A colleague and I started our morning off with a coffee and a conversation about integrating EOQ (Economic Order Quantity) into MPS (Master Production Scheduling). In no time at all we were debating between lean versus EOQ. While each approach has its merits, the two concepts present some conflicting advice. Here we go again! It doesn’t matter if you’re a technician working on the shop floor or an executive in the board room, if you’re in the business of manufacturing then this is a conversation you’ve had before. Without the right data it’s a debate that’s impossible to win, but I’m convinced that neither solution is perfect in all cases.
EOQ attempts to optimize lot size by balancing manufacturing cost (Fixed + variable costs) with things like inventory holding costs and capacity utilization. Lean relies on minimization of, among other things, lot sizes, inventory and waiting. Traditional ERP systems take fixed (often part specific) inputs for planning parameters and spits out a plan without any thought as to the efficiency (financial/shop capacity, etc.) of that plan. Master schedulers can manipulate the planning parameters to create lean or EOQ optimized schedules, but how do you decide which way is right for your organization?
Companies often swing back and forth between the two ideologies – often depending on which S&OP seminar an executive recently attended. I’ve seen attempts to transition to lean cripple an organization because they incorrectly applied the principles and go too hard and too fast. Yet, going all the way to EOQ could cause over-investment in inventory and tie up capital that would be better invested in new technologies/process that would allow a company to become more lean.
In my opinion, lean appears to be the better solution in many industries, but transitioning to lean is challenging and the reality is that many companies aren’t close yet. So, how do they make that transition? They can go fast, invest a significant amount of cash into the transition and throw a huge team of industrial engineers at the problem to look at everything from all angles. Alternatively, they can go slow, and use a small team of industrial engineers, but where do they start and can they move quickly enough to stay competitive in a rapidly changing world?
With the right analytics and the ability to compare multiple scenarios, it’s possible to find the happy middle ground in between and make a smooth transition to lean. Imagine a tool that allows supply chain professionals to compare both scenarios and understand the complete impact on their business of each option (globally and specifically), and allows schedulers and planners to make the right decision on a case-by-case basis. This could change the conversations of the S&OP/MPS teams as the data can enable rapid and accurate decisions on how to most effectively invest their resources (based on constraints like capacity, inventory holding costs, availability of supply, availability of cash for inventory investment, etc.).
Imagine a scenario:
- You’ve got a product line with high run rates and steady demand that screams lean but you’ve still got high fixed costs due to multiple products lines sharing the same manufacturing cell (repetitive tear-down/setup)? Let’s work under EOQ rules until your industrial engineers can come up with a solution that reduces your setup time, changes the planning parameters, and swings the balance back toward lean. Oh, and by the way, here’s a list of parts where your industrial engineers should focus their efforts based on the largest opportunities presented (based on current independent demand data).
- You want to go lean, but your customer’s demand schedule wreaks havoc on your capacity plan. Here are the most cost effective parts to re-schedule/ group to balance capacity with cost.
- You’ve ‘gone lean’ but aren’t! How do you correct until your industrial engineers catch up with your executive vision?
What are your thoughts? Have you had this debate before? Have you tried to go lean but haven’t received the benefits you expected from your investment? How are you changing the conversation in your organization to ensure you are investing resources effectively? Please keep the conversation going in the comments below.