Lean Supply Chain Management

Origins of the Lean Manufacturing

Over the span of circa 40 years time, from the beginning of the 1950s to the end of the 1980s, Toyota led Japanese automotive industry created a unique production/manufacturing system, which brought the industry from the ruins of the 2nd World War to the biggest automobile exporter in the world.

That system was known as the Toyota Production System (TPS), now more commonly known as lean manufacturing. The term ‘lean’ was first coined in a large scale research programme called IMVP (International Motor Vehicle Programme) initiated by MIT (Massachusetts Institute of Technology).

The primary concern of the programme was the unanticipated yet strong competitive advantages of Japanese automotive industry over that of American’s and European’s. The key findings of the programme have been published in many books and articles. One of them is a bestseller book entitled “The Machine that Changed the World”, in which the term ‘lean’ is defined as we know it today.

Lean manufacturing is a comprehensive production management system developed in Toyota originally but later gradually refined and improved by many scholars and practitioners around world. There are two maj or features of lean manufacturing that distinguishes it from mass production are: first, increased efficiency through the reduction of waste and error; and second, reduced carrying cost of inventories achieved by manufacturing in small ‘batches’.

The key ingredient to success of the system is Japan’s highly skilled workforce. The overriding concept of the lean system is about doing more with less - a philosophy for identifying and removing waste across the whole business activities. It is also about adding value for the customer and for the business and it is customer driven.

Lean manufacturing was not designed and implemented overnight. It took long years of relentless drive, continuous improvement, trial-and-error, and gradually perfected a system that works best. Compared with the mass production system, lean manufacturing centres management improvement on people especially the operators on the shopfloor. Whether it is quality circle or total preventive maintenance, it is the actively participating workforce that makes them work. Lean Manufacturing focus on the add value from demand.

The whole production system is basically pulled from the demand rather than entirely depend on forecasting based scheduled production. Product customisation and increased scope of customer choices are the direct results. Lean manufacturing develop and make use of employee’s intellectual assets. Everyone is encouraged to make improvement suggestions and even have the power to stop the assembly line if they see something wrong. High commitment, hard working, well educated workforce and loyalty to the company become part of the organisational culture.

Lean manufacturing emphasises the optimisation across organisations and supply bases not just the functional silos. It promotes close partnership relations with the first tier suppliers and other strategic partners in the distribution channel. It created the tiered supply base structure. The waste between the organisations, often ignored in the past, has been identified as key improvement area. The modular design of the automobile has been master minded to fit to the tiered supply structure. All in all, the lean system has also transformed the supply chain management which we call the ‘lean supply management’. This is precisely I am going to discuss in this chapter.

Lean Supply Principles

To understand what’s unique about lean supply and how it works, one must first examine the supply chain practice in mass production, knowing the whole lean manufacturing system was originally evolved from inherited mass production system. In the mass production supply system, the mass producer buys its basic components from a large supply base.

The supplier number will normally reach 5000 to 8000, bearing in mind that a modern automobile will have more than 20,000 basic components built into it. As shown in Figure 14 the mass supply structure is very flat. The mass producer takes on the assembly of the whole vehicle as well as many subsystems and modules. Thus the level of outsourcing is relatively low.

Figure 14. Mass supply chain structure.

The mass producer will design the parts to be made by the suppliers. The process is basically a sequence of one-step-a-time from design, bid, prototype, check, contract and make. With this system, when it comes to find and select the supplier, the cost will always come first. Whosever can make the same part at a lower price will win the bid. This will often lead to a scenario that the suppliers will quote a low price to win the bid and then expecting to raise the price through the annual price adjustment. Suppliers will hardly share any information with the buyer other than the volume and price.

The consequence of the mass supply system is far from beneficial. Supplier brought into the production too late that even the suppliers have better ideas on the design; it would be too late to change. Perhaps the buyer never intended to make use of the suppliers’ know-how on the design of the vehicle anyway. Intense cost pressure from the buyer to suppliers are detrimental that the buyer often play-off the suppliers making them reluctant to share production information.

This also made it impossible for the buyer to estimate the true cost of making the parts. When the supplier has improved its production efficiency there is no incentive to merge the learning curve (to share the saving). All these resulted in high parts cost and unsatisfactory quality.

Over the years the Japanese developed a set of completely different practices - the lean supply system (Figure 15). They can be summarised in 10 lean supply principles that are in stark contrast with what the mass supply system was about.

Figure 15. Lean supply chain structure.

Supply from a smaller 1st-tier supply base

 As shown in figure 15 the lean producer also use large number of suppliers, but it manages them in a tiered structure. The suppliers directly supply the buyer is called the first tier supplier. It is this group of first tier suppliers that the lean producer now deals with directly and gets all the supply of subsystems and modules and components from. Hence the first tier suppliers group is called the supply base.

The number of suppliers in the supply base for the lean structure is about 200 to 300. It is significantly lower than what mass supply system used to have. Using small supply base is a distinct supply chain configuration the all lean supply chains have in common. This structure change has led to a raft of supply chain behaviour changes that really deliver the advantages.

Develop appropriate usually close partnership

Develop appropriate usually close partnership: by using a much smaller supply base, the lean producer can manage to spare more time and other resources to interact with each and every one of the first tier suppliers. This has made it possible for the operational relationship between the buyer and the suppliers to become close. As will be discussed in the Chapter 7, the close and highly engaging relationships are usually defined by the contents of the exchanges in between.

The close partnership will typically entail the shared vision and mission, joint design and development of new products, strategically collaborated capital investment planning, capacity synchronisation, coordination on JIT delivery and inventory optimisation. The contractual terms for the suppliers are normally from medium to long term. The communication and engagement are at multiple levels in both formal and informal regularity.

Supplier selection based on performance 

Supplier selection based on performance: when the lean producer selects its suppliers, price is no longer the only criterion, nor the most important criterion like what mass producer will do. Lean producers will base its ranking and selection on a number of higher level performance focused criteria, such as quality standard, R&D capability, delivery reliability, management system and standard, commitment and relationship. Price will also be considered as one of the criteria, but it will always be referenced to the value that the company can offer. Details of supplier selection will be discussed in Chapter 6. Once selected as the suppliers, the lean producer will treat them as the ‘family member’ and an open and trust culture will be enforced.

Single or dual sourcing only

Single or dual sourcing only: Lean producer tends to prefer the ‘single sourcing’ or ‘dual sourcing’ strategy, not ‘multiple sourcing’. Single sourcing means the lean produce will source the product (with unique SKU) from only one supplier. This means there is no back-up suppliers and no duplicated suppliers for the same product. Compare with the multiple sourcing strategy, single sourcing has a number of key advantages. It consolidates the volume to one supplier so that the unit cost can be minimised; the supplier will reap the benefit of economy of scale.

It provides the convenience and focus when research and product development is required; to deal with two different companies for the same product design could raise unnecessary complications. It helps to develop close partnership; to contract the product to a single supplier is, in itself, a clear statement of trust and partnership initiation. However, there are also a number of risk factors involved in the single sourcing strategy. The risk of supply breakdown for whatever the causes could be an issue; lack of competition may promote complacency.

“Market price minus” rather than “Supplier cost-plus” 

“Market price minus” rather than “Supplier cost plus”: Lean supply chain deals with the pricing issue very differently. In mass supply system, the supplied component price is normally determined by the unit cost of making the component by the supplier plus the profit margin that the supplier needs to make. That is what’s called ‘supplier cost plus (margin)’.

The problem with this approach is that the supplier’s cost model is accepted without questioning. The uncompetitive supplier cost could slip into the supply chain and compromises the supply chain competitiveness. Lean producer use the ‘market price minus’ approach. It first determine the market price of the supplied component through market research and benchmarking; then take away (minus) the agreed reasonable profit margin that the supplier need to make on each unit; what’s left is the ‘target cost’.

If the target cost is lower than supplier’s actual cost, the buyer and the supplier will then work together to lower the cost to meet the target cost. In this way, both the market price and the profit margin for the supplier are secured. This also means that all the pricing in the supply chain are market acceptable, thus secures the product success.

Early and close engagement with suppliers for NPI 

Early and close engagement with suppliers for NPI : In mass supply system, the new product introduction is solely designed by the mass producer - the buyer; and the supplier’s job is simply to make it according to the blueprint given; the supplier has noinvolvement in the design stage. Lean supply system choose to identify its suppliers first and then get them involved in the design and planning stage for the new product introduction.

This way the suppliers will have plenty opportunities to contribute their expertise to the design and by working with the engineers from the buyer innovation and new ideas can be generated much more effectively. The engineers from the supplier may work in the buyer’s site as the ‘residential engineer’ as if they are the same company. In this way, many later stage production and engineering problems can be eliminated in the earliest design stage. It is an important part of supply chain collaboration and integration.

Synchronized flexible capacity  

Synchronized flexible capacity : In the lean supply system, the assigned capacity for both suppliers and buyers are not permanently fixed, because a fixed capacity will either be over-capacitated when the demand is low; or it will be under-capacitated when the demand is high. More importantly the capacities of the supplier and buyers throughout the supply chain should ideally be synchronized to achieve the optimum supply chain efficiency.

The lean supply system builds on a largely synchronized flexible capacity. The key is to have the flexible capacity at each link of the supply chain. This capacity flexibility means having the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one products or service to another. Such flexibility is achieved through flexible plants, processes, and workers, as well as through strategies that use the capacity of other organisations.

Just-in-time delivery 

Just-in-time delivery: JIT is a well known lean approach. It represents the key philosophy and characteristic of lean manufacturing and lean supply chain. JIT is an approach to material control based on the view that a process should operate only when a customer signals a need for more parts from that process. When a process is operated in the JIT way, goods are produced and delivered just-in-time to be sold.

This principle applies to the entire lean supply chain. Parts are produced and delivered just-in-time to be built into the subassemblies. Throughout the supply network, the trigger to start work is governed by demand from the customer. A lean supply chain can be conceived as a chain of customers, with each link coordinated with its neighbours by JIT signals. The whole supply chain is triggered by the demand from the end-consumer in the market place. This system of flowing materials and good through the supply network is characteristic of a pull system. Parts are pulled through the chain in response to demand from the end-consumer.

Incentive and reward alignment 

Incentive and reward alignment: Lean supply chain pays great attention on the alignment with the suppliers through incentive and reward. The objective of the lean producer as the buyer is not to take piece of profit from the supplier, but to work with the supply to get the cost down so that together they build a stronger supply chain. The contributions that suppliers made to the cost reduction will be rewarded and incentivised.

The typical practice is that when the supplier made x amount of saving through efficiency improvement, 50% of which will be retained by the supplier rather than become the cost cutting of the component to the buyer. Contributions on better design and quality improvement will be rewarded with more businesses. This approach not only aligns the value adding to the reward, but also significantly boosts the suppliers’ motivation and commitment in creating a competitive supply chain.

Willingness to share a substantial part of its proprietary information 

Willingness to share a substantial part of its proprietary information : Lean supply chain also represents a culture of mutual trust loyalty at least and usually within the supply chain. Suppliers are willing to share substantial amount of proprietary information with the buyer. This openness and trust not only makes the supply chain much more visible, thus easy to coordinate, but more importantly it creates synergy between the parties. The value of information increases when it is shared and made use of more widely.

Focusing on Cost-to-Serve

To think lean supply chain is just a cost cutting supply chain would have miss the significance of the lean by miles. It would become a ‘mean’ supply chain if that is the case. Although, cost and efficiency appears always on the top agenda when it come to make a process leaner, but the subtle yet fundamental difference between low cost and lean supply chain can never be ignored. A slight misunderstanding of the concept could have a long lasting detrimental consequence in supply chain performance. In a lean supply chain, a cost-cutting idea can only be acceptable if it passes the ‘cost-to-serve’ test. In other words, the focus of lean is not on the cost but on the cost-to-serve.

In a lean supply chain, a cost-cutting idea can only be acceptable if it
passes the ‘cost-to-serve1 test. In other words, the focus of lean is not
on the cost but on the cost-to-serve.

Organizations have been applying lean concepts to corporate logistics systems and the wider domain of supply chain management ever since Toyota demonstrated its undisputable leadership position in production management. However, as so often occurs when new concepts are applied to supply chain thinking, people can start to have unreasonable expectations about the actual benefits. The cause of such unreasonable expectation appears always stemmed from the misconception of the original terms and ideas.

The fundamental concept of lean is identifying and eliminating waste in the material, processes, time and information, and adding value perceived from the eyes of consumer. Thus waste is the one to be cut across the management spectrum, not necessarily the cost. When a cost is identified as the waste, which does not seem to have added any value, it should be rightly slashed. The key issue here, therefore, is to looking for the cost that adds no value. If the cost that does add value to the supply chain has been cut, value has been cut with it. There is little justification why should value adding cost is to be cut.

Toyota’s three original criteria for value adding activities are:

• There must be physical changes
• It must be concerned by the customer
• It must be right first time

Wasteful activities are therefore defined as non-value adding activities. This is where the concept of ‘serve’ kicks in. If the activity adds the value and the value is perceived by the customer, the activity ‘serves’ the customer. Therefore an appropriate translation of the lean principles in terms of attitude towards the cost should be that to identify and eliminating the non-value adding or non- ‘serving’ activities. Thus, a measure for how wasteful is a cost or a cost incurring activity can be defined by what’s known as ‘cost-to-serve’.

Cost-to-serve = Total cost involved /Customer perceived value and service

With this measure, one can compare activities to see which one adds more value and which one is more of a waste. When the ‘total cost involved’ remains unchanged, the more ‘Customer perceived value and service’ received the lower the ‘cost- to-serve’, and vice versa.

So, the lean approach is not cost cutting but cost-to-serve cutting, which clarifies the opening confusion in this section. Furthermore, the purpose of lean approach can, therefore, be interpreted as to minimise the level of cost-to-serve.

This lean concept based on cost-to-serve can explain why some supply chains achieve low cost by ensuring customers are not over-serviced, while others achieved much leaner supply chain by investing more into the operation.

Drivers for Lean Supply Chain

What makes a supply chain lean? Research and literatures have pointed to six key drivers that will lead to a lean supply chain.

Driver 1: Waste Reduction

Elimination of waste is one of the key tenets of lean manufacturing. In the broadest sense, waste can be found from all aspect of business activities. It can take the form of time, inventory, redundant process and defects. Supply chain members must work together to identify and eliminate all those possible wasteful and non-value adding elements in order to become lean.

This elimination of waste will have a direct and visible consequence, which is the reduction of cost to the supply chain. When the cost reduced, assuming the output of the supply chain remains the same, the supply chain efficiency improves and cost-to-serve reduces. It is crucial that waste must be assessed from supply chain perspective not from a company’s own individual perspective.

For example, a company may move the inventory responsibility to the supplier in order to reduce its own the inventory holding cost. This may seem to be a ‘waste’ or cost reduction activity. However, from a supply chain perspective, the inventory holding cost has not be eliminated but merely been moved from one section of the supply chain to another.

The emphasis, as discussed in the previous section, must be on the waste but not the cost. Cost cutting, if it becomes the driver, can be very misleading and confusion. A preoccupation of cost cutting often leads to conflict of interest between the parties of the supply chain; and increase the supply chain total costs whilst trying to reduce the cost in an isolated local section. More importantly, the most sinister waste often lies in between the suppliers and buyers and not covered in anybody’s boundaries.

The waste of supply chain resources by not getting the suppliers involved in the early stages of product development is often not identifiable by either side. It is therefore highly recommended that supply chain should have joint, if not integrated, approach toward waste reduction. Collaborative policies and jointly formed multifunctional teams are much more effective in identifying the waste lurking in the gaps of the supply chain.

Driver 2: Demand Management

Managing demand is by far one of most important frontier that supply chains compete in the market place, and there is always significant room for improvement. In fact, the performance of the supply chain viewed by the end-consumer is largely hinged on how the consumer demand is managed, fulfilled and satisfied.

The status quo of the demand management in supply chains today show it is not just a matter of a good will or customer minded attitude. It is now a measure of supply chain capability which is often facilitated by sophisticated POS (point of sale) data communication system. Demand management thus will be enhanced or constrained by the companies’ material resource management systems which may or may not be compatible throughout the supply chain.

How well firms manage the demand and demand related information such as forecasting and market signals is also reflected in how they view and manage their collaboration with buyers and suppliers. Real-time collaboration and responses are highly desirable but hardly evident in most of supply chains.

Collaboration, not just for demand management, must begin with management’s understanding and acceptance of the concept, followed by a communicated commitment throughout the managers as well as the workforce. Regular meetings and reviews between the partners should be hardwired into the processes. Documentation, such as supplier’s manual, could be a great building block.

Driver 3: Process Standardization

Process standardization enables the continuous flow to run through the company and the supply chain, which represents another tenet of lean supply chain. Flow means the uninterrupted movement of a product or service through the system to the customer. Major inhibitors of flow are work in queue, batch processing, and transportation. These roadblocks slow the time from product or service initiation to delivery, and increase the material and work in process carrying cost.

The process flow concept helps to see and understand the value stream of the production and the supply chain. It also represents a shift from the vertical organisational structure and functional silos to a horizontal connectivity of processes in a stream of value. This value stream process linked the business activities to the need of customers. This means managing the supply chain process flow means focusing on system efficiency rather than activity efficiency.

Flow is best enabled when material and processes are standardized across the supply chain to reduce the complexity. But the standardized processes can only be achieved through wide range of close collaborations between the members of the supply chain. The typical processes to be standardized are planning and production. It helps the supply chain up and downstream to have thorough understanding of the process involved. Products and material standardization can help to share the subcomponents across the product lines, which will lead to volume advantages, consistency and operational cost savings.

Driver 4: Engaging People

Lean manufacturing differs significantly from production systems in its people engagement.

To implement lean process and develop a lean supply chain, managers must start with engaging people. This means the lean campaign is not just a brilliant idea of the CEO, nor it is the job of executive board, it is task that everyone in the organisation must get involved, especially the operators and engineers in the operational frontier on the shopfloor.

The improvement ideas and innovative changes are often come directly from the people who do the job. This also means that ownership of the lean campaign is in the hand of every employee not just a small group of senior managers. Engaging people is a near miracle drive for the lean transformation.

• First, by engaging everyone in the company, you have dug into the goldmine of intellectual assets of people. Their knowledge and expertise have been mobilised to contribute to the value adding activities.
• Second, engaging people is the best way to motivate them. People are the only active force in the business. How powerful this force is depends almost entirely how well they are motivated for the common courses of the supply chain.
• Third, engaging people is the only practical way to change the organizational culture; culture is can only be carried and displayed by people. A lean supply chain can be built to last if and only if it is created with the embedded culture.

Driver 5: Collaboration

Lean philosophy promotes working together and collaboration. Lean supply chain thrives on collaboration. Collaboration can take place between organizations within the supply chain or across different supply chains. Collaboration often results in shred resources leading to high level of economy of scope; it also significantly reduces the business risks for the partners by sharing it and jointly averting it; it promotes technological advancement and innovative product and service development. The power of collaboration has undoubtedly been recognised in all lean enterprises.

How to initiate collaboration from the lean supply chain context? It must start with the top level strategic intention from both or all sides. This intention is obviously based on the stakeholder’s interest and the potential benefits that the collaboration may generate. Initial proposal and executive level contact to draw a broad plan and review all the involved factors; then further collaborative areas or projects can then be put into details; finally the implementation and trial programme can be launched. However this is what normally called the top-down approach.

Many collaboration is created from bottom-up approaches. In this approach, practice and experience in working together in the past will have laid a good foundation; managers then build on that to expand the scope of activity and formalise the collaboration through institutionalising the processes.

Driver 6: Continuous improvement

Lean philosophy believes the journey to improve will never end. If better is possible good is not enough. It does not need to be a quantum leap; any small steps of changes toward better operations will be encouraged. Toyota Production System itself was not designed and created by somebody overnight, but rather an ultimate result from long years of gradually, step by step changes through the continuous improvement processes.

A continuous improvement process is an ongoing effort to improve products, services or processes. These efforts seek the ‘incremental’ improvement at a time and over time; it also embrace the ‘breakthrough’ improvement as and when it occurs. Some successful implementations of the continuous improvement have been known as ‘Kaizen, which is basically the Japanese word for continuous improvement. The key features of Kaizen are:

• Improvements are based on many, small changes rather than one radical changes
• Ideas of changes are often come from the workers at the operational front
• Small improvements do not usually require any capital investment or major change of process
• All employees are engaged to participate to seek the ways to improve their own performance
• It encourages the workers to take the ownership of their performance

Lean Process Mapping Tools

Lean approach, unlike many other ‘flavour of the month’, has been extremely enduring. After three decades of worldwide preaching and application, lean movement is still going strong. In today’s business management world, lean method is still the most popular one across the world. Over more than 70% of organisations have, to various extents, exercised lean. One of the reasons why lean is so widely applied and continues to be the most favourable method is that it has a set of practical tools that can be readily applied in almost all business circumstances.

The tools created originally by the Toyota production systems are called ‘lean process mapping tools’. The purposes of those tools are to visualise the material flows in the production lines and in the supply chains; to see where the waste is. They help to pull together the lean thinking principles and facilitate the discussion and communication, and help to identify the bottleneck and prioritise the remedial actions. There are quite many widely used tools that can directly support lean supply chain management.

Most of the figures of the tools are sourced from the article ‘Going lean’ by Peter Hines and David Taylor (2000).

• Value Stream Mapping
• Time Based Process Mapping
• Process activities mapping
• Supply chain response matrix
• Logistics pipeline map
• Production variety funnel
• Quality filter mapping
• Demand amplification mapping
• Value adding time profile

The value stream mapping tool as shown in figure 16 is designed to map out the value adding and wastage from the supplier to customer, including logistics, purchasing, order fulfilment, production processes.

Figure 16. Value stream mapping tool

The time-based process mapping tool is a simply ‘walk through’ tool to identify and map out the activity time (suppose to be value adding) and waste time (non-value adding) in every steps that the material has gone through, as shown in Figure 17.

The process activity mapping tool maps out the four different activities: operation, transport, inspection and storage that the materials have to go through. Keys are assigned to each activity types to help visualisation. Plan flow diagram can also be added to optimise the flow.

Figure 17. Time-based process mapping

Figure 18. Process activity mapping

The supply chain response matrix is used to evaluate the inventory and lead times incurred by a supply chain in maintaining a given level of customer service. It is used to identify large sects of time and inventory and allows managers to assess the need to hold the inventory.

Figure 19. Supply chain response matrix.

The logistics pipeline map is a compliment to the supply chain response matrix. It shows the accumulation of process time on the horizontal axis and of inventory levels on the vertical axis. It shows exactly where the inventory and time accumulate within each operation (see figure 20).

Figure 20. logistics pipeline map

Production variety funnel is a visual mapping technique that plots the number of product variety at each stage of the manufacturing process. This technique is used to identify the point at which a generic product becomes either increasingly or totally customer specific.

Figure 21. Product variety funnel.

Quality filter mapping is a tool designed to identify quality problems in the order fulfillment process or the wider supply chain. The map shows where three different types of quality defects occur in the value stream.

Figure 22. Quality filter mapping.

Demand amplification mapping is a graph of quantity against time, showing the batch sizes of a product at various stages of the production process. This may be plotted with a company or along the supply chain. It also can be used to show inventory holdings at various stages long the supply chain.

Figure 23. Demand amplification mapping.

Value-adding time profile plots the accumulation of both value-adding and non-value adding costs against the time. It is an excellent tool for looking at time compression or mapping out where the money is being wasted.

Figure 24. Value-adding time profile.