Lean Supply Chain News Update

Supply chain success requires collaboration

NK Khoo Managing Consultant — Thu, 21 Sep 2006 17:57:00 +0000

By Ron Nussle, Jr.
Purchasing
September 21, 2006

Over the past decade, nearly every Fortune 500 company has embarked on a supply-chain cost-reduction program. Most savings reported come from commodity-leveraged negotiations or sourcing from low-cost countries (LCCs).

The Integrated Cost Reduction process uses a broader, more fundamental approach to cost that takes into consideration such factors as engineering, supply, design, marketing, and production. Especially important to the ICR process is how it integrates the proven best-of-the-best business improvement processes: Six Sigma in quality, value analysis/value engineering in design and purchasing, Lean in production, and supply chain management and e-procurement tools in procurement, production, and logistics.

The business world goes through one fad after another trying to improve its competitiveness. Over the past few years, the following supply chain cost reduction strategies have been the most common:

Supply chain leveraged negotiations. By themselves, they are typically just “margin-transfer” with four unintended (and often painful) side effects: suppliers recover their losses during the next upturn or engineering change notice; suppliers don't give their best cost ideas up front; suppliers don't recover their losses and exit the industry.

Outsourcing. There are many benefits, but also substantial costs and risks to outsourcing. Furthermore, outsourcing is not a silver bullet and some products and job functions cannot (or should not) be outsourced. How do you balance the investment in core products and services while simultaneously investing time, resources and management in an outsourcing program? It isn't easy.

Global sourcing (to low cost countries). It has become the favorite way for CEOs to lower costs, but takes unexpectedly large investments in time and resources before break even occurs. Typically, break even takes 18-24 months after the project is initiated.

Exchanges. They have failed to materialize any real cost savings and have almost all collapsed. A few short years ago, the Big 3 automakers, major airlines, medical companies and a number of other multibillion dollar players launched exchanges with great expectations of cost reductions and many press releases.

Today, this business model has been almost entirely abandoned.

Online reverse auctions. They are really just another form of “win-lose” negotiations. One $5 billion company experienced such a serious backlash after initiating online reverse auctions, it began missing shipments from suppliers.

While noncollaborative approaches may yield short-term savings, the above unintended side effects limit the overall benefit to cost of goods sold (COGS). One functional organization (purchasing, tooling services, etc.) may see their numbers get better while other organizations see increases in cost, or degradation in cycle time or quality.

Outsourcing: Theory vs. experience

Deloitte Consulting surveyed several companies
on their experiences with outsourcing. Following are some of the
results:

Outsourcing driver (Experience)

Cost savings (52% said cost issues were the main risk, and 81% found hidden costs they had no visibility to in the supplier's pricing. )

Best practice/quality/innovation (31% said vendors became complacent.)

Flexibility/capacity/scalability (Contracts are binding. Late changes are a problem. )

Focus on core/strategic functions (One in four mislabeled functions as non-strategic. )

Access to high-caliber labor (One in five saw vendor-employee turnover.)

Source: Deloitte Consulting Outsourcing Study, 2004

Aberdeen report backs adopting lean for supply chain

NK Khoo Managing Consultant — Fri, 22 Sep 2006 22:55:00 +0000

Author: RP news wires

Lean concepts are being extended throughout the supply chain by innovative enterprises according to a new Aberdeen Group benchmark study released this week titled "The Lean Supply Chain Report." For the study, Aberdeen surveyed more than 300 enterprises and discovered that early adopters of lean concepts have seen significant results. These results include cutting manufacturing and delivery times from several weeks to several days, and operating with virtually all inventories either in process or in motion while achieving delivery reliability that approaches 100 percent. According to Aberdeen, best-in-class performers are able to quantify the value of lean and measure their efforts towards initial investment with ROI at 33 percent.

Lean is a philosophy that espouses continuous improvement, the elimination of all forms of waste, and simplification / standardization of business processes. Its initial applications have focused on manufacturing processes. According to Aberdeen, the time has come to extend lean throughout the supply chain in order to transform from a "push" to "pull-based" model. Aberdeen identified the following as the top functional supply chain areas ripe for lean adoption:

· Supplier management and collaboration

· Supply chain planning toward demand pull

· Demand planning and demand pull lean supply chain processes

· Enterprise inventory optimization

Aberdeen further comments that enabling technology is key to orchestrate lean activities throughout the supply chain. Aberdeen recommends that lean adopters consider Web-based solutions, analytical tools and tools providing access to real-time data to further their lean supply chain efforts.

A Lean Supply Chain Manifesto

NK Khoo Managing Consultant — Fri, 22 Sep 2006 18:43:00 +0000

By Andrew K. Reese

In an age of extended global supply chains, when companies must be demand-driven and agile, what does Lean really mean?

[From Supply & Demand Chain Executive, August/September 2006] Lean has hit the mainstream — sort of.

In a report issued earlier this year, Boston-based technology consultancy AberdeenGroup wrote that fewer than one in five manufacturing enterprises (18 percent) have fully embraced and implemented Lean Manufacturing principles. Nevertheless, 90 percent of the manufacturing executives surveyed said that their enterprises are committed to Lean and pursuing the well-documented benefits that Lean can yield, according to "The Lean Benchmark Report."

But with Lean becoming widely accepted — if not yet widely adopted — in both discrete and process industries, the question arises, "Is Lean Manufacturing good enough anymore?" If your competitors are all reading the same business books and attending the same conference sessions explaining how to do Lean on the plant floor, will just doing Lean within the "four walls" of your enterprise still give you a competitive advantage? Or is it merely the cost of entry into the market these days?

The time is right, it seems, to take Lean outside your company. It's time for Lean Supply Chain.

Necessary, But Not Sufficient

Of course, Lean Manufacturing has continued to prove its value over the years. For example, a study released in April by Manufacturing Insights, an advisory firm headquartered in Framingham, Mass., showed that companies with high levels of maturity in their Lean initiatives (as well as their Six Sigma programs) are achieving significant benefits and competitive advantage. "Lean companies are growing revenue more rapidly, at higher profit margins and with more productive asset usage," write Bob Parker and Jay Holman, authors of the report, "Lean Six Sigma, 1Q06 Update: Lean Continues to Show High Performance."

The Manufacturing Insights report included a case study that showed how DuPont was combining Lean with Six Sigma and the Supply Chain Council's Supply Chain Operating Reference (SCOR) model to sustain momentum in its productivity improvement. In fact, Lean has always been about the supply chain to some extent. In the 1980s, when the U.S. automotive sector began implementing just-in-time production based on Lean principles derived from the Toyota Production System, a major focus was "pulling" parts and assemblies onto the production line just at the moment they were needed. Building a smooth flow of material along a streamlined value chain to eliminate waste necessarily involved suppliers, who were expected to support the OEMs' Kanban replenishment initiatives.

But the focus in the automotive industry's Lean initiatives remained on optimizing within the OEM's plant. Stephanie Miles, who is vice president for commercial services at global trade management solutions provider Management Dynamics (East Rutherford, N.J.), offers a simple explanation for why this kind of internally focused Lean is necessary but no longer sufficient to compete in today's "supply chain vs. supply chain" market. "Lean can help you optimize and save five minutes out of the manufacturing process, but if it gets lost in the supply chain, you might lose five days in the delivery cycle time," says Miles. In other words, all the Lean Manufacturing in the world won't save you if you don't have your value chain in order downstream to your customer and back upstream from your suppliers. If your suppliers are holding excess inventory on a just-in-case basis to ensure that they can meet your just-in-time mandate, the cost of holding that inventory ultimately is going to get factored into the total supply chain cost for the finished product.

What Is Lean Supply Chain?

One of the challenges in discussing Lean Supply Chain is coming to an understanding of what exactly that phrase means. The problem is that while Lean Manufacturing has been fairly well defined as a strategy for eliminating waste through continuous improvement programs, Lean Supply Chain still means different things to different people, depending on their rank and role in the supply chain, according to Gary Latham, an APICS-certified, 20-year veteran of the automotive and transportation industries. Latham currently is director of industry marketing in the Automotive Group at WhereNet (Madison Heights, Mich.), a provider of radio frequency identification (RFID) and real-time location systems for tracking and tracing assets in the supply chain.

It's really a matter of which metrics matter most to any given player in the supply chain, Latham says. "For example, if you're in charge of materials at the plant, your key metric is that you have inventory available for your production schedule, and a secondary focus would be not having too much or too little inventory. If you're the person in charge of the inbound and outbound yard at the plant, you're worried about managing all the inbound trailers, having high asset utilization and velocity in the shipping yard, and high productivity in the work force. If you're a shipper, you want to make sure that a trailer shows up on time to pick up your materials and gets it to your customer on time so that you don't get penalized, and that your materials get there undamaged."

A common theme does run through these different perspectives, however: the elimination of waste. As in Lean Manufacturing, practitioners of Lean Supply Chain focus on eliminating physical waste (in the form of inventory) and process waste (which could be, for example, unnecessary steps in a value chain or time during which assets or goods are unnecessarily idle). But unlike the internally focused Lean Manufacturing, Lean Supply Chain focuses on driving waste out of the entire value chain for a product. "To have a truly Lean supply chain, you have to go outside your four walls," says Dominick Corigliano, vice president of sales and marketing with Supply Chain Consultants, a Wilmington, Del., provider of software and services for supply chain planning and forecasting. "You have to reach out to your suppliers because there are going to be constraints present at both your suppliers and your customers."

The Relationship Challenge

Corigliano says that a truly Lean supply chain is one that is fully optimized for profitability. His colleague, Sujit Singh, chief operating officer at Supply Chain Consultants, adds that "fully optimized" means that all the parties in the supply chain not only are implementing Lean principles, they also are reaping the rewards. "When a big company directs the terms of its relationships with smaller suppliers to its own benefit, that is not a truly collaborative relationship," Singh says, "but Lean Supply Chain requires a true relationship where there actually is benefit for both sides from operating Lean." Singh is pointing to the principal challenge in implementing Lean Supply Chain: Building the right kinds of relationships with all the right partners to support Lean requires both a great deal of coordination within the supply chain and a highly collaborative attitude toward one's suppliers.

Relationship-building is necessary in Lean Supply Chain because of the data-gathering and -sharing requirements necessary to do Lean. Companies need significant amounts of data to understand the current state of supply chain processes between them and their partners; to build "as is" and "to be" models of the supply chain; to uncover gaps or redundancies that create waste; to track progress toward implementing Lean and to ensure that they are optimizing fully across the supply chain rather than isolated segments; and to monitor re-engineered processes for continuous improvement. Coordinating the collection of all that information alone represents a significant hurdle to doing Lean. "Companies are struggling with how they can coordinate with hundreds of trading partners to aggregate all that data together — it's just an enormous task," agrees Management Dynamics' Miles. She recommends breaking a Lean initiative into incremental projects with separate sets of partners, rolling the initiative out over time rather than taking a "Big Bang" approach, as a way of handling the coordination issue.

A second aspect of the data challenge is simply agreeing on the metrics that partners are going to measure and share. Picking the right metrics is critical to ensure that one company is not optimizing to its own benefit and to the detriment of its suppliers or customers, explains Sridhar Tayur, CEO of Pittsburgh-based SmartOps Corp., a provider of supply chain and inventory optimization solutions. "There are many partners involved, and their metrics are different than yours," Tayur says. "Your metric might be inventory turns, but that could be a secondary metric to a dealer that focuses on on-time service for his customers. If your focus on inventory turns forces him to jack up his inventory, in the end the whole supply chain becomes 'fat.'" To address this issue, Tayur urges companies to work collaboratively with partners at the outset of a Lean initiative to establish a set of metrics that will truly reflect the efficiency of the supply chain as a whole.

Building Trust

That level of collaboration, however, may require that companies rethink their relationships with their partners. "Communication and sharing of information really is one of the keys to eliminating waste in the whole supply chain," says Darren Dolcemascolo, senior partner with EMS Consulting Group Inc. (Carlsbad, Calif.) and author of Improving the Extended Value Stream: Lean for the Entire Supply Chain (Productivity Press, 2006). "But you have to overcome the usual paradigm of adversarial relationships with your suppliers. Because once you start talking to suppliers about letting you see and understand their processes, they're going to say, ‘Hey, we don't want you in here looking at our process. None of our other customers are doing that.' It's difficult to overcome that, but you have to start by building trust with all the suppliers in the value stream."

Ron Nussle, Jr., C.P.M., who is president of ICR Enterprises, a Union City, Calif.-based procurement and supply chain consultancy, urges companies to apply the Golden Rule to their relationships with suppliers when working with them on Lean or any other initiative. "If your supplier thinks that you have its interests in mind as well, it will be more willing to work with you on continuous improvements and to make investments that help give you better quality, cost, service and on-time delivery," says Nussle, who is co-author, with Jim Morgan, of Integrated Cost Reduction (Reed Business Press, 2004).

That sounds like common sense, of course, but Nussle, who went through extensive supply chain transformations at Honeywell Aerospace, Cessna Aircraft Co. and Lam Research Corp., says it's all too easy to start out with best intentions and then slip back into the "take the savings and run" mentality as an initiative progresses. "You have to keep thinking about what your suppliers' business needs are and how they match your business needs," he says.

One best practice that Management Dynamics' Miles recommends for ensuring consistent alignment of metrics and goals among supply chain partners is to institutionalize regular forums to review the performance of the supply chain as a whole, as well as each individual partner's performance against agreed metrics. The goal, Miles emphasizes, is not to beat up one side or another for failing to meet any specific metrics, but to examine root causes and share best practices for getting that metric back on track. "You really need to engage with your partners to improve the process together rather than just pointing out which metrics were off the plan," Miles says.

The Case for Lean

Ironically, even as economic forces are pushing increasing numbers of companies to pursue Lean Supply Chain initiatives, other macro trends are making it increasingly difficult to be successful with such projects. Colin Snow, vice president and research director with Ventana Research, a performance management research and advisory services firm based in San Mateo, Calif., points to increased global sourcing as one such factor. "The minute you go global, you've increased distance and lead times," Snow says. The greater distances make it that much harder to coordinate with suppliers and keep them focused on Lean goals. The increased lead times force companies to constantly make trade-offs between different transportation modes: Putting your goods on a plane costs significantly more, but it reduces the idle time that the goods are in transit, whereas ocean freight costs less but can increase the overall amount of inventory in the supply chain and certainly increases the time that you're holding the inventory.

Colin Snow, vice president and research director, Ventana Research

Still, Snow believes that the imperative for companies to become more agile and flexible — so that they can respond more quickly to changes in demand — is making Lean Supply Chain a mandatory initiative for enterprises. "The consumer is more fickle, and demand is becoming more and more variable, and meanwhile, nobody wants to hold the inventory," he notes. That means that companies sourcing overseas must ensure that their suppliers are running as part of an integrated Lean supply chain, getting parts and products to the dock on time so that ocean freight is a realistic option. It also is true that some companies are revisiting their decision to move their supply base offshore and are instead "near-shoring" some portion of their operations back to nearby countries or domestic locations to meet the most volatile demand.

Advocates of Lean emphasize that it is a long-term, ongoing project, a journey, if you will. Lean Manufacturing can be hard enough to implement well because of the requirement to bring multiple functions together from across the enterprise to agree on a universal set of strategies, goals and metrics. Lean Supply Chain only increases the complexity and the difficulty. As WhereNet's Latham says: "These Lean Supply Chain theories have been around for a long time, and people have thought these things through and produced reams of data on how to do it. But the issue isn't that we don't have any ideas on how to do it. The issue is that there are too many parties in the supply chain that have to all agree."

Of course, if it were easy, anyone could do it, and the competitive advantage of doing Lean Supply Chain would disappear, just as the benefits of Lean Manufacturing are diminishing over time as more companies embrace it. For the time being, however, Lean Supply Chain still holds out the promise that it can provide a competitive edge to those enterprises willing to make the investments, and the changes, necessary to begin the journey. Easy? Not a chance. Rewarding? Most likely. A necessity? Absolutely.

"Little miracles" in wholesale distribution

NK Khoo Managing Consultant — Tue, 12 Sep 2006 13:55:00 +0000

By Howard Coleman
Industrial Distribution September 7, 2006

When athletes train, they focus on the fundamentals, first and foremost. They go through a series of concentrated efforts to trim fat, increase flexibility and hone their efforts. The end result is a lean, agile body—ready to take on the rigors of competition.

A similar process should apply to all aspects of wholesale distribution. In those organizations that “get lean,” management works with its team of employees to develop a tightly coordinated system—one that is agile, synchronized and responsive to customers. When put into action, “lean” allows companies to serve customers faster, with less space and inventory, lower transaction costs and greater accuracy.

If “lean” is an approach that appeals to you, understand that it will not be an overnight process. You will need to re-evaluate your way of thinking, your management style and most likely your processes.

A series of processes based on successful lean and continuous improvement implementations have paved the way toward a new approach to performance improvement. These are essential to success, both across the organization and for long-term results, in order to improve key company metrics such as order fill rates, delivery costs, warehouse transaction costs, and inventory levels.

The lean and continuous improvement process is an extension of the lean manufacturing concepts that have long provided a framework at giants such as Toyota. Lean thinking concepts can be applied to a variety of sectors such as warehousing, distribution, retailing, order processing, sales, quoting, and customer service.
The best starting point is to recognize that only a small fraction of the total time and effort in any organization actually adds “value” for both internal and external customers. We’ve found that often as much as 60 percent of the activities performed add no value at all. Eliminating the non-value-added activities is the greatest potential source of improvement in a wholesale distributor’s performance.

The reduction of non-value-added activities has to be pursued throughout the whole organization and its departments. Only then can a wholesale-distributor understand the real cost structure contained within the “value stream” and focus on optimizing the whole.

Lean thinking is exactly what it implies: the conscious, focused effort to objectively examine one’s own workplace. The goals are searching out waste, increasing productivity, lowering total cost and increasing throughput. As part of this search, one must look for evidence of bottlenecks, which limit output, create unneeded inventory and manpower, and get in the way of smooth, accurate and timely operations.

Bottlenecks may seem obvious and easy to spot. But many are hidden. What we assume to be a bottleneck may really be an “unconstrained resource,” where output is actually thwarted by a complex or slow process. It may not necessarily be a physical impediment, just an old practice taken for granted, or a bureaucratic or procedural issue.
Using lean thinking as a tool to assess one’s own shop often generates surprising outcomes and can turn constraints into constructive paths for change.

The starting point
New relationships are required to eliminate intra- and inter-company waste and to effectively manage the value stream. Activities across the company need to be better synchronized. Instead of managing workload through successive departments and organizations, processes are reorganized so the product or service flows without interruption.
This requires first focusing on the fundamentals and re-engineering the individual processes, which become significant as the individual improvements are linked together.

Before heading to where we would like to be, establishing baseline measurements is a key. For instance, if inventory accuracy was an issue, we measured the percent of line items accurate from recent inventories. This way, we had measurements to compare to as we became lean.
Then we introduced “kaizen,” meaning gradual and orderly continuous improvement, another innovation from Toyota. Our teams broke down each and every warehouse and distribution center activity, mapped the processes to examine each one for value, and began to identify the barriers to improvement.

Team consensus determined priority. In some cases, we did allow “low hanging fruit” to be given higher priority so the team would have an opportunity for some quick wins. Among the first barriers identified were issues such as:

• Lack of personnel training, cross training, and teamwork
• Too many storage locations for the same product
• Poorly sized storage locations
• Fast-moving products not easily accessible and poorly located; i.e., long pick-paths
• Poor vendor/transportation, delivery scheduling
It is not unusual for each team to be able to come up with 30 to 40 or more barriers.

For each of the barriers, in priority order, the team developed corrective actions. As solutions were sought, tried and found to be successful, the “kaizen” approach resulted in several “little miracles.” These individually, and then collectively, had significant positive impact on overall performance:

• Changes in warehouse storage
• Re-slotting inventory in order to shorten picking travel time
• Rearranging some of the footprint of the warehouse facility
• Multiple order picking process capability
• Personnel assignments and work hours

In very few instances, significant capital investment was required. Where warehouse productivity was the issue, increases in picking productivity were 45 percent to 50 percent. Inventory accuracy would jump fairly easily and quickly to 90 percent when the identified root causes were eliminated. Most companies continue to work towards an objective of better than 98 percent accuracy.

The participants quickly recognized that the quality of company life improves when you share ideas, implement successful change and then obtain results. Some companies began to roll out this lean approach to other areas of their organization. They addressed issues related to improving the flow of goods from suppliers, including inventory replenishment cycle time, order quantities, and transportation.

It is difficult to obtain leading edge performance without technology. But if you are tempted to just add technology, you haven’t solved anything. While there is certainly nothing wrong with using appropriate technology, you will find that the processes must be figured out first. Only then can it be determined how the technology will help.

Your company’s mindset
For a successful lean approach, the mindset throughout your company needs to be one of challenging existing practices. A lean approach is an acknowledgement that someone can figure out a better way. It’s a road of discovery to understand operational parameters and maximizing flow.

Remember to understand the importance of the organization in the process and that achieving a lean environment takes time. A true lean-thinking organization doesn’t happen in a straight-line fashion. It’s a combination of all the little miracles that will fit together to achieve service excellence and lower total costs.

Suppliers join the design huddle

NK Khoo Managing Consultant — Tue, 12 Sep 2006 10:30:00 +0000

Teamwork is very important in the supply chain at United Technologies Corp., especially when one of the company's divisions is about to design a new jet engine, an air-conditioning system or a new high-tech elevator.

By James Carbone
Purchasing
September 7, 2006

Management at UTC knows that having a leading-edge design is not enough, so purchasing and suppliers get involved in design early through the 3P production-planning process.

“It is a one-week event that really lays out requirements in terms of manufacturing, logistics and design and gets everyone on the same page,” says Leon Veretto, director of operations analysis (supplier development). The product, its specifications, performance and cost, quality and targets are discussed. The idea is to make sure the product launches successfully.

“The 3P process is really attempting to mistake-proof a lot of different things, including the robustness of our design and the robustness of our supply chain,” says Scott Singer, director of supplier management.

Scott Singer: "We outline our expectations of the supply chain. We would like to see some cost sharing."

Purchasing helps select the suppliers that are involved with the 3P. Suppliers must have a needed technology and manufacturing expertise as well as meet UTC's quality and cost goals.

Purchasing's involvement in 3P is only part of its involvement in new product introduction. Purchasing also helps select suppliers and involve them with design even before the 3P process begins. Purchasing also evaluates potential new suppliers, especially in Lean manufacturing techniques, and helps them develop through a unique, innovative program called Operations Transformation Leaders (OTL).

“Procurement helps bridge our design community and supply base,” says Singer. “Procurement starts in the preliminary design phase when they start to scope out the high level sourcing plan for the products,” he says. That function is done by “strategic sourcing folks within our supply management organization who look at supplier selection,” he says.

Know thy supplier
The job of strategic sourcing specialists in supply management is to understand the supply chain capabilities of suppliers and to facilitate a dialogue with them and help determine which suppliers should be involved in new product development.

“In the early conceptual design stage before we award business we will bring in suppliers, in some cases competitors, to outline high-level objectives of the projects,” says Singer.

This early involvement by suppliers has become important, too, because many of UTC's new programs require significant investments by UTC and suppliers.

“We outline expectations of the supply chain. We would like to see some cost sharing,” says Singer. “Our expectations are that they view nonrecurring engineering and hardware development as an investment in the platform. In other words, we want free test hardware to be part of the co-investment of our tier one supply base,” he says.

Singer notes that UTC is asked by its customers such as Boeing and Airbus, for the same type of co-investment.

These early sessions with suppliers will help UTC determine which suppliers should be considered.

“We want to quickly get to the point of who do we believe the players are that we want to heavily engage with on 3P,” says Singer. “At that point, we are making a significant commitment with the supplier on the design and test of the program.”

No guarantees
Even though a supplier is selected to participate in 3P, it is no guarantee the supplier's products will be on the bill of materials for a new UTC product. “Suppliers may be switched out during the process,” says Veretto.

“In the 3P process, we have found suppliers that may have stood up and said 'we can embrace all these philosophies,' but we discover they did not have the management systems in place to meet our requirements, so we had to make some decisions and swap some of new tier-one suppliers,” he says. “It's much better to have this flushed out in the early phase than after you are launching production purchase orders.”

UTC often uses suppliers it has used in the past in the 3P process. “We like to work with our preferred legacy suppliers that have proven themselves on previous platforms,” says Singer. “However, we are always looking for a value proposition that will help us be more competitive in the marketplace.”

In some cases, UTC has to use new suppliers because of a transition to a new technology. An example is the Gen2 elevator developed by UTC's Otis Elevator division based in Hartford, Conn.

“We essentially created a new supply chain for it,” says Singer.

He said new suppliers were necessary because instead of using wire rope in the elevator, the Gen2 uses flat-coated steel-belt technology, a gearless machine and a permanent magnet motor to power it.

“It was a joint effort between engineering and procurement in identifying and choosing new suppliers,” says Martin Weichhardt, director of supply chain management at Otis.

He says finding a supplier to develop and manufacture coated steel belts was key to the success of the Gen2 elevator.

“The coated steel belt has wire strands, molded into a polyurethane type of material. Using the belts rather than wire ropes allowed us to reduce the weight of the elevator tremendously,” says Weichhardt. “A big part of the weight of an elevator is the wire rope itself, which is a steel cord, and there are usually a couple of wire ropes per elevator.”

Taking out weight allowed Otis to make an elevator that didn't require a machine room. Instead the electrical controls of the elevator are mounted on top of the elevator cab.

Otis considered a number of suppliers for the steel belts, but chose ContiTech of Hanover, Germany because of the company's expertise in the technology and its manufacturing and design capabilities. Later, Otis developed a second source, Brugg Group in Switzerland.

When UTC needs to change suppliers and qualify new ones, it evaluates them in two ways. Like many businesses, it has a standard supplier assessment process where suppliers are evaluated on quality, financial stability and manufacturing capability.

“But we have also developed a Lean assessment tool where we go to into a supplier with a series of questions and score them in terms of Lean manufacturing,” says Veretto.

“We look at quality systems, flow in shop, safety, leadtimes, and capacity. There are eight different elements that we score them on. We look at their management and their competency in terms of Lean and manufacturing,” he says.

Singer says other considerations include a supplier's engineering capabilities and a continuous improvement philosophy. “Are they a Six Sigma shop for example? Do they have a type of Toyota production system or a derivative of it?”

Based on that assessment, UTC determines if a supplier can “come up to speed” to meet the requirements necessary to be a UTC supplier.

If the supplier has a weakness, UTC will work with the supplier to improve with OTL teams.

“OTL teams are skilled in Lean and they work with a supplier's specific issues,” says Veretto. OTLs will do value stream mapping at suppliers, examining their processes to identify waste and find ways to eliminate it.

Many new suppliers, especially those in emerging markets, may have low-cost manufacturing, but lack robust quality systems and OTL can work with suppliers to improve those systems.

“In emerging markets, we are making significant investments in technical assistance because suppliers don't have requisite quality systems or sometimes even business systems to deal with large multinational corporations like UTC,” says Singer.

OTL, 3P and early purchasing and supplier involvement is paying off for UTC. It is reducing its number of suppliers and parts on platforms and speeding up assembly time.

Case in point: the Pratt & Whitney 600 jet engine, developed in 2005 and used in Cessna, Eclipse and Embraer planes. UTC programs helped to reduce parts count on the engine by 50%, reduce the number of suppliers from 110 to 25 and cut assembly time from eight days to eight hours.

Elements of Excellence
Involve suppliers early
Evaluate suppliers on Lean, among other criteria
Help suppliers develop themselves

The goals of 3P
Deliver customer required design quality.
Reach production volume for expected demand.
Hit target date of market availability.
Attain target cost.

Supplier tool reduces risk for UTC
While UTC works closely with suppliers, it is no guarantee that the supplier will be successful in the marketplace and continue to be financially healthy. To monitor suppliers' financial performance, UTC uses an online tool that sends up early warning signs if a supplier starts to get into financial hot water.

UTC uses a risk management tool called SBManager, developed by Open Ratings, a Dun and Bradstreet company.

Leon Veretto: "Operations Transformation Leader teams are skilled in Lean and they work with a supplier's specific issues."
“It is a pattern-recognition model,” says Leon Veretto, director of operations analysis. “It looks at past bankruptcies of suppliers and the events that lead up to the bankruptcies and patterns them in terms of three months before and six months before. It analyzes the types of things that were happening with the supplier.”

He says UTC monitors 25,000 suppliers with this tool. “When a supplier starts replicating a pattern that is consistent with other companies that have gone bankrupt, it gives you an early alert,” says Veretto. “It gives you a heads-up months before there is an issue and you can intervene.”

Intervention can involve talking with the suppliers about the financial issues and helping the supplier correct them or dropping the supplier from a project.

UTC has used the tool to prevent delay of launching of a new product.

Scott Singer, director of supplier management, said a couple of years ago a new supplier was selected because the supplier had a new high-speed machining technology for helicopter frames. “We had selected this supplier because the supplier was new and had differentiated itself with the technology,” he says.

“Things started to go badly with the supplier and the tool alerted us that the supplier was in financial trouble. It gave us a six to eight week advantage over other customers of this supplier to take corrective action,” he says. UTC found another source and the supplier went bankrupt.

Jim Lawton, vice president of marketing for Open Ratings in Waltham, Mass., says about 40 companies use SBManager and it has a success rate of 92% at predicting bankruptcies of companies six months ahead of time.

He says the tool identifies supplier problems, such as failing to pay their own suppliers, legal issues and problems meeting government and environmental regulations.

Jack be nimble

NK Khoo Managing Consultant — Sat, 02 Sep 2006 17:16:00 +0000

Magazine Article, Source : The Manufacturer US
Zone : World class manufacturing
Published : 29 Aug 2006 21:51

Agile manufacturing represents a moving target well worth hitting, says John Harney. Nobody agrees on its scope, but everybody agrees its benefits are indispensable

The old story about the blind men defining an elephant by feel certainly applies to agile manufacturing these days. Every consultant you talk to claims a different aspect of agile most drives its value. In general, the more traditional camp emphasizes agile as a reactive strategy – or the use of various technologies like production control, simulation, scheduling, MES and ERP to enable plants to reconfigure their production lines more quickly and flexibly to meet changing customer demand for product. The more contemporary camp stresses its proactive aspects – the use of those technologies to change the configuration of production lines that are driven by rapid product design changes, especially for products with short lifecycles.

What’s common to, but limited about, these approaches is that they are not holistic – they do not take into account that agile practices can optimize the operations of entire supply chains. As agile has matured as a practice and it’s enabling technologies have improved in turn, agile can increasingly eliminate waste, cut costs and improve flexibility in getting parts from suppliers, reengineering the production line, and making distribution more effective in driving regional sales.

So agile, which derives its value from enabling flexibility, often complements lean, whose value, it’s been traditionally thought, is in cutting cost. In other words, their applicability and benefits often overlap – making a production line more flexible often cuts waste and cost. Some would argue that agility is, in fact, a result of lean practices. In their minds, agility, not savings, was always the preeminent goal of the first practitioners of lean.

So it’s probably most instructive for customers trying to implement agile to take into account all of these emphases and apply the ones most relevant to their situation, because the resulting sum of benefits will be greater than if they myopically focus on either maximizing the efficiency of execution or optimizing the flexibility required for innovation.

Ralph Rio, research director, continuous improvement programs, ARC Advisory Group, is a proponent of proactive agile. Personal computers, for instance, have product lifecycles as short as 12 months because the speed of chip improvements from different vendors is continually accelerating. Design changes, in turn, drive production line changes. “You have to simulate the manufacturing processes,” explains Rio, “to make sure the product is manufacturable within reasonable cost restraints.” So agility for Rio is limited to design and production.

Though he concedes that agility enables shorter product lifecycles, Bill Swanton, vice president of research, AMR Research, stresses that variability in demand is the primary precondition for an agile strategy. “Demand is inherently unpredictable,” he insists, and “if you can’t respond to demand, …either you overproduce and you end up with excess and outmoded inventory you have to sell at a loss, or you underproduce and somebody else gets those orders. In either case, you end up with less margin than you could have had.” In short, not reacting fast to market opportunities or obstacles with the right amount and kind of product cuts into your profitability.

Either way, better information about design or demand leads to more agility in production – or shall we say, more innovative production, which yields leaner overall execution in the supply chain.

Dan Miklovik, managing vice president, The Manufacturing Practice, Gartner, however, argues that whether design or demand drives agility more depends on the business sector. “Agile in the automotive industry is a lot different than agile in the consumer electronics industry,” he points out. In the latter, he agrees, changing design is often critical for differentiation and, thus, short product lifecycles require more agility in reengineering the production line. In the auto industry, where product lifecycles are longer, however, rapid changes in design are less critical than the vagaries of customer demand. For example, he explains, “when gas went way up, sales of SUVs dropped way down, so [car manufacturers] had to shift their production mix” and get more agile with different parts like drivetrains without four-wheel drive and different production lines to accommodate different operations.

Miklovik, therefore, is more relative, but also more holistic, in his approach to agile. Not only does agility’s impact change per business sector but, he maintains, its impact is much greater throughout the entire value chain than Rio or Swanton would allow. Swanton admits that demand drives changes from production back – “you have to be more agile with your resources [like] production capacity, inventory, capacity of suppliers and contract manufacturers” – whereas Miklovik holds that design or demand can also have an impact from production forward – creating the need for more agile distribution to the customer. For instance, in food and beverage, he says demand for beer goes up in regions where the weather is hot, so manufacturers have to monitor climate and distribute more product to those regions more likely to buy it.

Because of short product lifecycles, fashion and electronics used to lead the way, but Miklovik contends that agile is permeating every industry now, even process manufacturing. For instance, by 2010 China predicts it will have as many cars as the United States, he says, so the increased demand there for gas is forcing oil and gas companies to be more agile long-term to serve that market. The recent hurricane in St. Louis, on the other hand, knocked out oil suppliers there, he adds, so oil companies had to quickly adapt distribution to serve that disaster zone.

He also explains that, with increasing use of agile, users are beginning to see that agility, not savings, was why Toyota first promoted lean manufacturing. Since real estate in Japan is so sparse, Toyota could not build out new plants and production lines to make cars for a global market that required, say, steering wheels on the right, so they reengineered their existing lines to support more model platforms and modifications which, as a by-product, drove out waste and cost. Westerners, with their quarterly revenue-driven thinking, seized on the savings benefit but overlooked the agility one. This insight, he claims, is leading more manufacturers to implement lean and agile programs hand-in-hand.

Agility is more necessary now, says Swanton, because “interprisewide” software platforms like ERP have changed the culture of formerly more stove piped department-specific thinking. For instance, plant managers might still maintain that efficient execution is the result of less change in production lines, but will change under pressure from sales when the latter presents real-time global sales figures that certain models are selling better in specific regions heretofore unavailable before ERP systems. The enterprise priority for overall profitability therefore now trumps departmental execution performance priorities.

Also, vendors offering ERP, MES, scheduling, production simulation and control and other software now “understand that they need to enhance their products to support much greater model variation, improved workflows, etc,” says Miklovik, “which obviously requires better data from the actual operations, that is, reaching down into the factory floor.” Swanton agrees: “the most important capabilities in products now are those [like real-time scheduling] that give visibility and local decision-making based on their information.” Therefore, adaptability, not just lean execution, has become a sine qua non for contemporary manufacturing.

Creating & Managing A Lean Supply Chain

NK Khoo Managing Consultant — Fri, 18 Aug 2006 19:01:00 +0000

Tuesday, August 15, 2006
By: Furniture World Magazine

Even smaller home furnishings retailers can cut wasted time, inventory and costs by implementing a “pull” approach to supply chain management.

By: Tom Craig

Lean supply chain management is not just for manufacturers who practice lean manufacturing. Nor is it just for large retailers. It is a practice that can benefit small and mid-size home furnishings retailers, wholesalers, distributors and others.

WHAT IS LEAN SUPPLY CHAIN MANAGEMENT?
Lean is how a properly designed and operated supply chain should function. A lean supply chain process is one that has been streamlined to reduce and eliminate waste or non-value added activities along the supply chain flow associated with the movement of products. Waste can be measured in time, inventory and unnecessary costs. Value-added activities are those that contribute to efficiently placing the final product at the customer’s door. The supply chain and inventory contained in the chain should flow. Any activity that stops the flow or that touches inventory should create value.

WHAT MUST BE DONE TO BE LEAN?
Supply chains tend to accrue waste and non-value added activities for many reasons, both internal to the company and external. Regaining lean supply chain efficiencies may mean addressing many of the same issues that created the problems of extra and unneeded time, inventory and costs.

The ideal approach is to design the perfect supply chain and fit your company’s operation onto it. Supply chain management is meant to reduce excess inventory in the supply chain. It should be demand driven, built on the “pull” approach of customers pulling inventory in a flow as required, not by suppliers pushing inventory. Excess inventory reflects the additional time spent within the supply chain operation. So the perfect supply chain is lean, having removed wasteful time and inventory.

A lean supply chain, with the pull, flows back from the store floor through to purchase orders placed on suppliers. Anything that delays or impedes this flow must be analyzed as a potential non-value added activity.

Increasing Efficiency of Warehouse Operations

NK Khoo Managing Consultant — Fri, 18 Aug 2006 16:56:00 +0000

By John Geary

Rugged PCs offer wireless solutions to warehouse inefficiencies

The challenge of responding to the threat of cheap offshore labor is not new to North American businesses. Nearly a hundred years ago, Henry Towne wrote about the need for increased efficiency and productivity:

We are justly proud of the high wage rates which prevail throughout our country, and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets, and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes.

Foreword to Frederick Winslow Taylor's Shop Management (1911)
Efforts to improve efficiency over the past century have often focused on the reduction of waste, defined as processes and resources that represent direct costs and opportunity costs but do not add any value.

The elimination of muda, the Japanese term for waste, is at the core of the Lean Manufacturing management philosophy promoted by Taiichi Ohno, the father of the Toyota Production System, also known as “Just In Time.” He listed “the seven wastes”: defects, transportation, human motion, waiting, inventory, over-processing and over-production — and an eighth waste, underutilized skill, was later added to the list.

Inefficient Warehouse Operations

At least the first four of these eight wastes are prevalent in current warehouse operations. “Many warehouse and distribution center operations continue to suffer from significant inefficiencies, as forklift operators waste time and resources hunting and digging because they lack adequate information on the location of items and the optimal route for putaway, replenish and retrieval actions,” says Michael Giuliano, the president of Meridian Research and Development LLC.

Giuliano has advised automobile manufacturers and large consumer goods producers on the application of Lean Manufacturing principles to warehouse logistical operations. “We all know what it is like to lose your keys and have to search around the house for them. Imagine the inefficiencies and frustrations involved when forklift operators waste time searching around the warehouse. It is not unusual for our analysis to determine, for example, that 2.5 minutes are wasted during the average retrieval cycle, and that figure is multiplied by hundreds or thousands of cycles per week.”

On the opposite end of the efficiency spectrum, newly constructed high-tech warehouses are designed from the bottom up to automate most or all operations. Elaborate cranes, conveyor belts and robotic systems are coordinated to perform put-away and retrieval operations with little or no human intervention. These operations are highly efficient, but the high capital requirements make them cost-prohibitive for most types of warehouse operation.

Equipping Forklifts with PCs

A more practical and affordable solution for many new and existing warehouses is to empower operators by installing an onboard computer on each forklift, making the location of items and empty storage space immediately visible.

Rugged PCs, with user-friendly touch-screen user interfaces connect to a warehouse management system (WMS) via a wireless local area network. Some more sophisticated WMS can indicate not only the location from which to pick, replenish and put-away, but also the optimal sequence of these events.

At the 900,000 square foot distribution center for City Furniture, in Tamarac, Fla., all 35 forklifts are equipped with fixed-mount rugged computers with flat panel LCD displays. “Our forklift operators perform at maximum efficiency, because they always have real-time access to the information they need,” according to Chad Simpson, City Furniture's Technical Support supervisor. “An optimized step-by-step routing scheme is displayed on their screens to guide them to their destination.”

The WMS is typically interfaced with an existing enterprise resource planning (ERP) system or accounting package. This provides an integrated method of automatically tracking inventory, processing orders, and handling returns. WMS is frequently implemented with automatic data collection using barcode scanners and the increasingly common radio frequency identification (RFID) tags, now mandated by Wal-Mart and other retailers.

“The implementation of a WMS along with automated data collection will likely give you increases in accuracy, reduction in labor costs and a greater ability to service the customer by reducing cycle times,” according to Dave Piasecki of Inventory Operations Consulting LLC, author of Inventory Accuracy: People, Processes, & Technology (2003). For some warehouse and distribution center operations, the more efficient processes and better utilization of storage space will also result in inventory reduction and increased storage capacity.

Time Saving

These benefits directly address the elimination of wastes at the core of Lean Manufacturing philosophy. Equipping forklifts with computers integrated with a warehouse management system immediately reduces the waste involved in transportation, human motion and waiting.

Shorter, more direct routing reduces travel time and, therefore, the demand for forklifts and the associated labor, capitol, maintenance and energy costs. Travel time is reduced because operators always know their precise destination. After a put-away, a warehouse management system can direct a forklift to do a pick at the closest available location in situations where like items may be stored in several different areas.

By giving operators better information about the location of items, human motion is also reduced: Operators no longer need to continually get on and off the forklift to check three or four labels before finding the location of the intended item.

The Japanese industrial engineer, Shigeo Shingo, famously explained that a bolt with 15 threads on it cannot be tightened until the last turn, and therefore the other 14 turns are wasted. This observation led to the development of fasteners, tools and methods designed for one turn, one-motion installation.

Similarly, the forklift operator provides a necessary function only when he or she picks the correct item. Any searching activity leading up to the locating and retrieval of that item represents a waste of time and resources — waste that should be eliminated. Thom Raddatz, the Warehousing Manager at Seaquist Closures of Mukwonago, Wis., estimates that he would need 50 percent more forklifts if he did not equip them with an onboard computer tied to their SAP software system.

Better Response Time

More efficient warehouse operations also means better response times (less waiting) for dependent production processes and for customer fulfillment. According to Raddatz, “Other departments at Seaquist Closures can request materials from a desktop PC, and that request immediately appears on the forklift operator's computer screen. When loading a truck for delivery to a customer, the forklift operator types in the PRO number (pick up record) and confirms that all items are loaded. Immediately, the billing process is initiated. If the customer calls a minute later, our customer service representatives can respond with up-to-date details about the shipment.”

Nicholas Hanke, the MIS Systems administrator at Minnesota Corrugated Box Inc. of Albert Lea, Minn., says that automated forklift operations using computers to help improve customer relations. “We have a number of customers that maintain inventory in our warehouse. By automating the record keeping of our forklift operations, our customers can use a Web interface to instantly check their own inventory levels.”

Shorter lead time not only provides better service, but it can also result in a reduction of inventory and floor space requirements.

Reduction of Defects

Shingo, the Japanese industrial engineer, is also known for his concept of mistake-proofing, or poka yoke, that he developed as part of the Toyota Production System. One example of such a behavior-shaping constraint is the shaping of the top-right corner of 3.5 inch floppy computer disks to ensure that the disk cannot be inadvertently inserted upside-down. Another poka yoke is the inability to remove a car key if the automatic transmission is not first put in the "Park" position, thereby preventing an unsafe parking condition.

Onboard computers connected to a WMS are poka yoke devices that reduce the incidence of retrieving and shipping the wrong item by matching the item with information on the item's location. The use of automated data collection (barcodes and RFID) virtually eliminates such errors and significantly improves inventory accuracy.

And operators are happy to give up the tedious and error-prone task of searching for items and manually checking and recording ID numbers. Onboard computers, with barcode and RFID readers, remove guesswork and force better habits, allowing workers to achieve higher productivity. Simpson of City Furniture says, “Some of our forklift operators do not use computers at home, but they really enjoy having state-of-the-art technology at work. The graphical user interface of the computer is easy to use, and it allows them to work smarter, not harder.”

WMS reduces defects in another way, by reducing the wasteful disposal of spoiled perishable goods. The WMS can automatically direct the operator to retrieve the particular units with the shortest remaining shelf-life, in a FIFO arrangement, without the operator having to engage in the time-consuming process of manually checking and comparing dates. Some companies shipping perishable goods will use FIFO for closer destinations and LIFO to overseas destinations with longer in-transit times.

Quantifiable Results

For these reasons, onboard forklift computers integrated with a warehouse management system provide a good return on investment for many traditional warehouse and distribution center operations. “These warehouse logistical systems produce results, especially in the area of labor savings, which are easily quantifiable and go directly to a company's bottom line,” according to Giuliano. “Giving forklift operators access to useful information technology produces success stories for Lean Management and Six Sigma programs, but you do not have to have faith in any particular management theory to recognize the excellent payback that can be achieved.”

Toyota's relationship with vendors is an important link in its success

NK Khoo Managing Consultant — Wed, 09 Aug 2006 02:54:00 +0000

Posted: Aug. 5, 2006

John Torinus

As the Toyota juggernaut continues to roll over U.S. automakers, it is instructive to remember that 70% of a car's parts are made by outside vendors, like those spread across Wisconsin.

Toyota isn't winning by itself. It's winning with its supply chain. There is a huge lesson from Toyota on how to manage supplier relationships.

Toyota passed Ford in July to become the second-largest automaker in the United States. It had passed DaimlerChrysler in the U.S. in April, and it is gaining rapidly on General Motors for the No. 1 spot across the world. Honda is also gaining rapidly on Detroit's Big Three.

That, of course, means that Wisconsin parts companies are working hard to break into the Toyota and Honda supply chains, not an easy assignment. None has given up on the Big Three, but everyone wants to be supplying the winners.

One of the big differentiators between how the Big Three operate and how the vaunted Toyota production system works is how they deal with suppliers. Toyota takes the stance that it competes supply chain against supply chain, so it works hand-in-hand with vendors. It's not just what happens in its body and assembly plants.

Advertisement

Taiichi Ohno, the production guru at Toyota, put it this way: "Achievement of business performance by the parent company through bullying suppliers is totally alien to the spirit of the Toyota production system."

Jeffrey Liker, who studied the Japanese company for 20 years and wrote the enlightening book, "The Toyota Way," said its suppliers become part of an extended family. In some cases, Toyota has an ownership stake in its suppliers.

Toyota is very demanding of itself - indeed, rigor top to bottom is the defining hallmark that Liker uncovered - and it's very demanding of its vendors. But it is also very supportive. If a vendor needs help or is failing, Toyota people descend on it until its basic processes are back under control.

It isn't fun, but it makes the vendors better, and it is a rare day that Toyota eliminates a supplier.

Most American companies are still stuck in the old-fashioned way. They use the big club to force price reductions, quality improvements or just-in-time deliveries. Threats of moving the business and intimidation are the major tools.

That, along with the loss of business with the Big Three, have been the major factors in the rash of bankruptcies and reorganizations in the auto parts sector.

Fortunately, some American companies have figured out that Toyota's approach works far better. Harley-Davidson and Kohler, for example, offer lots of help to their vendors.

A Harley expert recently came to Serigraph, free of charge, to teach us more about lean manufacturing. I was astounded to learn when he went to work on a part for a Harley competitor.

He didn't care that it was a competitor's part he was improving, because it improved the process for Harley parts as well. He helped our company become a better vendor.

Kohler offers similar free expertise for the asking.

When there is collaborative effort by customer and supplier, the gains far outweigh unilateral demands. It is almost impossible, for instance, for a supplier to win an engineering change on a blueprint that would benefit both parties and the end consumer, without the customer involvement.

Unfortunately, mutual effort is the exception rather than the rule.

Development of a supply chain becomes even more difficult in a global setting. Or as one expert on lean manufacturing put it: How do you do lean importing of components? Yet many American companies are bringing in parts on slow boats from China.

The answer usually is a supplier quality assurance (SQA) office in Asia. SQA representatives live in the plants of Asian vendors to make sure the quality measures up before the parts are loaded into a container.

Still, communications and relationships halfway around the world are never easy, and there are any number of horror stories about supply chain foul-ups that prove costly and sometimes even fatal.

It is logical to think that a well-managed domestic supply chain offers huge advantages to one stretched 10,000 miles.

The main issue remains, though, how the supply chains are managed. Toyota has proved beyond a shadow of a doubt that its supplier philosophy wins in the long term. Those original equipment manufacturers stuck in the one-way or the highway approach remain there at their own peril.

Supply and Da Man

NK Khoo Managing Consultant — Sun, 23 Jul 2006 19:52:00 +0000

Companies that green their supply chains can find savings galore
By Joel Makower

18 Jul 2006
How many light bulbs does it take to change a supply chain? In the case of Baxter Healthcare Corp., just three.

When Jenni Cawein, manager of corporate environmental health and safety engineering at the Illinois-based $9.8 billion health-care giant, arrived six years ago, she saw that the company was losing ground on waste. "I asked my boss, 'Who's working with purchasing?' It turned out it was nobody," she says. Cawein set out to build a case for integrating environmental criteria into the company's procurement process.

Show them the money.
Photo: iStockphoto.

"I asked what the purchasing department cared about the most," Cawein explains. "I did a lot of research, and of course they care about cost reduction, and had made certain commitments to reduce costs."

Armed with details about the department's goals, Cawein set up a time to address the purchasing staff. At that meeting, she offered an illustrative example involving three fluorescent light bulbs: one cost $1 and was expected to last 2 years; another cost $5 and lasted 8 years; the third cost $2 and lasted 2 years, but used 30 percent less electricity.

"When I ran the actual numbers, including real costs of electricity for all of our facilities around the world, plus labor and disposal costs, and showed them the data, their eyes just opened up," says Cawein. "I showed them that the cheapest bulb would cost us $50 million more than the most efficient bulb."

Cawein's message was clear: greening the supply chain is a strategic, bottom-line issue. Largely as a result of Cawein's light-bulb inspiration, Baxter has embarked on an effort to integrate environmental thinking into every aspect of supply-chain management.

Baxter is not alone in embracing supply-chain environmental management (though its effort may be one of the more ambitious). Companies in a number of sectors have been driving environmental thinking increasingly further upstream -- typically beginning with a handful of their biggest suppliers, and expanding those successes to smaller players.

Link Link, Nudge Nudge

In recent years, the supply-chain environmental management, or SCEM, movement appears to have gathered steam, and has given birth to some new industry and government initiatives. The U.S. EPA's Green Suppliers Network, a public-private partnership, aims to help suppliers and manufacturers eliminate waste, save money, and reduce their eco-impact. Members of the network -- including Abbott Laboratories, General Motors, GlaxoSmithKline, Herman Miller, Johnson & Johnson, Pratt & Whitney, and Steelcase -- focus on the root causes of waste, enabling them to decrease the use of toxic and non-renewable materials, use energy more efficiently, reduce labor costs, and promote greater employee participation in environmental-improvement activities.

At Baxter, SCEM isn't limited to buying light bulbs -- or, for that matter, to procurement itself. Its efforts extend from the manufacturing floor all the way to end users, primarily hospitals and doctors' offices.

Once Cawein helped her company's purchasing department understand the business value of SCEM, the next step was to bring manufacturing into the fold. Like many companies, Baxter has embraced the concept of "lean manufacturing," viewed by business gurus as being to the 21st century what "mass production" was to the 20th.

Lean manufacturing centers around the identification and elimination of waste. Its touted benefits are cuts as great as 50 percent in production costs, number of personnel, time required to get new products into the field, plus higher quality, higher profitability, and increased flexibility, among other things. In lean-manufacturing systems, waste-free, "continuous one-piece work flow" processes are highly reliant upon real-time supply-chain reliability. Lean manufacturing's focus on waste and procurement creates an attractive partner for SCEM: the former looks at things from a system-wide view, while the latter delves into the nitty-gritty process steps.

Baxter's supply-chain efforts extend downstream as well. The company's participation in another program co-sponsored by EPA, Hospitals for a Healthy Environment, has enabled it to better understand some of the end-of-life issues its products encounter inside health-care facilities. That, in turn, has helped Baxter work with suppliers to make changes in packaging and materials that reduce customer waste. In one case involving a medical-grade plastic that usually ended up in landfills, the manufacturer was able to get government funding to help develop a less-wasteful alternative. "I would never have dreamed," says Cawein, "that there was as much government seed funding for these technologies as there is."

If You've Got the Money, Honey, I've Got the SCEM

Efforts like Baxter's demand that companies already have in place a firm environmental commitment and some strong management systems. A benchmarking survey of large companies conducted several years ago by Business for Social Responsibility found that companies with leading supply-chain practices shared common organizational characteristics, including a strong commitment to environmental stewardship; a desire to serve as a model for their industry; clear, consistent, and frequent internal communication and communication with suppliers; ongoing supplier education; and continuous improvement through built-in feedback mechanisms.

Such qualities, BSR concluded, are what separate ad hoc, reactive approaches to supply-chain management from more holistic, strategic approaches like Baxter's.

Cawein will be the first to tell you that making such shifts isn't easy. "You've got to be persistent and patient," she counsels. "You're talking about culture change. It's going to take a while. What I tell myself is that as long as I'm making steps forward, I'm happy. I expect this [effort to improve] will never end if we do it right."

Learning how to talk with procurement folks is key, she says. "You have to focus on your own internal people who are responsible for suppliers first, and that will take you a while. Environmental people on their own cannot do this. They tend to talk in generalities, and purchasing people tend to talk in hard facts. When you talk about cost savings, you've got to be specific. That's the thing that really started to bring them over. It has to be quantifiable."

In the end, it's the economics, stupid. If you can convince the powers that be that there's a way to save money beyond the purchase price -- and then can show them that it comes out of a specific budget -- you can break through the purchasing department's traditional reluctance to change vendors or products, says Cawein. "You've got to show them the link and prove it to them. Once they understand that it's not funny money, they go out and start negotiating."

Lean SCM - More Essentials

NK Khoo Managing Consultant — Sun, 23 Jul 2006 19:07:00 +0000

Thomas Craig
Expert Author
Published: 2006-07-18

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-

1) Determine value from the view of the customer, not the view of the company.

2) Make the product and information flow.

3) Pull product; do not push it.

4) Manage toward perfection with continuous improvement.

CHALLENGES. 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.

LEAN TOOLS. 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.

CONCLUSION. 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.

Outsourcing: Supply-Chain Stretch

NK Khoo Managing Consultant — Sat, 17 Jun 2006 23:36:00 +0000

Manufacturers meet growing value-chain challenges with a little help from vendor partners.

Saturday, July 01, 2006
By Jill Jusko

Opportunity and challenge. Both are by-products of globalization for many U.S. manufacturers. New markets open both for finished goods and for the sourcing of raw materials and components -- but the supply chain stretches. Consequently, supplier lead times lengthen; the demand for their products remains now, now, now; and cross-border and international regulations add yet another level of complexity.

On a domestic scale, customers' demands for product on a just-in-time basis continue to challenge suppliers, while manufacturers remain in pursuit of ways to reduce the amount of inventory they carry.

To meet these challenges and opportunities, U.S. manufacturers look increasingly to their value-chain partners for assistance, both by outsourcing logistics efforts to third-party providers and by partnering more closely with their valued suppliers.

StorageTek de Puerto Rico, a company of Santa Clara, Calif.-based Sun Microsystems Inc. and a 2005 IW Best Plants winner, for example, holds approximately 70% of its inventory in its Supplier Logistics Center (SLC), a warehouse or inventory hub operated by a third-party provider and located less than one mile from StorageTek's manufacturing facility in Ponce. That third-party provider handles transactions related to incoming inventory from StorageTek suppliers and delivers inventory to StorageTek in response to pull signals from the manufacturing floor.

The SLC, which began operations late in 2002, is one component of StorageTek's comprehensive lean supply-chain effort driven by pull signals, explains Osvaldo Cruz, materials group manager for the Puerto Rico operations. Among its benefits, he notes, are a reduction in the number of warehouses StorageTek operates, reduced inventories as a result of the lean supply model, and more open space in the factory for additional production. The inventory in the SLC is owned by the supplier until StorageTek pulls it into production.

Additionally, StorageTek employs a third-party financing strategy for inventory received from a Far East supplier. The program temporarily transfers ownership of the inventory from the supplier to the third-party provider until StorageTek pulls it into production, allowing the supplier to get paid more quickly, yet relieving the manufacturer from the costs of carrying inventory. (A more detailed description of the trade payables program is available at http://www.industryweek.com/ReadArticle.aspx?ArticleID=11070.)

3PL Use Widespread

The use of third-party logistics providers is ubiquitous in manufacturing, with all signs pointing to a desire by users for even greater service offerings. The 2005 IndustryWeek Value-Chain Survey, for example, showed that more than half of respondents outsourced -- in whole or in part -- their inbound and/or outbound transportation, as well as customs and export-related functions. More than four in 10 manufacturers who participated in that same study, conducted with research partner IBM Business Consulting Services, also said they outsourced warehousing and distribution functions.

Add to that the results of a separate study, the 2005 Third-Party Logistics (3PL) Study, which showed that approximately 80% of North American survey participants employed third-party logistics providers. Manufacturers represented 70% of the North American respondents to that study, a 10th annual effort by Georgia Institute of Technology, with contributions from consulting firm Capgemini, global logistics provider DHL and technology provider SAP.

"Increased global sourcing is a major force in the use of 3PLs as formerly domestic companies start to learn about the complexities and capacity constraints and regulations involved in international commerce," comments Cap-gemini's Peter D. Moore, vice president, logistics and fulfillment/RFID. "As the need for visibility to inventory is extended beyond the enterprise and over long distances, many companies are seeking partners to help them."

Indeed, John Kivinen, director of supply-chain design, UPS Supply Chain Solutions Consulting Services, says global sourcing has meant increased business, such as "more shipments moving longer distances. This provides an increase in transport volume. But more than that, it increases opportunities to provide end-to-end global solutions that help to minimize the cost and risk that global sourcing creates."

And users want more services. According to the 2005 3PL study, "Although many 3PL providers satisfy user requirements around basic services, such as transportation or warehousing, users continue to identify ongoing development of capabilities as a key issue. The stated need for advanced supply-chain services and for organizations that can serve as 'integrators' has validated a 'strategic service' model in meeting -- and servicing -- the needs of 3PL users."

Results from the IndustryWeek Value-Chain Survey suggest that manufacturers might be well-advised to consider outsourcing their logistics functions. Indeed, survey respondents overwhelmingly reported that their outsourcing of transportation functions was effective in helping achieve business objectives. Nearly 93% identified it as effective, with fully 51% calling it "extremely effective." Similarly, nearly 88% of survey respondents who outsource their warehousing and distribution centers said such outsourcing was effective, with nearly 55% reporting that it was "extremely effective."

Partnering For Improvement

Is it outsourcing or is it partnering? At 2005 IW Best Plants winner Thomas & Betts Corp., Athens, Tenn., Operations, about 70% of raw material components is supplier-managed. It's a partnership between the manufacturing plant and the supplier, says plant manager Herb Bradshaw.

"Our suppliers are now able to monitor current on-hand quantities in our plant and plan their daily deliveries in 24-hour windows. We also maintain projected future demand by component part number based on a 13-week historical usage. This demand can be modified to accommodate any type of special sales scenarios," he explains.

Bradshaw says a once primarily manual system has evolved into primarily electronic inventory and materials management process. Five daily supplier-managed-inventory reports help suppliers plan and deliver stocks daily.

The plant manager said some job elements of internal material management employees have diminished or been consolidated as the supplier-managed inventory program has grown. However, "even though our suppliers are doing an excellent job, we still have responsibility to manage our end of the business," he says. In fact, the plant's materials and production departments were merged to create value-stream supervisors within the facility. Those supervisors still have full responsibility for planning, scheduling and supervising a complete product family. "The fact that our suppliers have become integral to our success through their shared responsibility and inventory management is a key element."

Multiple benefits have accrued as a result of the supplier-managed inventory program. Bradshaw says raw and component inventories have been reduced by nearly 70%; inventory accuracy is very high; stock outages have been minimized or eliminated; and the need for an annual physical inventory has been eliminated, saving about $35,000 each year.

When the chain breaks

NK Khoo Managing Consultant — Sat, 17 Jun 2006 23:30:00 +0000

The Economist , June 17, 2006 U.S. Edition

Being too lean and mean is a dangerous thing

IT BEGAN on a stormy evening in New Mexico in March 2000 when a bolt of lightning hit a power line. The temporary loss of electricity knocked out the cooling fans in a furnace at a Philips semiconductor plant in Albuquerque. A fire started, but was put out by staff within minutes. By the time the fire brigade arrived, there was nothing for them to do but inspect the building and fill out a report. The damage seemed to be minor: eight trays of wafers containing the miniature circuitry to make several thousand chips for mobile phones had been destroyed. After a good clean-up, the company expected to resume production within a week.

That is what the plant told its two biggest customers, Sweden's Ericsson and Finland's Nokia, who were vying for leadership in the booming mobile-handset market. Nokia's supply-chain managers had realised within two days that there was a problem when their computer systems showed some shipments were being held up. Delays of a few days are not uncommon in manufacturing and a limited number of back-up components are usually held to cope with such eventualities. But whereas Ericsson was content to let the delay take its course, Nokia immediately put the Philips plant on a watchlist to be closely monitored in case things got worse.

They did. Semiconductor fabrication plants have to be kept spotlessly clean, but on the night of the fire, when staff were rushing around and firemen were tramping in and out, smoke and soot had contaminated a much larger area of the plant than had first been thought. Production could be halted for months. By the time the full extent of the disruption became clear, Nokia had already started locking up all the alternative sources for the chips.

That left Ericsson with a serious parts shortage. The company, having decided some time earlier to simplify its supply chain by single-sourcing some of its components, including the Philips chips, had no plan B. This severely limited its ability to launch a new generation of handsets, which in turn contributed to huge losses in the Swedish company's mobile-phone division. In 2001 Ericsson decided to quit making handsets on its own. Instead, it put that part of its business into a joint venture with Sony.

This has become a classic case study for supply-chain experts and risk consultants. The version above is taken from "The Resilient Enterprise" by MIT's Mr Sheffi and "Logistics and Supply Chain Management" by Cranfield's Mr Christopher. It illustrates the value of speed and flexibility in a supply chain. As Mr Sheffi puts it: "Nokia's heightened awareness allowed it to identify the severity of the disruption faster, leading it to take timely actions and lock up the resources for recovery."

There are two types of risk in a supply chain, external and internal. As in the Ericsson case, they can conspire together to cause a calamity. This seems to be happening more and more often. It is not just that inventory levels are getting leaner, but the range of items that companies are carrying is also growing rapidly, points out Ted Scherck, president of Colography, an Atlanta-based logistics consultancy. Just look around a typical supermarket. Where it once stocked mainly groceries, it now also sells clothing, consumer electronics, home furnishings and many other items.

This compounds supply-chain problems. "In many cases shippers have gone too far in implementing the lean supply chain and have found themselves virtually out of business because of a by now annual catastrophic event," says Mr Scherck. As examples, he cites a dock strike in California, a typhoon in Taiwan, a tsunami in Asia and a hurricane in New Orleans. More recently a huge explosion at the Buncefield oil storage terminal in Britain's Hertfordshire caused widespread problems for businesses not just locally but across a large part of England.

In 2003 a number of companies suffered serious disruption because of severe acute respiratory syndrome (SARS). Even though SARS turned out to be not as virulent as influenza, and only 8,000 people got infected, with one in ten dying, it still cost an estimated $60 billion in lost output in South and East Asia. The latest worry is the spread of avian flu. If the virus concerned were to mutate and become infectious for humans, the consequences could be far more devastating.

Sometimes even a political wrangle in Brussels will bring a supply chain to a shuddering halt. Last autumn some 80m items of clothing were impounded at European ports and borders because they exceeded the annual import limits that the European Union and China had agreed on only months earlier. Retailers had ordered their autumn stock well before that agreement was signed, and many were left scrambling to find alternative suppliers. A compromise was reached eventually.

However, most supply-chain disruptions have internal causes, says Vinod Singhal, a professor of operations management at the Georgia Institute of Technology (see chart 3). His research on the effects of supply-chain failures shows that they can be immensely damaging. This emerged from an investigation into what happens to shareholder value when companies announce supply-chain problems, based on a sample of 800 such announcements big enough to generate news in the financial press. The disruptions ranged from a delay in 2000 of shipments of workstations and servers by Sun Microsystems to a parts shortage at Boeing in 1997 that the company said would delay some deliveries.

Typically a company's share price dropped by around 8% in the first day or two after such an announcement. This is worse than the average stockmarket reaction to other corporate bad news, such as a delay in the launch of a new product (which triggers an average fall of 5%), untoward financial events (an average drop of 3-5%) or IT problems (2%). And the effects can be long-lasting: operating income, return on sales and return on assets are all significantly down in the first and second year after a disruption.

"It's like having a heart attack," says Mr Singhal. "It takes a long time to recover." And have the dangers increased in recent years? Like other experts, he believes that some companies may be running their supply chains a little too lean: "It's great when it's working, but too much leanness and meanness can actually hurt you."

The financial information analysed for this study came out before the terrorists attacks on America on September 11th 2001 and the subsequent massive tightening of security around the world, so global supply chains today are subject to many more potential hold-ups. Still, it is impossible for customs officials to search every container, box or package entering every country, so the responsibility for security and import declarations rests with the shipper and the company carrying the goods. In effect, the system works by a process of pre-clearance. The details of everything contained in a shipment now have to be sent ahead electronically, and customs and security officials at ports and cargo hubs divert anything they want to take a closer look at.

Companies that put a lot of effort into ensuring the safety of the goods they are sending, or carrying on behalf of others, are likely to be rewarded by seeing them pass swiftly across borders. Customs clearance is itself a huge business. "Information and technology is the only way to accomplish this," says Ed Clark, chief executive of FedEx Trade Networks. These systems also need to be able to cope with unplanned events. For instance, if a cargo aircraft has to divert to another airport because of bad weather, centrally held electronic versions of the necessary "paperwork" can be transmitted to a new port of entry.

Sometimes even computer systems will not alert a company to a problem. For instance, Toyota is upgrading its business-interruption planning to a higher level in response to the filing for Chapter 11 bankruptcy protection last year by Collins & Aikman, a big American-based supplier of trim items for cars. The parts company had been supplying Toyota in Europe, which had an inkling that something might be wrong and started to arrange alternative supplies to be on the safe side.

"We realised that through good communication and contacts we had managed to identify a risk in good time and take action," says Mark Adams, Toyota's European purchasing manager. It was a lesson the company wanted to apply more widely, so it launched a weekly get-together for managers, sometimes by videoconference, to discuss any new rumours and potential risks梐nd work out a recovery plan just in case.

Toyota builds more than 600,000 cars a year in Europe, where it has some 200 first-tier suppliers operating more than 400 factories. They work with second, third and fourth-tier suppliers, so the overall number grows exponentially the further you go down the chain, where problems can be harder to spot. This means the suppliers themselves have to be involved in the risk-management process.

Mr Adams says a supplier may find it difficult to tell the company that it has a problem. But Toyota emphasises that given the co-operative nature of a supply chain, with early knowledge there is more chance of putting things right. Mr Adams explains that as a first step the company would seek to help its suppliers solve their own problems. "We are hugely more competent at this than we were a year ago," he adds. And so far, Toyota has been able to act swiftly enough to prevent any supply problems holding up production.

Is a lean, flexible and highly outsourced supply chain like Toyota's any safer than the vertically integrated production methods of old, as practised at Henry Ford's giant River Rouge manufacturing complex near Detroit? At its zenith in the 1920s, ships carrying raw materials such as iron ore and coal梠ften from Ford-owned operations梬ould unload directly into the plant. Steel was produced on site, then cast, pressed and machined into all the components needed to assemble a car. The process was inflexible梬hich is why Ford's cars could be any colour as long as it was black梐s well as rather inefficient. Toyota has turned that process on its head, making its manufacturing system far more capable of responding to change. That is one of the best insurance policies a company can have.

"You are always looking for flexibility, particularly as you manage risk," says Cisco's Mr Mendez. Again, transparency is important. "Once you understand where you are, you can begin to design and budget for contingencies," he adds. The risk-management budget should perhaps be seen as separate from the operating and capital budgets, he suggests, to allow risks and their potential costs to be dealt with more directly.

Are competitive pressures pushing companies towards running their logistics operations ever leaner? "They are galloping there," replies Michael Cherkasky, the boss of the company that owns Marsh, the world's largest insurance and risk specialist. "I don't think many understand the risks that are involved." He is concerned that companies are outsourcing not only peripheral activities but many core functions too. That makes it difficult to pick up the pieces when things have gone wrong.

Britain's Cranfield University is running a research programme into the fragility of supply chains, prompted by the British government after protests over high fuel costs in 2000. Lorry drivers blockaded fuel-delivery depots, bringing many businesses to a standstill. "I reckon this was the first time the government realised there were such things as supply chains, and just how fragile they had become," Mr Christopher told a recent conference.

Some people even suggest that supply chains should be regulated, a bit like public utilities, because countries have become so highly dependent on private-sector production infrastructure. Barry Lynn, author of a book on this subject, "End of the Line", thinks that perhaps companies should be required to limit their outsourcing and use more than one supplier of essential items. In his book, he argues that globalisation and outsourcing provide only a temporary benefit to consumers because the companies that form part of supply chains will buy each other up in pursuit of ever greater efficiency, and thus lose most of their flexibility.

There are signs that some companies are already alert to these concerns and may be planning to reorganise their supply chains to make them safer. That process could speed up if disruptions become more common. Mr Sheffi is in no doubt that the best way to achieve a resilient supply chain is to create flexibility梐nd that flexible companies are best placed to compete in the marketplace.

"Customers are rethinking their global supply chains for a lot of their products," says Mr Scherck. For bigger firms, that could mean adopting what he calls the "continental strategy": having a spread of suppliers in different continents for added flexibility, as Dell and Cisco do. Smaller firms may not be able to achieve a geographical spread. But in any case, companies do not want to go back to carrying lots of inventory in different locations. "So you need to do something in-between," concludes Mr Scherck. "You will have to carry a little more cost than an absolutely lean model, but you get protection."

"There are very legitimate, very good business reasons not necessarily to complete and ship from Asia," says Flextronics's Mr Wright. Companies may consider other options in other parts of the world even though these may look more expensive. "Sometimes you might have to go to a higher cost structure to make your supply chain more robust and reliable," observes Mr Singhal.

So the limits of globalisation may end up being defined by the management of supply-chain risk. And unfortunately the world is unlikely to become any safer. There will always be natural disasters, as well as corporate mistakes. In order to insulate themselves from the consequences, companies will have to spread their risks more widely. That does not necessarily mean fewer aircraft will be queuing up to land at Louisville and Memphis, or that fewer container ships will set sail from Asia's bustling ports. But it does mean that in future companies may spend rather more to maintain a number of different supply chains, and some of those may be closer to home.

The Lean Supply Chain

NK Khoo Managing Consultant — Sun, 11 Jun 2006 11:56:00 +0000

Thursday, June 08, 2006
Stephen Hochman

The principles of lean are universal enough to apply outside the four walls of a company, yet few manufacturers have extended these techniques to their supply networks. Why? Cultural inertia and the complexities of network globalization have stood in the way. To overcome these obstacles, supply chain managers can start by improving true-cost models, value stream maps, and narrow process improvement trials.

Still early in the game

Dan Jones, co-author of The Machine That Changed the World, advises companies to define the scope of their value streams as broadly as possible. Improve only one small piece of your value stream, logic says, and you are sub-optimizing. Look at the whole chain and new, better ideas emerge for how to deliver value to your customers on demand.

So far most companies have failed to extend their lean processes to partners in their supply networks. A recent AMR Research study found that organizations were five times more likely to push inventory cost to their suppliers than they were to co-invest in demand pull (see Figure 1). These companies are saving on direct cost, but leaking profits to lost velocity.

Why is it taking so long?

One reason for the gap between a lean supply chain vision and reality is often the sheer magnitude of the culture shift. It is easy to forget that Toyota started down the lean path back in 1950, well before lean even had a name. For Toyota, lean was just a way to deliver more value at lower cost. The company also had the early advantage of network proximity. Back then, if its procurement managers had an idea for process improvement, they could just walk across town to their suppliers and press the issue.

Add 5,000 miles, 12 time zones, different languages, and different cultural norms—change becomes more difficult. It’s one thing to persuade your management team of the rewards of moving faster at home, but it’s another to convince overseas suppliers to take on new planning models and accept alternate incentives. If you are not at odds with your supply partners over direct costs, you are in the minority. Introduce the idea of shared profit destiny and new metrics tied to flow and speed, and the gate may clang shut. It’s not that your partners don’t want to improve. It’s that the geographic, cultural, and historical obstacles to common understanding are vast.

A second often overlooked reason for the slow pace of lean adoption is the analytical complexity. Inside the four walls of the factory, cellular production techniques and visual kanbans are often all you need to operate a clean, fast, reliable pull process.

Vertically integrate back through raw materials—like Spanish retailer Zara has done—and you may be able to get by with a point-of-sale (POS) feed from store to factory, simple product data management and CAD suites to manage modular material and product designs, and a distribution package to track trucks going from factory to stores in adjacent markets (Zara faces new challenges as it expands overseas, but that’s a story for another time). But most of us face competitive pressures that make more complex supply networks an economic necessity.

Getting down to lean business

Network complexity and cultural inertia are here to stay, but five simple startup tactics can help you begin extending lean out to your supply network:

Step 1: Build consensus on sources of customer value.

Decide which metrics really matter. Sit with your controller or your CFO and start to have the hard conversations about total cost, including the cost of lost time. Collaborate on a simple model to capture key economic assumptions about costs and benefits of velocity. If speed is the biggest profit driver, there will be direct cost tradeoffs to flow past the more intransigent bottlenecks in your supply network.

Develop simple tradeoff scenarios that your CFO can feel comfortable presenting informally to the rest of your senior team. Don’t set out to change the accounting system, but do validate the model with key supply network stakeholders. Use the numbers to gain buy in on the magnitude of the lean supply chain opportunity.

Step 2: Value stream map your network’s current state.

Use your cost-benefit model to persuade functional champions to carve out three uninterrupted days, preferably with a lean/kaizen facilitator, to map out the current state of your supply network.

Choose which metrics will be attached to each box. A general rule is to use elapsed time per process step. The theory says remove non-value-added time and cost will follow. If you have a particularly close supplier relationship, involve that supplier. One company even included a trusted customer in its initial mapping effort. The more parties you have at the table, the more you will gain visibility to the scope of opportunity.

Step 3: Quantify the muda (or waste).

Companies often find that less than 20% of their supply chain work time is value added. One footwear company found that its value-added work time was 6%. Numbers like these catch people’s attention.

Step 4: Map your future state and your ideal state.

The idea of the future state is to go after quick wins and deliver tangible results. For that reason, a future state value stream map generally looks anywhere from three to nine months out.

The ideal state allows you, in parallel, to take the gloves off and think about more dramatic innovation. It sets the guideposts so that your interim future states don’t impede global optimization.

Step 5: Pilot a near-term network improvement.

Now that you’ve defined the ideal vision of your lean supply network, seek a low-cost, high-impact target for improvement. If heavy automation is required, then that’s probably not the right place to start.

One high-tech manufacturer taking on a lean supply chain initiative insisted that all decision support processes be simple enough that any manager could understand why a decision was being made, but sophisticated software tools can help. A subsequent article will address the advantages and pitfalls of applying technology to lean supply chain initiatives.

© Copyright 2006 by AMR Research, Inc.

Lean SCM - The Essentials

NK Khoo Managing Consultant — Mon, 29 May 2006 17:03:00 +0000

Lean SCM - The Essentials Thomas Craig
Expert Author
Published: 2006-05-26

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 management:

1) 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.

2) Transportation. Unnecessary or slow movement of product adds no value. This can include movement of inventory between company facilities.

3) 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.

4) Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.

5) 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.

6) Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.

7) 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.