Lean supply chain

Magazine Article, Source : The Manufacturer US
Zone : Logistics and supply chain
Published : 18 May 2006 15:00

Demand-driven production calls for a demand-driven supply chain. George Schultz finds out what is different, and where the cost-cuctting opportunities are

Cutting all waste – of time, resources and costs – out of an enterprise constitutes what is generally called “lean” strategy. Apply it to supply chain performance and it shows the divergence of industry today, in how individual companies harness lean principles to stake competitiveness in their markets.

Fidelitone, a major service parts provider, and Procter & Gamble and Seagate Technology, big players in quite different product sectors, all implemented ambitious “lean” strategies in their complex supply chains. They did so in strikingly different ways, but all keyed on demand dynamics.

Fidelitone leveraged its long experience in manufacturing, warehousing and distributing products to become service parts strategic partner for the likes of Sears, Black & Decker, and Best Buy. It developed a demand-driven and lean-focused information technology, a system adaptable to its clients’ diverse business plans.

Procter & Gamble largely invented the model of manufacturing-marketing that goes from consumer demand at the store shelf all the way back through production to supplier requirements. Yet, especially with acquisition of the Gillette Co., P&G remains intent on further transforming its consumer driven supply network (CDSN) through lean principles.

Seagate, the world’s largest maker of disc drives, faces strongest pressure from the supply-into-production end in its extremely volatile sector of the computer industry. Hence, it focuses on continued progress of its demand-driven supply network. The idea is actual market demand pulling through its integrated operations to trigger supply replenishment for the economies of lean inventory.

Many manufacturers today can relate to Fidelitone’s role and its quest for fast-paced supply and logistics solutions. It essentially is a 3PL (third-party logistics provider) that provides value-added services – “in spades” here. The company was founded 70 years ago to manufacture phonograph needles (some still remember that product name), which marks quite a transition since CD players doomed its market.

That may be a fitting parallel to what Fidelitone executive vice president Tom Giovingo decries as “the old typical supply chain model.” He describes it as “having one or several warehouses packed full of duplicated inventories based on inventory forecasting. “Manufacturers buying hundreds or thousands of items from particular suppliers had them programmed in a system of, for example, a four-week lead time, whatever was standard for a particular company. You ordered and always had some standard safety stock calculated,” he adds, “continuing to be over-inventoried as you sat on the items.

“But in today’s supply chain environment, with customer requirements and cost pressures from customers as well as stockholders,” says Giovingo, “we all have to be much more progressive.”

One way of becoming lean, Giovingo says, “is having the proper technology – beginning with a [demand] forecasting tool that will allow you to set business rules, business parameters, lead time and safety stock, not only at the supplier level but also at the SKU (stock-keeping unit) level. That’s one way we view lean management with inventory discipline.”

Fidelitone operates in a range of 30,000 to 80,000 SKUs in service spare parts for commercial and residential users among its clients’ customers. All must be deliverable wherever and whenever needed. A good operational understanding comes from the Best Buy example. “They chose to approach their repair parts [fulfillment] for consumer electronics, computers and appliances in a non-traditional way,” Giovingo explains. “Instead of partnering with one, two or three suppliers, they’ve chosen our National Parts Group, an affiliate which Fidelitone established for Best Buy specifically.

“They aggregate all their orders nationwide to our company. With Best Buy’s involvement, we’ve developed 37 ‘shipping partner’ relationships among distributors, manufacturers, rebuilding houses and supply houses - for example, OEM batteries for a Sony cordless phone, because Sony doesn’t itself manufacture batteries.”

Fidelitone (or National Parts, in this case) is the manager using its customized technology that integrates the broad supply base with the order processing base. Upon Best Buy ordering items, multiple in most instances, a “needs list” goes electronically via EDI or FTP to appropriate supply partners (“in sort of a reverse auction”) with SKU numbers and quantity. Upon its availability and price response, the supply source selected receives its order, usually within an hour of first communication for typically same-day shipment.

It’s fast, and paperless. And it’s customizable. The whole vendor shopping and order management mechanism is processed through Fidelitone’s ERP system, ASW, from International Business Systems. Giovingo stresses, “The only way I’m able to manage all that effectively is utilizing technology; I could never throw enough people at this process. And it’s able to provide a customized, flexible solution that adapts to each client’s individual business criteria. We would not have the strategic partners we have if we were not flexible in modifying our processes to accommodate our clients.”

Like many companies today, Procter & Gamble exercises manufacturing flexibility and cycle response in producing to demand (versus to forecast). But this company, much more than most, really goes to the source – consumer behavior at the store shelf. “We consider that ‘the consumer is boss’,” says Rick Ciccone, director of supply chain operations for P&G, “and retailers are responding, which puts new pressure on manufacturers.” He holds that today’s supply networks aren’t fast and flexible enough, citing as one challenge the pace of innovation with products increasing in number and complexity (noting a 20 percent increase in innovation for the past three years). Another factor is consumer demand for affordability and value. And, manufacturers, to be effective, need to understand full end-to-end supply network time.

With acquisition of Gillette, effective in October of last year, P&G is the world’s largest consumer products company. It has more than 170 manufacturing facilities in 40 countries, plus some 20 R&D centers globally. “It combines each company’s unique consumer/shopper under-standing to strengthen retailer relationships,” Ciccone says, “and expanded innovation platforms and pipelines.”

So continues P&G’s three-year “consumer-driven supply network transformation” that includes building capabilities to produce to a demand operating strategy. This stresses greater links to external metrics – “beginning at the store shelf, the consumer’s expectation there and taking the product home, and then we work our way back through the supply network. Historically, companies would start at the manufacturing point and push inventory out to retailers and push it into warehouses,” Ciccone says.

Among key operating principles already determined, generally for any company, are that external focus presents “a culture change” in many organizations, and that previous focus on cost reduction needs to be shifted instead to attention toward “value and growth creation.”

Ciccone says that P&G has had its own comprehensive supply chain framework in use for the past 10 years. And similarly, with early reference to the Toyota Production System, “for decades we have used various performance tools, including lean. “About 10 years ago we brought the best of all of these tools together in our own production system which we call IWS, for ‘integrated work systems.’ So we’re not limited by just what is in the lean toolbox. We have a much more holistic and broader approach to it.”

Significantly, Ciccone observes that “’information replaces inventory’, which is kind of a foundational piece of the supply chain that then supports CDSM. Traditionally,” he notes, “you would have had buckets of inventory throughout all of the interfaces. With information now, you have visibility of that inventory and can reduce those buckets and synchronize the entire supply chain. So we really do have that philosophy that information begins to eliminate, to take the place of inventory.”

Meanwhile, Seagate Technology, the hard disc drives maker, continues its journey to a demand-driven supply network, defined more specifically as Seagate’s “inbound supply chain” by Rich Becks, vice president for worldwide supply chain, lean and e-business operations. Yet, it is a real time, demand-pull supply chain, Becks notes, having end-to-end visibility and transparency using Web portals, with an e2open portal as the hub to its partners. (e2open provides software and services to manage inter-company processes.) All collaborative processes are affected, including design, supply chain and channel management.

To counter volatile demand driving up inventory levels in manufacturing-to-forecast, Becks says, the transformation entails implementing buy-side VMI (vendor-managed inventory) and “stocked” customer VMI hubs. Moreover, it is implementing auto-replenishment and has initiated a strategic buffer program, while using the SCOR (supply chain operations reference) model of the Supply Chain Council to benchmark “best practices” initiatives.

To add perspective to all this: Seagate is a vertically integrated global manufacturer which ships some 100 million disc drives a year and consumes 90 million parts per day from more than 100 suppliers. Complex? All told, it deals with more than 5,000 part numbers, and 100 of its product lines are subject to frequent changeover in production. Operationally, the company uses “lean” replenishment with kanban, e-kanban and material kitting.

On the outbound (customer) supply chain side, Becks says objectives include “meeting customer demand without excess inventory, and [ensuring] realtime visibility into point-of-sale data and channel inventory.” Overall, he says results of the demand-driven transformation so far show improved customer delivery with better capability for unplanned responses, plus a tremendous productivity improvement in drive production. He reports a 114 percent inventory-turn improvement and global inventory cut in half.

The Supply Chain Council is a global not-for-profit organization based in Washington, DC. Its software-based SCOR Model is a tool for improved supply chain planning and communication, applicable across all industries. It groups all supply chain functions under five top-level processes: plan, source, make, deliver, and return, with increasingly detailed layers of functions and metrics.

It was at a Supply Chain Council member’s executive retreat recently that Procter & Gamble’s Ciccone first observed that, through synchronized operations enabled by lean strategies, “information replaces inventory.” Probably the key objective of all this attention.