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Integrated Management Systems: ERP & Hoshin Kanri

Many companies receiving either the Deming or Japan Quality Awards have implemented both ERP and Hoshin Kanri. ERP, Enterprise Resource Planning is the best strategy for integrating company-wide management processes. Hoshin Kanri—is a medium and long-range business planning strategy that directly integrates with a company’s business philosophy and vision —one that includes implementation of annual targets and measures.

Hoshin Kanri was developed in Japan but it is based on the US techniques of Management by Objectives and the classical Plan-Do-Check-Act improvement cycle. Hoshin Kanri is used to communicate company policy to everyone in the organization. Its primary benefit is to focus activity on the key things necessary for success. Japanese Deming Prize winners credit Hoshin as being a key contributor to their business success. Progressive US companies, like Hewlett-Packard and Xerox, have also adopted Hoshin as their strategic planning process. Almost all Malcolm Baldrige National Quality Award winners use some form of "Hoshin like" planning process.

In its simplest form, Hoshin Kanri is nothing more than a system of forms and rules that encourage employees to analyze situations, create plans for improvement, conduct performance checks, and take appropriate action. In practical application, however, is much more than forms and rules - Hoshin is a philosophy of management!

Basic elements of Hoshin Kanri strategy are:

1 Establish a Comprehensive Business Philosophy & Vision

1 Set Operating Goals and Targets

1 Conduct Strategic Gap Analysis / Strategic Assessment

1 Conduct Comprehensive Evaluations of Strategic Analysis Results

1 Establish Medium & Long-Term Strategic Plans With Concrete Objectives

1 Establish and Implement Annual Objectives and Measures.

1 Constantly Review "Check/Act" Aspects of Implementation Results.

ERP is an integrated management process for an entire business enterprise. The concepts and techniques of ERP must be applied across all company functions. ERP integrates management processes to assure that decisions and planning are born out of the same databases, assumptions and methodology and language—and includes Continual improvement techniques and supply chain management. ERP solutions focus on optimizing productivity by focusing on planning and executive reporting of the Enterprise as an integrated unit. When used as an integrated management process companies significantly improve their business performance and competitive positions.

ERP is much more than a manufacturing software tool. It is a management philosophy for making and keeping promises—to better manage the supply and demand sides of the business using directly integrated management systems. The focus is on results –improving competitiveness in the marketplace and improving overall company business performance.

Resource utilization must be properly measured to properly manage the supply and demand sides of the business. Inefficient utilization of resources drives costs up and customer service down. Methods and approaches for resource management and ERP planning are changing with the introduction of Hoshin Kanri.

Effective ERP requires that integrated management processes extend horizontally across the company, including product development, sales, marketing, manufacturing, and finance. It must extend vertically throughout the company's supply chain to include the acquisition of raw materials, suppliers, customers, and consumers. The fundamental purpose of ERP is to establish a process that links projected demand plans to supply plans, so that the resources of manufacturers, their suppliers, and especially their customers are utilized in the most efficient and cost effective way.

To do so requires a process for anticipating demand and planning and scheduling resources in a manner that supports a company's strategic and financial goals. There are five major elements in this:

  1. An integrated business operating process that links strategic plans and business plans to sales plans and operations plans.
  2. A people-driven process that is supported by a computer system.
  3. A formal resource planning process that involves all functions within a company.
  4. Defined responsibilities and performance measurements for all functions in a company.
  5. Communications among all functions in a company as well as communications among all divisions and sister companies.

Strategies must be tied to tactics, supply is resolved with demand, the financial system is tied to the operating system, aggregate planning is translated into detailed planning, and planning and execution are linked together via a two-way flow of information and a spirit of cooperation among all functions.

ERP is a people process supported by the computer, rather than the other way around. People -- and their behavior and discipline in utilizing the ERP process -- is vital. When people understand how to utilize the ERP process, tools, and techniques, the data and information will be highly accurate, and they will make sound decisions.

ERP philosophy has evolved from MRPII philosophy. MRPII philosophy evolved from MRP philosophy. It is important to understand the difference between each term:

MRP: Material Requirements Planning

MRP: (From the 60's& 70’s) includes only Material Planning Projections
Based on Bill of Material Explosions

Typical Functions:

1 Bills of Material
1 Inventory Management
1 Work Order Management
1 Shop Floor Scheduling
1 Production Activity Control
1 Material Shortage Management

Fundamental Process Questions:

1. What do you want to make?
2. What materials does it take?
3. What materials do you have?
4. What materials do you need to get?

MRPII: Manufacturing Resource Planning

MRPII (From the 80's& 90’s) includes ALL Manufacturing Resources
for "What If" Pro-Active Process Simulations

Typical Functions:

1 Financial Modules
1 Business Plan
1 Resource Planning
1 Production Plan
1 Sales and Operations Plan
1 EDI and Customer Orders
1 Master Production Schedule
1 Rough-Cut Capacity Planning
1 Detailed Capacity Planning
1 Product Costing Modules
1 Engineering Change Management
1 MRP: Material Requirements Planning

Fundamental Process Questions:

1. What do you want to make?

2. What materials does it take?

3. What materials do you have?

4. What materials do you need to get?

5. What constraints must be met now or in the future?

ERP: Enterprise Resource Planning

ERP (From the 80's& 90’s) includes ALL Business Management Systems, Philosophies and Performance Evaluation at All Levels

Typical Functions:

1 Financial Planning Simulations
1 Business Planning Simulations
1 Sales/Marketing Planning Simulations
1 Distribution Requirements Planning
1 Resource Management Simulations
1 Production Management Simulations
1 Supply Chain Management Simulations
1 Continual Improvement Strategies
1 R&D Management Simulations
1 MRPII: Manufacturing Resource Planning

Fundamental Process Questions:

1. What do you want to make?

2. What materials does it take?

3. What materials do you have?

4. What materials do you need to get?

5. What constraints must be met now or in the future?

6.How will performance be planned, simulated, measured, and improved?

Where Accountability & Performance are Assigned & Measured as Follows:

ERP: Executive Planning
Financial Planning, Business Planning, Sales/Marketing Planning, Resource Management Simulations

ERP: Intermediate Planning
Distribution Requirements Planning, Master Production Schedule, Rough-Cut Capacity Planning,
Detailed Capacity Planning, Engineering Change Management, Material Requirements Planning

ERP: Operations Planning
Procurement, Inventory Management, Bills of Material Management, Work Order Management,
Production Activity Control, Shop Floor Scheduling, Product Costing

ERP creates organizational synergy that drives the development of highly effective processes that are properly managed for continual success. The dramatic results are derived from a deep organizational understanding of ERP philosophy. Proactive strategies become the mainstay of the company-wide operating system. Without this organizational understanding, well-intended efforts will deliver wrong results. Organizational profitability is derived from the organization’s overall willingness and ability to improve. Therefore people at every level must see beyond their local functions and interactively understand how their individual actions increase or decrease profitability.


Excerpts From Some Of The Experts…

An Excerpt from: "Creating the Sweet Spot of Success: Operational Excellence in the 1990's"- Roger Brooks, Oliver Wight Companies

In this article several important points are provided regarding “Operational Excellence”
—A buzzword from Harvard Business Review

“…During the 1980s, companies invested millions of dollars in systems and machinery to improve their operations, but ignored their people. Most of these companies were disappointed with the results. Improvements in productivity, quality, and cost savings were marginal at best. Some companies, however, attained spectacular results. What is the difference? The manufacturing companies that appear to be "cruising to victory" realize that the soft side of their business -- the people side -- is where their companies' greatness lives. Greatness and competitive advantage is achieved with people - not brick and mortar, and capital equipment. How companies educate, develop, deploy, and empower their people determines whether they find the sweet spot of success.

What Counts in Manufacturing Today

In today's economic environment, manufacturing companies can only stay ahead by investing in their one true competitive advantage -- their people. Think about it. In manufacturing, the only thing that counts are our customers -- and they want top quality, innovative products, delivered quickly at a reasonable price. The only way to address these issues is with people. Only people can design new products, design manufacturing processes, work with suppliers, and stay in tune with customers to create long-term, loyal relationships that will help business to succeed.

I look at it this way: You want to dance with the customer and let him lead. This requires understanding what your customer wants, anticipating his next move, and then keeping in step. And even then, this is only the "price of admission." It might get you through the first song, but doesn't ensure that the customer will stay with you. The competition wants to dance with your customers, too, and will try to provide more innovative products, higher quality, lower prices, and better service -- just to get on the customer's dance card.

If you are going to keep the customer, you must continue to improve. And improvement is borne through people.

Staying Ahead

Producing innovative products, quality, price, service, and delivery is a tough act. It takes coordination and synchronization of effort to accomplish all these things in manufacturing today. Every person in the company must know what they need to do and must work together to perform their assignments to achieve the common goal. That is the difference between achieving marginal results and spectacular results.

The challenge is to understand your customers on the one hand, know your company's business goals on the other hand, and determine what every business process in your company must do to meet those goals. This becomes the performance expectation that drives every function, every department, and every person in your company.

Here's how an executive of a manufacturing company defines this level of performance:

As a company, it means a synchronized application of resources, from the top level all the way down to doing the work, from the beginning of taking the order, planning an order, to delivery to the customer. Resources can be anything -- time, people, energy, and money.

When companies perform at this level of synchronization, they have attained Operational Excellence. This term is not just another buzzword. What gives this term meaning is that there are benchmarks and performance criteria, based on the highest industry standards, for companies to determine their operational proficiency. Operational Excellence means giving customers more than is expected in a professional and profitable manner.

To be operationally excellent, a company must be:

Ø Better than the competition in at least one, and ideally all, of the important dimensions of Operations -- flexibility, innovation, price, quality, delivery, and service.

Ø Excellent in all the fundamentals -- asset management, product introduction, demand management, etc.

Ø Continuously improving cycle times, operating margins, asset returns, and customer satisfaction.

The alternative was expressed well in a recent Harvard Business Review article:

Competitive purgatory is the sorry state of too many formerly proud U.S. corporations. They are languishing from the devastating effects of seven familiar sins:

1. Inconsistent product quality,
2. Slow response to the marketplace,
3. Lack of innovative, competitive products,
4. Uncompetitive cost structure,
5. Inadequate employee involvement,
6. Unresponsive customer service, and
7. Inefficient resource allocation.

HBR's remedy for overcoming this "sorry state" is Operational Excellence:

What's needed is a total reinvention of the soft side of the organization to produce a work environment that stresses speed, Spartanism, innovation, and marketplace focus. First, top managers must decide what their company stands for and convince their employees of this uniqueness. Second, they must set standards that drive their business to world-class levels and be tough about enforcing them and raising them. Third, they must push constantly to ensure that enough innovations take place to change the company's future significantly.

What Does Your Company Stand For?

The performance required to attain Operational Excellence differs from company to company, depending on markets served and competitive forces. However, the target is always the same --the customer. Understanding the markets you serve, the competitive forces you compete against --all within the context of the customer --results in a definition of what a company stands for. It also is the first step toward achieving Operational Excellence…”

An Excerpt From: "MRP II in the Year 2000 - APICS - Performance Advantage, March, 1994- Correll, Jim; Goddard, Walter

“…Sales &Operations Planning Will Become a Standard Management Practice in the Year 2000
When MRP II is utilized as an integrated management process, there is a free, uninhibited flow of information between departments and functions. The information is expressed in terms and units of measure that each function understands and can apply to their planning and scheduling. What makes this information flow possible is the introduction of Sales and Operations Planning (S&OP) to the MRP II process. S&OP was developed in the mid-1980s and is becoming more widely practiced by companies. Many companies credit S&OP with being the major factor in improving demand forecast accuracy, better managing resource allocations, and better executing the company's sales and production plans. We foresee that S&OP will become a standard operating practice in the years to come. The senior management from all functions of the company -- sales, marketing, product development, manufacturing, and finance -- participates in the S&OP process. They meet regularly, usually monthly, to update the company-operating plan by projecting future demand and analyzing the company's resources and capacity.

During Sales and Operations Planning, the executive management team makes the key decisions in how to allocate the resources when projected demand and supply plans are out of balance. They work together to resolve any issues that will prevent the company from achieving its operating plan. This results in a single plan that all functions operate from in executing the plan. Viewing the sales and production plans over at least an 18-month period gives senior management the ability to anticipate and resolve problems before they occur. There also is greater understanding throughout all functions in the company of the implications of the decisions that are made during S&OP.

John Campbell, Vice President of Operations for Gallo Salame, explains: “Everything we do today has a reason. Everything is tied together. Before, we would make a change for what seemed to be the right reasons, and we would cause many other things to happen that we hadn't anticipated. Now when we make changes that cause other things to happen, we aren't surprised -- we expect it."

Major developments in software also will enable companies to perform extremely rapid simulations to predict the impact of changing conditions on the sales and operations plans and the company's financial performance. Companies now are able to perform simulations, but the process is often cumbersome and slow, limiting the number of simulations that can be performed.

Many executives view S&OP as the process that enables them to take charge of running the business. Bill Drees, Vice President of Consumer Products and International Sales for Pioneer Flour Mills, explains:

"MRP II, for us, is all encompassing; it is a way of life and how we run our business. I don't understand companies that approach it strictly from a manufacturing standpoint. The main advantage is for marketing. It enables you to understand the dynamics of the market and the dynamics of your company. Everyone in the company can see the sales plan through the forecasting system. Everyone can see the production plan. It even can be used to directly input your customers 'forecasts into your planning system."

MRP II and Continuous Improvement
The advent of Continuous Improvement techniques also is changing the way MRP II is applied in companies. In most cases, it is resulting in a simplification of MRP II planning techniques. There is great synergy from combining the attributes of MRP II with the attributes of Continuous Improvement. MRP II gives companies the ability to effectively plan and control the business environment; whereas Continuous Improvement changes today's environment. Good controls make changes easier; changes make planning and control more effective, and so on. The purpose of Continuous Improvement techniques, like Just-in-Time, kanbans, and setup reduction, is to simplify the production process and eliminate waste. As a result, Continuous Improvement has helped to make easier many MRP II planning techniques and eliminate some planning activities altogether.

When companies utilize flow processes, for example, routings are eliminated and the number of items in a bill of material are frequently reduced. The fewer items to plan, the more straightforward the planning process becomes.

As flow lines are created, detailed capacity planning often is no longer necessary; rough-cut capacity planning at the S&OP and master schedule levels as well as finite scheduling are sufficient and effective for those products produced in the flow lines.

Shop floor control traditionally uses dispatching to communicate what jobs to work on next. With kanbans, however, a visual control is used to authorize production, often eliminating the need for work orders as well. Although a kanban is a powerful production control technique, it is not a planning technique. The kanban can communicate to the shop floor what to make, when to make it, and how much to make -- but only for the time frame. Kanbans cannot predict what materials nor how much will be needed in future time periods. The visibility of changes in future demands is the job of MRP II.

In a Continuous Improvement environment, companies make a conscious effort to eliminate anything that hides problems. When the reliance on safety stock, scrap factors, and yield factors is minimized -- or eliminated all together -- the planning process is simplified. Also, as cycle times are dramatically cut by reducing queues, the need for replanning and communication of exception action messages is lessened.

We believe that the practice of Continuous Improvement will become commonplace in the next decade as pressures mount to significantly reduce cycle times, cut costs, and improve quality. The ramification will be greater emphasis on front-end, long-term planning, using Sales and Operations Planning, Master Scheduling, Rough-Cut Capacity Planning, and Finite Scheduling.

Supply Chain Management
Another development that we predict will become more widely utilized in the year 2000 is Supply Chain Management. Some companies, like Zeneca Colours in the United Kingdom and Pioneer Flour Mills of San Antonio, TX, are already beginning to employ Supply Chain Management.

Pioneer Flour Mills was recently asked to link up with one customer, a major food supplier, through an Efficient Customer Response (ECR) process, which is the food industry term for Supply Chain Management. Eleven trade industry groups, representing food retailers and manufacturers, are participating in the development of ECR industry wide. ECR involves directly tapping into customers' inventory and forecast information, using Electronic Data Interchange (EDI) and computer networks, to determine when to produce and deliver product to their customers.

The purpose is to better manage supply and demand between customers and suppliers, just like MRP II enables companies to better manage supply and demand internally between sales and manufacturing. ECR is an extension of MRP II's principles and techniques that enables companies to reach beyond distribution centers all the way to the ultimate consumers. Use of ECR is expected to slash $30 billion in costs over the next five years from the process of making, distributing, and selling food.

Pioneer Flour Mills is one of five manufacturers asked by the major food company to participate in its ECR process. DeGregorio and others at Pioneer Flour Mills believe they wouldn't have been asked to participate if they had not implemented MRP II.

"MRP II gives you the ability to do ECR. Without being proficient at scheduling, planning, capacity management, inventory management, and inventory accuracy, you couldn't begin to think about doing ECR. Trying to do ECR without MRP II would add costs, rather than drive costs out," DeGregorio states.

High Level of Operating Proficiency Required
To operate a business as described in this article -- using MRP II as an integrated management process for the entire business enterprise and adapting MRP II to a Continuous Improvement environment -- implies a high level of operating proficiency.

Achieving this level of operating proficiency is the driving force behind the tradition of the Oliver Wight ABCD Checklists. The checklist is now in its fourth edition; the purpose of each edition has been to lead manufacturing companies to a new level of operational excellence. The Fourth Edition of the checklist provides benchmarks and performance measurements for strategic planning, people and teams, total quality and continuous improvement, product development, and planning and control. Class A companies, as measured by the 4th Edition ABCD Checklist, reap the benefits from managing all five processes.

The benchmarks and measurements for certifying a company Class A will be different in the next decade than they are today. A fifth edition will be developed when attainment of the fourth edition standard starts to become more common; then we will raise the high bar another level to reflect the competitive requirements that will take companies beyond the year 2010…”

Breakthrough Improvement From Vision-Driven Leadership

An Overview of The Hoshin Planning System
Leveraging the Creative Talent of Your Workforce Thru Hoshin Planning
Developing Deployment Strategies For Training & System Development


ERP-MRP Evolution…
ERP & Hoshin Kanri…
ERP Implementations… 
Profit-Ability Improvement... (¬Click here to see definitions)
Profit-Ability Management Principles... (¬Click here to see definitions)

People, Empowerment & Profit-Ability… (¬Click here to access articles)
Hoshin Kanri & Deming's Plan-Do-Check-Act... (PDCA) Cycle…

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