Taking Lean Thinking into your supply chains

It's tough out there. International competition is forcing cost-downs but demanding more agile and responsive operations in the struggle for customer service. That puts lead times, batch sizes and inventory under even more pressure. None of that is new, but given that the cost-cutting and efficiency improvements at the businesses and production levels are either done or well underway, we need a new solution. The answer is better, more synchronised, lean supply chains. And the prize, we're told by those doing it, is: slashed lead-times, reduced direct and indirect costs, and reduced raw, WIP and/or finished goods inventories. And that's just for starters. You can also expect to: transform poor supplier reliability through collaborative operations; get flexibility and responsiveness all the way through manufacturing; achieve best-in-class customer service ratings; and make fire-fighting and expediting things of the past. But it's not happening. A survey of 800 companies, from SMEs to global multi-nationals, published by Deloitte last month shows clearly that organisations are not getting the best out of their supply chains. And the reason, according to Mark Shaw, supply chain practice director at Deloitte, is: "Organisations are tending to optimise locally rather than globally, from the suppliers' suppliers to their customers' customers." He refers also to companies moving manufacturing out to Eastern Europe and Asia, but failing to take adequate account of international compliance, logistics and currency factors, while allowing information sharing to be too departmental and too local. But changing that entails some serious re-thinking of our fundamental business and operational processes – and also thinking differently about the roles and requirements of some of our IT. How do you do this? What does a lean supply chain look like? How do you move from where you are today, to a lean supply chain that fits you? Those and other questions – like what's hype, what's reality, what are sensible priorities, who should be involved and what do I need to do to my IT – were the subjects of a major Lean Supply Chain Forum organised by this journal and its sister title, 'Works Management', last month at the Gaydon Motor Heritage Centre in Warwickshire. We put together a panel of experts: Prof Dan Jones, world-renowned lean thinking guru and author of the book 'The Machine that Changed the World'; Ken Douglas, technical director, BP; David Marsh, global strategy and business architecture manager, Diageo; Dr Michael Ali, CIO at Jaguar and Land Rover; Deloitte's Mark Shaw; Stuart Facey, vice president TrenStar; and Graham Leake, lean transformation agent and former manufacturing director with Britax Aerospace. Their collective conclusion: we need to start with proven lean thinking concepts and methodologies, but extended to drive what Dan Jones calls "brilliant processes," in tandem with IT – capitalising on the web but including information, automation and workflow systems at a range of levels plus modern tracking technologies. These are the way to sustainable improvements: big picture, long range planning, for example, alongside exception-based real-time visibility of changing demand, material movements and WIP plus detailed, optimal and synchronised production systems that help us to deal with real world manufacturing issues as they happen. Easy to say; much harder to do. Just as with original lean thinking, simplified visibility and replenishment are among the keys. But every company and every supply chain is different, and lean, after all, is a journey. Lean teaches the value of learning to see, value stream mapping and reorganisation as starting points: but none of these is going to be trivial across networks of customers and suppliers often with conflicting interests and different agendas. And that's especially the case for SME manufacturers. So to Jones, and he points out Toyota's own claim that it gets "brilliant results from average people managing brilliant processes, whereas its competitors get average or worse results from brilliant people managing broken processes." For him, those 'brilliant processes' are not just about moving to parts per million quality in production, on time delivery and so on – cutting the cost base – but also doing that in supply chains. Jones believes automotive assembly plants and retail in the form of Tesco are the models closest to excellence. "If you're trying to screw 2,500 components together once a minute on a vehicle, any disruptions to inbound flow are going to have massive implications for management. By getting to five parts per million [errors] you dramatically reduce the number of problems you have to deal with every day." Hence the lean supply chain focus in automotive: that and the scale of investment and clout available. Jones is adamant: achieving lean supply chain excellence isn't only about cutting inventories and time in a supply pipeline – the physical waste. That's key, but every bit as important is working at your flow, and going for schedule stability. "Schedule instability tells you exactly the same story about the information flow as inventories in physical flow," he warns. But because manages think they can't flow, they set it aside and go for the waste they can influence. That has to change. He gives the example of a pharmaceutical company making product with six years shelf life, travelling through three warehouses to the customer, with around 11 months inventory in the pipeline, yet with plant schedules being changed every day. "Ridiculous isn't it? How do you break through the chaos of constant short term plan changes? What a mountain of gold if you could solve that problem." Rapid and reflexive For him, the answer is "rapid reflexive replenishment" – trying to replenish in a day exactly what was sold in a day, as opposed to cognitive planning and scheduling. And it's based on Toyota's spare parts distribution system, which has only two months inventory end-to-end, compared to most supply chains' 11 months. "It's probably the most slick supply chain anywhere in the world. It has the smoothest order signals and the highest correct on-time completion in the business. That was the model we used to teach Tesco." It's also about "understanding that you've got at least two different kinds of flows," says Jones. "Look at your SKUs and your volumes by SKU and you'll recognise that 50% of your volume comes from 6% of your SKUs. So you put a fixed schedule, fixed sequence in for those products and get a level flow. You link all the processes, dedicate some lines and within six weeks I guarantee you'll see a 30% increase in output. Levels of availability on that product will make your finance director ring up and say 'What the hell's going on!'." And you continue that process, gradually sucking in more of your SKUs, gaining experience "until you're really good, your batch size is very small and you can get to variable schedule, variable sequence. Then for the other products you start analysing them differently and costing them very differently and asking whether you need them." That's the 'how', but his fundamental point: "If you can make the supply chain extremely rapid, extremely reflexive, you can take noise out of the order signal, which is the biggest problem outside the plant – information flow." 'If' is the operative word here, or perhaps 'when'. Jones counsels against "buying a better scheduling system", but concedes that it's far from easy, and can take years. Others believe that for manufacturing SMEs, while this kind of replenishment cycle should be a goal, for as long as customers are kings, it may never happen. In the meantime, scheduling systems have crucial roles to play despite Jones' view that they're predicated on "the curse of economic order quantity logic." Jaguar Land Rover, for example, is wrestling with levelling demand signals to its suppliers. The IT for broadcasting immediate term requirements in sequence is there, but change is too frequent. "We fall into the trap of treating [the supply chain] like it's a bucket – one department, one company, handing over something to the next," agrees the firm's Michael Ali. "You can't get any saving that way ... because of the whiplash effect of a small variation on our side generating huge variations down the chain. We've got to get more discipline and control of our processes." Why is it such a problem? We all know why: customers change their minds; distributors bunch orders together; sales outlets want physical goods to sell and then incentivise staff accordingly; promotions are poorly planned; the list goes on. It's not just about economic order quantities, although that's a big part. But it all leads to chaos that for now is only manageable by IT handling the information flow to which it has access. Add to all that the issues for many in UK manufacturing around make/configure-to-order because of the demand for variety, and reflexive replenishment looks a very distant dream. No-one denies we can, and must, strive for it – and one of the keys is in the 'runners, repeaters and strangers' thinking above that separates production and supply chain processes according to SKU frequency at whatever build level. Another is challenging the need for big buffers of inventory, so that costs can be cut and information flow, of necessity, improved. Yet another is in going for common processes. Even the vast Diageo organisation, which encompasses 500-plus brands, 10,000 SKUs and operations in 140 countries, is successfully driving for the latter, with common processes for beers and spirits in Ireland and Australia. "We've broken the thinking that says my product's so different from anywhere else, the complexity's so different, that it can't be generalised," says David Marsh. IT on the Lean journey But equally, we have to use the IT available to manage what can't be done that way yet. And Diageo's solution there is wall-to-wall SAP, which has been being rolled out since 2004. Marsh's answer to the challenge that SAP might "lock in the waste in his system instead of focusing on waste reduction and reflexive supply chains" was unequivocal. "Does MRP work for us? Yes it does: it works downstream; it pulls from the suppliers – we've got a collaboration website with our main suppliers so they see what our 13 week schedule is in advance. Any changes, and we've got alerts. What we're working at now is how to move that further into upstream distribution." Even Jones concedes: "I still think that capacity and materials planning and look-ahead are where you need these kind of systems – but actually driving production and shipping instructions need to be separated." And Ali suggests that part of the value of getting ERP systems is in beaming accurate, up-to-date data to the heartbeat processes, wherever they are – as opposed to people having printouts, different databases etc. In short, it's worth reminding ourselves there's more to IT, and for that matter ERP, than MRP alone. It's about much smarter integration and communication, with computer-assisted automation and modern IT-enabled business processes that also strip out waste, repetition, duplication and effort, while also building in flexibility and agility so that manufacturing businesses and their supply chains become more responsive. That's in and between internal departments – including sales, engineering design, purchasing, production engineering, planning, manufacturing, assembly, test, packaging and after-sales service – as well as out through multiple sites and into supply chains. Together these can revolutionise companies' carrying costs and simultaneously their customer service and thus profitability. For example, estimating and quoting engines and product configurators can strip huge amounts of time out of front-end sales and sales engineering – and then also transform production engineering and operations automatically. Likewise, while there remains no panacea for forecasting demand, today the emphasis needs to shift to working seamlessly with customers, partners and suppliers to smooth demand where possible and to enable accurate and agile scheduling where it's less so. Back in the world of smaller manufacturers though, Graham Leake, agrees that managing the various supply chains is crucial to success. Until recently, Britax Aerospace had some 350 suppliers and a flat Pareto analysis, he says, so the start point was cutting that to a manageable number. But you also need to drive further improvements from the shopfloor, working with suppliers through procurement people, aided with production and business information on systems – so they have the time to do so. The same, incidentally, applies to engineering design so that the right parts are available for the right orders at the right revision level. Jones sees this as the third generation of lean thinking, after lean supply chains. "Design for lean is actually the biggest benefit of all… Toyota is challenging each new product generation every five years to come in at 30% lower cost with additional functionality, which means they've got to fundamentally rethink. If you don't have a direct loop between the people who design the next generation product and the processes to make it and deliver it and the supply chain, you won't get the iteration you need and you will not get design for lean." Ali agrees, saying that the Jaguar Land Rover design chain, as with many, has some of the least documented, least rigorous and least disciplined processes – and that's with 80% of car parts being designed by suppliers. He stresses that for design freedom you can't enforce too much structure, but adds: "The biggest pain point for the suppliers was the engineering change order process, and one of the solutions was something as simple as having a standard engineering change order form… And the other part is in collaboration, with very simple tools built into the desktop." For Leake, the solution has been a simple web-based system for immediate information sharing to provide visibility into the supply chain, with alerting on exceptions. And if you're looking for other connections between lean thinking and IT, think of getting the waste out and information flow improved, in material tracking and reconciliation. Leake makes the point that a lot can be done with suppliers, even if it's only initially around barcoding. "We were not a large customer of the suppliers so we couldn't dictate, but it was a question of saying 'We'll help you through this; we're only talking about a PC program and a label printer'." BP's Ken Douglas makes the point that there are some huge improvements to be had with relatively simple initiatives. "You can get a lot of information on a barcode, and if you need a bit more, try 2D barcodes," he says. "You don't need RFID to take over from hand written labels!" But he also suggests that companies consider the value of "an expert sitting alongside all your assets providing information about their state, location, whatever, all the way from raw materials to finished goods… There are a lot of very fundamental changes in technology that are allowing us to acquire information about the physical world much more cost effectively, much more easily."