Lean Supply Chain and Logistics Management, page 3
The Lean Supply Chain Report by the Aberdeen Group, published in 2006, pointed out that there were a number of pressures that are driving Lean beyond the factory, including the need to improve operational performance and reduce operating costs, and customers demanding shorter order cycle times [www.aberdeen.com, 2011].
They point out that in some sectors, such as automotive, becoming Lean has become a requirement mandated by customers, while in general, in many industries, customers want shorter lead times, smaller order quantities, and lower prices. In order to do this, companies need to reduce their costs and make their supply chain operations more efficient.
In Operations Management, Roger Schroeder mentions two types of competitive supply chain strategies based on the type of product that is being supplied, imitative versus innovative.
Typically, imitative products have very predictive demand and therefore can use an efficient, low-cost supply chain strategy (e.g., generic over-the-counter drugs). Innovative products, on the other hand, have very unpredictable demand and require a faster, more flexible (and thus more costly) supply chain strategy [Schroeder et al., 2010].
It is not a one-size-fits-all type of thing, though, as an individual company can have multiple supply chains based upon their product lines. On the other hand, in Operations Management, Heizer and Render discuss using the supply chain to support three different competitive operations strategies [Heizer and Render, 2010]:
1. Differentiation—Where your product or service is better or different from the competition (e.g., Jet Blue Airways)
2. Cost Leadership—Low-cost strategy (e.g., Emerson Electronics)
3. Response—A quick response strategy (e.g., FedEx Corporation)
Again, a company may employ multiple strategies, which of course impact the supply chain used to support the strategies.
The Lean Supply Chain Report mentions top actions for Lean supply chains. Best-in-class companies are now focusing more on adding value from the customer perspective, while average and laggard companies are still focusing more on reducing non-value-added activities and reducing inventory and assets. All are also working on increasing supply chain flexibility and implementing a continuous improvement culture throughout the supply chain.
The report also points out that some of the top barriers to Lean strategies in the supply chain are cultural change required, top management commitment, and lack of participation of suppliers and other partners [www.aberdeen.com, 2011].
This is generally good news, but it shows that, in general, there is much work to be done (and many battles to be fought). So it is even more important to do it right early in the transformation process.
That is what this book is all about.
While this book will give the reader some background on the definition and history of Lean, it will also provide both the tools and practical applications to be successful.
The reader will also note that, as in many areas of business, there are lots of acronyms in this area of study, such as 5S-workplace organization (5S), total productive maintenance (TPM), and just-in-time (JIT), etc. which will be explained as we go along.
This book will describe how to identify and eliminate waste specifically in the supply chain and logistics function, types and examples of applications, and the tools to make it all happen. It includes snippets from articles and quotes from industry experts interspersed throughout the book to give the reader insight into current industry trends, as well as the use of technology to enable a Lean supply chain, internally as well as downstream and upstream.
CHAPTER 2
Historical Perspective: From Lean Manufacturing to Lean Enterprise … the Need for Speed
Evolution of Lean
In order to understand Lean and its current and future applications, it is important to first briefly review the history of manufacturing (Fig. 2.1) and how the concept of Lean originated and evolved. A good reason to do this is, as George Santayana once said, “Those who cannot remember the past are condemned to repeat it.”
Figure 2.1 History of manufacturing.
As mentioned previously, Lean is a team-based form of continuous improvement focused on the identification and elimination waste from the customer’s perspective. Obviously, things haven’t always been that way. If we look back the start of manufacturing hundreds of years ago, most goods were made by individual craftspeople or artisans.
Early concepts like labor specialization (Adam Smith), in which an individual was responsible for a single, repeatable activity, and standardized parts (Eli Whitney), helped to improve efficiency and quality. Up until that point, the individual craftsperson made most if not all of the product (furniture, wagons, etc.). If a wagon wheel broke, it had to be made from scratch and might not even be exactly the same as the wheel it replaced!
Around the turn of the 20th century, the era of scientific management came about, in which concepts such as time and motion studies (Frederick Taylor) and Gantt charts (Henry Gantt) allowed management to measure, analyze, and manage activities much more precisely.
The really big advancement came in the early 1900s with the era of mass production. Concepts like the moving assembly line (e.g., Ford Motor Company), economies of scale (produce large quantities of the same item to spread fixed costs), and statistical sampling were applied. Today, this concept is known as a push process, which is the antithesis of today’s demand pull (by the customer) Lean thinking.
As the saying used to go, you could have any color Ford Model T, as long as it was black! In a push process, goods are produced in advance of actual demand and kept in inventory (typically based upon some kind of forecast) with the hope that customers will buy it.
In the 1980s, we started hearing about a new concept called Just in Time (JIT). This concept actually originated out of necessity by the Japanese after World War II when resources were scarce. It is a method of keeping minimal inventory of material (or information)—not too much and not too little. The demand for the JIT inventory is determined by downstream activities (ultimately the customers) that use it. A great tool to implement this concept is kanban, which will be discussed later in the book, but in general terms, kanban is a visual method for replenishing inventory that is withdrawn or consumed by a downstream process.
JIT, kanbans, and other concepts and tools, such as total quality management (TQM), electronic data interchange (EDI), and employee empowerment emerged. Many came from Japan, using statistical and other concepts taught by Americans after World War II such as W. Edwards Deming and Joseph M. Juran. The results were evident as Japanese products gradually went from being poorly made (e.g., cheap toys and transistor radios in the 1960s) to high performance and quality (e.g., Toyota, Nissan, etc., had a reputation for quality from the 1970s onward).
The Japanese also laid the groundwork for the concept of “demand pull” or Lean systems (sometimes referred to as flow manufacturing, flexible manufacturing, JIT, and other terms) to emerge. The true precursor to this is the much written about Toyota Production System (TPS), which was started in the late 1940s in Japan and which focuses on continuous improvement and respect for people. The objectives are to design out overburden (muri), inconsistency (mura), and waste (muda). TPS encourages employees to get to the source of a problem or issue by focusing on waste (which will be discussed in much detail in the next chapter).
The Need for Speed
This brings us to today and the future. While there is still an ongoing focus on cost and quality, there is now more of a “need for speed.” This is a result of many converging technologies and cultural shifts. The advent of the Internet and e-commerce in the 1990s enabled news and information to travel at “warp” speed. That, combined with the “me too” generation’s need to have things now, has both increased the need for speed to acquire goods and services, and also shortened product life cycles (e.g., cell phone models become old or obsolete in months not years).
The Internet when combined with massive enterprise resource planning (ERP) software systems (for which demand exploded as a result of the “year 2000” or Y2K technical issues) allowed manufacturers to become interconnected with both customers and suppliers to share and collaborate.
The world has become a global economy with companies sourcing product and material worldwide in search of the best quality at the lowest cost. E-commerce and ERP systems have lowered the boundaries for entry to the global economy for smaller companies as well, allowing them to compete anywhere, anytime against larger competitors.
All of that has led us on a path to mass customization, which is the capability to combine low per-unit costs of mass production with the flexibility associated with individual customization. One of the best examples of this in manufacturing is Dell Computers. They take your highly customized order for a computer (i.e., various combinations of monitors, hard drives, memory, etc.) and both assemble and ship within 24 hours. They can produce in small batch sizes and keep minimal inventory on hand. Dell works closely with suppliers (many of whom locate nearby) to continuously resupply inventory on a JIT basis. Instead of weeks and months of supply of inventory on-hand, Dell only keeps days and hours.
Dell is one example of a true demand-pull system, driven by end-customer demand. However, not all companies are candidates for this type of production. In fact, most companies that I’ve visited or know of use some kind of a combination of push and pull systems.
Lean Office
Around the year 2000, Lean manufacturing began to move from the shop floor to the office, as it became apparent that waste was everywhere and that offices shared some of the same characteristics of manufacturing, such as batching, setups, equipment failure, standardized work, etc. In fact, as much as 60 to 80 percent of a product or service lead time can be found in the office environment [which may include functions as diverse as customer service, order management, quoting, engineering, and research and development (R&D) to name a few].
The benefits of Lean Office vary, but include:
More flexibility and responsiveness
Reduced lead time
Reduced errors and
Extra processing
Improved utilization of personnel
Reduced transactions
Simplified processes
Lean Supply Chain and Logistics Management
It has only been in the past 3 to 4 years that the concept of Lean has moved to the supply chain and logistics management environment. I believe there are a number of reasons for this.
A major reason is that, as previously mentioned, Lean started in manufacturing (especially repetitive, assembly-line manufacturing), then gradually moved to other manufacturing processes, such as continuous flow (e.g., chemical, food, and beverage) and, somewhat, to batch processing or job shop (smaller, often customer-specific production). Most manufacturers wanted to first “Lean out” within their “four walls” before working heavily with customers and suppliers. So, in a way, it is a natural evolution to move to the supply chain and logistics area. Companies now realize that they can only take things so far without collaborating and partnering more closely with customers and suppliers. Otherwise, in many cases, they just push their inefficiencies on to suppliers (e.g., JIT of raw materials) and are constantly frustrated with distorted and volatile customer demand (i.e., the bullwhip effect).
Additionally, while there has always been an emphasis on reducing costs, the recent economic meltdown has focused the red, hot light on supply chain management even more. So these days, any tool that can wring inefficiencies out of a system draws people to it.
Lean Six Sigma
There has also been a convergence of two different concepts, Lean and Six Sigma, referred to as Lean Six Sigma. In fact, many universities and organizations offer Lean Six Sigma certification programs.
According to the Bain & Company Web site (www.bain.com) “Lean Six Sigma is a blend of two concepts: Lean manufacturing, which is aimed at reducing waste, and Six Sigma, which helps companies reduce errors. Together they can help companies reap the benefits of faster processes with lower cost and higher quality.”
However, Bain & Company has also learned through their surveys that “despite its growing popularity and impressive results at some companies, Lean Six Sigma often fails to deliver expected results. Our recent management survey of 183 companies found that 80 percent are not achieving their expected value from Lean Six Sigma efforts, and 74 percent are not gaining the expected competitive advantage because they have failed to achieve their savings targets.” This is similar to things that have been written about Lean in general in the United States. Key success factors will be discussed in Chap. 10. [www.bain.com, 2011]
The concept of Six Sigma was originated by Motorola in the early 1980s and is now used in many industries. The term Six Sigma refers to a process that has 99.99966 percent of products produced free of defects (statistically speaking).
While, as mentioned previously, Lean is a team-based form of continuous improvement which uses relatively simple concepts to make improvements and covers the entire process or value stream, starting from the customer end working its way upstream to suppliers, Six Sigma is a tool (heavily statistical) that looks at individual steps in the process and attempts to identify and remove defects and variability. In general, Lean tries to reduce waste in the production process, and Six Sigma tries to add value to the production process.
Cycle Time versus Processing Time
While Lean is an easy concept to understand, it requires a slightly different way of thinking for everyone involved. First, it is important to understand the difference between cycle or lead time and processing time (Fig. 2.2).
Figure 2.2 Cycle versus processing time.
Cycle time refers to the time required to finish an operation. An example of this would be the time it takes to manufacture and ship a widget (e.g., 5 days). This is the time it takes from when a customer places an order to when it is shipped (representing the cycle time, which of course varies by industry). That cycle may include manufacturing functions such as cutting, drilling, polishing, and packaging, which may only take minutes to an hour. These activities, where raw materials or inputs are transformed to finished product or outputs are referred to as processing time and add value from the viewpoint of the customer (i.e., what they are willing to pay for), but are typically a very small part of the process (5 to 10 percent).
From a Lean perspective, that cycle time is actually much longer than our widget example of 5 days, as there are many other non-value-added activities, such as product waiting for inspection, waiting to be moved, move time, setup time, and various administrative activities to name a few (see Fig. 2.3). As a result, inventory builds up to cover these non-value-added activities. It can take the form of raw materials, work in process (WIP) and finished goods inventory. When those inventories are converted to days of demand, the “true” cycle time, at least from a Lean perspective, balloons from 5 days to many weeks or months.
Figure 2.3 Value-added versus non-value-added.
Historically, management has typically looked at increasing the speed of the processing time (e.g., increased hits/minute on a punch press, bottles filled/minute, etc.), while not looking as closely at reducing or eliminating non-value-added activities, as in many cases, they are hidden by inventory or just considered to be part of normal business operation.
It may make perfect sense to increase processing time, but in many cases it may not help the overall process efficiency, which Lean is all about.
Takt Time
There is a term called takt time, which refers to the production rate needed to meet customer demand for a family of products or services (“family” refers to an items or services that have mostly the same production or delivery steps). It is typically measured by dividing work time available by units required. In a Lean process, it is important that every step can meet this takt time. So in some cases, speeding up the processing time may actually be the wrong decision and create more non-value-added activities to the process.
Dock-to-Dock Time
One way to measure the effectiveness of a process is called dock-to-dock time, which looks at how long key material or product is in a facility. The longer it sits, the higher the cost and lower the throughput. It is also good to think of the order-to-cash cycle as a Lean measurement too. Eliminating non-value activities is a way to shorten the cycle time so as to speed up getting paid by the customer, which in today’s challenging economic environment is a good thing.
The classic visual for this is a pie diagram showing a small piece, representing value-added activities (5 percent) and the much larger section (95 percent) representing non-value-added activities, much of which (60 percent +) is pure waste. The idea is that instead of expanding the pie by adding more people and other resources, focus on reducing the non-value-added activities and transferring those people and resources to value-added activities.
The net result, if done properly, is increased throughput with the same or less effort. It’s really about people working smarter, not harder, using ideas that, for the most part, they come up with themselves.
In Lean terms, non-value-added activities are referred to as waste, which we will cover in the next chapter in some detail. It is a different way of thinking but can be a very effective way to find areas for improvement.
