LEAN SUPPLY CHAIN MANAGEMENT - THE ESSENTIALS
A major mass merchandiser has decided to go leaner with its inventories. This decision has significant implications and impact for its supply chain and for the supply chains (and manufacturing) of its suppliers. Lean logistics has just taken a new meaning for everyone. Smaller lot sizes, increased flexibility, more rapid deliveries have been ratcheted up even more as a requirement and way of doing business. Companies are assessing expanding from lean logistics---where tools of lean are used in segments of the company, such as warehousing-and becoming lean across their entire supply chain.
Lean is becoming a strategy method for gaining competitive advantage and even for survival, not just for manufacturers, but also for retailers and wholesalers. Adding value and removing waste are no longer options for companies. Non-lean practicing companies face competition from foreign made goods-competition which can have significant impacts on their business and industry. Even lean practitioners understand that the effort to be lean is ongoing.
Manufacturers have recognized the value of lean for their production area. However lean has not been recognized by retailers, wholesalers, manufacturers and logistics service providers, including 3PLs, as part of a strategy for growth. The value and waste of supply chains has not been given sufficient attention. Some of the lack of attention reflects recognizing the intricacies, complexities and differences of supply chain management, especially where international sourcing and manufacturing is involved.
Surprisingly, retailers and wholesalers have often not recognized the need for lean in their businesses. Their business approach often uses a batch and queue inventory approach. Their common attempt at being competitive has been to push suppliers to reduce prices. After years of this approach, that fruit is no longer low-hanging and may not even be on the tree. So what are they to do to stay competitive? One sound option is to develop and implement lean supply chain management.
WHAT LEAN SUPPLY CHAIN MANAGEMENT IS. Lean and supply chain management have much in common as to recognizing the customer, being based on pull, requiring flow, assessing the waste of inventory, and creating value with growth, not just reducing costs. Companies with a lean supply chain, the inbound from suppliers and the outbound to stores or to customers, have identified the value of the supply chain and the waste that exists and are removing the waste.
The purpose of a lean supply chain is to meet the 5R's of logistics, namely, inventory that is:
- the RIGHT product
- in the RIGHT quantity
- in the RIGHT condition
- at the RIGHT place
- at the RIGHT time
Activities that support the 5Rs add value. This applies both to the movement of product and to the movement of information. Conversely, any activities that do not add value, do not further these 5R's, are waste.
By being lean, companies are efficient at lower volumes / lower size lots, have greater flexibility; gain higher productivity, increase product mix diversity, improve rapidity of product development cycle, and have higher quality of performance.
Waste can be difficult to recognize; it is seen and accepted of how the business of the company is conducted. It is deemed as part of the ongoing "process" and is built into whatever is done.
Drawing on the types of waste in manufacturing, there are seven types of waste in supply chain managemen:
- Over supply. This is supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories-and revenues and profits.
- Transportation. Unnecessary or slow movement of product adds no value. This can include movement of inventory between company facilities.
- Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.
- Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.
- Movement. Any unnecessary movement of people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.
- Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.
- Over processing. This is doing more than is necessary.
These waste activities occur in different ways for both Make To Order and Make to Stock companies. Compressing cycle time and increasing inventory velocity are the preferred results for lean supply chain management.
The first requirement to becoming lean is to be able to identify waste. If you are not able to see waste, you cannot begin to remove it and become lean. Waste impacts time required, inventory investment and turns, capital tied up and not earning an adequate return. Lean is about removing waste, not just reducing it.
Being able to understanding and identify waste then requires removing that waste. The initial question then is where and how to begin implementing lean supply chain management.
Three points must be recognized.
First, lean requires a strategy. It is not just a supply chain program or just a manufacturing program. It is a paradigm that requires a change throughout the organization if it is to be truly successful in removing waste and adding value. Organizations must look at everything differently.
Second, lean goes beyond the four walls of the warehouse or factory. It goes beyond the organizational boundaries of the company and extends to suppliers and to customers. This breadth of scope is why it requires strategy for success.
Third, there are lean principles that must be the basis of the lean supply chain. Namely-
- Determine value from the view of the customer, not the view of the company.
- Make the product and information flow.
- Pull product; do not push it.
- Manage toward perfection with continuous improvement.
Supply chain management, especially developing and implementing lean supply chain management, has challenges that must be acknowledged. These are in addition to the "usual" company issues with lean, such as lack of implementation know-how, resistance to change, lack of a crisis to create urgency, gaining resources and commitment, and back-sliding.
Sometimes these challenges are not addressed or appreciated with lean SCM. These include--
- International sourcing-Procuring finished goods or raw materials in China, India, Germany, Brazil and elsewhere outside of North America creates a significant obstacle to lean. The order-to-delivery time is long. Time is a waste, and it compounds the inventory waste issue by making firms buffer and carry more inventory than is needed to compensate for the time. Being lean with a 20-40 day transit time brings a unique test to developing lean SCM
- Accounting-Standard cost accounting and generally accepted accounting does not recognize waste as lean does. Not having financial support to waste and value identification makes lean difficult to implement and sustain. Inventory and time are not regarded as lean does. Inventory is not an asset for lean. Accounting systems do not recognize time. Rework is not treated the same with accounting.
- Organization silos-Supply chain management and lean are processes that cross organization boundaries. Implementing a process that goes horizontal on a vertical and functionally defined organization creates gaps in both processes. These gaps create areas where waste can develop and where removing it can be difficult.
- Number of firms-There are many suppliers and many logistics service providers in a supply chain. Some of these are visible; some are less visible. Many suppliers or logistics service firms do not practice lean. Taking lean outside the four walls of the company into other firms adds to the time and complexity of implementing and becoming lean.
HOW TO BEGIN
The initial step to implementing lean is to evaluate and to measure the present supply chain. You have to know where you are to begin the long journey of continuous improvement. Value stream mapping (VSM) is a visual tool to define the current state of a company's supply chain, to identify waste and to lay the foundation in determining the future state flow of the supply chain.
Value stream mapping (VSM) identifies waste in supply chains, especially with regards to time and inventory. Initial VSM efforts include defining the present value stream for product families, those that share common operations or have large volume impact, either units or dollars, or other delineator as determined.
With mapping the current supply chain state, you can then draw on the various lean tools to design the future supply chain flow. This future state should include the infrastructure to support it-training, culture, quality methods, accounting systems, and investment policies.
There are tools to becoming lean. Each have differences as to ease of use, time to implement, benefits and risk.
- 5S-The 5S's-Sort, Straighten, Sweep/Shine, Standardize, Sustain/Self-discipline--is a visual way to organize to remove waste with extra time for travel or employees. This tool can be used in distribution centers and in offices.
- Rapid setup-Rapid setup or changeover has application in the warehouse to adjust layout for seasonal products, new products and changes in what products are fast-moving and often picked and the complementary items that go with these fast-movers. Reducing the time can involve housekeeping and maintenance (including 5S), setting up smaller areas for SKUs, technology (such as warehouse management systems and RFID).
- Standardize-Standardize involves efficient work process that are repeatedly followed to define the who, what, how, where, and when. This tool helps firms to synchronize the time required to pull and ship all the orders (takt time) and the actual time to do this (cycle time). It can be the basis for employee training. Use of this tool can range from warehouses, issuing purchase orders and other office activities.
- Kanban-Using kanban presents a new, unique way to view "warehousing" and inventory positioning in the supply chain. . It presents a way to coordinate multi-step processes for multiple products. With kanban, small stocks of inventory are placed in dedicated location(s) for supply chain control. This approach runs counter to the traditional way of large distribution centers delivered truckloads of products to stores or customers. Instead mini-"warehouses" are used to position inventory closer to the end customer and increase the rapidity of delivery and inventory turns. Point of sale and other technologies can be the withdrawal signal to trigger both drawing from and replenishing kanbans. Items placed in supply chain kanbans could be limited to high value inventory, such as "A" items, and then using regular warehouse for the B and C items. A variation to kanban is with the import supply chains and differentiating A versus B versus C items and using faster mode and faster carrier transit methods for select items. This reduces time and inventory with smaller batch sizes for these select items. All inventories are not treated the same way from suppliers nor with regards to warehousing.
- Workcell-A workcell is a unit larger than an individual operation but smaller than a department. It is self-contained as to equipment and resources. The potential application is with combining multi-operations into a central area exists where warehouse do additional activities, such as kitting or assembly.
- 6 sigma. This is an advanced tool and ties to quality. The focus is variation and controlling and is preventing errors. Statistical measurement is fundamental. It is used throughout the supply chain, not just in select activities or locations. Six sigma takes lean supply chain management to its ultimate level.
There is no "one" tool for lean SCM. Various tools can be used in different areas and in different sequences to add value and reduce waste.
Often, there are complementary or supporting processes with lean supply chain management. The additional processes may include Strategic Sourcing to manage supplier performance for critical and important items; Strategic Customer to gain the needed viewpoint of key customers; and Sales and Operations Planning to blend the strategic sourcing and customer with the tactical day-to-day supply chain management.
Getting started with lean and sustaining it with continuous improvement is not easy. Lean takes time, years, to accomplish. There is no quick fix to being lean. Often the waste has become incorporated into the daily operation company-wide and is accepted as part of doing business. In some instances, there may be too much instability in a supply chain to begin lean. The first step is then to increase stability before beginning lean.
But the benefits can be significant from gaining market share, reducing capital tied up in inventory, increasing profitability, improving customer service, increasing capacity and taking time out of the entire company's way of doing things.
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