Posts Tagged ‘Lean manufacturing’

As if earthquakes, tsunamis and floods aren’t enough, now car companies need to deal with a worldwide shortage of PA-12, a special nylon used by almost all auto companies. According to Businessweek, PA-12 (polyamide resin) is a form of nylon that is used for plastic pipes, tubes and hoses to carry vapors, fuels and other liquids. It also used in plastics used in car seats. An explosion at the end of March at a chemical plant in Germany knocked one of the few companies that manufacture this resin out of production. Not only does this company (Evonik) manufacture this chemical, it also manufactures almost 70% of CDT (cyclododecatriene) which is used by other companies to make PA-12. Ouch.

What makes this worse is that car companies following the tenants of just-in-time have very little inventory, especially of component parts. Just-in-time practices consider inventory to be one of the wastes that should be relentlessly targeted and eliminated. This has resulted in billions of dollars of savings due to reduced inventory levels and more streamlined operations. However, that inventory reduction means that there is no buffer to carry companies when a significant supply disruption occurs.

The explosion at the plant in Germany, the earthquake and resulting tsunami in Japan, and the floods in Thailand are causing automakers to rethink their approach to just-in-time. The world has changed since just-in-time was developed by Toyota in the 1970s. Factors like increasing globalization, reliance on specialized parts (where one factory makes a large percentage of the world’s supply) have increased the risk associated with the zero inventory principle.

Having lived through several Lean implementations, I used to be a strong believer in zero inventories. But I’ve come to realize that while inventory reduction is still a goal to be striven for; the RIGHT amount of inventory is going to be some quantity greater than zero. I’m not going to go into mathematical theories about how much. I’d probably get most of it wrong anyway. What I will say is that you need to look at your component part sourcing and pick the right amount of inventory for those components;

• Do you have parts that are sourced through a single supplier? When doing this assessment, don’t just look at the supplier. If you can, look at the supplier’s supplier. With the flood in Thailand, not only was the drive assembly impacted, but several component part manufacturers were co-located with the assemblers. When the flood hit the assembly plant, the component plant got hit to. Assembly plants not affected by the flood were still impacted because they couldn’t get parts.
• If you have multiple sources, are those sources in the same geographic area? If an event like the Japan earthquake were to happen, it is likely that both suppliers would be taken down.
• If your source is on the other side of the world, what would happen if there was a major interruption to shipping? A large storm, a significant event at a busy port could delay the shipment of goods by weeks.

If you answer yes to any of these questions, then maybe you should consider holding more inventory on these components. Even if you have multiple sources, you may need to hold enough inventory to cover the lead time needed to get these other sources ramped up to cover the full demand. This might be a good exercise for the Chaos monkey. (Pick a part and simulate what would happen if you couldn’t get this part for a week…or a month…or 3 months). Another related exercise would be to simulate the effect of disabling all suppliers in a given region for 2 months. What would be the impact on your supply chain? How would you recover?

I certainly don’t recommend drifting back to the bad old days of building inventory for the sake of building inventory. I also still think that unnecessary inventory is waste. However, there is the right quantity of inventory for each part and those that can figure it out will be better able to survive a significant supply chain event.

Are you planning on changing your inventory strategies as a result of recent events? If so, comment back and let us know.

Welcome to the first blog post in the SCM30 series. Throughout 2012, Kinaxis will be exploring the past 30 years—as well as the future—of supply chain management. Though supply chain management concepts have been in practice since the turn of the last century, it is widely agreed that the term was created by Keith Oliver in 1982—you’ll find more details on that in the post below.

Watch for the SCM30 posts on alternating Fridays over the next few months. These blog posts will be fueled by conversations on the Supply Chain Expert Community discussion forum. Look for the next discussion to start there on Monday, March 26.

I came across the following blog post at The Manufacturing Blog that gives a plain English description of pull-model production methods – how to be lean and demand-driven.

I particularly like Stephen’s analogy of push vs. pull manufacturing:

By trying to guess potential demand, manufacturers often found themselves in the same situation as someone carrying an umbrella on a sunny day because the forecast predicted rain: extra effort for no reason. Modern manufacturers prefer to stick their head out the window and check for rain before grabbing their umbrella, so to speak, limiting waste and maximizing efficiency.

As Stephen points out,

Understanding the many complex strategies behind these new manufacturing methods can be as difficult as predicting the weather, as they have brought along with them a series of three-letter acronyms that dominate jargon-filled conversations about current manufacturing trends, like JIT, TPM, QRM, and JIS. These letters don’t exactly help to explain the basic ideas behind pull-production manufacturing, which actually make a lot of sense when spoken in plain English.

Thus, Stephen gives us a plain English guide to the ‘alphabet soup’ and breaks things down to the key concepts of lean manufacturing, Six Sigma and flexible manufacturing. It’s a good overview.  And the long list of acronyms in the post reminds me of our Suitemates “Suites are Sour” comedy video episode – the acronyms in our industry are not just limited to manufacturing and supply chain terms, but also applies to the associated technology applications!

Without a doubt, Lean Manufacturing has been a transformative idea that has its genesis in the Toyota Production System.  Many companies have been able to reduce inventories and reduce order-to-delivery times simultaneously.  There is nothing new in this statement.

What is interesting is an article in Business Week discussing how Deere & Co is struggling to satisfy customer demand because of their adoption of Lean.  While undoubtedly, as stated in the Business Week article, there has been a big emphasis on Lean adoption in Deere which has led to large reductions in inventories, I think there is more that can be drawn from the story. The question is whether you can get too Lean?

Source: AGCO Corp. http://www.AGCOcorp.com

Before I start though, here are some caveats:  I am not a Lean practitioner, I am not a financial analyst, and I do not know the strategies of the companies I will discuss below.  But I am a farm boy, and had a Massey Ferguson, one of the AGCO brands.  I spent many happy hours ploughing fields and reaping crops on “big red”.  I learned to drive the tractor when I was 5 and had to pull down on the steering wheel because I wasn’t heavy enough to push the clutch down.  Going to the tractor dealer was infinitely more interesting than going to the car dealership or toy store.  However, I digress.  As a child I experienced the side of the buyer, and as an adult I have been inside more than one of the Ag equipment manufacturers as a consultant, so I know a little of their operations too.

As the Business Week article states, this is a highly seasonable business.  One thing that has changed dramatically since my father bought tractors is that they are now highly configurable with all sorts of options that include air conditioning and GPS.  Combining seasonality with configurability is a toxic mix for getting Lean wrong.  A central tenet of Lean is “level loading” which is all about keeping a regular cadence in production.  This is fine when you can predict the demand very well, but outside of these tight boundaries, it is really easy to get into trouble either in terms of missing customer shipments (as is the case at Deere), or in terms of not making best use of capacity. From the numbers, it appears that Deere has focused on reducing inventories without implementing an adequate postponement plan to reduce the order-to-delivery cycle.  Let’s go and look at the numbers.

The data in the table above is based upon the 2009 financial results.  (You can do the same analysis using our free benchmarking service.) From this, we can see that Deere & Co has by far the lowest days of inventory (DOI).  However, look at their cash-to-cash (C2C) and days of sales outstanding (DSO).  Their DSO is 7 times more than that of AGCO, which is best-in-class.  What I suspect is that the Deere DSO represents a lot of inventory sitting on dealer floors for which Deere has extended long payments terms to the dealers.  I don’t know this for a fact, but from what I know of the relationships between OEM’s and dealers in the Ag Equipment industry, I suspect this is the case.

More interesting from an operational perspective, is to analyze Deere’s inventories, especially in comparison with those of AGCO.  We see that Deere has roughly double the finished goods (FG) inventory of AGCO and roughly half the raw material (RM) inventory of AGCO.  The work-in-progress (WIP) inventories are roughly the same, though in real terms, AGCO’s are 33% lower.  The conclusion I come to is that Deere makes FG and stuffs the channel.  If the FG values don’t convince you, what about the DSO?  It would appear that AGCO has worked out how to forecast dependent demand – components and sub-assemblies – so they buy a bunch of stuff and then do late stage assembly to meet market demand.  I come to this conclusion because they have the highest RM yet the lowest WIP and FG.  Compare that to Deere which is organized the other way around with more FG and relatively little WIP and RM.  My conclusion is that AGCO is the company that has truly embraced Lean.  Simply reducing inventories without a good postponement strategy is a recipe for poor performance. Where we see the real benefit to the AGCO investors in the return on invested capital (ROIC). Clearly there is a lot that Deere is doing that is correct.  Of the big Ag Equipment companies they have the highest margin values, all the way from gross margin through to net margin.  So I hope they get this right.

Let me repeat at this point that none of my analysis is based upon deep knowledge of how these companies operate.  I could be wildly wrong, but I don’t think I am.  What do the Lean experts out there think?

I came across a great blog post by Atul Chandra Pandey from Infosys titled “Y2010 & Ahead – value chain trends in emerging economy” in which Atul emphasized the following trends in the first part of a 2-part series:

• Customer side equations will take prominence over rest of value chain
• Supply chains will get more integrated with marketing and service chains
• Speed and responsiveness will be key drivers for spend on new initiatives
• Cost will continue to play critical role in decision making
• Asset Management will gain more prominence and will help in accelerating “green” initiatives

I responded to Atul in the following manner:

We too are experiencing that prospects and customers are focusing a lot more attention on customer satisfaction as it pertains to on-time delivery of orders, but also to the enquiry-to quote and quote-to-order processes.

I couldn’t agree more with your third point about speed and responsiveness. Overall the trend we are observing is that consumer behaviour is pervading B2B transactions with ever shorter lead times. Coupled with the adoption of Lean and postponement strategies, companies have to be very responsive to changing demand, blurring the lines between planning and execution. These are the business drivers for your third point about agility and responsiveness.

Cost will always be a driver in supply chain management. If we adopt any of the Lean concepts it should be the elimination of waste. All too often I come across situations where the information and decision lead time exceeds the physical lead time to manufacture and/or deliver the order.

But this got me thinking about several other reports and observations that have come across my desk over the past 12 months.

First and foremost must be the article by Dan Gilmore at Supply Chain Digest highlighting the work done by Supply Chain Digest’s research arm CSCO (Chief Supply Chain Officer) Insights.  There is an excellent report titled ”Next Generation Supply Chain Management: Integrating Planning and Execution” available from this link. (Subscription required).  In the article, Dan Gilmore observes that “For many years, analysts and others have offered separate models of ‘supply chain planning’ and ‘supply chain execution’ processes, and the technology vendors were generally organized in that sense as well. You can find many diagrams that show hierarchical planning processes with no connection at all to execution, for example. The report argues, and the research supports, that this gap must be closed from a process perspective to meet the challenges of today’s supply chains.” I added the bolding because this is the key to being able to provide the speed and responsiveness to which Atul at Infosys refers.  Not only that, but also managing to contain if not reduce supply chain costs will depend on being able to reduce this gap between planning and execution.

Traditionally we have used inventory to buffer against what we would like to happen (the plan) and what actually happens (execution).  But this is no longer possible.  As the graphic below illustrates, as long ago as 2004 postpone strategies had pushed much of the inventory up the supply chain to the suppliers.  They too have adopted Lean and postponement strategies, leading to even lower inventories.  And then there is the effect of the recent recession.  Nearly all the OEM’s I speak to are struggling to secure supply of components, clearly indicating reduced inventory levels in the suppliers. I wish I had equivalent inventory figures for 2009.  Anyone willing to provide these figures?

Then there is the excellent blog written by Lora Cecere recently titled “Tackling the Black Hole in the Center of Your Supply Chain” in which she states “We now know that fixed data integration, one-dimensional rules mapping, and traditional master data techniques from ERP to Supply Chain Optimization are insufficient.  As a result, plans are created and consumed in isolation, and transactional systems hum along with little– to no — guided intelligence.”  So as the speed of business has increased – some would describe this as volatility – the supply chain systems have not kept up.

And most of the information is now external to your organization.  Companies have being trying desperately to get point-of-sale information to get early trend analysis of sales.  At the same time, many brand owners have largely outsourced manufacturing, not only lengthening the physical supply of goods, but also the time and effort it takes to make a decision.  All of these factors are only making the gaps between planning and execution even wider.  But the business need is to close this gap; to respond to demand changes quickly and effectively.  As Lora Cecere, states, the solutions from the 1990’s have not kept pace with the business needs.  Throwing more ERP at the problem isn’t the solution.  At their heart, all ERP systems are essentially accounting packages.  They deal with your data – financial and operational – but provide very little help in dealing with the majority of the information, which now exists outside of your organization.

What are your thoughts?  Do you experience this gap?  Are your systems able to cope.  Will your next breakthrough in performance come from learning to plan better, or learning to respond to plan variance?  In other words, closing this gap between planning and execution.  Robust debate encouraged.

I’ve been thinking about this post for some time.    I’m a Toyota customer.  Our family has owned four Toyota Corolla’s over the past twenty years and we’ve always been very happy with them.  Our most recent purchase, a 2010 Corolla S, has been a great car for my daily 160 Km (100 mile) commute.  With a fuel mileage of 5.6 litres per 100 km (35 mpg) on the highway, I’m not cursing the oil companies with the vehemence I once did.   On the other hand, this is the first time I can recall in all the years that we’ve owned Toyotas that I’ve had to deal with a recall. And so far, I’ve had two (brakes, accelerator pedal)…with a possible third (power steering?) rumoured to be in the works.

The Toyota quality problems have disappointed me.   I learned about the Toyota production system when I was studying Industrial Engineering in college.  At that time, it was held up as the future in manufacturing - a model that other manufacturers around the world should follow. It still is.  At Toyota, defects are considered to be MUDA (waste) when they occur, the root cause is found and eliminated. This is the cornerstone of their system.   Since then, my studies in lean manufacturing have taken me deeper into the Toyota manufacturing system and my faith in the quality of their products has only improved.

I expect better from Toyota…and I suspect Toyota feels the same way.

Toyota has made mistakes: first the error that caused the problem in the first place, then the shoddy handling of the first incidents (which could be the result of disbelief that the problem could be caused by a manufacturing defect).  They seem pretty confident now that they have the problem figured out.  Let’s hope so.

What got me thinking is this…  Here is this vaunted company, renowned for the fine quality of its products, with systems specifically designed to prevent quality problems from happening and especially from getting out of the factory.   Yet, this company is running into some serious quality problems.

Think about Toyota and their processes.  Think about your company and your processes.  Which company do you think would be less likely to run into this type of problem? What processes do you have in place to ensure that this doesn’t happen?  Here’s something more interesting.  On February 1st, Toyota announced that they had figured out the gas pedal problem.  On February 11th, I had my car in for an oil change and they told me they had the kit to fix the accelerator pedal so they would do that while my car was in.  Toyota had the parts to address the sticking pedal recall days after announcing the fix.  How long would it take your company to respond?

I’m not trying defend Toyota.  Like I said, they made mistakes – and it’s costing them.  What I’m trying to do is to have us learn from what Toyota has done wrong, and from what Toyota has done right.   Who knows…  The next time it might be your company facing a problem of this magnitude.   Will you have the capabilities in place to respond?

What do you think?

I participated recently on a Future Pharmaceuticals podcast titled “Responding to Change and Cycle Time Reduction” with Walter Kittl (Siegfried-USA), Philippe Cini (IBM Global Services), and Zach Pitluk (Proveris Scientific) which was hosted by Reid Graves (Merck).  One of the questions was: What should senior mgt within the pharmaceutical/biotech industry do differently to realize rapid improvements in managing their supply chains?  Is there enough collaboration, sharing of best practices, awareness, and education?

The key point I stressed in my answer was to bring in fresh ideas from other industries.  Drug companies, specifically the pharmaceutical companies, have enjoyed very high gross margins – often as high as 85% –  for many years based upon patent protection and good portfolios of new drugs coming to market.  This has led to the slow adoption of Lean principles and little focus on supply chain innovations and efficiency when compared to other industries, particularly high-tech/electronics or consumer packaged goods.  These industries experience much lower gross margin, sometimes as low is 10%, meaning that their supply chain operations have to be much more efficient.  Some key metrics, averaged over the last 4 quarters, that illustrate the differences are below.  Notice the considerably longer cash-to-cash cycle, largely due to much higher inventory levels.

Telling an industry that they need new ideas is not always the sure way to a long term future in that industry.

Thankfully, I came across an article in the Wall Street Journal about the new CEO at Novartis, one of the largest drug companies.  (A subscription may be required to read the full article.)  As per the WSJ, Joe Jimenez “has led Novartis’s largest division—its prescription-drug business—for the past two years, overseeing strong growth. He joined Novartis in 2007, having spent most of his career at HJ Heinz Co., Clorox Co. and ConAgra Foods Inc.”

These are all consumer packaged goods companies. To quote the WSJ, Mr. Jimenez called the food business a “leaner industry” that was better at responding to changes in the marketplace, including changing consumer preferences.  “Margins are lower and the time with which you have to move is quicker,” Mr. Jimenez said of the food business. “The pharmaceutical industry in the past has not been focused on taking out non-value-added cost because the growth has been very good,” he said.

So there might be a future for me in the pharmaceutical industry after all.

More seriously, the business drivers for the increased focus on supply chain efficiency are directly related to the product portfolio performance.  Many of the larger companies are reaching the end of the patent period on their stronger performing drugs and do not have drugs coming though the development stage that will replace the older drugs.  Another contributing factor to an increased awareness of the importance of greater supply chain efficiency is the debate over healthcare reform in the US.  In addition, there has an increase in the competition from drug companies in the so-called BRIC countries (Brazil, Russia, India, and China) especially in generics. Although these countries are less of a factor in the prescription drug business at the moment, they are likely to be a much bigger factor  in this part of the business over the next 5-10 years.

What do you think?  Will the pharmaceutical industry transform itself internally, or will “fresh blood” be needed?

Lora Cecere, while at AMR Research, published a list of predictions for 2010 that are CPG and retail focused, which is her specialty.  What is interesting about the list,  in my opinion anyway, is that we will see a lot of retail behaviour begin to percolate down the supply chain.  This is my first prediction, but it is really an observation of an acceleration of this phenomenon, rather than a beginning.  At the heart of Lora’s predictions is the shift of power over the last 20-odd years from the brand owner to the retailer to the consumer.  This is associated with a big increase of online shopping, or as Lora states “What’s old is new again, with e-commerce rising from the ashes of the dot.com bubble.”

It is this re-emergence of e-commerce that has given the consumer the buying power.  Of course, the recession has had a role to play by making price a key buying criterion, possibly the key criterion.  But e-commerce allows the consumer to compare several alternatives, in terms of both brand and price, in a fraction of the time and with greatly reduced effort.  While mall shopping isn’t going away any time soon, there is no doubt that e-commerce has shifted the buying power to the consumer through ease of use and ease of choice.  For example, my daughter went to the mall with a friend and came home excited about a skirt she had seen in a store but couldn’t afford it.  My wife called her friend to get a few more details and then spent about 20 minutes on the internet finding the best deal, which was 30% less than the store price, including shipping.  It would have taken her at least 20 minutes to drive to the mall and the 30% reduction does not include the cost of driving to the mall.  And it arrived in time for Christmas.  What’s not to like about this story?

So how does this relate to our market, which is much more in the low volume, high mix and build-to-order category, rather than the high volume, low mix and make-to-stock environment typical of CPG?  As has been commented by many people before me, retail-like behaviour is being adopted in more industrial environments.  I visited a fab-less semiconductor manufacturer in late December that is wrestling with increasing demands for a much wider choice of product capabilities coupled with expectations of greatly reduced order to delivery lead times.  The lead time expectation is a lot less than the manufacturing lead time so the semiconductor manufacturer is looking at postponement strategies including, very importantly, die reservations in the foundry, which of course they do not own.  Because of a greater product portfolio they cannot afford to keep the same levels of inventory because of the associated risks of price reduction and obsolescence.  As I stated in the opening paragraph, the adoption of consumer behaviour in a business-to-business environment has been increasing over the past few years, and will only accelerate.

Perhaps it is Lora’s point about the effect Wal-Mart is having on the supply chain that best captures the impact consumer and retail behaviour is having on the larger manufacturing sector.  Because Wal-Mart is such a dominant player, initiatives enforced by Wal-Mart soon trickle down the supply chain through multiple tiers of supply and affect other industries too.  Lora selects 3 initiatives: “sustainability scorecards, rethinking inventory strategies, and the initiation of the Supplier Alliance Program.”

Let’s start with inventory.  For centuries, inventory has been used as a buffer between demand and supply, starting with grain silo’s and other food stores.  The fab-less semiconductor manufacturer I mentioned above is, like many other manufacturers, adopting postponement strategies including reducing inventories to preserve cash, while at the same time being faced by the need for shorter order to delivery times.  Obviously there is a lot that can be done to improve manufacturing flexibility and shorten change-overs, but the biggest gains are to be had in reducing the order processing times, especially the time it takes to determine if the order can be delivered on time and in full.  Given the reduction in inventory, the issue has gone from available-to-promise (promising from finished goods inventories) to capable-to-promise (determining if the products can be manufactured in time), blurring the distinction between execution and planning.

The sustainability scorecard will perhaps have the biggest and widest long term effect on the supply chain.  As stated in a New York Times article, “In the future they may also have information about the product’s carbon footprint, the gallons of water used to create it, and the air pollution left in its wake.” With the impact of environmental legislation also trickling through the supply chain, particularly the electronics supply chain, it will only be a short time before a full product sustainability scorecard will be required including “carbon” accounting.  I think it is only some time before we will have a “carbon cost of goods sold.” And, as commented on in the NYT article by Tim Marrin, associate director of external relations for Procter & Gamble, “The last thing a supplier really wants is when you’re doing a separate index for every retailer.”  Wal-Mart has the market “muscle” to see this through and to ensure a standard is adopted across the industry.  For assembled products, such as consumer electronics, this means that the suppliers to the brand owners will also have to conform.  Which is how we will see the “trickle down” effect influence the adoption of a sustainability index on labels permeate other industries.  To be fair to high tech, particularly computing, they have had a start rating in effect for some years.  But the Wal-Mart initiative will take this to a whole new level of detail and accountability.

Am I just still too full of Christmas “cheer”?