The Lean Supply Chain

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.