Using Lean Principles to “Lean Out the Supply Chain”

Sandra Barkman, MS, C.P.M., Senior Procurement Agent The University of Michigan

734/615-5961; sbarkman@umich.edu

Bryon S. Marks, MBA, Divisional Supply Chain Manager Eaton Corporation

517/960-5410; bryonsmarks@eaton.com 92nd Annual International Supply Management Conference, May 2007

Abstract. With contacts throughout the supply chain, who better than the Supply Chain professional to implement Lean principles? This paper explores Supply Chain Management’s (SCM) strategic use of Lean as a business philosophy. Defining the value stream from raw material to finished product delivery, SCM links with multiple functions throughout the product life cycle. Using these contacts, the SCM function ideally positions itself to implement Lean strategy in the organization’s operations and support structures.

Five principles of Lean and delivery applications using those Lean principles are introduced. As background, Lean origins and terminology are included. Lean, as an organization wide philosophy, may be used to integrate every function, eliminating waste and finding the value added activity for which the ultimate customer is willing to pay. Introduction. Supply Chain Management has a lead role in strategic operations management. By using that role, the SCM function can become a direct force in the construction and implementation of an organization’s strategic goals. SCM has evolved from a tactical service oriented function to a strategic service and process oriented function. This change has paved the way for the supply function to lead the formulation of organizational strategy. Lean Manufacturing is a business philosophy that can serve an organization to achieve those strategic goals. Lean manufacturing principles stress defining value in terms of importance to the customer and eliminating any wasteful activities; that is, those activities the customer does not find valuable. Since the entire value stream (from raw materials to end user) is evaluated, SCM is in a pivotal position to lead and sustain the implementation of Lean principles.

Value stream mapping shows the relationship of current processes. By examining the processes within the map, non-value added activities are identified for elimination, creating a future state map. Cross-functional and cross-organizational approaches to mapping are essential for success of the organization’s strategic goals. Supply Chain Management’s Role in Operations Management. Supply Chain Management (SCM) is defined as managing the entire customer order fulfillment beginning with order entry to the acquisition of the materials from suppliers, to the flow of materials/services through the operation, and through the distribution of the product to fulfill the customer order. The changes in the role of the traditional Purchasing function to a SCM mentality set the stage for optimal impact from the Supply function. This paradigm shift aligns SCM with all functions

including Finance, Production, Sales, and Marketing to define the overall business goals for the organization. The Supply Chain function is in a unique and pivotal position to lead the identification and implementation of strategic plans for the entire value stream. In their book, Lean Thinking, James Womack and Daniel Jones define the value stream as “the specific activities required to design, order, and provide a specific product, from concept to launch, order to delivery, and raw materials into the hands of the customer.” (Womack and Jones, 1996) SCM is integrated with all the functions along the value stream. This integration affords SCM the unique position to lead in the identification and implementation of the strategic goals of the organization. By developing and using relationship management skills to synchronize the entities throughout the value stream, SCM seizes the opportunity to use this blend of internal and external contacts to create a seamless process. Measuring progress toward strategic goals aligns all functions and entities to collaborate. Using Lean Principles to Eliminate Waste in the Supply Chain. Lean Manufacturing is a philosophy driven by a compilation of operational techniques supported by research and practice. Elimination of waste and identification of value added activities are drivers for the Lean culture. Lean philosophy is founded in Taiichi Ohno’s methods developed at Toyota to create continuous improvement. (Womack and Jones, 1996) This philosophy applies to any part of the value stream. Womack and Jones conceptualize the “Lean Enterprise” in their book, Lean Thinking. This concept extends “lean thinking” across the value stream integrating value adding, waste eliminating techniques cross-organizationally. This extension reaches back to raw material and forward to the ultimate customer. (Womack and Jones, 1996) Suppliers and customers are brought into the Lean culture to maximize waste elimination.

With contacts in all functions of the value stream, who better than the Supply Chain professional to lead the implementation of Lean principles -

identifying value added activities and eliminating waste in an organization? Lean Terminology. Assimilating the Lean vocabulary is essential. Value Added – Value added activities are the steps in a process transforming material or information that makes a product or service more valuable to a customer. Non-value added activities are any steps in a process that do not make a product or service more valuable as defined by the customer. In other words, value added activities are what the customer is willing to pay for. Non-value added activity uses resources for which the customer is not willing to pay. These non-value added activities add costs to the value stream. Unless these non-value added activities are eliminated, either the customer pays for the added steps as part of the product price, or the costs of those added steps are subtracted from the bottom line of the producing organization. Table 1 provides some of the basic Lean terminology. As the philosophy originated in a Japanese company, many of the words remain Japanese. The vocabulary becomes part of the organization’s culture as Lean manufacturing principles are implemented.

Implementing the Five Principles of Lean. Describing the Lean philosophy Womack and Jones state, “It provides a way to specify value, line up value creating actions in the best sequence, conduct these activities without interruption whenever someone requests them, and perform them more and more effectively.” (Womack and Jones, 1996) This can be stated as the five Principles of Lean Implementation:

1. Specify Value (from the customer’s point of view) 2. Identify all the steps in the Value Stream (mapping) 3. Flow 4. Pull 5. Pursue Perfection (Principles)

The Value Stream Manager is the key person in an organization responsible for the overall set of processes that make up the value stream. “…without this (Value Stream Manager), parts of the flow will be left to chance – meaning that individual processing areas will operate in a way that is optimum from their perspective. To get away from the isolated islands of functionality you need one person with lead responsibility for understanding a product family’s value stream and improving it.” (Rother and Shook, 1998) SCM is situated to take this designated Value Stream Manager role. The established contacts between internal functions and external organizations (suppliers and customers) facilitate the realization of the five Principles of Lean Implementation. The mapping exercise establishes a macro view of the value stream and the functions, organizations, and processes involved. By examination of the current state map, the value added and non-value added activities are identified and categorized. SCM leadership in Lean implementation. Supply Chain Management’s change from traditional purchasing to a strategic leadership role places the function in line to lead the implementation of Lean principles throughout the organization and across the value stream. Relationship management plays an important part of creating the synergy required of functions and organizations in a successful value stream. Referring to the future of Purchasing and Supply, Roberta Duffy in ISM’s Purchasing Today states,

“… relationships will be elevated to such priority that supplier and customer relationship management centers could be combined into a single office, where knowledge can be leveraged across the supply chain.” (Duffy, 2000)

This “single office” concept is similar to the “Value Stream Manager.” The concept is the identification of one person or entity in an organization that is responsible to identify the entire value stream. That entity becomes the champion to implement continuous improvement throughout the value stream. This single office or Value Stream Manager concept aligns with SCM’s strategic role.

SCM’s emphasis on total costs rather than price is conducive to the Lean philosophy. Total Cost of Ownership (TCO) adds all the cost inside the value stream. TCO is easy to see in the value stream map. The cost of each map element can be determined and summed for “total cost.” By eliminating the wasteful activity and the cost associated with that waste, the total cost of the value stream is reduced. The customer price can be reduced, and with that reduction in price, there is potential increase in market share. Summing total cost before and after

elimination of non-value added activity provides a measurement of the effective elimination of waste in the value stream. Implementation of Lean principles across the value stream facilitates the success of goals set for the entire organization. The value stream manager that implements Lean takes continuous improvement further than the organization, to its suppliers and customers. The Supply Professional deals with suppliers and concepts. Working with them to reduce overall costs is very important. However, to make Lean a success it must be a way of doing business throughout the entire business process. All entities, from R & D, sales and marketing, inside sales, materials, planning and scheduling, production, warehouse and shipping, accounting and invoicing, must be “leaned out” to be successful. By implementing lean in only certain departments such as Operations, an organization will never gain the true potential of Lean. If it is not implemented across the company (and cross-organizationally), the various entities will constantly be at odds with each other, losing the synergy required to achieve company-wide strategic goals. This continuous improvement results in product or service defined by the customer to have value. The steps defined as muda are eliminated, leaving only value added steps that contribute directly to what the customer considers of value. Becoming a unified team across the organization provides a strategic advantage. Gearing strategically to a common set of organizational goals keeps the focus on continuous improvement throughout the entire value stream. Implementing Lean across the organization gives the exposure to value added and non-value added activities. This continuous improvement identifies and eliminates waste resulting in cost savings – cost savings that directly contribute to the bottom line of the organization. The measurement of these goals reflects the efforts of everyone involved to realize those same common goals. Lean Principles Applied. As an example of the many applications of Lean Principles in the supply chain, three delivery scenarios are examined: 1. Traditional Warehouse Operation; 2. Cross-docking; and 3. Direct Delivery to the Production Floor. Observations on each scenario are provided.

Traditional Process Flow Observations

Supplier Company A Customer Utilizes current assets

Shipped from

Supplier ReceivedUtilizes inventory buffer for backup to inaccurate forecasting

Stocked in the Warehouse

Continues the costs of warehousing, picking and inventory

Picked from the Warehouse Adds opportunity for errors from additional handling Staged to ship to the Customer Adds opportunity for damage or shrinkage

Shipped to the customer

Received by the Customer

Cross-Dock Observations

Supplier Company A Customer Reduces handling and storage; carrying costsShipped

from Supplier Received Releases assets to be used in other ways

Staged to ship to the Customer

Requires smaller more frequent orders; forecasts and lead-time

Shipped to the customer

Received by the Customer

Requires paradigm shift from the “less expensive to buy and warehouse truckload quantities” to a Just in Time (JIT) mentality

Direct Delivery to Production Observations

Supplier Company A Customer JIT delivery to "Point of Use" - eliminating inventoryShipped

from Supplier

Received by the Customer Requires quality to be built in

Requires trust between all parties

No inventory buffer for emergencies

Eliminates costs associated with warehoused inventory, material handling

Graphically it is easy to see the elimination of activity. It is through examination of customer specification – what the customer finds of value – that the correct value stream configuration is chosen. Conclusion. SCM facilitates a more efficient and effective organization. Adding the implementation of Lean manufacturing principles introduces a new dynamic to the culture of the organization. This dynamic constantly assesses the processes used to run the organization and methodically analyzes each for non-value added activity. The commitment from the Lean culture requires the elimination of identified waste throughout the value stream.

The SCM function with its transformation from the traditional transaction driven purchasing function to a strategy driven force is positioned to lead and sustain the construction and implementation of organization wide goals. By applying Lean principles, mapping the value stream and process flow, the waste is identified and can be eliminated, resulting in a lower total cost of ownership. By using relationship management skills within the value stream, SCM can lead the integration of the entities in the value stream. Collaboratively, these entities can set mutual goals that strive to benefit all the entities of the value stream. The measurement of these goals shows the effectiveness of the effort.

Terminology Definition

muda Waste, any activity that uses resources but creates no value.

heijunka

“Level Scheduling” -- Sequencing orders to smooth day-to-day variations in orders. Results in more frequent production of product being driven by actual customer orders. Eliminates the inventory of “batch processing.”

level selling

Customer order management to eliminate surges in selling. Smoothes the demand for product creating a more consistent production plan with the ability to create level scheduling.

kaizen Continuous, incremental improvement of an activity resulting in elimination of waste and identification of value.

kanban Signal system that pulls material through the value stream and results from an upstream production of delivery.

JIT Just-in Time – a system to pull the right material to the right place in the value stream at the right time and in the right amount.

target cost

The acceptable product cost to the customer. The cost that includes development, production, and a reasonable rate of return for the producer. The cost at which the customer is willing to consume the product and is willing to pay for the amount of value in that product.

poka-yoke Mistake proof processes.

preventative maintenance

Methodically maintaining maintenance on production equipment to eliminate the downtime associated with machine failure. Can be extended to include all equipment with potential detrimental downtime effect to the value stream.

Table 1. Lean Terminology

REFERENCES.

Duffy, Roberta J. “The Future of Purchasing and Supply: Elevating Relationships,” Purchasing Today, Vol. 11, No. 2, February 2000, pp. 31- 34.

Rother, Mike, and Shook, John. Learning to See, Value Stream Mapping to Add Value and Eliminate Muda, Version 1.2, The Lean Enterprise Institute, Inc., Brookline, MA, 1998.

The Lean Enterprise Institute, “Principles of Lean, http://www.lean.org/WhatsLean/Principles.cfm, December 31, 2006.

The Lean Enterprise Institute, “The Value Stream Manager,” http://www.lean.org/Community/Registered/Article.cfm?ArticleId=44, December 31, 2006.

Womack, James P. and Jones, Daniel T., Lean Thinking, Banish Waste and Create Wealth in Your Corporation, 1st edition, Simon and Schuster, New York, 1996.