Lean Supply Chain and Logistics Management, page 5
They quickly become “stale” and inaccurate if not updated regularly. Some companies even try to operate under a “two number” forecasting system, in which functions such as sales and marketing use a budgeted number while operations uses a statistical forecast. Then everyone wonders why things are out of control. Needless to say, this can become a total disaster.
Adjusting forecasts to compensate for supply issues—People have a natural tendency to want to adjust a forecast because of potential supply issues. It is important to first come up with your “best guess” forecast and address those issues when discussing potential supply issues.
Using sales or shipment data versus demand or order data—This used to be more of a problem because of the cost of computer memory, but it is critical to the accuracy of a forecast to use historical data of what the customer ordered, when they ordered it, and in the quantity they ordered. If you use sales or shipment data, you are doomed to repeat problems of the past (e.g., the order shipped short, late, or from an alternate location).
Aggregate versus SKU (stock keeping units or an item at a stock keeping location) accuracy—It is a “given” that forecasts are more accurate at the aggregate level than at the SKU level. While, as already mentioned, it is useful to look at higher-level forecasts, accuracy measurements and control at all levels is important (variance targets of course may be greater at the SKU level than the aggregate level).
Poor communication—Lack of communication or a “silo” or functional mentality can result in inaccurate forecasts and create waste through the entire process, which could have been avoided. For example, if someone in sales knows about a new customer and does not pass on some information (with sales estimates), operations will end up scrambling at the last minute to meet the order, if not ending up missing the opportunity altogether.
Not seeing the forest for the trees—As mentioned in this chapter’s title, some people just become used to fire fighting and are so deep into the detail they cannot see the big picture. A good forecasting process enables everyone to plan, not react, reducing the resultant wastes that are created by fire fighting. This is part of a sales and operations planning(S&OP) process which will be discussed in detail in Chap. 10.
Source
Supply chain costs can range from 50 to 80 percent of a company’s sales depending on the industry. Therefore, it is not difficult to see why it is an area of interest in terms of looking for waste.
Lean sourcing or procurement is a different way of looking at and working with suppliers. There is a greater use of partnerships and alliances as well as a greater need for coordination and collaboration.
Traditional supply chains are managed more on a cost basis, negotiating with many suppliers. While this may still be effective in some instances (e.g., commodities), Lean procurement is all about long-term partnering with fewer, longer-term suppliers with less reliance on low-cost bidding. Motorola, for example, has eliminated traditional supplier bidding by adding emphasis on quality and reliability and in some cases may sign contracts that are in place throughout a product’s life cycle [Heizer and Render, 2011]. In this way, the relationship can be mutually beneficial. The value is created by economies of scale and long-term improvements (see Table 4.1).
Table 4.1 Lean Supply Chain Characteristics
As a result of this type of relationship, where trust is very important, suppliers are more willing to get involved in JIT partnerships and share in the design process and be willing to contribute technological expertise. For example, when Cessna Aircraft opened a new plant in Kansas, they set up consignment and vendor-managed inventory programs with some select suppliers. One supplier, Honeywell, was allowed to maintain avionic parts onsite. Other vendors who participated kept parts at a nearby warehouse to supply the production line on a daily basis. This was a win-win situation, as Cessna was able to execute JIT inventory replenishment for parts, and their suppliers gained better insight into Cessna’s production requirements and could offer suggestions for product improvements, thereby strengthening the relationship [Heizer and Render, 2011].
Some suppliers may be somewhat hesitant because of issues such as having too much reliance on one customer, shorter lead times, smaller order quantities, etc. As a true partnership, the customer must be willing to work with the supplier and share costs, training, and expertise so that they are not just passing off their problems upstream. Of course, you need to always have a “backup” plan and only single source (i.e., one supplier for an item) where there is very little risk involved (e.g., commodity-type item, easily substituted part, etc.).
There are many Lean opportunities in procurement including:
JIT, such as in the Cessna example above. There may also be a potential application for vendor-managed inventory (VMI), in which a supplier manages its customer’s inventory of parts and supplies (to be discussed in detail in Chap. 6).
Batch size and lead time reduction—producing smaller quantities of items more frequently, thus reducing inventory and cycle time.
Blanket orders—in which a customer places a single purchase order with its supplier containing multiple delivery dates scheduled over a period of time, in many cases at predetermined prices.
As they say, “If you can’t measure it, you can’t improve it.” This applies to all of the applications mentioned in this book. By performing Lean assessments and supplier reviews, you can determine how lean your supplier is and what progress has been made toward that goal.
Make
Some might argue as to whether or not the Make process is part of supply chain and logistics management or just supported by it. Either way, there is no doubt that if not functioning properly, it can cause massive wastes in the entire supply chain.
Once you are comfortable with the demand side (i.e., sales forecasts), it is critical to execute an accurate, deliverable supply plan. This includes production planning for finished goods, as well as procurement planning for any materials (raw, component, or finished) sourced from a supplier.
In Successful Lean Planning, an article that appeared in the May/June 2010 APICS Magazine, Preston McCreary writes, “Planning is a key part of any manufacturing business strategy and possibly even more important in a lean-flow company. Planning determines how, when, and where a product is produced. Successful planning ensures customers get products on time and within cost expectations—creating more opportunities to sell. Poor planning will cost the company money, create chaos… and lead customers to buy product elsewhere. Lean planning uses the concept of pull versus push” [McCreary, 2010].
Rarely have companies been able to go completely from a push-type system, producing in large batches based upon a forecast, resulting in large amounts of finished goods inventory, to a customer-demand pull system, in which customer demand triggers activities such as distribution and production upstream. Most companies are somewhere in between. The goal is to get closer to “make what you sell” and have an ultimate (yet perhaps even unrealistic) goal of one-piece flow.
Make to Order (MTO) versus Make to Stock (MTS)
For many companies, it may be impractical to have a Make-to-Order (MTO) process, which is most conducive to one-piece flow and a totally pull system. As a result, they operate primarily under a Make-to-Stock (MTS) process.
The concept of postponement can also be a useful tool to bridge the gap between MTO and MTS. Postponement occurs when decisions about the transportation or transformation of product form in the supply chain are postponed until an order is received from the customer. An example of postponement would be when a computer manufacturer delays assembling the final customer order until it is released to the plant or warehouse for assembly or shipment. It is only at this point that the order is assembled and shipped as there may be an almost infinite combination of computers (and components), monitors, printers, etc. available. This reduces the number of items that a company needs to stock and keep track of.
However, even if a company operates in an MTS environment, customer demand can be used in combination with forecasts to drive more of a pull system, helping to eliminate some of the inherent waste found in the process.
Distribution Requirements Planning
In order to go from push to pull, a tool like distribution requirement planning (DRP) helps in the transition (see Fig. 4.2). The use of time-phased demand planning enables you to evaluate demand closer to the customer [at your distribution centers, and in the case of collaborative planning, forecasting, and replenishment (CPFR, discussed in Chap. 13), at your customer distribution centers]. This phased demand factors in consumption of the forecast by live orders, lead times, order minimums and multiples, scheduled orders (production work orders, purchase orders, and transfers), and scientific safety stock.
Figure 4.2 DRP screen and description.
Many times when assembling production plans, companies neglect to include current demand information, as well as a “robust” safety stock to compensate for variability in demand and lead times.
It is critical that safety or buffer stock is scientifically calculated and recalculated on a regular basis. Typically, this number is based upon a desired service level by SKU, which calculates the number of standard deviations needed to cover that item’s demand and lead time variability. It is always a good idea to calculate safety stock by ABC code with a higher service level (typically 99 percent) for As, lower for Bs, then lowest for Cs and beyond (some businesses have D and E items). By using this methodology, current demand and lead time variability is accounted for, as well as optimizing overall inventory levels.
In many cases, companies use a one-size-fits-all method for safety stock, which tends to bring overall inventory levels way up, while keeping service levels (especially for A and B items) lower than desired. The one-size-fits-all type of inventory planning usually results in having not enough of the “right” product and too much of the “wrong” product.
This type of inventory model is used when demand is not constant or certain and the actual reorder point is calculated as
Daily demand × order lead time + safety stock
Take, for example, the situation in which the average daily demand for a widget is 30 units, replenishment lead time is 3 days, and desired safety stock is 15 units. In this case, when the inventory gets down to 45 units, a replenishment order is placed for 30 units. The goal here is to always try to have 15 units of safety stock at the end of each planning period (i.e., days, weeks, or months).
While the use of safety stock is great for longer-term, aggregate production planning (and for item parts and supplies planning), DRP is more effective when using safety time, in which you have an inventory target of a specific number of days, weeks, and months of supply of an SKU’s forecast. This uses a reorder time model, in which inventory is brought up to a target of days of supply based upon the SKU’s forecast. It enables you to match an item’s “peaks and valleys,” which is very important, as one week of supply for an item may be 100 units during some months, and 1,000 units during others. Safety time should also be applied differently based upon SKU characteristics (e.g., A items carry lower safety time, C items much greater).
Even when using reorder time in DRP, it’s a good idea to still calculate safety stock as a “second view” (or the greater of the two), at the least. If you find that there is a great difference between the safety time and safety stock requirements, you may want to investigate further. For example, if a nonseasonal item calls for a safety time of 2 weeks of supply, which equates to 100 units based upon the forecast and the calculated safety stock calls for 500 units, it may indicate that this item has a very erratic sales history. To be on the safe side, you may want to go with the higher number in this case.
By using a tool like this, much inventory waste can be removed from the system, while improving customer service levels.
Deliver
As flow and velocity are critical to Lean thinking, the Deliver process can contribute greatly to these goals. This includes both transportation and distribution operations.
In transportation, areas of Lean thinking may include:
Core carrier programs to reduce number of suppliers and develop collaborative long-term relationships
Improved transportation administrative processes and automated functions, such as transportation management systems (or TMS; see Chap. 12 for more details), which may help to optimize mode selection, right-sizing equipment, pool orders, and combine multistop truckloads
Cross-docking, in which incoming materials are quickly passed through a distribution center, typically within 24 hours, to outbound trucks for final delivery
Reviewing import/export transportation processes that are both complex and ripe for waste
Gaining control of inbound transportation and increasing use of backhauls to reduce costs and improve productivity
Reviewing freight auditing and payment processes that are often manually processed and errors may not be caught until post-payment audit if at all
Warehouse operations usually have high levels of activity with people and products always in motion. However, this type of action doesn’t always result in real productivity.
Even though there appears to be constant motion in a warehouse, actual customer orders may move rather slowly through the system. Ideally, information and materials should “flow” through a facility. In reality, they tend to be batched and sit in queues in between processing steps (think of an inbox in an office, or some pallets sitting in an aisle). As a result, this ends up increasing the lead time and results in a less than optimal use of resources. This can often result in wasted space in a warehouse.
In warehouse operations, waste is found throughout the basic functions of receiving, putaway, replenishing, picking, packing, and loading. This waste can be a result of:
Defective products or errors, which create returns
Overproduction or overshipment of products
Excess inventories, which require additional space and reduce warehousing efficiency
Inventory accuracy issues
Waiting or searching for tools and equipment, such as a forklift or a ladder
Waiting for parts, materials, and information
Excess motion and handling
Inefficiencies and unnecessary processing steps
Material handling steps and distances as well as blocked aisles
Information processes and computer issues (system running slow, downtime, multiple screens to access, scanner issues, etc.)
Return
Returns or reverse logistics, as it is commonly known, is the return of product from a customer for a variety of reasons (defective, damaged, wrong item, servicing, did not want, etc.). As a result, this process is, for the most part, a waste, as it is caused primarily by defects and errors upstream from the customer.
By focusing on upstream returns, this activity can be substantially reduced. However, as there will always be some returns, it is important to look at the process for authorizing and handling returns from a Lean perspective as well.
In Implementing Six Sigma Principles in Reverse Logistics, part of the proceedings of the 2009 Annual Meeting of Collegiate Marketing Educators, Servos et al. point out that “movement, processing, and corrections are three areas of cost that are particularly well suited to… waste elimination… in reverse logistics.”[www.a-cme.org, 2011]
Most companies have some kind of return merchandise authorization (RMA) process, whereby a customer must get some kind of approval to return a product before actually doing so (usually in the form of an RMA number provided by the supplier).
RMA processes usually involve several functions, many steps, and various people. Things to look at for waste may include:
Reducing the number of RMAs that are open at any one time and setting limits for how long they can be open
Reducing freight costs associated with returns
Streamlining the actual RMA process trying to especially focus on wastes in movement, processing, and corrections
Improving and enforcing compliance by both company reps and customers
Eliminating return of unwanted parts (e.g., destroy in field if appropriate)
Improving focus on spare/repair parts inventory
The SCOR model of Plan, Source, Make, Deliver, and Return is a great way to start to wrap your head around this complex subject and to identify general areas for improvement in the supply chain.
As the reader can see, there are many opportunities in supply chain and logistics management on which to focus and, in the process, eliminate waste. In the next chapter, we will discuss some of the basic Lean tools and examples of how to use them.
CHAPTER 5
Basic Lean Tools: You Can’t Build a House without a Solid Foundation
The saying “you cannot build a house without a solid foundation” definitely applies when discussing Lean. In fact, there is something called “the House of Lean” (Fig. 5.1), which helps to illustrate this concept.
Figure 5.1 House of Lean.
Although the importance of having a Lean culture as a key success factor has been discussed already (and will be discussed in more detail in Chap. 10), understanding how and when to use Lean tools will now be discussed in this chapter.
In many cases, value stream mapping (VSM; Fig. 5.2) is typically the next step taken by management after gaining a basic understanding of general Lean concepts. However, it is best to wait to address the details of VSM until Chap. 11, as you first need to understand the basic and advanced concepts and tools (in some detail) that can be used to deliver the opportunities for improvement identified in a value stream map.
