The Lean Supply Chain
From our discussions with representatives in the manufacturing
industry, the key areas of supply chain concern are demand management,
outsourcing, and inventory management. Interestingly enough,
these are the same concerns from others industries like, medical
devices, healthcare, printing, and contract packaging. In most
organizations, supply chains are disconnected and business processes
are not linked to suppliers or internal/external customer needs
(see Figure 1). In fact, very few organizations understand
how to serve customers or end-users. Organizations that
have successfully integrated their supply chains recognized
they need to understand some basic ingredients found in ALL
Lean Supply Chains.
These ingredients are defined as:
- Product Flow – which is the value-added movement
of goods and services from the receipt of supplier raw material
to delivery of product to customers.
- Customer Demand – which is the actual demand that
drives supply chain output.
- Information Flow – which is the flow of relevant
data that supports the flow of product and service.
- Customer/supplier Linkages – key interfaces with
customers and suppliers impacting the movement of goods and
A lean supply chain integrates ALL four aspects from internal
order fulfillment to external work performed by third party
contractors, suppliers, distribution networks and service providers.
These activities determine what work needs to be performed,
how it needs to proceed, who is going to do it, and the priority
in which it is processed and completed. Internal logistics
focus on the relationship linking procurement, production, and
delivery of goods in a seamless process. External logistics
links the operations with suppliers, service providers, contractors,
The key supply chain processes are procurement, customer service,
warehouse, planning, distribution, transportation, information
systems, and inventory control. Activities that emanate
from these key processes are sales, planning, order entry, receiving,
shipping, inspection, purchasing, production scheduling, master
scheduling, warehouse management, and supplier management among
others. These functions and activities represent an average
of between 4% and 20% of sales. In a synchronized manner,
these key processes provide a seamless and well coordinated
supply chain to respond to customers and end-users. The
goal of the lean supply chain is to deliver products at the
lowest total cost while developing value-added processes (as
defined by the customer).
Value-added in terms of linking processes and activities, is
described as “delighting the customer through a continuous stream
of value-added activities”, or “adhering to the highest standards
of business performance as measured by the customer”.
As value is identified to individual activity, value streams
are identified with the lean supply chain. The most effective
method of identifying value and “value streams” is process mapping
and value chain analysis. A comparison of value-added
features and non-value added practices is a fundamental exercise
in the development of any value chain in the lean supply chain.
A well-defined lean supply chain is characterized by processes
that are considered core competencies by the organization and
are supported by qualified suppliers and driven by customer
needs. Accordingly, organizations that emphasize lean
supply chains, like new technology, align key processes and
regard them as core competencies rather than manufacturing components
and assemblies. As a result, new and current products
and services are delivered to market faster and more efficiently.
Supply chain optimization efforts begin with this core group
of critical drivers as follows:
- Product Flow – In many supply chains, products tend
to move forward in a “push” system. Under this system
(in response to forecasts) inventory is built to a consistently
high level which clearly strains working capital, while increasing
lead-time, scrap, and rework. The opportunity to reduce
inventory and non-value-added activity takes place when the
supply chain is physically mapped and then redesigned.
A primary result of this redesign is often an approach called
“Kanban”. The Kanban technique allows for the radical
change from a “push” to “pull” system which brings stock to
the point of consumption only when it is needed for replenishment.
A logistic system that links suppliers and customer
requirements, Kanban provides a methodology for pulling only
those components that are required to meet immediate production
requirements. The Japanese refer to Kanbans as a
simple parts-movement system that depends on cards and boxes/containers
to take parts from one work station to another. The
essence of the Kanban concept is that a supplier or the warehouse
will only deliver to the point of use as needed. Workstations
located along the production lines only produce/deliver components
when they receive a card and/or empty containers. Since
Kanban is a chain process, production or delivery of components
are pulled/issued to the production line. Kanbans drive
the movement of materials from cell to cell in a modified
pull system. Material is delivered to internal customers
all along the supply chain in the shortest, unobstructed manner
as requested by the user.
- Customer Demand – Forecasts are essential to the
supply chain, if for no other reason, than to support financial
planning. It provides rough-cut capacity planning data,
and a basis for negotiating annual supplier blanket agreements.
For the most part, it is used to provide information
and data that provides projections and glimpses of the future.
Beyond these features, the forecast has little value
in day-to-day operations. The shift to customer actual
demand requirements drive the execution of short-term schedules,
daily production output, and supplier delivery requirements.
Actual customer demand replaces forecast and is fed
directly into the MRP System. Customer demands drive
planning outputs, and internal/external schedules.
Replenishment and work schedules are driven by customer demand,
literally synchronizing ALL activities related to the supply
chain. (See Figure 3).
- Information Flow – A robust supply chain must work
with accurate information starting with forecasting to delivery
of products to end-users. Supply and demand should
be synchronized considering factors such as service levels,
variability, events, and capacity as processed by technology
platforms and users of the information. Virtual networks
(e-commerce) link participants and activities including raw
material suppliers, manufacturers, distributors, wholesalers,
and consumers. Enterprise resource planning systems
and the Internet are now the technology platforms that process
information quickly and efficiently. As depicted in
Figure 4, customer data is shown being processed in an ERP
system supporting a “Pull System”. MPS, MRP, planned
events, and internal/external schedules are driven by data
that is actively received from customers. Inventory
levels, consumption triggers, production schedules, order
points, material consumption, and back-flushing activities
are based on customer product requirements. In this
case, data is used to share information (forecast) and the
execution of production schedules and supplier delivery schedules.
- Customer/supplier Linkages – As total cost to the
lean supply chain becomes an overall initiative, organizations
are beginning to investigate the entire customer/supplier
network for potential improvements. Outsourcing key
production assemblies and production activity to suppliers
who invest in equipment and projects that are mutually beneficial
and share key information create barriers of trust throughout
the supply chain. As trust is established and resources
are pooled, satisfying customer needs at the lowest cost are
attainable. An effective supply chain in any true partnership
must include a list of customer needs and a selection of customers
who can facilitate critical success factors. Techniques
like Quality Functional Deployment (QFD) and “Voice of Customer”
can be implemented to formalize the bridge between suppliers
and customers. Suppliers are utilized to evaluate how
they can help reach benchmarks. The value sought by
suppliers is the reduction of total cost, improvement in quality
and achieving process improvements quickly and effectively.
Suppliers are qualified and a small number are selected
as partners. Essentially, a lean supply chain operates
more efficiently with a reduced number of single-sourced suppliers.
Concurrently, as part of the Supplier Qualification
Process, raw material is certified to insure inspection-free
reliable components are delivered directly to point of use.
The effective use of any of these techniques and strategies
in tandem can have a positive impact on cycle times, the elimination
of non-value-added activity, inventory, and increased productivity.
The immediate impact on the balance sheet and income
statement and consequently the relief on working capital is
a strong motivation for continuing efforts in reengineering
of the supply chain.
Transforming a disjointed supply chain into a lean supply chain
requires a great deal of analysis and coordination. An
organization must identify all non-value-added activity; address
fragmented functions, adversarial supplier relationships, and
an unwillingness to share important information. Basic
processes such as order fulfillment, production and logistics
flows need to be analyzed. Operational areas must be
fully aligned with business strategies, goals, and performance
metrics. Every relationship must be clearly defined and
their impact on the value stream be understood. The performance
of key suppliers and customers in terms of quality, delivery,
and service should be expressed in relation to their impact
to the financial bottom line. Finally, to optimize the
value creation, all activity associated with the supply chain
should have a close alignment with organizational goals and
As processes and activities are synchronized into a value stream,
the lean supply chain transcends ALL functionally-driven strategies,
techniques, and performance metrics. Although individual
functions may be efficient, a well-coordinated number of key
processes yield better results. How well a lean supply
chain will perform is dependent on the maintenance of optimized
and synchronized processes, established world class suppliers,
and meeting customer needs. Remember, the key to any efficient
supply chain is to eliminate the cause for the pause or match
demand to production and single source suppliers. Clearly, the
lean supply chain strategies we described above are applicable
to the wholesale industries as well as the retail environments.