Lean SCM - The Essentials

Lean SCM - The Essentials Thomas Craig
Expert Author
Published: 2006-05-26

A major mass merchandiser has decided to go leaner with its inventories.

This decision has significant implications and impact for its supply chain and for the supply chains (and manufacturing) of its suppliers. Lean logistics has just taken a new meaning for everyone. Smaller lot sizes, increased flexibility, more rapid deliveries have been ratcheted up even more as a requirement and way of doing business. Companies are assessing expanding from lean logistics---where tools of lean are used in segments of the company, such as warehousing-and becoming lean across their entire supply chain.

Lean is becoming a strategy method for gaining competitive advantage and even for survival, not just for manufacturers, but also for retailers and wholesalers. Adding value and removing waste are no longer options for companies. Non-lean practicing companies face competition from foreign made goods-competition which can have significant impacts on their business and industry. Even lean practitioners understand that the effort to be lean is ongoing.

Manufacturers have recognized the value of lean for their production area. However lean has not been recognized by retailers, wholesalers, manufacturers and logistics service providers, including 3PLs, as part of a strategy for growth. The value and waste of supply chains has not been given sufficient attention. Some of the lack of attention reflects recognizing the intricacies, complexities and differences of supply chain management, especially where international sourcing and manufacturing is involved.

Surprisingly, retailers and wholesalers have often not recognized the need for lean in their businesses. Their business approach often uses a batch and queue inventory approach. Their common attempt at being competitive has been to push suppliers to reduce prices. After years of this approach, that fruit is no longer low-hanging and may not even be on the tree. So what are they to do to stay competitive? One sound option is to develop and implement lean supply chain management.

WHAT LEAN SUPPLY CHAIN MANAGEMENT IS.

Lean and supply chain management have much in common as to recognizing the customer, being based on pull, requiring flow, assessing the waste of inventory, and creating value with growth, not just reducing costs. Companies with a lean supply chain, the inbound from suppliers and the outbound to stores or to customers, have identified the value of the supply chain and the waste that exists and are removing the waste.

The purpose of a lean supply chain is to meet the 5R's of logistics, namely, inventory that is:

- the RIGHT product

- in the RIGHT quantity

- in the RIGHT condition

- at the RIGHT place

- at the RIGHT time

Activities that support the 5Rs add value. This applies both to the movement of product and to the movement of information. Conversely, any activities that do not add value, do not further these 5R's, are waste.

By being lean, companies are efficient at lower volumes / lower size lots, have greater flexibility; gain higher productivity, increase product mix diversity, improve rapidity of product development cycle, and have higher quality of performance

Waste can be difficult to recognize; it is seen and accepted of how the business of the company is conducted. It is deemed as part of the ongoing "process" and is built into whatever is done.

Drawing on the types of waste in manufacturing, there are seven types of waste in supply chain management:

1) Over supply. This is supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories-and revenues and profits.

2) Transportation. Unnecessary or slow movement of product adds no value. This can include movement of inventory between company facilities.

3) Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.

4) Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.

5) Movement. Any unnecessary movement of people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.

6) Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.

7) Over processing. This is doing more than is necessary

These waste activities occur in different ways for both Make To Order and Make to Stock companies. Compressing cycle time and increasing inventory velocity are the preferred results for lean supply chain management.

The first requirement to becoming lean is to be able to identify waste. If you are not able to see waste, you cannot begin to remove it and become lean. Waste impacts time required, inventory investment and turns, capital tied up and not earning an adequate return. Lean is about removing waste, not just reducing it.

How far are we from the smart supply chain

BangkokPost.com

Chris Catto-Smith

Many companies have developed very efficient supply chains, but are they smart? What makes a smart supply chain? Or is it a silly question to begin with?

Eight years ago, we made a presentation to the World Economic Congress in Hong Kong on the characteristics of "smart" supply chains. Let's see how far things have progressed against the original points in that presentation, as follows.

True visibility to actual demand. The opening point was "assessing true customer demand through a 'pull' approach was the first step to achieving smart supply-chain management.".

And today? Despite increased understanding and the opportunities to reduce its impact, organisations still haven't solved the bullwhip effect. The emphasis must still be on developing relationships with supply-chain partners who can respond appropriately to demand signals across functions. This enables the collection of significant transactional detail in a way that is extremely smart and can contribute to accurate forecasts of consumer demand.

Internet-enabled global visibility. "Near-real-time track and trace of inventory at the SKU-level by location (SKUL) is required for smarter international and domestic supply chain activities."

In 1998 near-real-time-visibility was a more of a buzzword than operational reality. However, now most organisations are able to exercise good visibility and control over their activities. "Visibility" is clearly part of a smart supply chain, with organisations understanding much more clearly the concepts and requirements of implementation throughout multiple levels.

Modular application architecture. The point we raised then: "Modularisation and smarter application design at each level of activity across the supply chain will enable tighter systems integration, deployment of specific capabilities as quickly as required in company-owned and logistics service-provider facilities, faster customisation of functionality without destroying future upgrade paths, with a focus on event-driven architecture."

And the point now? Service-oriented architecture (SOA) is now widely adopted now from a technology perspective. What SOA can do is enable true event-based processing, which can improve how information flows and enable smart communication (such as alerts) for exceptions or potential problems.

Real-time planning/execution linkage. Our view then: "Linkages between supply-chain planning and execution systems must occur both at the data and process levels."

Our view now: The internal barriers that existed then between planning and execution still need to come down. We need more "smarts" embedded in transaction-based execution systems between organisations - not just internally.

Reporting and analysis. Then: "Deployment of supply chain reporting solutions that compare planned results to actual performance are necessary for smarter control and analytics."

What is happening now: We have seen broad and growing use of Six Sigma methodologies within our supply-chain processes, but not fully embraced supply-chain statistical process control. There has been increased sophistication and standardisation of practical supply-chain metrics, particularly through SCOR (www.supply-chain.org). Metrics are critical to the smart supply chain, unfortunately competing implementations of project such as Balanced Scorecard without utilising cross-functional SCM measurements is hurting many organisations.

Common messaging-alert systems. Our point then: "Messaging and alert systems that cross multiple applications should be deployed to ensure smarter management of supply chains."

And now: This concept has morphed to mean "event management systems" that cover the entire supply chain. Unfortunately few companies, with the exception of some retail groups, have moved much beyond very basic event management systems. Event management is an important attribute but it is doubtful we will be able to implement global event management systems across all supply-chain processes.

On reflection, back in 1998 we had ignored the critical role of people in establishing and maintaining smart supply chains. If given a chance at the presentation again, we would start with the importance of having organisations aligned to key processes and their respective (customer-facing) demand chains. Senior management would share the same SCM measurements (such as those outlined in SCOR) and their team bonuses linked to (and dependent on) those of their counterparts in supplier and customer organisations. Even so, we have come a long way in eight years.

Lean supply chain

Magazine Article, Source : The Manufacturer US
Zone : Logistics and supply chain
Published : 18 May 2006 15:00

Demand-driven production calls for a demand-driven supply chain. George Schultz finds out what is different, and where the cost-cuctting opportunities are

Cutting all waste – of time, resources and costs – out of an enterprise constitutes what is generally called “lean” strategy. Apply it to supply chain performance and it shows the divergence of industry today, in how individual companies harness lean principles to stake competitiveness in their markets.

Fidelitone, a major service parts provider, and Procter & Gamble and Seagate Technology, big players in quite different product sectors, all implemented ambitious “lean” strategies in their complex supply chains. They did so in strikingly different ways, but all keyed on demand dynamics.

Fidelitone leveraged its long experience in manufacturing, warehousing and distributing products to become service parts strategic partner for the likes of Sears, Black & Decker, and Best Buy. It developed a demand-driven and lean-focused information technology, a system adaptable to its clients’ diverse business plans.

Procter & Gamble largely invented the model of manufacturing-marketing that goes from consumer demand at the store shelf all the way back through production to supplier requirements. Yet, especially with acquisition of the Gillette Co., P&G remains intent on further transforming its consumer driven supply network (CDSN) through lean principles.

Seagate, the world’s largest maker of disc drives, faces strongest pressure from the supply-into-production end in its extremely volatile sector of the computer industry. Hence, it focuses on continued progress of its demand-driven supply network. The idea is actual market demand pulling through its integrated operations to trigger supply replenishment for the economies of lean inventory.

Many manufacturers today can relate to Fidelitone’s role and its quest for fast-paced supply and logistics solutions. It essentially is a 3PL (third-party logistics provider) that provides value-added services – “in spades” here. The company was founded 70 years ago to manufacture phonograph needles (some still remember that product name), which marks quite a transition since CD players doomed its market.

That may be a fitting parallel to what Fidelitone executive vice president Tom Giovingo decries as “the old typical supply chain model.” He describes it as “having one or several warehouses packed full of duplicated inventories based on inventory forecasting. “Manufacturers buying hundreds or thousands of items from particular suppliers had them programmed in a system of, for example, a four-week lead time, whatever was standard for a particular company. You ordered and always had some standard safety stock calculated,” he adds, “continuing to be over-inventoried as you sat on the items.

“But in today’s supply chain environment, with customer requirements and cost pressures from customers as well as stockholders,” says Giovingo, “we all have to be much more progressive.”

One way of becoming lean, Giovingo says, “is having the proper technology – beginning with a [demand] forecasting tool that will allow you to set business rules, business parameters, lead time and safety stock, not only at the supplier level but also at the SKU (stock-keeping unit) level. That’s one way we view lean management with inventory discipline.”

Fidelitone operates in a range of 30,000 to 80,000 SKUs in service spare parts for commercial and residential users among its clients’ customers. All must be deliverable wherever and whenever needed. A good operational understanding comes from the Best Buy example. “They chose to approach their repair parts [fulfillment] for consumer electronics, computers and appliances in a non-traditional way,” Giovingo explains. “Instead of partnering with one, two or three suppliers, they’ve chosen our National Parts Group, an affiliate which Fidelitone established for Best Buy specifically.

“They aggregate all their orders nationwide to our company. With Best Buy’s involvement, we’ve developed 37 ‘shipping partner’ relationships among distributors, manufacturers, rebuilding houses and supply houses - for example, OEM batteries for a Sony cordless phone, because Sony doesn’t itself manufacture batteries.”

Fidelitone (or National Parts, in this case) is the manager using its customized technology that integrates the broad supply base with the order processing base. Upon Best Buy ordering items, multiple in most instances, a “needs list” goes electronically via EDI or FTP to appropriate supply partners (“in sort of a reverse auction”) with SKU numbers and quantity. Upon its availability and price response, the supply source selected receives its order, usually within an hour of first communication for typically same-day shipment.

It’s fast, and paperless. And it’s customizable. The whole vendor shopping and order management mechanism is processed through Fidelitone’s ERP system, ASW, from International Business Systems. Giovingo stresses, “The only way I’m able to manage all that effectively is utilizing technology; I could never throw enough people at this process. And it’s able to provide a customized, flexible solution that adapts to each client’s individual business criteria. We would not have the strategic partners we have if we were not flexible in modifying our processes to accommodate our clients.”

Like many companies today, Procter & Gamble exercises manufacturing flexibility and cycle response in producing to demand (versus to forecast). But this company, much more than most, really goes to the source – consumer behavior at the store shelf. “We consider that ‘the consumer is boss’,” says Rick Ciccone, director of supply chain operations for P&G, “and retailers are responding, which puts new pressure on manufacturers.” He holds that today’s supply networks aren’t fast and flexible enough, citing as one challenge the pace of innovation with products increasing in number and complexity (noting a 20 percent increase in innovation for the past three years). Another factor is consumer demand for affordability and value. And, manufacturers, to be effective, need to understand full end-to-end supply network time.

With acquisition of Gillette, effective in October of last year, P&G is the world’s largest consumer products company. It has more than 170 manufacturing facilities in 40 countries, plus some 20 R&D centers globally. “It combines each company’s unique consumer/shopper under-standing to strengthen retailer relationships,” Ciccone says, “and expanded innovation platforms and pipelines.”

So continues P&G’s three-year “consumer-driven supply network transformation” that includes building capabilities to produce to a demand operating strategy. This stresses greater links to external metrics – “beginning at the store shelf, the consumer’s expectation there and taking the product home, and then we work our way back through the supply network. Historically, companies would start at the manufacturing point and push inventory out to retailers and push it into warehouses,” Ciccone says.

Among key operating principles already determined, generally for any company, are that external focus presents “a culture change” in many organizations, and that previous focus on cost reduction needs to be shifted instead to attention toward “value and growth creation.”

Ciccone says that P&G has had its own comprehensive supply chain framework in use for the past 10 years. And similarly, with early reference to the Toyota Production System, “for decades we have used various performance tools, including lean. “About 10 years ago we brought the best of all of these tools together in our own production system which we call IWS, for ‘integrated work systems.’ So we’re not limited by just what is in the lean toolbox. We have a much more holistic and broader approach to it.”

Significantly, Ciccone observes that “’information replaces inventory’, which is kind of a foundational piece of the supply chain that then supports CDSM. Traditionally,” he notes, “you would have had buckets of inventory throughout all of the interfaces. With information now, you have visibility of that inventory and can reduce those buckets and synchronize the entire supply chain. So we really do have that philosophy that information begins to eliminate, to take the place of inventory.”

Meanwhile, Seagate Technology, the hard disc drives maker, continues its journey to a demand-driven supply network, defined more specifically as Seagate’s “inbound supply chain” by Rich Becks, vice president for worldwide supply chain, lean and e-business operations. Yet, it is a real time, demand-pull supply chain, Becks notes, having end-to-end visibility and transparency using Web portals, with an e2open portal as the hub to its partners. (e2open provides software and services to manage inter-company processes.) All collaborative processes are affected, including design, supply chain and channel management.

To counter volatile demand driving up inventory levels in manufacturing-to-forecast, Becks says, the transformation entails implementing buy-side VMI (vendor-managed inventory) and “stocked” customer VMI hubs. Moreover, it is implementing auto-replenishment and has initiated a strategic buffer program, while using the SCOR (supply chain operations reference) model of the Supply Chain Council to benchmark “best practices” initiatives.

To add perspective to all this: Seagate is a vertically integrated global manufacturer which ships some 100 million disc drives a year and consumes 90 million parts per day from more than 100 suppliers. Complex? All told, it deals with more than 5,000 part numbers, and 100 of its product lines are subject to frequent changeover in production. Operationally, the company uses “lean” replenishment with kanban, e-kanban and material kitting.

On the outbound (customer) supply chain side, Becks says objectives include “meeting customer demand without excess inventory, and [ensuring] realtime visibility into point-of-sale data and channel inventory.” Overall, he says results of the demand-driven transformation so far show improved customer delivery with better capability for unplanned responses, plus a tremendous productivity improvement in drive production. He reports a 114 percent inventory-turn improvement and global inventory cut in half.

The Supply Chain Council is a global not-for-profit organization based in Washington, DC. Its software-based SCOR Model is a tool for improved supply chain planning and communication, applicable across all industries. It groups all supply chain functions under five top-level processes: plan, source, make, deliver, and return, with increasingly detailed layers of functions and metrics.

It was at a Supply Chain Council member’s executive retreat recently that Procter & Gamble’s Ciccone first observed that, through synchronized operations enabled by lean strategies, “information replaces inventory.” Probably the key objective of all this attention.

Keeping Supply Chain Transformation Simple

By Editorial Staff

A no-frills approach and collaborative supplier relations prove keys to success in inventory optimization at Styker Instruments

[From Supply & Demand Chain Executive, April/May 2006] Stryker Instruments designs and manufacturers a range of complex specialty surgical equipment used in operating rooms around the world. But when it comes to deploying new technology to streamline the company's supply chain, Stryker's operating philosophy is "keep it simple," according to Mark Lincoln, director of manufacturing at the Kalamazoo, Mich.-based division of $4.87 billion Stryker Corporation.

"Many of our strategies are built around simple philosophies, and the simplest is, let's not make things more complicated than they need to be," says Lincoln, who recently had the opportunity to put that philosophy to the test when Stryker undertook a project to improve inventory visibility and real-time communications with its supply base. Lincoln's experience leading this supply chain enablement project offers insights into the benefits and challenges of applying simplicity to complex supply chain problems.

The Groundwork for Transformation

Stryker Instruments first developed a strategy for improving its supply chain back in the mid-1990s, when the company also began working externally to establish closer partnerships with its suppliers. At the time, Stryker's approach was to share as much information as possible with its supply base, albeit in a manual fashion, to help the suppliers run their own businesses more efficiently and, consequently, serve Stryker better. The company also established a supplier advisory board that met quarterly with Stryker's top dozen suppliers to discuss issues in the supply chain and ways to improve the supply chain that would benefit all the parties involved.

In the late 1990s and moving into the new millennium, Stryker turned its focus to its own operations, working internally to implement lean manufacturing and streamline its production processes. As those efforts progressed, the company began to look at addressing two supply chain issues. First, Stryker wanted to target inventory reduction by implementing an electronically enabled, or e-commerce-based, vendor-managed inventory (VMI) program. "I wouldn't say that inventory management was a huge problem for use, but we just knew that we wanted to do something different to control our inventory a little bit better," Lincoln says. Essentially, Stryker wanted to give its U.S. and overseas suppliers visibility into the division's inventory information without having to implement an expensive electronic data interchange (EDI) system. Data targeted for exchange with suppliers included forecast, consumption, shipping and receipt information coming from the company's manufacturing resource planning system at its Kalamazoo facilities.

In addition, the company thought that it could streamline its purchasing function so that Stryker could maintain or reduce headcount in procurement even as it grew the business. The company also believed that if it could relieve its procurement staff of manual chores and day-to-day management tasks, the purchasing function could refocus on more strategic activities and become more proactive in managing the company's supply chain.

As Stryker began examining its options for accomplishing these two goals, the company turned to its supply base for consultations — and this is where all the relationship- building that Stryker had done in years past paid off. Rather than encountering a suspicious supply base wary of change, Stryker found suppliers amenable to participating in the project. "We created a steering committee with our suppliers and tried to make sure we were able to answer all the questions and concerns that they would have from a supply chain standpoint. We didn't do [this project] in a vacuum," Lincoln explains. Together, Stryker and its suppliers drew up a set of functional specifications that included the top ten capabilities they believed were necessary in a solution to address Stryker's two objectives. This process ensured supplier buy- in for the project from the very start and would help smooth the implementation of the solution later.

The Simple Approach

Lincoln says that Stryker's approach in searching for a solution to meet its requirements was to look for a tool that would address the specific objectives the company had in mind, enabling inventory visibility and real-time communications with suppliers to establish a workable VMI process. "We didn't want to revamp everything that we were doing, we just needed to get better and quicker at communicating," Lincoln explains.

After reviewing its options with its suppliers, all parties agreed that the best choice was a solution called i-Supply from TradeBeam, a San Mateo, Calif.-based software company offering a suite of supply chain applications that address the end-to-end procure-to-pay cycle, including inventory management. Simplicity was a key selling point for the TradeBeam solution, according to Lincoln. "It was very intuitive to use, and it just made sense," he says. "It wasn't a big ERP project. There wasn't going to be a half-year or year- long implementation, and it met our particular needs in terms of inventory visibility and real-time communication."

The TradeBeam solution provides the company's suppliers with real-time inventory consumption, forecast and shipping data, as well as visibility into their supply chain interactions with Stryker. Suppliers can use a Web browser to communicate advanced shipping notices (ASNs) and promise-to-ship information to Stryker as well. And TradeBeam's solution provides alerts to supply chain participants, allowing for more proactive, exception-based management of the supply chain.

Rolling out the New Process

Stryker signed the contract with TradeBeam in the fourth quarter of 2000, went through system setup and training for in-house staff and suppliers by the end of the year, and went live in January 2001 with a pilot program that lasted through April of that year. As the company rolled the solution out to its broader supply base during the pilot, Lincoln and his team went site to site around the supply chain to introduce vendors to the new process, spending a half-day or day with each supplier to ensure that they were onboard with the solution.

A few suppliers did express some initial concern that implementing TradeBeam might actually make their job harder because the system called for exchanging much more information with Stryker. "But," Lincoln says, "once we got them fully trained and they really understood it, they absolutely embraced it and didn't want to get rid of it." Stryker did wind up taking a couple suppliers off the system temporarily because they were unable to assimilate the new solution into their processes and learn the solution's functionality at the initial pace that Stryker had set. However, additional training ameliorated these difficulties, and Stryker eventually brought those suppliers back into the system.

Here again, the good relations that Stryker had built with its suppliers were an asset that the company was able to tap into as it drove the rapid, widespread adoption of the solution. "If we hadn't had that relationship and instead just tried to force them to use a new program, I don't think we would have been as successful implementing this with our suppliers," Lincoln says.

Internally, the only issue that arose within Stryker stemmed from the rapid implementation pace that the company has set for the project. The foreshortened timetable got the solution up and running quite quickly, but subsequent to the go-live Stryker went back and made various modifications to the system, which meant additional work for the company's information technology staff and TradeBeam's project staff. "We might have spent a little bit longer in the set-up phase trying to think of all the different scenarios and ways that we could use this tool, and all the information we wanted to pull from our ERP system into TradeBeam," Lincoln admits. "But the flipside of that is that every day we might have spent trying make it perfect before we implemented it would have been costing us money. There's a fine line between spending all the time out front and getting it perfect versus implementing it and fixing it later but getting the benefit of it right away."

Measuring the Impact

To date, Stryker has rolled out the new process and the TradeBeam solution to close to 100 suppliers, accounting for more than 95 percent of its direct materials spend. Stryker actually uses the solution to track 100 percent of its parts because of the visibility that the system provides to the company's buyers, but the suppliers of about 5 percent of the parts that the company buys are not using the system to manage their business with Stryker.

The manufacturer did not have a specific inventory reduction goal in mind going into the project, according to Lincoln. "As we were selling this expense and this new project across our organization, we wanted to be careful not to lay out the whole ROI in terms of reducing inventory by X dollars," he says. "Because we didn't know at the time — maybe this new system would say that we needed more inventory in certain areas. Six months later, if we hadn't reduced inventory but we were running a better business, we didn't want that to be considered bad."

Nevertheless, Stryker has documented inventory reductions of 30 percent over time, as well as an increase of 16 percent in inventory turns, and the elimination of expedited freight and stock-out occurrences. In fact, Lincoln says that the company recorded double-digit inventory reductions within the first 90 days, achieving a full payback on the division's investment in the solution before the pilot project was even completed. In addition, the company was able to reduce its materials staff by two people since going live, even as Stryker's purchases grew by double-digit percentages in the three years following the implementation.

As important, the division has continued to increase its service levels to its end customers. Lincoln says that the TradeBeam solution cannot fully take credit for that result, but it has played a significant role in streamlining order processes between Stryker and its distribution centers internationally, with previously manual processes now handled using EDI through the system. And the system has helped Styker's own suppliers improve their performance as measured, for example, by such metrics as "short parts" versus "green parts." "It hasn't eliminated stock outs and back order situations, but it has allowed us to identify those situations more quickly and focus on those exceptions a lot quicker than our old system," Lincoln says.

Looking back on the project, Lincoln believes that a key lesson to take away from the project is the importance of solid, long-term relations with the supply base when a company is attempting to quickly transform its supply chain. In Stryker's case, the collaborative relationship that the division had built with its suppliers allowed the different parties to work together to identify a suitable solution that met a shared set of requirements and that would benefit all sides. In this instance, that was important not just for the suppliers but for Stryker as well. "Because you're at the mercy of the supplier," Lincoln says, "It's true vendor managed inventory, so if you don't have the trust in them and they don't have the trust in you, you're setting yourself up for failure."

Sidebar: Best Practices

Build relationships early — Establish collaborative relations with suppliers before undertaking supply chain transformation.

Keep it simple — Don't try to solve all your problems at once.

Don't paint yourself into an ROI corner — Define your return on investment carefully so that overall positive results are not overshadowed by shortfalls on isolated metrics.

Sidebar: ROI

Inventory...........................................30 percent reduction
Inventory turns....................................16 percent increase
Expedited freight............................100 percent reduction
Stock-out occurrences...................100 percent reduction
Time to payback..............................Within first 90 days

Extended Lean Can Make Your Supply Chain Hum

By John Rumasuglia

OEMs are ready to embrace Lean Manufacturing after the 2001 recession, but traditional approaches were designed for vertically integrated enterprises. The answer to their problem? Extended Lean and Statistical Kanban.

The electronics manufacturing industry has changed dramatically during the past 20 years. Two decades ago, most computer and telecommunications original equipment manufacturers (OEMs) were vertically integrated companies with design, manufacturing, assembly, sales, marketing, service and repair under the same roof. A small community of outsourcers found work making and assembling printed circuit boards and other commodities for these industrial giants, often in small lots for prototype production runs.

Gradually, these tiny contract manufacturers (CMs) expanded their offerings to include more sophisticated multi-layer boards, flexible circuits, surface-mount packaging, and tape-automated bonding, while the OEMs concentrated on building complete systems.

By 1995, contract manufacturers like Solectron, Flextronics, Celestica (then an IBM subsidiary), Sanmina-SCI, and Jabil Circuits — whose combined annual revenues were less than $2 billion — began spreading their wings, taking on ever more sophisticated systems-level manufacturing, assembly and component sourcing. Meanwhile, the OEMs increasingly focused on their core competencies — design, sales and marketing.

By 2000, CMs had given themselves a new name to reflect their elevated status — Electronic Manufacturing Services — and the transformation of the global electronics manufacturing industry was complete. In fewer than five years, the industry had evolved from an environment dominated by vertically integrated enterprises to an ecosystem of outsourced supply chains — with EMS, OEM and tier-one component suppliers making up the three most important links.

Today, the Big Five EMS firms alone employ 270,000 people and have combined annual revenue exceeding $65 billion. And global revenue from all forms of electronics outsourcing will approach $500 billion this year, according to the Outsourcing Institute. But while the EMS and OEM industries have grown to enormous size (Cisco, Dell, Intel, HP and IBM had combined product revenue of about $200 billion last year), most observers forget that supply chain manufacturing is immature and largely untested.

Indeed, since outsourcing became the dominant manufacturing model in the late 1990s it has faced only one economic downturn, and it failed that test miserably. In 2001, electronics manufacturers ran into a perfect storm: a national recession, the dot-com implosion and the 9/11 terrorist attacks. In two years, the semiconductor, computer and telecom OEMs wrote down nearly $13 billion in excess inventory. Since nobody has repeated the business cycle, one wonders how the industry will fare the next time the economy goes boom, then bust.

Anatomy of a Supply Chain Disaster

What caused the industry's $12 billion inventory overhang? Bad forecasting played a part. As did a build-to-forecast manufacturing model based on materials requirements planning (MRP II) principles. While MRP may have worked for vertically integrated manufacturers in slow-moving industries where demand was relatively constant, it never stood a chance in today's fast-paced, outsourced economy where demand fluctuates rapidly and product life-cycles are measured in months instead of years.

“The trouble with building to forecast is that the forecast is never accurate for long,” states Gary Cortes, co-founder of FlowVision, a Lean Manufacturing consultancy based in Dillon, Colo. “The $13 billion write-off happened because there was a complete disconnect between the OEMs, their contract manufacturers (CMs) and the component suppliers,” he says. “The OEMs gave overly optimistic forecasts to their CMs who then placed orders for components. The distortion rippled through the supply chain, growing larger as each tier added capacity and ordered more and more material. When the downturn came, there was a huge inventory pileup in place.”

Larry Leveille witnessed the effects of bad forecasting first-hand. As a business unit director at Jabil Circuits, a $6 billion global EMS firm, Leveille recalls the go-go years prior to the 2001 crash as a euphoric period in which OEMs ignored the dangerous inventory build-up because demand seemed limitless. “During the dot-com craze they didn't want to leave any sales on the table,” recalls Leveille. “OEMs cared only about sales; if you didn't deliver according to their schedule, price and quality, they would go elsewhere. They dropped their forecasts to the CM in [electronic data interchange (EDI)], and you filled the order, end of story.”

As long as companies continue to build to forecast using MRP II push-production methods, another inventory disaster is just a matter of time, says Cortes. “Most companies are doing a better job keeping inventory in check right now because they were burned last time and senior management is paranoid. But it's not systematic. At some point another bubble will emerge, experienced senior managers will forget or be replaced, and disaster will strike again. It's only a matter of time.”

The First Steps...But Are They Working?

Of course, some OEMs learned from the last debacle that build-to-forecast production is dangerous, particularly in an extended supply chain involving hundreds or even thousands of suppliers. After all, the OEMs that insisted that contract manufacturers and suppliers build to their forecast ended up owning the unsold inventory. Now some of these companies are applying Lean Manufacturing practices to internal and external business processes.

While many CMs have Lean initiatives underway, nearly all of them are focused on internal production issues such as line-design, set-up and staffing.

“It is almost impossible to do Lean throughout the supply chain without the OEM leading the initiative,” comments Leveille. The reason? OEMs have built large planning, forecasting and contract management organizations with which to control the outsourced supply chain. “In the 1980s, OEMs would tell their CMs to build a certain number of printed circuit boards. The CM would get quotes from component suppliers and give a bill-of-materials (BOMs) cost to the OEM who would approve it or not,” he says.

But that changed once the OEMs began outsourcing the manufacture of complete systems. In order to mitigate risks and keep costs low, OEMs sourced finished products from multiple contract manufacturers. In addition, they insisted on controlling supplier selection as well as negotiating key terms and conditions of the contract with suppliers that govern pricing, volume, liability and so on.

With so little flexibility, the CMs and their suppliers had no choice but to respond to OEM forecasts as if they were gospel. OEMs may have outsourced manufacturing, but they were managing the supply chain with old-fashioned MRP tools designed for vertically integrated enterprises and command-and-control economies.

Of course, OEMs pay a heavy price for insisting on complete control. When the economy goes bust and their forecasts prove wildly inaccurate, they own the results, including all of the material flowing into the supply chain, the work in process, the finished goods inventory, the whole nut. That is why they ended up taking the lion's share of the $13 billion write-down. And it's also why some OEMs are beginning to change their tune and turn to Lean.

Certainly, they will find many willing partners among the forward-looking contract manufacturers and component makers in their supply chains who realize that in the long term Lean is important to their very survival. During the past decade, even well-managed firms that understood and tried to run Lean inside the four walls of their factories had trouble because the most influential members of their supply chains insisted on meeting pre-determined production schedules tied to unrealistic forecasts, irrespective of true demand.

How do you tell suppliers to only ship product based on actual demand (a key element of Lean known as “kanban”) when the OEM, and other key supply chain partners are responding to an inaccurate forecast? Furthermore, in many cases, sourcing contracts that are set up between the OEM and suppliers permit the supplier to ship components to the contract manufacturer even when they are not needed.

A New Way of Thinking

In today's globally outsourced economy, competition is no longer company against company, but supply chain vs. supply chain. Companies that want to run Lean must learn to do it collaboratively, in groups. In a Lean supply chain, traditional forecasting and MRP production scheduling techniques are used only for planning — to run what-if scenarios and communicate trend analysis back to suppliers. But they are not used to order material or produce products. Only kanban signaling is allowed for that.

Kanban is a Japanese word that means “signal” or “billboard.” It is the most fundamental concept in Lean manufacturing used to describe a material replenishment process in which every stage of production signals the one preceding it when more material is required or an act of production has been executed and a new one is ready to begin. Unlike MRP systems, which push material through production according to a pre-determined schedule that is based on a potentially inaccurate forecast, kanban is a pull-production process that is based on true customer demand. Kanban eliminates all but a small reserve of inventory or safety stock that functions as a re-order point while enabling the manufacturer to respond to unexpected surges in demand or interruptions in supply. When material drops below this re-order point, a kanban signal is sent to replenish it.

OEM executives love Extended Lean in a downturn because the only inventory in the pipeline (besides a small safety stock) represents actual customer demand. But how does a Lean supply chain respond during an upturn? Can Lean contract manufacturers and Lean component suppliers respond quickly to an unexpected upsurge in demand? Or will Lean OEMs find themselves stuck in first gear while competitors race ahead? In other words, how responsive is Extended Lean since, by definition, it must orchestrate complex activities across multiple tiers in a supply chain in which the OEM has relinquished centralized control?

It is a fair question, and until recently it was the Achilles Heel of Lean as it applied to outsourcing and supply chains. That is why most proponents of Traditional Lean sequester themselves within the four walls of the factory. Traditional Lean makes sense in a vertically-integrated enterprise, or within the confined space of a factory where managers can remove wasteful steps and redesign the lines. But Traditional Lean does not work in a modern supply chain.

Extended Lean makes the supply chain responsive by using a new technique known as Statistical Kanban, which was developed by Gary Cortes and his colleagues at FlowVision. How does it work?

The Lowdown on Statistical Kanban

“Statistical Kanban enables manufacturers to anticipate fluctuations in demand and meet virtually any guaranteed service level that a customer requires,” says Cortes. “Let's say we have to carry some level of finished goods inventory to guarantee a specific level of service required by an OEM customer. This is inventory that the OEM has ordered and agreed to purchase. We can statistically determine the ideal level of inventory that is needed at each stage of the supply chain based on historical usage patterns and trends,” says Cortes.

Statistical Kanban is used to guarantee a service level for which a customer is willing to pay. For example, FlowVision is working with a company in San Jose, Calif., that makes complex electronics-based systems with a long supply lead time and for which there is high demand. The company wants to guarantee that it can meet 99.7 percent of orders within a short delivery schedule. Using Statistical Kanban, FlowVision calculates the amount of finished goods inventory required to meet 99.7 percent of orders within that company's guaranteed time-frame. Using Statistical Kanban, the company guarantees that at most it will miss only 3/10ths of one percent of orders. Its customers are delighted with that level of service.

“In order to achieve that level of service, we need to have a certain amount of material in the pipeline,” explains Cortes. “At a minimum, all of our components must achieve a 99.7 percent service level. When we statistically size the inventory, whether for finished goods or components, we mathematically calculate the variation in historical usage of those components and that finished product. We also look forward to account for any future anticipated changes in demand. Then we size the inventory to achieve a specific confidence level for which the OEM customer is willing to pay. Obviously, the higher the confidence level, the more inventory we will require, and the higher the cost to the customer. But the customer knows that up-front and can choose according to different scenarios. What is the financial impact of moving from a 99.5 percent service level to a 99.7 percent service level? With Statistical Kanban you can tell exactly what those additional two-tenths percent of certainty are going to cost.”

Properly applied, Statistical Kanban is the key to implementing Extended Lean throughout a supply chain. Once the OEM, contract manufacturer and supplier agree on a guaranteed service level, they can mathematically determine the level of finished goods inventory. At that point, the only time they produce more of that particular product is when there is a signal from the distribution center or wherever the finished goods reside that the OEM has reached a re-order point. Then and only then does the supply chain produce more.

Says Cortes, “We still use forecasts to tell us where we think we're going, and we use MRP to establish our lead-time offset, so we know how long it will take to order, receive, build and ship a product, but we are not going to order or build anything unless the customer actually buys a product. It is a completely different mindset from how most manufacturers operate today, particularly in a complex supply chain where the OEMs talk to their sales guys, estimate demand, add a little extra, then buy material and fill up their finished goods inventory. And if the forecast is wrong? Hey, it's just another multibillion dollar write-off.”

Welch's Signs Three-year Contract with Weber Distribution

By Editorial Staff

Juice and jam maker hands West Coast distribution duties over to 3PL

Santa Fe Springs, CA — May 5, 2006 — Juice and jam company Welch's has signed a three-year contract with Weber Distribution, a logistics and supply chain management provider, to serve as its West Coast distribution center, effectively immediately.

From Welch's Lawton, Mich., manufacturing plant, more than 100 different flavors and sizes of juices and jellies are shipped via rail to Weber's La Mirada, Calif.-based facility. The 203,000-square-foot distribution center contains six onsite rail doors where roughly 260 inbound loads or nearly 450,000 cases of Welch's products are received each month.

Some of the product is stored in a 75,000-square-foot section of the warehouse, while much of it is immediately processed and labeled for distribution to Welch's customers across the 11 Western states. Welch's customers include mass retailers and grocery chains such as Wal-Mart, Costco, Safeway and Vons, as well as convenience, food/drug and specialty stores.

According to Bruce True, Welch's manager of distribution planning, Welch's hired Weber because of its expertise in handling grocery and for its distribution network. "We closed our plant on the West Coast, so we needed to find a third-party logistics (3PL) company that could handle warehousing, order consolidation, and delivery to our customers," said True. "Until Weber, we were shipping 95 percent of the product from our plant warehouses directly to our customers."

Weber processes, picks, labels and transports an average of 425 orders, or more than 350,000 cases, per month for Welch's.

As part of the agreement, Welch's is taking advantage of Weber's vendor compliance program, which manages all of the major retailers' specific routing, shipping and labeling requirements. The compliance program includes a custom-designed internal Web site that allows Weber's warehouses to reference major retailers' most recent routing and shipping requirements without having to individually review and interpret routing and vendor guides.