Managing Lean Manufacturing Using Microsoft Dynamics AX 2009

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This is an excerpt from the book Managing Lean Manufacturing Using Microsoft Dynamics AX 2009 by Dr. Scott Hamilton.
The book can be ordered on
Reprinted with kind permission of the publishers.


An integrated supply chain management (SCM) system represents a critical success factor for effective implementation of lean manufacturing. The SCM system supports development and consensus for the demand plan, integrates engineering and sourcing information, manages changes associated with continuous improvement, and ensures supply-demand synchronization with demand pull techniques. The SCM system also defines product structure and costing information, provides the basis for financial information and reports, and provides a single source of the truth for decision making.

Many have argued that traditional SCM/ERP systems do not apply to lean manufacturing. One argument is that the weekly time increments associated with sales and operations planning, and the resulting supply orders, represent a blunt instrument that does not support the details of day-to-day coordination required by demand pull techniques. A second argument is that many SCM/ERP software packages lack the new constructs such as kanbans needed to support lean manufacturing. These limitations have often necessitated the use of manual systems, such as physical containers or cards to represent kanbans and a manually maintained schedule board. However, the manual kanban systems have their own difficulties such as lost cards and lack of information integration and visibility.

Most of the published literature provides few prescriptions about actual software functionality to support SCM for lean manufacturing. In addition, the lean enthusiasts emphasize new conceptual models and a new vocabulary which contributes a sense of mystique for those only familiar with the traditional SCM approaches.

This book covers the SCM software functionality to support lean manufacturing scenarios, as defined by functionality within the latest release of Microsoft Dynamics AX 2009. It also covers the traditional SCM approaches to these same scenarios, as defined in a previous book Managing Your Supply Chain Using Microsoft AX 2009. The book explains how to transition from traditional to lean approaches. In particular, it explains the incremental conceptual differences between the lean and traditional SCM approaches.

The targeted reader includes those individuals implementing or considering Dynamics AX to support their lean manufacturing initiatives, as well as those providing sales and implementation services. Figure 1.1 summarizes the reasons for reading this book for each of these audiences. The book is especially targeted at those people trying to understand the new conceptual models associated with lean manufacturing approaches, where they already have familiarity with traditional approaches to supply chain management.

Applicability of Lean Manufacturing Approaches

Lean manufacturing approaches generally apply to the use of a manufacturing cell that produces a family of products (or a single product) with certain characteristics. These favorable characteristics include a higher certainty of demand, linear demand patterns, higher usage rates, higher component costs, shorter component lead times, and stable product structures with similar components. These favorable characteristics can apply to make-to-stock and make-to-order environments. In contrast, the lean approaches do not generally apply to products with the opposite characteristics, such as low certainty of demand, erratic demand patterns, low usage rates, long lead time components, and dynamically changing product structures. The traditional SCM approaches tend to work better for products with these opposite characteristics. Vendor-managed inventory may also be considered for low-cost high-usage components such as nuts and bolts.

Lean manufacturing approaches have been especially applicable in two basic scenarios as described below.1

  • Make-to-stock products with a small finished goods inventory. This example reflects the classic Toyota system approach with a short order-to-ship lead time and manufacturing cycle (ranging from hours to 1-2 days). Finished goods inventory can be stocked in a shipping area or at the final work cell, where the inventory levels typically reflect a day of supply (depending on the volatility of demand). The choice of a location for finished goods inventory affects the choice of a kanban approach. Fixed kanbans can replenish finished goods inventory at the shipping area, whereas pull-to-order kanbans (for the sales order quantity) can pull inventory at the final work cell to the shipping area. The book's baseline scenarios for Scenario #1 and Scenario #3 illustrate the different locations for finished goods inventory.

    An additional benefit of locating the finished goods inventory at the final work cell is that production personnel can easily see their inventory position and act accordingly.

  • Make-to-order products with no finished goods inventory. This example reflects the Dell Computer approach where sales order visibility exceeds the manufacturing cycle. The customer provides forward visibility by placing sales orders with future delivery dates or by accepting a promised sales order delivery date in the future. The pull-to-order kanban quantities typically reflect the precise quantity and mix of products specified in the sales order. Alternatively, a pull-to-order kanban can be expressed as multiple kanbans with a quantity that reflects the item's normal container size.

    Many make-to-order products are built from stocked components, where the stocked components may be purchased or manufactured. The stocked components are typically placed in a stockroom (or kept at the producing work cell) based on fixed kanbans, and pulled to the relevant work cell based on sales order demands. This approach employs pull-to-order replenishment kanbans to move a stocked component to its point of use. The book's baseline scenario for Scenario #4 illustrates a lean environment for make-to-order products.

    A product may be completely make-to-order, such as a custom product or a rarely produced product. Pull-to-order kanbans can be used for every item in the product structure, including purchased components.

The lean manufacturing approaches to supply chain management reflect a number of lean techniques. Techniques such as kanbans and positioning required resources at the production area have special relevance, but other techniques also apply. These include value stream mapping, quality at the source, total productive maintenance, setup reduction, batch size reduction, standardized work, work balancing, production leveling, visual performance data, and continuous improvement. 2

Maturity Stages in Lean Manufacturing

Most companies begin their lean journey with a pilot project approach, which represents the first of three maturity stages in lean manufacturing.3 The pilot project focuses on shop floor processes and implementing lean methods at one or more work cells. The project may involve changes in the factory layout based on value stream mapping. Illustrative changes include the definition and design of work cells, supermarkets for floor stock areas, and a reduction in bottlenecks. The pilot project uses kanbans for manufacturing and visual coordination tools, and typically supports tracking of floor stock inventory and an order-based approach to costing. A supplier has been identified for each purchased item (along with quality at the source initiatives), but purchasing kanbans are not typically used because suppliers are not ready for this type of coordination. Figure 1.2 summarizes this first stage and the other maturity stages of lean manufacturing.

The pilot project stage can be also be characterized by several other lean methods that are summarized in the figure. Once the pilots are working well, the lean methods are rolled out across the plant and into other areas of the business.

With the second stage, the biggest change involve value stream costing. Components are issued to the value stream, and end items are received from the value stream, and the component inventory in floor stock locations is typically not tracked. Other changes include the widespread use of manufacturing kanbans and selective use of purchasing kanbans. The third stage involves organizing the company by value stream, and extending the lean practices throughout the company and with customers/suppliers.

These three maturity stages are reflected in variations of using the lean manufacturing functionality within Dynamics AX. For example, the software supports the transition from traditional SCM approaches to lean, the transition from order-based costing to value stream costing, and the transition from detailed tracking to no tracking of floor stock inventory. Chapter 11 summarizes the transition from traditional to lean.

Summary of New Constructs for Lean Manufacturing

The conceptual model for lean manufacturing involves new constructs concerning kanbans and work cells. These constructs are introduced now, and subsequent chapters provide more detailed explanations.

Kanbans (aka Kanban Orders)

A kanban has a unique identifier (aka kanban order number), and each variation of a kanban order has a slightly different life cycle and associated status (aka kanban order status). The terms kanban and kanban order will be used interchangeably; they both refer to a pull signal for coordinating supply chain activities. The replenishment policies for a kanban order are specific to an item, warehouse and container. 4 Stated another way, a kanban order inherits a set of replenishment policies that reflect its source of supply such as purchased or manufactured, and whether it is directly linked to a sales order. The linkage to sales order demand defines the two basic types of kanbans – a fixed kanban and a pull-to-order kanban (aka PTO kanban) – which act as pull signals for replenishing stocked or pull-to-order items respectively.

  • Fixed Kanban. A fixed kanban communicates a pull signal using a fixed container quantity and multiple containers. The fixed kanbans are not linked to actual sales orders. They reflect anticipated rates of demand based on the current sales backlog or sales forecasts for end items, plus bill of material (BOM) information for components.

  • PTO Kanban. A PTO kanban is closely linked to an actual sales order, whether it represents the end item or a component within the end-item's bill of material. It typically communicates a pull signal using the sales order quantity for a single container. It can also be expressed as multiple containers (with a fixed quantity per container) that add up to the sales order quantity.

Variations in kanban orders reflect these two basic types (fixed kanbans and PTO kanbans) and the sources of supply (manufacturing, purchasing, and replenishment). Each variation has a slightly different approach for defining replenishment policies and creating kanban orders. In addition, each variation has a slightly different life cycle of kanban order transactions and status, and different coordination tools.

The book's explanation of kanban variations will employ consistent terminology to minimize possible confusion. Figure 1.3 summarizes the terminology for fixed and PTO kanbans. The book will sometimes shorten the terminology for fixed kanbans by dropping the word "fixed”, since the alternative is already differentiated by the words "PTO kanban". The figure illustrates this shortened term by displaying the word [Fixed].

The new constructs related to kanban orders replace the traditional SCM approaches that involve purchase orders, production orders and picking lists. They can also work in parallel with the traditional approaches, typically because lean manufacturing has only been implemented for selected product lines, for selected portions of a product structure, or for selected trading partners in the supply chain.

A manufacturing kanban order supports coordination of production activities, but it does not support cost accumulation for actual costing purposes. When order-based costing is required, each receipt of a manufacturing kanban can automatically generate an associated production order. The autodeduction of components (and routing data) for this production order supports the actual costing capabilities within AX.

Work Cell

A work cell represents a group of equipment and workstations in a bounded area to facilitate small-lot continuous flow production. Component inventory is located in a floor stock area near the work cell, along with other required resources, to support a point-of-use strategy.

A work cell represents a simpler alternative for modeling lean scenarios in comparison to the use of Dynamics AX work centers and routing data. You indicate the work cell for producing an item as part of the kanban policies for a fixed or PTO manufacturing kanban. The list of empty kanbans by work cell provides a coordination tool. Takt time metrics provide a measure of work cell performance, and the work cell's drumbeat can support sales order delivery promises based on available capacity.

The simpler alternative of a work cell does not currently support value-added costs related to direct manufacturing and overhead allocations. Most lean scenarios focus on direct material costs so the limitation is not an issue. However, some lean scenarios require value-added costs to support calculation of a manufactured item's cost and suggested sales price. Autodeduction of these value-added costs supports an order-based costing approach for manufacturing kanbans. In this case, routing data must be used to support the costing purposes. Chapter 5 explains several work cell considerations, including the use of routing data for costing purposes.

Other New Constructs

Kanbans and work cells represent the primary constructs for managing lean scenarios. Other new constructs represent advanced functionality covered in separate chapters. This includes the new construct of a lean order schedule (Chapter 9) and the alternative approaches to fixed kanbans (Chapter 10).

A Baseline Model of Operations

This book employs a baseline model of operations and several baseline scenarios to simplify explanations. The baseline model focuses on standard products (identified by an item number) that must be tracked by site and warehouse area. Additional characteristics of the baseline model are listed below.

  • Work cells within a single physical site. The work cells for lean manufacturing may comprise some or all of the manufacturing processes within a single physical site. A work cell can also represent a subcontract manufacturer.

  • Warehouse areas without bin locations. Examples of warehouse areas include a stockroom, the floor stock area next to a work cell, and a shipping area. Inventory balances are not tracked by bin location within a warehouse area, since the layout and low inventory minimize this requirement. The floor stock areas for components, and the stockroom areas, are often termed supermarkets as a reflection of their efficient organization.

  • Focus on direct material costs. Most lean scenarios focus on direct material costs, and (when applicable) the outside operation costs for subcontract manufacturing.

  • Focus on standard costing. Most lean scenarios focus on standard costing for inventory valuation purposes. However, some lean scenarios require actual costing, which involves an order-based costing approach to manufacturing kanbans. In this case, each receipt of a manufacturing kanban order can create a behind-the-scenes production order with autodeduction of components (and routing data) to support actual costs.

  • No routing data, although the selected use of AX routing data for costing purposes may employed. The costing purposes include the calculation of a manufactured item's cost and sales price based on routing data, and the cost accumulation (via autodeduction) against a production order to support actual costing.

  • No inventory tracking of batch or serial numbers

  • No use of the item variant fields such as color, size or configuration id.

  • No quarantine orders or quality orders.

Variations to the baseline model are described in Chapter 10; they reflect alternative approaches for handling lean scenarios.

Summary of Scenarios used throughout the Book

The book employs several baseline scenarios to illustrate lean manufacturing and simplify the explanations. These lean scenarios are initially described in terms of traditional SCM approaches (in Chapter 2), and subsequently described in terms of lean SCM approaches using fixed kanbans, PTO kanbans, and lean accounting. This provides an anchor-and-adjustment approach to learning. The primary scenarios are listed below; some scenarios have variations.

  • Scenario #1: Make-to-stock products with internal manufacturing
    • Single level product
    • Multilevel product (Scenario #1a)
    • Multilevel product and black hole warehouses (Scenario #1b)

  • Scenario #2: Make-to-stock products with subcontract manufacturing
    • Using a discrete kit of supplied components
    • Using consigned inventory stocked at subcontractor (Scenario #2a)

  • Scenario #3: Pull-to-order shipping area for stocked products

  • Scenario #4: Make-to-order products
    • Single level product
    • Multilevel product (Scenario #4a)
  • Scenario #5: Value stream costing

    The variations to a scenario reflect different business practices. For example, Scenario #2 covers the dominant approach to subcontract manufacturing, and Scenario #2a covers an alternate approach. The case studies at the end of each chapter highlight additional variations of lean scenarios.

    Each scenario highlights the nature of coordination tools such as kanbans or traditional supply orders. Each scenario also highlights a point-of-use strategy of placing components in a floor stock area for a work cell, which must be reflected in BOM information for the warehouse source of components. The diagram for each scenario illustrates the bill of material information and the work cell information. The diagrams also highlight sales orders triggering the creation of PTO kanbans.

    Executive Summary

    The software functionality to support supply chain management in lean manufacturing employs kanbans to support make-to-stock and make-to-order production strategies. Kanbans provide a different approach to SCM coordination in comparison to traditional approaches employing purchase orders, production orders and picking lists. However, many companies must employ both kanbans and traditional supply orders in the early maturity stages of lean manufacturing.

    This chapter reviewed the applicability of lean manufacturing approaches and the associated maturity stages. It introduced the new constructs concerning kanbans and work cells, where work cells replace the use of AX work centers and routing data. It described the baseline model of operations used throughout the book to simplify explanations, and also summarized the baseline scenarios used to illustrate common lean environments.

    About the Author

    Dr. Scott Hamilton has consulted with more than a thousand companies worldwide and has conducted several hundred executive seminars on supply chain management (SCM) and enterprise resource planning (ERP) issues. He also helped design three influential ERP software packages. His books include Maximizing Your ERP System and the APICS CIRM textbook on information systems for manufacturing, and previous books on Microsoft Dynamics AX and Dynamics NAV. Hamilton can be reached at or at 612-963-1163.

    This is an excerpt from the book Managing Lean Manufacturing Using Microsoft Dynamics AX 2009 by Dr. Scott Hamilton.
    The book can be ordered on Reprinted with kind permission of the publishers.

    1 These two lean scenarios were described in the book Lean Transformation by Bruce Henderson and Jorge Larco, published by Oaklea Press in 2000.
    2 A pamphlet entitled “The Lean Manufacturing Pocket Handbook” (written by Kenneth Dailey, ISBN 0-9747221-0-3) provides an excellent yet brief summary of lean manufacturing techniques.
    3 The brief description of maturity stages draws heavily on the comprehensive explanations provided in the book Practical Lean Accounting by Brian Maskell and Bruce Baggaley, published by Productivity Press in 2004.
    4 A container has other synonyms such as tote or pallet. A printed kanban ticket typically accompanies the container as part of the visible pull signal. Alternatively, an electronic version of the kanban ticket (aka the kanban order) can act as the pull signal without accompanying a physical container.
    5 The replenishment policies and life cycle transactions for these kanban orders have many similarities with traditional production orders, purchase orders and picking lists. The kanban orders also employ alternative coordination tools that have similarities with traditional tools. An understanding of these similarities helps to bridge the change in conceptual models and vocabulary for lean manufacturing.
    6 The AX solution approaches for modeling single-site and multisite operations are described on pages 351-355 in the AX 2009 book.

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