domain.

Lean Six Sigma (2000) is promoted by

George in both product and service.

Burton and Boeder in “The Lean

Extended Enterprise” (2003) move

beyond the four walls of the factory and

address partnering and supply chain

management with very quantitative

descriptions of Lean tools and processes.

A major research initiative led by MIT

(the Lean Aerospace Initiative) attempts

to translate the full spectrum of Lean to

the US aerospace industry and its suppliers

with a complete and comprehensive set

of resource and guidance documents to

enable any organization, company or

institution to transform itself to a high

level of Leanness.

Specialist Lean and Six Sigma consulting

firms, such as The Center for Excellence

in Operations, Inc. (CEO), Lean Horizons

Consulting, and MIT through the LAI

consortium, have been major contributors

to companies’ implementation of Lean

principles and practices with major

improvements in sales per employee,

space utilization, administrative cost

reduction, process cycle time reduction

and bottom line performance, among

many other operational processes.

Meanwhile the Toyota Motor Company

continues its dramatic increase in

world-wide automotive market share

emphasizing well established Lean

methodologies such as 5S, visual controls,

Kaizen (continuous improvement),

cellular manufacturing, pull systems

and kanban, total preventive maintenance,

and quick changeover, among others.

To these tools they’ve added Obea (an

integrated product development team,

Japanese style), CCC21 (Construction of

Cost Competiveness for the 21st century)

and GBL (Global Body Line, a technique

for body assembly with one fixture instead

of many). These initiatives all add up to

finding ways to eliminate all forms of

waste (people resources, space, time etc.).

Figure 2: The Lean Transformation




In the US a few very innovative companies

have leveraged the principles and practices

of Lean with advanced business models,

which have allowed them to clearly

dominate the markets they serve.

The number of companies which have

fully embraced Lean for all enterprise

processes is limited. A recent assessment

of the degree of Lean principles and

practices embedded within the US

Aerospace industry found that prime

contractors and OEM’s have approximately

50 percent of their operational processes

transformed and institutionalized to a

Lean state, while the majority of their

administrative and operational support

processes are largely untouched. Also,

only 10 to 15 percent of their suppliers,

many who supply both aerospace and

commercial customers, were transformed

to a Lean state.

Clearly the supply chain network

represents the “Achilles heel” of US

industry and must be transformed.

Otherwise the significant gains made

by those companies who have both

transformed and managed their supply

networks to a largely Lean state will

continue to enhance their market and

competitive positions while others will

become marginalized.

Underlying all of these Lean initiatives –

and the effort to embed and institutionalize

the Lean processes that have produced

the gains noted – has been the critical

enabling role of integrated, enterprise-

wide IT systems. This was a key finding

of the Aerospace industry assessment of

its Lean status and the success these

companies have had in improving their

operating results. The reasons are not

difficult to understand:

A Transformation to Lean means examining

every enterprise process, subjecting it to

a Value Stream Analysis, standardizing

this revised process, and embedding it

into the various IT programs that represent

the work of the organization and its

constituent functions. By incorporating

these Lean processes in an integrated

ERP system available from SAP’s suite

of enterprise management solutions, an

organization has taken a major step

toward a high level of Leanness. It also

positions itself to invest the benefits (both

staff and financial) into other strategic

and operational areas key to improving

market and competitive position.

While this action is a major step forward,

it does not address the issues of the

extended enterprise, both at the partner

and supply chain levels. There is a wide

diversity of IT systems at the lower level

of suppliers, and there are many enterprise

legacy systems which are interfaced

with some core system but not truly

interoperable on a real-time basis.

Today’s companies are highly competitive,

global operating environments where the

best suppliers are geographically dispersed.

In this world, instantaneous, real time

information regarding a supplier’s status

is critical to enabling the pull or flow

type of manufacturing, distribution,

and sales operations.

Two types of IT systems are needed to

meld together the various operational

programs and provide the adaptability

to change that today’s markets require.

Among those currently available is an

innovative integration architecture from

SAP, including SAP NetWeaver and its

associated mySAP Business Suite. Its

capability to pull data from diverse

applications and provide it to decision

makers individually or in multiple forms

of functional “dashboards” significantly

enhances the value of the well proven

mySAP suite of solutions. The SAP suite

of products is capable of moving to the

adaptive data and decision processes that

are viewed as the future direction of

companies’ business models. These

models require highly agile, adaptive,

fact-driven decisions.

It is important to realize that these

systems integrate all of the enterprise

life cycle functions necessary from new

product development, to production,

sales, distribution and service. A

significant focus on the early portion

of product development has been shown

to be critical in producing the type of

product at the quality levels and prices

expected by customers today. These

represent processes that can be further

value stream analyzed for the state of

Lean established by management, and

represent a head start on moving rapidly

to a high state of Lean operations.

Figures 3a through d provide a

comprehensive summary of the

characteristics, capabilities, actions

and enablers of the progression from

Lean Manufacturing to Adaptive Supply

Chain. How best for any company or

institution to get started, assess its Lean

status or remain on a well chosen path

to a Lean status is highlighted in Figure3c. The key actions that should be taken

are noted; a summary of SAP solutions

consistent with the actions of 3c are

summarized in Figure 3d so that the

implementation of actions using available

SAP products provide a proven methodology

to rapidly and reliably achieve a high

level of Lean proficiency. The validity

of this approach is demonstrated by the

success of Lockheed Martin’s Commercial

Space Systems and Rockwell-Collins,

among others.




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Lean Extended Enterprise- Supply Chain Interoperability- Lean Network Events- Integrated Value Stream Analysis- Coordinated ERP Interfaces- Network KPI’s

Lean Enterprise- Integrated Operations Focus- Six Sigma Events- Multi Process Value Stream Analysis- ERP- Enterprise KPI’s

Lean Manufacturing- Operational Focus- Kaizan Events- Single Process Value Stream- MRP2- Manufacturing KPI’s

Adaptive Supply Chain- Real Time Decision Focus- Decision Modeling and Simulation- Decision System Metrics and KPI’s

Figure 3a: Lean Transformation: Characteristics


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Adaptive Supply Chain- Coordinate Collaborative Adaptive Vision and Objectives- Require Network Lean Assessment (Internal/External)- Establish Network Lean Requirements Capability- Select Primary and Alternate Network Entities- Implement Collaborative Adaptive System- Architecture and SystemsLean Extended Enterprise

- Network Products High Quality- Network Products/Service Value Optimized- Predictable Response to New Orders- Broad Range of Products and Service- Consistent and Repeatable Order Performance

Lean Enterprise- Engineer-to-order Product Quality- Engineered product value optimized- Rapid response for new products

Lean Manufacturing- Repetitive Product High Quality- Manufacturing Cost Optimized- Rapid Response for “Standard” Products- Recognized Industry Reputation

Adaptive Supply Chain- High Quality Alternate Sources- Broad Range of Products and Service- Highly Agile and Efficient Network Management- Product Offerings Value Optimized - Rapid and Predictable Response to New Orders

Figure 3b: Lean Transformation: Capabilities





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Lean Extended Enterprise- Collaborative Strategic Vision and Objectives- Conduct/Lead Unbiased Collaborative Assessment (Internal/External)- Perform Network Gap Analysis- Select Network Constituency- Conduct Collaborative Education and Training- Prioritize Lean Actions Implement Collaborative IT Systems Architecture

Lean Enterprise- Formulate Strategic Vision and Objectives- Conduct Unbiased Assessment (Internal/External)- Perform Gap Analysis- Conduct Lean Education/Training- Prioritize Lean Actions- Implement ERP System Backbone

Lean Manufacturing- Develop Operations Vision and Objectives- Conduct Unbiased Assessment (Internal/External)- Perform Gap Analysis- Conduct Lean Education/Training- Prioritize Lean Actions- Embed Lean in Manufacturing Systems

Adaptive Supply Chain- Coordinate Collaborative Adaptive Vision and Objectives- Require Network Lean Assessment (Internal/External)- Establish Network Lean Requirements Capability- Select Primary and Alternate Network Entities- Implement Collaborative Adaptive System- Architecture and Systems

Figure3c: Lean Transformation: Actions


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Lean Extended Enterprise- Lean Qualified and Validated Network Staffs- Network Node Interface Value Stream Analyses- Collaborative IT System Architecture and Systems

Lean Enterprise- Lean Educated and Trained Staff- Enterprise Processes Value Stream Analysis- Kaizen, Lean, and Six Sigma Integration- IT System Architecture and Systems

Lean Manufacturing- Lean Educated and Trained Staff (Green and Black Belts)- Process Value Stream Analyses- Kaizen Mindset- IT Technology Framework and Systems

Adaptive Supply Chain- Validated Lean Network Entity- Network Node IT Proficiency- Agile and Qualified Network Entities- Broad Capacity Range of Network Entities (Flexible Outsourcing)- Collaborative and Adaptive IT Architecture and Systems

Figure 3d: Lean Transformation: Enablers



to Lean has been successfully carried

out. Major innovative technical steps

by SAP in architectural structuring of

enterprise portals, along with the

subsequent integration of its entire suite

of integrated business solutions to this

architecture, provide the most technically

advanced solution to the interface and

integration problem of disparate application

systems organic to most companies today.

This suite of products includes SAP

NetWeaver, an innovative development

that for the first time provides a coherent

platform to integrate disparate application

systems and becomes an integral element

of SAP’s Lean enabling architecture.

For many companies, the manufacturing

floor was the initial focus of their

Transformation to Lean initiatives.

Many of the characteristics of such

a transformation are highlighted in

Lean Manufacturing in Figure 4.

The capability of such companies’

manufacturing function generally

established their image and market

position, and the key activities, initiatives

and enablers that formed the basis of

their competitive position are noted.

Particularly significant was their strategic

view of IT systems, even within the

manufacturing domain. Robust ERP

functionality, inherent with the SAP

R/3 integrated product was the critical

enabling capability that resulted in the

benefits noted earlier in this report.

The SAP’s “Solution Manager” rapid

implementation process enables a

comparatively short and inexpensive

implementation cycle. Certain of these

companies then transitioned from a Lean

Manufacturing state to that of a Lean

Enterprise – particularly those with a

high content of Engineer-to-Order

products. This is especially true when

their strategic view indicated the critical


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Adaptive Supply Chain- Coordinate Collaborative Adaptive Vision and Objectives- Require Network Lean Assessment (Internal/External)- Establish Network Lean Requirements Capability- Select Primery and Alternate Network Entities- Implement Collaborative Adaptive System- Architecture and SystemsLean Extended Enterprise

- SCM

Lean Enterprise- ERP- PLM- CRM- SCE

Lean Manufacturing- MES- MRP2

Lean Adaptive Enterprise- NetWeaver

Figure 4: The Lean Transformation: TechnologyLean PotentialBy mid-2004, specific operating, financial,

performance, and market position results

from companies’ Transformation to Lean

initiatives were telling a very pervasive

story of benefits. Increases in sales per

employee by factors of two to three, and

increases in net income and inventory

turns are a few of the many key benefits

companies have realized.

Unseen to many involved in this

Transformation to Lean is the critical

role of modern Information Technology,

particularly that which provides the

architectural backbone and portal service

interface for all enterprise and extended

enterprise operations. Recent research

has validated the role of such technology,

along with its accompanying IT strategic

vision and its governance. Even for those

companies which have shown outstanding

results from their Lean initiatives alone,

there is substantial room to improve.

And, for those companies contemplating

a Transformation to Lean initiative, they

should note that the key to achieving

overall enterprise performance is the

incorporation of the value stream analyses

into a properly selected IT system in a

carefully planned sequence.

This two path approach—one which

conducts a value stream analysis of each

enterprise process, and the second which

embeds the results of this analysis into

the selected IT system—should be carefully

coordinated and sequenced for maximum

benefit and least cost of implementation.

Adoption of this methodology provides

the continuous improvement environment

for value stream analysis. This continuous

improvement is the major driver of Lean

benefits once the initial Transformation

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influence of the early engineering effort,

well characterized by the influence factors

depicted in Figure 3a.

Others, interested in moving more rapidly

to a Lean Enterprise, embarked on a

broader scope for their Lean Transformation

initiative and embraced a more complete

enterprise functionality. This was obtained

with an enterprise application of the

mySAP Business Suite, elimination of most

legacy systems and optimization of their

processes through the value stream

analysis noted earlier.

SAP recognized that the future for many

companies would be characterized by

broad collaborative partnerships and a

robust supply network. SAP also recognized

that this extensive collaboration would

require SAP solutions to interface and

interoperate with a diverse set of IT

systems. Although a partnership of IT

“equals,” all employing SAP solutions

would be the most straight-forward to

interface/integrate, it was realized that

such was unlikely in the near term

because of the large number of legacy

systems typical of most companies. In

addition, an innovative architecture and

enterprise portal design were necessary

to overcome this very real circumstance.

SAP’s Enterprise Services Architecture

and SAP NetWeaver represent the

innovative solution to this issue. Key to

many companies was the comparative

ease with which their supply networks

could interface and apply the portal

features of SAP Netweaver, enabling a

more adaptive and flexible approach to

managing the supply chain issue. For

the first time, a meaningful lean Adaptive

Supply Chain Network operation becomes

feasible and practical.

In the future, in a global supply chain

network companies need visibility into

potential disruptions and need robust

adaptive algorithms to recommend

alternative sources of supply and or

alternate modes of transportation. SAP

NetWeaver and mySAP Business Suite

solve these requirements.

Extensive additional benefits are

expected with this adaptive technology.

Most important will be recognition of

such companies as the market leaders

and competitive gold standards, such as

Rockwell-Collins and Lockheed Martin.

Lean EnablersA key enabling role of integrated robust

extended enterprise IT systems to the

Lean Transformation process has been

described and the specific capabilities

of the SAP portfolio of these products

illustrated earlier in this report. Inherent

within the products are numerous features

that enable Lean processes and represent

functionality that facilitates the actual

transformation process.

Highlights of such functionality which

support Lean concepts include:

n New Product Development

and Introduction

n Supplier Relationship Management

for Direct and Indirect

n Supply Chain Planning

n Total Preventive Maintenance (TPM)

n Shop Floor Control – Pull/Push

Planning (Kanban and MRP)

& Flow Manufacturing

n Transportation and Warehouse

Management

n Performance Management (SCOR

Model) – KPIs and Benchmarks for

Continuous Improvement

The SAP NPDI solution addresses the

entire engineering development process

from new production ideation management

to production launch.

n Product ideation management is

SAP’s methodology to evaluate new

product ideas, markets, the voice of

customer (Quality Function Deployment

or QFD), and design for value. This

process avoids waste by evaluating

new product feasibility and the

business case prior to any major

engineering investment.

n Collaborative and Concurrent

Engineering brings design, process,

tooling, and quality engineers together

to develop new products in the shortest

time. SAP tools such as Web based

program/project plans and sharing of

engineering CAD drawings and

documents allow geographically

dispersed engineers to work on

common projects concurrently. Also,

a portal-based cockpit provides senior

management with visibility and

control over all projects/programs

and resources.

If 80% of supply chaincosts are determined in the design phase of product definition, then better executionhere should have hugebusiness impact.

The Value of PLM and How To Get ItKevin O’Marah, Michael Burkett

AMR Research Report, April 2003

New Product Development and Introduction (NPDI)

www.ceobreakthrough.com S U M M E R 2 0 0 4 1 1


n Stage-Gate Program Management

(known as Advance Product and

Quality Planning, APQP in some

industries) helps minimize late

engineering changes, re-work, and

supports design for manufacturability.

Control Plans and Production Part

Approval Process supports Six

Sigma process capability before

production begins.

Supplier RelationshipManagement (SRM)

SAP SRM covers all aspects of both

Direct and Indirect Material Acquisition.

The processes supported include:

n The evaluation and selection of

suppliers based on multiple criteria

such price, Six Sigma quality, JIT

(Just in Time) delivery capability,

and financial viability. In a Lean JIT

production environment all of these

are critical.

n Web-based B2B applications provide

process efficiency and help ensure

lowest total cost. eRFQs, Auctions,

workflow driven electronic requisitioning/

approval, and eCatalogs streamline the

processes and leverage total ‘spend’ to

drive lowest cost.

n The SAP Supplier Portal supports

Web-based Lean execution processes.

Buyers and suppliers can collaborate

on a ‘browser accessed’ intuitive

application. Enabled processes include:

• Supplier registration

• Standard Purchase Order

(& PO Change)

• Blanket PO Delivery Schedules

(EDI DELFOR/830 releases)

• Advance Ship Notices

(EDI SHPADV/856)

• Supplier Managed Inventory (SMI) –

Supplier empowered for consumption

driven replenishment using a

Customer MIN/Max with real-time

inventory visibility.

Supply Chain Planning

The traditional Sales and Operations

Planning process is a key element of the

Lean enterprise. Future sales plans must

be meshed with production capability

and capacity. Constraints involving tools,

machines, labor, and suppliers must be

modeled and reconciled. Flexibility must

be designed into the supply chain.

The SAP Advance Planning and

Optimization (APO) and Strategic

Enterprise Management (SEM) tools

provide capability to synchronize sales,

finance, and operations in the medium

and long term.

n Demand Planning to develop an

accurate sales forecast

n Supply Network Planning to develop

best feasible production and distribution

plan to support the sales plan

n Strategic Planning and Simulation

breaks down plans at the strategic level

(for example, financial statements) into

tactical and operational plans within

the same framework. You gain a unified

planning environment that enables you

to complete planning with a speed and

accuracy never possible before.

Sales and Operations Planning helps

reduce waste associated with sales

exceeding capacity to deliver. This waste

results in unhappy customers (Customer

Quality KPIs) and potentially costly

attempts by operations to resolve

constraints in the short term.

Quality Management andPreventive Maintenance

Total Quality Management and Total

Preventive Maintenance are cornerstones

of Lean Six Sigma. JIT Production assumes

there is no unplanned downtime due

to machine breakdowns or component

quality problems. Unplanned downtime

in a JIT environment creates serious and

costly supply chain disruptions.

n SAP supports preventive maintenance

for all machines, tools, and test

equipment. Maintenance orders are

automatically triggered by workflow

events to perform tasks to test, replace

wear items, recalibrate gages,

recondition tools, etc. Preventive

maintenance tasks are scheduled

around production plans.

n Previously in the NPDI section above

the APQP process was noted as means

of assuring product quality and process

capability before product begins.

n Once production starts additional

quality functions include:

• Inbound material inspections –

but with the ultimate objective of

supplier quality reaching Six Sigma

levels. Eliminates the need

for inbound inspection, which by

definition is a non-value added

(waste) activity.




SAP Transportation Managementprovides optimization logic for consolidating

deliveries and orders as shipments. Lean

Transportation also supports track and

trace with proactive electronic alerts

which tell the customer and the shipper

when a shipment is not progressing as

planned (e.g., sea container did not get

loaded on the expected ship).

Performance Management(SCOR Model) – KPIs andBenchmarks for ContinuousImprovement.

The SAP Enterprise Portal and Business

Warehouse are the basis for the SupplyChain Cockpit. The Supply Chain

Cockpit is based on the SCOR Model,which provides consistent benchmarks

and KPIs to drive Kaizen. Specific

support includes electronic exception

alerts (intuitive UI), benchmarking

and continuous improvement metrics

and KPIs.

SAP has also employed this SC Cockpit

to capture MES (manufacturing execution/

shop floor data) to connect the ‘shop floor

to the top floor’.

Combined with MES partner solutions,

the SC Cockpit provides real-time

production and quality data (noted

earlier as a key attribute or capability

of successfully implemented Lean

operations). Electronic alerts provide

proactive exception based shop floor control.

• Supplier Performance – quality

related statistics such as parts per

million (PPMs) are recorded and

available for both the customer and

the supplier via the Supplier Portal.

• Statistical process control – establish

control plans and parameters and

record actual results. SAP has

partnered with manufacturing

execution system providers to

automatically collect SPC data

in real-time and report exceptions

through a portal based cockpit.

Alerts are sent to drive ‘Management

by Exception’.

Shop Floor Control – Pull/PushPlanning (Kanban and MRP) &Flow Manufacturing

Lean manufacturing is based on shop

floor goals of on-time delivery with the

lowest possible inventory. Just in Time

(JIT) production strives to produce the

exact quantity ordered on the date

required by the customer. Purchased

materials are scheduled to be delivered

JIT to support production. Customer

orders ‘pull’ production and in turn

Kanban signals ‘pull’ supplier deliveries.

Lean processes enabled by SAP include:

n Electronic Kanban – Kanban control

cycles or loops can be established to

supply from a warehouse, an earlier

in-house production step, or a supplier.

Within the ‘four walls’ the ‘point of use’

and the ‘source of supply’ will each see

the same electronic Kanban board

showing the real-time status of Kanban

containers (full, empty, in transit). There

are no Kanban cards to pick up, deliver,

or lose. Outside suppliers can access

‘pull’ signals via EDI or via the Web based

Supplier Portal.

n Flow manufacturing embodies the

concepts of producing in small lot

sizes (ideal is lot size of one) and level

schedules (heijunka – Japanese term

for “make flat and level”). SAP supports

Flow Best Practices such as line design

and balancing, Takt-based scheduling,

and line hierarchies with feeder lines

as well as processes like repetitive

manufacturing and backflushing.

n SAP also has Advance Planning tools

to do finite and constraint based

scheduling in complex environments.

These tools can be leveraged when

standard Lean Flow scheduling

techniques need to be further

optimized to develop a model mix

schedule or sequenced schedule.

Transportation and Warehouse Management

Advanced Warehouse Managementincludes RF barcode or RFID enabled

tracking of all incoming and outgoing

items, which provides process efficiency

and fool-proofing (Poka Yoke) capability

by eliminating manual data entry.

Additional Lean processes include

cross docking, yard management and

task resource management.

www.ceobreakthrough.com S U M M E R 2 0 0 4 1 3


Conclusions andRecommendationsQuality, reliability and predictability

of the supply chain at all tier levels is

critical to the agility and Lean operations

required in the current global competitive

market environment. Singular failure of

even one of the supply chain’s key

elements can be catastrophic to the just

in time, flow manufacturing processes

consistent with Lean operations.

Adaptability and agility of all elements

of this integrated OEM/supply chain

network are mandatory requirements

for an industry leading performer. The

institutionalization or embedding of Lean

operating processes into an integrated

enterprise IT system is observed to be

the optimum architecture to achieve the

full benefits of a Transformation to Lean

with the Toyota Production System

(Lean) precepts.

Outstanding enterprise performance

has resulted from this integrated Lean/IT

Transformation model. At present the

SAP business suite of enterprise

application solutions has been found

to be the “gold standard” of enterprise IT

system performance excellence and most

applicable to creating and managing an

adaptive supply chain complex.

Recommendations for those contemplating Transformation to Lean initiative include:

1) Organizations considering adoption of a Transformation to Lean operating state should invest upfront resources into theimplementation of lean techniques and methods in parallel withtheir selection of an enterprise architecture and application suite.

2) SAP NetWeaver and the mySAP Business Suite of solutions represent the current optimum enterprise IT system for incorporation of the lean process value stream analysis.

3) Primary attention should be given to a company supply chain and its degree of leanness, agility and adaptability.

4) Supply chain application IT systems that provide real time, actionable information and adaptability to chaining supplier performance issues represent the most important attributes of a global supply chain configuration.




About the AuthorsTerence T. Burton is founder and President of The Center for Excellence in Operations, Inc. (CEO). Terry has over thirty years ofexperience in Manufacturing, Quality Assurance, Engineering, Materials Management, Purchasing, Distribution, and ManagementConsulting. Terry is best known for his “hands-on” approach to consulting, focused on tangible improvements and measurable results.

Prior to his consulting career, Terry held several senior line management positions at Wang Labs, Polaroid, and Atlantic Richfield,and practice leadership positions with two other international consulting firms – KPMG Peat Marwick and Pittiglio, Rabin, Todd, &McGrath (PRTM). He has extensive management consulting experience with over 175 clients in North America and Europe rangingfrom large diversified international Fortune 500 corporations to small and mid-sized companies.

Terry holds a B.S. and M.S. in Industrial Engineering from the University of New Haven, and an MBA from Boston University. Terryis a certified Six Sigma Black Belt and Master Black Belt candidate; national LEAN SIG Chairman and CPIM certified member ofthe American Production and Inventory Control Society (APICS); a member of AME, ASQ, and PDMA. He is a frequent speaker formany industry and professional associations, and has written hundreds of articles for various trade publications. He is co-author offive books, his most recent being The Lean Extended Enterprise: Moving Beyond the Four Walls to Value Stream Excellence, was justreleased in June, 2003. Terry has a new book, Six Sigma for Small and Mid-Sized Organizations due out in September, 2004.

Thomas E. Shaw is a member of the GEIA (Government Electronics and Information Technology Association) a sector of theElectronic Industries Alliance (EIA) responsible for systems, standards and technology important to both industry and governmenteffective design, development and management of complex systems. His knowledge and background in enterprise IT systems andassociated application products, such as PDM and CM, was the basis for his selection by the DCMA (Defense Contract ManagementAgency) and the DCAA (Defense Contract Audit Agency) to be the sole industry participant in an integrated CMA/DCAA/industryassessment of various ERP systems in implementation or in selection planning stages by Aerospace and Defense contractors.

He and his industry/industry association team completed and distributed a major report to the Director, DCMA in February 2004 on the Degree of Implementation of Lean Aerospace Initiative Principles and Practices in the US aerospace and defenseindustry. Many of the findings of this major report are the basis of the content of this white paper and the conclusions and recommendations thereof.

He is a member of Accenture’s Executive Action Group, responsible for corrective action and leadership of certain key companyengagements. He previously was Vice President of Engineering for Lockheed Martin Sanders, Manager of Engineering forRaytheon’s Missile Systems Division and General Manager of Research and Engineering, General Electric company.

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