Highlights of our full range of training courses / Workshops:
Lean & Agile Supply Chain / Inventory Modelling
Lean & Agile Manufacturing Planning & Control
Operations Management / Team Leader Training
Step Change Management / Business Process Reengineering
Continuous Improvement
Procurement (Purchasing & Supplier Management)
IS / IT / e-commerce
Product Management / New Product Introduction / Quality Management
Bookmarks for this topic below:
Our full range of training
Relevant Training / Workshops
Expert Systems / Tools
Relevant Further Reading
Relevant Training Course / In-house Workshop Highlights:
SSC01 Tools Techniques & Modern
Trends in Supply Chain Management
SSC07 Strategic
Supply Chain Management (The 13 Principles)
And some aspects of the following courses are also relevant:
M21 Lean Manufacturing Detail
M15 Agile Manufacturing
SSC02 Material Control Process Selection
SSC06 Warehouse Operations Management
P01 Modern Procurement Practice
P02 Supplier Development
P03 Service Level Agreements
P04 Supplier Assurance
Expert Systems / Tools:
Lean & Agile diagnostic checklist
Relevant Further Reading:
The following further articles were mentioned in this paper:
a. Permanently Maintained Website Articles:
Focused Improvement Systems
Demand Management
Postponement and Mass Customisation
Agile Manufacturing
Just In Time
Kanban
The Future
New Product Introduction
Capacity Management
Sales and Operations Planning
Service Level Agreements
Lean Manufacturing
E-commerce
b. Previously Featured Articles from our Archives
(Up to 2 per organisation available on request):
Previous Best Practices:
B036: Collaborative Engineering
Previous Techniques:
T002: Commonality Trees
T008: Lead-time Analysis
T025: Self Billing
Previous Malpractices:
M005: "Economic Batch Quantity EBQ / EOQ: (The worst way to set batch sizes)"
M007: "The Cost of the Costing System"
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Lean & Agile Supply Chains
Links to
related training and further reading on left
This article describes both the principles and best practices surrounding
lean supply chains. It also describes the meaning, weaknesses and some of the
problems of leanness in a supply chain and how they can be overcome by
incorporating
Agility. It then puts this into context with other methods.
The Problem
A conventional supply chain behaves as shown in the above diagram. When
the customer turns left the supply chain turns right, and the movement is
amplified. The problem is that the system behaves like a chain because the
commercial, communications and logistics links in the chain act as a barrier to
the smooth flow of demand information in one direction and the rapid supply of
goods and services in the other direction. These also cause a lag in response
time, which in turn leads to all the supply difficulties first described by
Jay Forrester in his book "Industrial Dynamics" and called the "Forrester
Effect".
The Solution
The solution to this problem is the free flow of demand information in one
direction and, in response, the timely and free flow of goods and services in
the other. We liken this to a supply train, which is more cohesive and
integrated. In the illustration below the carriages represent different tiers in
the supply chain.
The Supply Train
This supply chain behaves as a train as follows:
- The supply chain is one train
designed into tiers
- Side movement is constrained by rails which represent three aspects of control:
- Good rapid information flow. There is an uninterrupted flow of
operational and development information between carriages in both directions
- Good uninterrupted flow of goods and services
- Coordinated inventory policy. Inventory is strategically positioned
between carriages by design
- The carriages are connected with no commercial obstacles
- Administration between carriages is designed to be simple and mistake proof
- Changes are coordinated between carriages
- There is one demand signal from the front (the end customer)
In fact the relationships are actually a network where many-to-many
relationships exist in a network between many customers and many suppliers. This
makes integration more difficult.
Lean & Agile Supply Chains
should be designed and maintained using the following
13 guiding principles:
-
Viability, risk, resilience, & contingency are managed strategically (See
Capacity Management)
-
Supply chain designed for flow & minimum lead-time, exploiting natural
groups, segmentation,
postponement & mass customisation (avoiding
"one size fits all")
-
Sales & Sales Initiatives Planning, Product Development / New Product
Introduction Planning integrated into Supply Chain Management (SCM) Planning
-
Managed by a Development, Sales & Operations Management Process (DS&OM),
reconciled to Business Plan (not just
sales and operations planning)
-
Production policy is based on resource domination of demand from make-daily
/ sell-daily, "Fixed Order Cycles (FOC)" to "Fixed Order Quantity (FOQ)"
-
Batch size is determined by capacity or physical constraints, not EBQ (See
Previous Malpractice 005:
"Economic Batch
Quantity EBQ / EOQ: The worst way to set batch sizes")
-
Manufacturing sequence is fixed within a period to maximise throughput (not
scheduled) (This process relies on small scheduling intervals. E.g. every
repetitive item made weekly.)
-
A replenishment pull (Kanban) system based on
consumption
-
Resilience (buffers) resized regularly, with mathematical integrity, to
satisfy individual customers & avoid risk, then positioned strategically
-
Changeover times are reduced to where repeaters can be made < weekly
-
Operated to a fixed (weekly) cycle with timetable
-
Measured as a vertically integrated total supply train system
-
Measurement drives improvement
Lean & Agile supply chains can be achieved in seven steps:
- Redefine the architecture of supply.
- Weld the links together contractually in a cohesive way to remove the
commercial obstacles.
- Remove the obstacles to the free flow of information, both for
development and operational demand needs.
- Remove the obstacles to the smooth supply of goods by developing better
logistics methods and systems.
- Position stock strategically in the chain to accommodate known
communications and logistics constraints (whilst continuing to remove the
constraints afterwards) and then remove nearly (but not) all of the other
stock.
- Reduce Commercial Administration.
- Behave like one entity, by co-ordinating change activity, appropriate
measurement and management.
This approach has a significantly different emphasis to "lean manufacturing", and is described in overview below:
1. The Architecture of Supply
"Tiering"
Characteristic of automotive and aerospace supply chains is a tiered
effect where the supplier network itself is structured into 1st,
2nd and 3rd etc. tier suppliers. Top tier suppliers
(to the final assembler) make major components or sub assemblies or systems
and they in turn are supplied by the next tier component manufacturers etc.
Consequently in a lean supply chain each level has fewer suppliers. Super
suppliers can emerge who act as consolidators for several suppliers feeding
into the next level. The higher level tier often encourages consolidation to
improve their inbound logistics and reduce their administration.
Strategic Sourcing, Category Management & Supplier Reduction
Because it takes fewer resources to manage and administer fewer
suppliers, the number of suppliers are actively reduced. Other reasons for
the number of suppliers being reduced in the supply chain led by "lean"
thinking but apart from "tiering" include:
- Designs simplified to reduce the parts count.
- A strategic approach to make vs. buy.
- Sourcing and organisational design governed by logical segmentation
into vertically integrated categories.
- Sourcing rules simplified and dual sourcing largely removed.
- The use of "consolidators" to effectively out-source kitting, or to
allow a key supplier to supply via sub-contracting (possibly to the
original supplier) a range of existing supplies.
2. Welding the Links Together Contractually
Long term collaborative relationships
As applied to the supply chain, leanness has some similarities to the
mass production concept of supplier networks, where suppliers (but which are
not owned by the assembler), are part of a stable consortium. These networks
are based on long term relationships rather than competitive tendering
(although the original sourcing is tender based). This aspect has proven
difficult for many Western purchasers to adopt, who seem to prefer arms
length competitive tenders and the assumption of variable costs whereas the
lean system assumes relatively fixed costs. In a lean supply chain contracts
are written to encourage collaborative rather than adversarial
relationships, which reduces the need to re-source. (See
Previous Best Practice 036: Collaborative Engineering)
Cost Transparency
Prevalent in these networks is pricing is based on open-book costing
rather than secretive costs. There is expectation that once the learning
curve has been mounted and continuous improvement takes hold, that costs and
prices will reduce in subsequent years and that these savings will be
shared. So this is not a soft, cosy relationship. There is price pressure
and other tensions in the relationship. In some situations this has been so
great that it has led to some suppliers walking away from some major
customers. Often tooling is part or fully funded by the next higher level in
the supply chain. In some circumstances this can lead to problems because
the supplier (who is the expert) can have some difficulty in persuading the
customer to fund major overhauls, or create a window of opportunity by
building stock to release the tooling for major repair. (See "Previous
Malpractice M007: The Cost of the Costing System")
Performance
Performance is generally measured in terms of quality, delivery
reliability and cost reduction. (See Focused Improvement Systems), but other dimensions are
often important and performance is often specified by a
Service Level Agreement.
Demand
In lean supply chains apparent or forecast
demand is managed with the aim of smoothing production to reduce
cost. In agile supply chains
real demand
is passed uncorrupted throughout the supply chain and is met without
incurring additional cost. (This is one of the major differences between "lean"
and "agile manufacturing".)
3. Remove the Obstacles to the Free Flow of Development and Demand Information
3.a) Development Information
Suppliers are often formed into associations where benefits accrue from
shared experience. There has often been a very generous sharing of
techniques and experience by some of the top-tier manufacturers to help
their suppliers to develop. However this help has, in some circumstances,
come with strings attached, and in at least one case we know of came with an
implied threat that if you do not take the medicine (however irrelevant it
is) you will not be a supplier for much longer. Whilst generally major
systems will be sole sourced, many commodity items will not be.
"Collaborative Engineering" links the R&D
activity into cohesive project teams with joint development objectives.
3.b) Operational Demand Information
"Demand Management" is covered by a separate
article, but the more information you can obtain about the downstream
activities in the supply chain the better. Electronic Point Of Sale (EPOS)
information from your customer or end customer can be transmitted down the
supply chain. Most of the multiples can now supply this data. The problem is
being able to assimilate it quickly. (See "The Future".)
Regularly refreshed long-term forecasts are needed to facilitate long
term planning. Short-term replenishment communication can be by
Just in time
methods and in particular Kanban. The
difference in this situation is that the batch size considerations between
supplier and customer are influenced by transport costs as well as internal
set up costs. There are however some logistics methods which alleviate this
problem shown below.
EDI has been used in the automotive industry since 1985 to speed the flow
of demand data between customers and suppliers and these sorts of
e-commerce
methods will increase in the Future.
4. Lean Logistics Methods and Systems
Supplier top up systems
Commodity items are delivered and managed on the customer's site (often
at the point of use rather than raw material stores). Payment occurs either
on delivery or on usage. Usage is generally a better method because this
discourages abuse by the supplier (by overstocking). However it is then in
the suppliers interest to reduce stock which can lead to under-stocking. In
this situation the customer monitors stock-outs.
Payment may be (or may not be) by "self billing"
(usage triggers a payment without an invoice).
Distribution Centres
Suppliers deliver to a central warehouse where redistribution can occur
to suit the customer. This is mainly to provide an "in-house" buffer to
avoid shortages and to enable the assembler to kit efficiently to feed their
point of use. I do not view this as a particularly useful mechanism and I
believe it will eventually be replaced by agile
methods. However if you have a warehouse, your
warehouse operations management must be excellent.
Third Party Kitting
This is effectively the sub contracting of the kitting process to usually
a major commodity supplier. This method has implications on traceability and
the management of the process but is fairly popular in the aerospace & now
electronics industries.
Milk Round
In this case, rather than the supplier delivering to several customers,
the customer collects from several suppliers (at ex-works cost). If the
customer has several suppliers in that area, shipping loads can be
consolidated, or in one recent case the company had customers in the same
area as suppliers so they collected after delivery giving a two-way load.
5. Positioning stock in the supply chain
Where should the stock be kept if at all?
The main assumption made about lean supply
chains is that they contain little or no stock. However
stock reduction in a supply chain can only reflect the reductions in
uncertainty that the supply chain achieves. There are no free lunches here!
This topic is covered in The Future. If there is little or no stock in the supply
chain and the chain is not agile, shortages
will occur.
The best place to hold stock is at the customer end of the chain so that
is instantly available. But stock at this stage has attracted more value and
it is committed to that (one) end product. However if stock is held early in
the supply chain the more flexibility there is to make the stock into other
things and it has no added value. This argument is more fully explored in
Postponement and Mass Customisation. But in order to
understand the problem you have to understand the lead-times involved. We
have developed two techniques we have called "Lead-time Analysis", and "Commonality
Trees" to analyse the situation to support these decisions.
6. Reduce Commercial Administration
Much of the administration is removed by creating a long-term contract.
However there is considerable administration in demand communication, demand
assimilation down the chain and billing and payment administration. All of
these can be reduced.
"Demand Management" is covered above and in
a separate article. "Demand Assimilation" is the internal process within a business, which turns the latest demand
information from customers into internal and external statements of
dependent demand to pass on down the supply chain. A
future article
will cover this.
Billing can be simplified by "self billing".
7. Co-ordinating Change Activity, appropriate measurement & management
It is often the changes in product design or demand, which ultimately
trigger changes down the supply chain. Collaborative
development needs to exist as part of a
new product introduction process. There
needs to be a "fast track" method of accomplishing multi-tier communication
quickly for significant change. This will be the subject of a
future article.
Measurement and management is a supply chain management process, designed
to optimise the performance of the whole supply chain, not the management of
silos within the supply chain.
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