lean supply chain management principles and...

1 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology

LeanLean EnterpriseEnterprise

ValueValue

Lean Supply Chain Management Principles and

Practices



ValueValue

Lean Supply Chain Management Basics Learning Points

� Lean supply chain management represents anew way of thinking about supplier networks � Lean principles require cooperative supplier

relationships while balancing cooperation andcompetition � Cooperation involves

collaborative relationships & coordinationmechanisms � Supplier partnerships & strategic alliances

represent a key feature of lean supply chain management

a spectrum of



ValueValue Theory: Lean Represents a “Hybrid” Approach to

Organizing Interfirm Relationships

� “Markets” (Arm’s Length): Lower production costs, higher coordination costs � Firm buys (all) inputs from outside specialized suppliers � Inputs are highly standardized; no transaction-specific assets � Prices serve as sole coordination mechanism

� “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs � Firm produces required inputs in-house (in the extreme, all inputs) � Inputs are highly customized, involve high transaction costs or dedicated investments,

and require close coordination � “Lean” (Hybrid): Lowest production and coordination costs; economically most

efficient choice-- new model � Firm buys both customized & standardized inputs � Customized inputs often involve dedicated investments � Partnerships & strategic alliances provide collaborative advantage

Dominant conventional approach: Vertical integration, arm’s length relationships with suppliers



ValueValue

Lean Supply Chain Management Differs Sharply from Conventional Practices

ILLUSTRATIVE CHARACTERISTICS

CONVENTIONAL MODEL LEAN MODEL

Number & structure Many; vertical Fewer; clustered Procurement personnel Large Limited Outsourcing Cost-based Strategic Nature of interactions Adversarial; zero-sum Cooperative; positive-sum Relationship focus Transaction-focused Mutually-beneficial Selection criteria Lowest price Performance Contract length Short-term Long-term Pricing practices Competitive bids Target costing Price changes Upward Downward Quality Inspection-intensive Designed-in Delivery Large quantities Smaller quantities (JIT) Inventory buffers Large Minimized; eliminated Communication Limited; task-related Extensive; multi-level Information flow Directive; one-way Collaborative; two-way Role in development Limited; build-to-print Substantial Production flexibility Low High Technology sharing Very limited; nonexistent Extensive Dedicated investments Minimal-to-some Substantial Mutual commitment Very limited; nonexistent High Governance Market-driven Self-governing Future expectations No guarantee Considerable



ValueValue Lean Supply Chain Management Principles

Derive from Basic Lean Principles

� Focus on the supplier network value stream � Eliminate waste � Synchronize flow � Minimize both transaction and production costs � Establish collaborative relationships while balancing

cooperation and competition � Ensure visibility and transparency � Develop quick response capability � Manage uncertainty and risk � Align core competencies and complementary

capabilities � Foster innovation and knowledge-sharing



ValueValue A Set of Mutually-Reinforcing Lean Practices

Translate these Principles into Action

Design supplier network architecture • Design of supplier network driven by strategic thrust

• Fewer suppliers; “clustered control” • Supplier selection based on performance

Develop complementary supplier capabilities

• Ensured process capability (certification) • Targeted supplier development (SPC, Kaizen) • Greater responsibilities delegated to suppliers

Create flow and pull throughout supplier network

• Linked business processes, IT/IS infrastructure • Two-way information exchange & visibility • Synchronized production and delivery (JIT)

Establish cooperative relationships & effective coordination mechanisms

• Joint problem-solving; mutual assistance • Partnerships & strategic alliances • Open and timely communications • Increased interdependence & “shared destiny”

Maximize flexibility & responsiveness • Seamless information flow • Flexible contracting • Rapid response capability

Optimize product development through early supplier integration

• Integrate suppliers early into design & development IPTs

• Collaborative design; architectural innovation • Open communications and information sharing • Target costing; design-to-cost

Integrate knowledge and foster innovation

• Knowledge-sharing; technology transfer • Aligned technology roadmaps

This lecture highlights key enablers & practices by ng on: • Synchronized production and delivery • Partnerships and strategic alliances • Early supplier integration into design and development IPTs

focusi



ValueValue

Synchronized Production and Delivery Throughout the Supplier Network is a Central

Lean Concept

� Integrated supplier lead times and delivery schedules � Flows from suppliers pulled by customer demand (using

takt time, load leveling, line balancing, single pieceflow)

� Minimized inventory through all tiers of the supply chain � On-time supplier delivery to point of use � Minimal source or incoming inspection � Effective two-way communication links to coordinate

production & delivery schedules � Striving for zero quality defects essential to success � Greater efficiency and profitability throughout the

supplier network



ValueValue Aerospace Firms Have Faced an Uphill

Challenge in Synchronizing Flow with Suppliers

PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS

10.7

42.2

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Defense (25) Commercial (9) (Year: 1993; N= Number of responding business units/c

Defense/Commercial: than 75% of sales to defen or commercial markets

More



ValueValue

Supplier Certification has been an Important Early Enabler of Achieving Synchronized

Flow in Aerospace

PERCENT OF DIRECT PRODUCTION SUPPLIERS OF A TYPICAL AEROSPACE ENTERPRISE THAT ARE CERTIFIED (1991, 1993, 1995)

7.40 6.86

2.55

15.28

10.86 10.38

5.63

19.62

23.19

20.11

15.63

36.33

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Industry (48) Airframe (13) Electronics (20) Engines and Other (15)

(N=Number of respondents answering this question for all three years)

1991 1993 1995



ValueValue Closer Communication Links with Suppliers

Paved the Way for Synchronizing Flow

TYPES OF INFORMATION PROVIDED TO RESPONDING BUSINESS UNITS BY THEIR MOST IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993

48.72

70.51

17.95

83.33

41.03

88.46

19.23

70.51

20.51

52.56

17.95

69.23

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

1989 (38,14,32,15,16,14) 1993 (55,65,69,55,41,54) (N=78:

Production Cost Data

SPC Data

Performance ImprovementActions Longer-term Business Strategies& Plans Financial Information not PubliclyAvailable Feedback on Purc/Supplier Mgmts Operations

Total number of responding business units)



ValueValue

Concrete Example: Engine Parts CastingSupplier Worked with Customer Company to

Achieve Synchronized Flow



ValueValue

Mastering & Integrating Lean Basics with Prime was Necessary for Achieving

Synchronized Flow

� 6S -- Visual factory � Total productive maintenance � Quality control � Process certification � Mistake proofing � Setup reduction � Standard work � Kaizen



ValueValue

Supplier Partnerships & Strategic Alliances Ensure Substantial Performance

Improvements

� Long-term relationships and mutual commitments � Intensive and regular sharing of technical and cost

information � Mutual assistance and joint problem-solving � Customized (relationship-specific) investments � Risk-sharing, cost-sharing, benefit-sharing

arrangements � Trust-building practices -- “one team” mindset;

collocation of technical staff; “open kimono” � Progressively increasing mutual dependence -- shared

fate discouraging opportunistic behavior � Self-enforcing contracting driving continuous

improvement



ValueValue Supplier Partnerships & Strategic Alliances

Bring Important Mutual Benefits

� Reduced transaction costs (cost of information gathering, negotiation, contracting, billing)

� Improved resource planning & investment decisions � Greater production predictability & efficiency � Improved deployment of complementary capabilities � Greater knowledge integration and R&D effectiveness � Incentives for increased innovation (through cost-

sharing, risk-sharing, knowledge-sharing) � Increased mutual commitment to improving joint long-

term competitive performance



ValueValue Major Lean Lessons for Aerospace Industry

� Supply chain design linked to corporate strategic thrust � Fewer first-tier suppliers � Greater supplier share of product content

� Strategic supplier partnerships with selected suppliers � Trust-based relationships; long-term mutual commitment � Close communications; knowledge-sharing � Multiple functional interfaces

� Early supplier integration into design � Early and major supplier role in design � Up-front design-process integration � Leveraging supplier technology base for innovative solutions

� Self-enforcing agreements for continuous improvement � Target costing � Sharing of cost savings



ValueValue

Chrysler: Supplier PartnershipsSpeed Development

Length of Product Development Cycle

LH Cars (98E)

160 Weeks*

JA; Cirrus/ Stratus (95)

184 Weeks

Neon (94)

180 Weeks

LH Cars (93)

183 Weeks

Dakota Truck (87)

232 Weeks

K-Car (81) Minivan (84) Shadow (87)

234 Weeks

* Estimated Source: Dyer (1998)



ValueValue EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY

AEROSPACE GRAMS: IMPACTS ON PRODUCIBILITY AND COST

20.0

77.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Group A (With) Group B (Without)

Firms facing producibility and cost problems

% of responding firms in Group A(4/20)

% of responding firms in Group B(7/9)

Numerator(s): N=4,7: Number of affirmative responses to this question (i.e., faced producibility and cost problem) in each group (i.e., Group Aand Group B)Denominator(s):R=20,9: Total number of respondents to this question in each groupSample Size: S=29: Maximum possible number of respondents to any question in the survey (Group A:20 ; Group B:9)

WITH: supplier involvement in IPTs WITHOUT: Without early supplier involvement in IPTs

EARLY: Before Milestone

SOURCE: Lean Aerospace Initiative Product Development Survey (1994)

Aerospace: Early Supplier Involvement in IPTs Impacts Producibility and Cost

DEVELOPMENT PROPRODUCT

With early



ValueValue

Early Supplier Involvement: Key Success Factors

FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY

SUCCESS FACTORS

55.0

11.1

40.0

22.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

GroupA (With) GroupB (Without)

EARLY SUPPLIER INVOLVEMENT IN IPTS

Established co-located IPTsincluding suppliers

Used commercial parts

Numerator(s): N=11,8 (Group A) ;1,2 ( Group B): Number of affirmative responses to this category of practice/implementation ( i.e., co-located IPTs, use of commercial parts) Denominator(s): R=20,9: Total number of respondents to this question in each group Sample Size:S=29: Maximum possible mumber of respondents to any question in the survey (Group A:20 ; Group B:9)

NOTES Early: Before Milestone 1 With / Without: Early supplier involvement in IPTs (before Milestone 1)

question in each group, by


ValueValue

Evolution of Early Supplier Integrationin the Aerospace Industry

Arm’s length; interfaces totally defined and controlled

Collaborative; but constrained by prior workshare arrangements

Collaborative and seamlessly integrated, enabling architectural innovation

Virtual Team w/o boundaries

Prime

Key Suppliers

Subtiers

“Old” Approach “Emerging” Lean

Prime

Key Suppliers

Subtiers

“Current” Lean

Collaborative with rigid organizational

interfaces

Prime

Key Suppliers Subtiers

Rigid vertical FFF interfaces and control

ARCHITECTURAL INNOVATION: Major modification of how components in a system/product are linked together

•Significant improvement in system/product architecture through changes in form/structure,functional interfaces or system configuration •Knowledge integration over the supplier network (value stream perspective ; prime-keysuppliers-subtiers; tapping supplier technology base)



ValueValue

Summary: Architectural Innovation YieldsSignificant Benefits

Case Studies

Key Characteristics

Case Study A(SMART MUNITION

SYSTEM)

Case Study B(ENGINE NOZZLE)

MAKE-BUY; DESIGNRESPONSIBILITY

• Early supplier integration into IPT

• Teaming with key suppliers to optimize design

• New joint design and engineering approach based on make-buy

• Prime retains design control

SUPPLIER ROLE • Collaborative design • Suppliers given design

responsibility and configuration control

• Part of joint design team • Component design

responsibility • Joint configuration control

SUPPLIER SELECTION;

AGREEMENT

• Competitive pre-sourcing • Commercial pricing • Long-term commitments • Long-term warranty

• Supplier downselect after joint preliminary design period

• CPFF • Not-to-compete

agreements

PROCESS;RELATIONSHIPS

• Collocated teams • Open communications;

knowledge-sharing • Worksharing • Electronic linkages • Gov’t part of team

• Collocated teams • Concurrent engineering • Knowledge-sharing • Electronic linkages • Government involvement

MAJOR DRIVERS Cost Performance

ARCHITECTURAL INNOVATION

Guidance control unit redesigned from modular to integrated system architecture

Riveting, rather than welding, resulted in redesign of interfaces and how components are linked together

MAJOR BENEFITS

• Over 60% reduction in unit cost

• Cycle time: to 48 mo. (down by 25%)

• Win-win for value stream

• Five-fold reduction in unit cost

• Cycle time reduction not as important

• Substantial risk reduction • Win-win for value stream

64 mo. down



ValueValue Summary of Key Practices Enabling

Architectural Innovation

� Pre-sourcing; long-term commitment � Early supplier integration into IPTs; IPPD; co-location; joint

design & configuration control � Leveraging technology base of suppliers (key suppliers; tooling

suppliers; subtiers) � Workshare arrangements optimizing supplier core competencies � Retaining flexibility in defining system configuration � Open communications; informal links; knowledge-sharing � Target costing; design to cost � Supplier-capability-enhancing investments � Incentive mechanisms (not to compete agreements; long-term

warranty); maintaining trade secrets � Government part of the team; relief from military standards and

specifications


ValueValue

Electronic Integration of SupplierNetworks:

� Important success factors include: � Clear business vision & strategy � Early stakeholder participation (e.g., top management support; internal process

owners; suppliers ; joint configuration control)

Challenge: Electronic integration of supplier networks for technical data exchange as well as for synchronization of business processes

Early Results

� Migration/integration of specific functionality benefits of legacy systemsinto evolving new IT/IS infrastructure

� Great care and thought in experimental IT/IS projects intofully-functional operational systems

� Electronic integration of suppliers requires a process of positivereinforcement -- greater mutual information exchange helps build increased trust, which in turn enables a closer collaborative relationship and longer-termstrategic partnership

� Close communication links with overseas suppliers pose aserious security risk and complex policy challenge

scaling-up




ValueValue Fostering Innovation across Supplier Networks Ensures

Continuous Delivery of Value to all Stakeholders

� Research: Case studies on F-22 Raptor avionics subsystems -- what incentives, practices & tools foster innovation across suppliers?

� Major finding: Innovation by suppliers is hampered by many factors. This seriouslyundermines weapon system affordability. � Excessive performance and testing requirements that do not add value � One-way communication flows; concern for secrecy; “keyhole” visibility by

suppliers into product system architecture � Little incentive to invest in process improvements due to program uncertainty;

limited internal supplier resources; often narrow business case � Major subcontractors switching rather than developing subtier suppliers � Yearly contract renegotiations wasteful & impede longer-term solutions

� Recommendations: � Use multiyear incentive contracting & sharing of cost savings � Improve communications with suppliers; share technology roadmaps � Make shared investments in selected opportunity areas to reduce costs � Provide government funding for technology transfer to subtiers



ValueValue Quick Review of Aerospace Progress

� Aerospace industry has made important strides in supplier integration, but this is only the beginning of the road � Production: Supplier certification and long-term supplier partnerships --

process control & parts synchronization � Development: Early supplier integration into product development critical � Strategic supply chain design is a meta core competency

� Implementation efforts have required new approaches � Re-examination of basic assumptions (e.g., make-buy) � New roles and responsibilities between primes and suppliers � Communication and trust fundamental to implementation

� Aerospace community faces new challenges and opportunities � Imperative to take “value stream” view of supplier networks � Focus on delivering best lifecycle value to customer � Need to evolve information-technology-mediated new organizational

structures for managing extended enterprises in a globalized market environment



ValueValue

Lean Supplier Networks Offer SignificantCompetitive Advantages

� Exhibit superior performance system-wide --greater efficiency, lower cycle time, higher quality � Not an accident of history but result of a dynamic

evolutionary process � Not culture dependent but are transportable

worldwide � Can be built through a proactive, well-defined,

process of change in supply chain management



ValueValue

Key Questions for Aerospace Enterprise Management

� Does the size, structure and composition of the supplier network reflect your enterprise’s strategic vision?

� Has your enterprise created partnerships and strategic alliances with key suppliers to strengthen its long-term competitive advantage?

� Are major suppliers as well as lower-tier suppliers integrated into your enterprise’s product, process and business development efforts?

� Has your enterprise established mutually-beneficial arrangements with suppliers to ensure flexibility and responsiveness to unforeseen external shifts?

� Does your enterprise have in place formal processes and metrics for achieving continuous improvement throughout the extended enterprise?



ValueValue

Emergence of Strategic Supplier Partnerships has been aCentral Feature of Aerospace Industry’s Transformation

in the 1990s*

� Survey: 85% of firms established production-focused supplier partnerships involving long-term agreements (LTAs) with key suppliers

� Major reasons: � Reduce costs 97% � Minimize future price uncertainty 85% � Mutual performance improvement 85%

� Chief characteristics: � One or more products, 3+ years 97% � Multi-year design/build 49% � On-going (evergreen) 24%

*Responding firms with LTAs; based on an MIT Survey (1994-95)



ValueValue

Case study: Major producer of complex airframe structures

Mon

ths

REDUCED CYCLE TIME (Main Product

Order-to-Shipment, months)

36

12

0

5

10

15

20

25

30

35

40

1989 1997

Perc

ent o

f all

supp

lier

IMPROVED SUPPLIER DELIVERY (Dock-to-Stock, w/o prior inspection)

0%

75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1989 1997

ship

men

ts

19971989

REDUCED SUPPLIER DEFECTS (Defects found at factory floor)

7.10%

2.90%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Rej

ectio

ns a

s %

of a

ll in

com

ing

supp

lier s

hipm

ents

Case Study Results Show Significant PerformanceImprovements by Building Integrated Supplier Networks

through Supplier Partnerships



ValueValue

Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks

95 100.0

0 50.0

Established strategic supplier partnerships � Procurement dollars under long-term agreements(%) � “Best value” subcontracts as % all awards

75 83.0

0 76.4*

Improved supplier quality and schedule � Procurement (dollars) from certified suppliers � Supplier on-time performance (% of all shipments)

1.9 7

4.9 13

Improved procurement efficiency � Procurement personnel as % of total employment (%) � Subcontracting cycle time (days)

162542 Reduced and streamlined supplier base � Number of direct production suppliers

AFTERBEFOREKEY PRACTICES

BEFORE: 1989 AFTER: 1997 *Refers to 1991

(%)


ValueValue Focus on Early Supplier Integration

Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier

integration into design and development process

� Nearly 80% of life cycle cost committed in early design phase � Design and development of complex aerospace systems calls on core

capabilities of numerous suppliers, providing as much as 60%-70% of end product value

� Supplier network represents an enormous beehive of distributed technological knowledge & source of cost savings

� What are better ways of leveraging this capability for more efficient product development in aerospace sector?

� Worldwide auto industry experience provides critical lessons




ValueValue Lean Difference:

Lean Difference: Significantly lowerdevelopment cost and shorter cycle time

Average engineering hours per new car

(millions of hours)

Average development cycle time per new car

(months)

Prototype lead time

(months to first engineering protoype)

US

Japan

US

Japan

US

Japan

3.4

1.7 50%

61

45

11.8

6.5

26%

45%

Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 1985-89.

Auto Industry



ValueValue

Lean Difference: Auto Industry Supplier Role in Design

Lean difference starts with significant supplier role in design anddevelopment

1980’s (1985-89)

1990’s (1992-95)

US Japan 3%

81% 16% 8%

62% 30%

58% 30% 12%

39% 55%

6%

Supplier Proprietary Parts Supplier Designed “Black Box” Parts

Assembler Designed Detail-Controlled Parts

Source: Clark, Ellison, Fujimoto and Hyun (1995)

Percent of total cost of parts purchased from suppliers

lean supply chain management principles and...

Documents