Posts Tagged ‘Lean manufacturing’

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

The latest edition of the IndustryWeek Manufacturing Business Challenge entitled “Longing for lean results” is now available.  This edition focuses on a company that has implemented lean six sigma practices but has yet to realize the operations performance benefits they desire.  Solutions are offered by Kinaxis and bBy Philip E. Quigley, CFPIM, PMP, and Douglas Lada, PMP of CSC.

The full list of past issues is below:

• 05/08 Eroding Virtual Enterpise
  Gain control and Confidence of Outsourcing Partners.
• 06/08 From Supply to Demand
  Realigning supply chain to react to customer demand.
• 07/08 Faded, Jaded Forecasts
  S&OP doesn’t reflect operations capabilities or market needs.
• 08/08 Winning New Business
  But Supply chain and operations must react and respond.
• 09/08 Fast but Inefficient
  Short lead times lead to excess inventory.
• 10/08 Plan for a New Plan
  Old ways failing as new markets and geographies tackled.
• 11/08 No More Belt Tightening
  Finding hidden inefficiencies in the supply chain.
• 12/08 Longing for Lean Results
  More and sustained improvements expected.

I was intrigued by the cover page story in The Economist this week, titled “All you need is cash”.  While fleetingly wondering if The Economist had to pay royalties to the Beatles, I was more interested in their analysis of the changes occurring currently in our attitude toward cash management, particularly the attitude toward leveraging debt. 

Over the past decade the attitude of the markets, and consequently that of Finance, has been that cash is bad.  Right now the companies most leveraged are in serious trouble to finance their operations let alone refinance their debt.  The Economist relates this attitude to cash loosely to lean manufacturing and lean supply chains, where cash is the equivalent of inventory and must be reduced to a minimum.  While from an accounting perspective inventory and cash are viewed as assets, and therefore roughly equivalent, any operations person will tell you that inventory is a liability, especially finished goods.  As I have expressed in a previous article, a negative cash-to-cash cycle is the equivalent to debt:  Finance loves it, but it increases the risk enormously, especially when it is a financial instrument rather than an operational instrument.

I posted a response to The Economist article, the text of which is below.

## My Comment ##

While there is a lot of good analysis in the article, and some in the commentary, I do want to comment on the one sentence devoted to Lean manufacturing.  There is no doubt that Lean increases the risk of shortages in times of uncertainty.  The whole point of Lean is to have a repeatable and smooth process, especially when coupled with Six Sigma.  There are well recognized ways to “right-size” inventory to accommodate variability and uncertainty, both of which have increased because of the credit crisis. 

Too often in the West we have taken Lean to mean zero inventory.  This behaviour started with the US car manufacturers forcing their suppliers to adopt VMI without ever improving processes, the result being that the suppliers had to finance large inventories while the overall system inventory did not go down.

At the same time it must be noted that buffer inventory is there to buffer against demand and supply uncertainty.  Too often inventory targets were set on a “just in case” basis.  Applying Lean principles well and across tiers of the supply chain has reduced inventory.  What better way to free up cash for operations.

However, all too often Finance has forced Operations to set inventory targets that are too low, greatly increasing the risk of supply disruptions.”

My colleague, Randy Littleson, posted an article recently about a Fortune article on Tim Cook, the COO at Apple.  While the article, in my opinion, places too much emphasis on improved financial performance based upon the reduction of inventory, it also emphasises how much operational improvement has gone hand-in-hand with the reduction in inventory, including both opening the Apple stores, thereby getting a better view of “true” demand, and of outsourcing manufacturing, thereby gaining more supply flexibility.  In the process Apple has been able to “right-size” their investment in inventories.  Without the operational improvements, the financial improvements would have been difficult to sustain.

I do still worry about the manner in which Apple uses their market presence to force payment terms on their customers and suppliers which results in a negative cash-to-cash cycle.  This is a financial instrument which forces an extra burden of cash financing on the Apple suppliers.  Not only have they had to take on more inventory liability and carrying costs, but they have to finance long payments terms.  I do not believe this to be in the long term benefit of Apple, let alone their suppliers.

I came across an article entitled “A plan to fix the U.S. auto industry” that I found interesting in large part because it spoke to supply chain management’s role in solving the critical problems the industry faces.  I added a comment to the site and have copied it here as well.

## My Comment ##

I like the fact that you focus on some of the supply chain challenges.  Clearly, the first goal is building products consumers want - high quality, fuel efficient, the right styling, etc.  The Big Three have a long way to go there.  But, as you accurately pointed out, the supply chain is an integral part of the system that can’t be overlooked.

Toyota has revolutionized the automotive industry with their adoption of lean manufacturing practices that reverse the conventional flow and focuses on eliminating waste in the process.  Reversing the flow means that instead of “pushing” products out (you build them and push them out to dealers), you build based on customer “pull” (a customer buys a car and that sends a signal back up the supply chain to build another one, which signals to buy the parts, etc.). 

By “leaning out” their processes they can dramatically reduce inventory throughout the supply chain.  The other thing Toyota (and most Japanese/foreign automakers) has led in is its relationship with suppliers.  Like many industries, automotive manufacturing has become an exceptionally outsourced process with parts coming from many suppliers (years ago, Ford, for example, would make all the parts and do the final assembly.  This has changed radically) that span the globe.  Toyota treats their supply chain partners as just that, partners.  Toyota invests substantially in training their partners on their lean techniques and ensuring that they are fully aligned.  At the end of the day, Toyota knows that their supply chain is only as strong as the weakest link and that, despite heavily outsourcing the manufacturing of key components, it is the Toyota name on the end product and, thus, they are fully accountable for the end result.

The Detroit automakers, on the other hand, have taken a very different approach.  They generally treat suppliers as commodity providers of services and focus first and foremost on the supplier that can provide the part(s) at the lowest cost.  It’s not as much as a partnership as it is a “buyer-seller” relationship at arms length.  The resulting differences are profound.

As your article accurately points out, one aspect of reinvention that the Big Three need to face is how the supply chain fits into their overall strategy.

You can see more on this discussion here: “What’s your relationship with your suppliers?“

If you follow a number of supply chain management blogs you’ve probably seen that there are a series of posts going out regarding the seven grand challenges for spend and supply chain management.  This was initiated by Michael Lamoureux at Sourcing Innovation.  Michael has a listing of all the posts there.  The idea was inspired by Gartner’s Seven Grand Challenges for IT over the next twenty-five years.

I’ve given this lofty idea some thought, solicited input from others here at Kinaxis, and came up with the following grand challenges (not a list of seven, but a list nonetheless of critical challenges).

1. The struggle to connect outsourcing and lean.  Lean manufacturing requires a “synchronized” value chain.  Outsourcing makes that extremely challenging, especially if the goal is to maintain the lean state throughout that value chain.  Often companies only attempt to achieve a lean state internally and drive buffer inventory strategies at their sub-contractors (non-lean) to make sure they are positioned to support course corrections.  The benefits of both are seemingly clear, but how do the two interact?  Companies are plowing ahead with initiatives in each area, but do they have plans to make them work harmoniously?
2. Being in control when you’re not in control.  Over the last several years, we’ve seen the pendulum swing for brand owners, from complete control of an integrated manufacturing function to a heavily (and in many cases, completely) outsourced model with globally distributed partners.  The initial driver for outsourcing was cost.  The problem of course is that with outsourcing came less control.  Their brand and reputation is on the line, but they don’t directly control the key aspects that impact quality, compliance, etc.  We’ve recently seen numerous high profile examples of where this has posed major problems.  On top of this, we’re seeing major changes in the cost structures that are impacting labor, transportation and other product and manufacturing costs.  A huge challenge for brand owners will continue to be balancing the issues of being in control when they are not directly in control of all aspects and to continually adjust to changing conditions “on the ground” that impact costs.  The ability to quickly take apart and rebuild supply chains to factor in these changing conditions will be key, while simultaneously building in the visibility, processes, controls and relationships to make it all work.
3. Sustainability.  I do not believe, as some have argued, that this is the latest “hot topic” or fad, nor is it simply timely because of the political timeline.  I think these are real and serious issues that will only increase in priority on a global basis.  The challenges of designing sustainability into products is one thing, but one aspect that I think is a huge, huge issue hanging over this important topic is the lack of global standardization.  It’s tough enough to meet the needs of, say the EU, but when their standards are different than those in China which are different than those in the US and so on, you have a major issue.  I think we’re going to need some better global standardization to make huge breakthroughs here or the costs and overhead associated with these initiatives will prevent full adoption.
4. The role of supply chain in a company.  I continue to believe that far too many companies are taking far too tactical a view on their supply chains.  Supply chain excellence is NOT a priority to most CEOs.  They are focused on revenue, profitability and compliance and view the supply chain as a tactical and operational necessity.  The reality is that as companies become more globalized both in terms of their operations and their revenue potential, the supply chain continues to take on a growing strategic role.  Supply chain risk management is a hugely important topic that needs to be led from the top down.  Failure to elevate the important and signifance of the role supply chain plays will continue to place companies at risk.
5. Increasing volatility.  If you compare the environment/world you live in today vs. that of, say 5-10 years ago, I think most would agree that things are moving at a faster pace and customer expectations continue to climb while their loyalty is less.  Volatility is on the rise.  I see nothing on the horizon that will change this.  Think of how easy it is today for a startup in China, India, or you name it to compete with you on a global basis - in your backyard, with your previously most loyal customers.  It can happen to anyone seemingly overnight.  This means that customers are in the driver’s seat and are calling the shorts.  My sense is that most companies are not wired to win in this environment.  For years companies have been built around the mindset that we plan, then we execute.  If we can do this better than anyone else - strictly speaking from a supply chain perspective (not all other aspects of competitive differentiation) - then we will win.  That’s just no longer enough and I think the trend here will continue to accelerate and place even greater pressures on companies to rethink the way they approach supply chain management.  Dealing with increasing volatility is a very substantial challenge.

I hope some of these grand challenges are thought provoking.  Would welcome your thoughts as well.

In the latest edition of Manufacturing Insights, Bob Parker has a good piece discussing how high-tech/electronics can realize benefits through lean manufacturing.  Bob uses the publicly reported results on revenue and profit to draw a reasonable conclusion that the companies that have actively adopted Lean methodologies are out-performing those that have not.   He further elaborates on some of the challenges that the adoption process must address as the complexity and breadth of the supply chain grows.  In fact, I don’t think the article emphasize this enough.   The goal of lean manufacturing is to essentially connect the entire value stream and eliminate all forms of unnecessary waste.   The bottom line promises many things including; reduced lead times, less inventory, improved quality, and ultimately the ability to be much more responsive to customer needs.   With the continuing outsourcing trend, and both customers and suppliers more geographically dispersed, the ability to connect and synchronize that value chain has become dramatically more challenging than the days of the vertically integrated factory.

Many of our most sophisticated customers are still struggling with approaches to ensure that as demand changes occur, the entire supply chain is correspondingly adjusted.   To make the point clear, imagine a string of cars on the highway that are only 10 feet apart but all traveling at 60 mph.  If the first car suddenly slows down, only the second car in that string knows that anything has happened and even a minor delay in response will increase the risk of crashing.     With each successive car the opportunity for safely adjusting their speed diminishes, until at last you have one enormous pile of wreckage.    Instead, imagine if all the cars had radios so that the first car could broadcast the fact that he was hitting his breaks.   All the cars would slow together, and thereby avoid the resulting accident and rising insurance costs.

The challenge of connecting the supply chain is no small task as many of the players are using different ERP systems and lack the sophistication to properly establish or adjust ROP (reorder points) values based on the changing variables (demand, yields, etc..).   This is an area where RapidResponse with its ease of integration to disparate ERP systems and  exceptionally powerful analysis and reporting tools can be an instrumental part of the Lean value chain synchronization process.   As demand changes at the brand owner location, and assessment of the risk and need for Lean related adjustments across the entire supply chain can be made.    If adjustments are needed, they can then be communicated simultaneously.