We're gonna need a bigger box
Adopting lean principles on the plant floor is a great start. But look beyond the plant floor to distribution and logistics for a greater payoff.
The concept of lean as a philosophical approach to business management began on the manufacturing floor. The idea, to oversimplify, is to get everyone in the organization to focus on getting at root causes for waste and then changing processes to eliminate them. Thus, every worker on a production line has authority to shut the line down when he notices something wrong.
In recent years, lean concepts have begun to spread from the plant to distribution, logistics and beyond. And the reason is clear enough: Getting good on the plant floor alone touches but one— albeit critical—part of the supply chain. All the activities on both sides of manufacturing offer potentially plenty of fat just begging for a lean diet.
Robert Martichenko makes that argument. "If you are calibrating how to eliminate waste and reduce lead time from order to delivery, it is easy to make the bridge to how lean applies to logistics and the supply chain," he says. Martichenko, the president of LeanCor, a company that both operates as a third-party logistics service provider and offers training programs, writes on and teaches lean concepts regularly. He is the co-author with Thomas Goldsby, Ph.D., an assistant professor of marketing and logistics at Ohio State University, of the 2004 text Lean Six Sigma Logistics.
"When you look at the house of lean, a whole pillar is built around flow and JIT inventory systems," he says. "If you are going to eliminate waste and focus on inventory and lead time reduction, you need to go into the logistics and supply chain network because a large percentage of lead time is actually spent outside the four walls."
Dr. Sridhar Tayur, CEO and founder of SmartOps, takes the argument a step further. "Unfortunately, many companies have thought about lean in too narrow a box," says Tayur, whose firm provides inventory optimization software for large companies. He cites some early efforts by Caterpillar's Building Construction Products Division, one of his firm's clients. "Caterpillar reduced inventory in the plants. Demands from dealers and the response time became longer and more unpredictable. So the dealers started to build inventory. They started gaming the system. Plant inventories were down, but supply chain inventories were up. The question is, What box are you drawing for lean? You have to think of a bigger box. In the end, it is not a question of whether you are good in one area, but if you are good from the start of the supply chain to the hands of the customers."
By focusing on total supply chain inventory, according to a case study prepared by SmartOps and approved by Caterpillar, the division was able to reduce component inventories by 22 percent overall. Plant and dealer inventories also fell, for a total inventory reduction of 16 percent, while product availability improved, and average order lead time fell by 20 percent.
"You start with inventory," says Tayur. "That's the most visible form of things that could be wasteful. Zealots say the optimal inventory is zero, but you have to be moderate in a supply chain. What is the 'just enough' amount of inventory? You start with how much has to be there."
Martichencko says, "What lean means from a high level in manufacturing or distribution and logistics is the recognition that time is made up of waste and value. "If you can focus on eliminating waste through continuous improvement, you will only be left with value."
Looking at lean in that way, says Martichencko, shows why translating lean principles to supply chain operations beyond the manufacturing floor makes enormous sense.
What it means to be lean
But the surge of interest in implementing lean practices has raised a series of questions—not least of which is how does "lean" differ from all the other quality initiatives that have come before it, including just-in-time and six sigma.
Karl Manrodt makes the point that the whole idea of supply chain management, without the "lean" modifier, is, in essence, about the elimination of waste. So just what is the difference between supply chain management and lean supply chain management?
"If you went to someone who did not know anything about supply chain management and said the goal is to reduce waste, they might ask if that is lean or regular supply chain management. It is both," says Manrodt, an assistant professor of logistics at Georgia Southern University who has written extensively on lean principles in the supply chain. "All supply chains endeavor to be lean. Don't I by default want high quality and to reduce waste?"
His answer is that bringing lean principles to bear on the supply chain is more a matter of emphasis than a major change in goals. He suggests that lean tools are essentially weapons in the arsenal of managers in supply chain operations to identify and eliminate waste. "It is a set of tools you can use," he says. "You can now talk the language with your manufacturing counterparts."
Learning to be lean
Martichenko puts it somewhat differently. "The difference between a lean culture and a non-lean culture is that lean cultures are learning organizations," he says. "They become that way through problem solving and continuous improvement. What I see is that a lot of companies want to improve, but they don't see the problems. They are too married to their internal culture."
Tayur, too, uses an education metaphor to get across a point about the amount of time needed to change a culture so that lean concepts are embedded in everyday operations. "We've started to move from the plants to the DCs, plus dealers, plus tier one suppliers," he says. "You cannot go from kindergarten to a Ph.D. [program] in one year, but you can get to middle school."
Taking a broad philosophical perspective is advocated by the founders of the Lean Learning Center, a lean consulting and curriculum provider. Jamie Flinchbaugh, one of the firm's founders, explains that perspective with reference to the "5S" list that is often used to summarize lean principles. The 5Ss are, in brief, Sort (organize work), Set in Order (put tools, etc., where they are needed), Shine (keep things spotless), Standardize (build consistent processes), and Sustain (keep up the good work and continuously improve).
"One of the most common questions we ask is, What is the purpose of 5S?" Flinchbaugh says. "You get answers about eliminating waste, improving productivity, standardization and building morale. But none of those are the real reason. The real reason is to be able to spot problems quickly," he says. "No matter how much technique you have, if you do not understand the reasons why, you won't succeed."
Lean at work
What are those problems in a distribution environment?
Flinchbaugh says that while every business operation has unique issues to solve, he does see some common areas of concern in distribution that the application of lean principles can help address.
"One is what we call the last mile," he says. "A great deal of effort in distribution goes into how to get from Shanghai to Canada or from Michigan to Boston. When something has to move five feet, that's where we lose all that sophistication and effort. When we look at errors, it is not the wrong truck going to the wrong city, but 'the wrong box on the wrong skid' incidents that are the real opportunity. We figured out how to get from Hong Kong to here, then someone prints a list. It is the last inch of information flow and material flow that offers lots of opportunity."
Manrodt argues that the number one issue in implementing lean principles in supply chain operations is demand management. "That has to be the starting point in the lean supply chain," he says. "One of the reasons lean will survive is the emphasis on demand signals. You need good information." Extended supply chains mean that businesses will never reach zero inventory or one-at-a-time production, holy grails in some lean theories. "But it goes back to the same principle, the reduction of waste," he says. And in logistics, he says, that requires a quicker demand signal flowing to all parties in the chain.
It is easier said than done. Manrodt cites the example of one company he has worked with that has about a 180-hour production cycle for its product. But logistics does not get the signal until 53 hours before the product has to be shipped. "It all goes back to demand management," he says. "If they had that signal earlier, how much could they improve transportation? If we work together, we need the same type of information. When you get a signal, I need it, too."
But, he says, a number of barriers can stand in the way of information sharing, including a lack of IT resources, resistance to change, and turf-related power struggles. The last, in particular, he sees as counterproductive. "You gain power by sharing data rather than keeping it to yourself," he contends.
Martichenko and Tayur focus more on the role of inventory as both a target for improvement and something that can disguise problems. Martichenko's thoughts echo some of the philosophical precepts behind the just-in-time movement. "What you have to recognize is that problems are hidden by inventory," he says. "The first reaction to problems is to throw inventory at it. Lean is about exposing problems and exposing waste and recognizing that what is hiding the problems is inventory. If you can reduce inventories, you can expose problems that exist in the organization."
Martichenko emphasizes the importance of takt time, a term common among lean practitioners that essentially equates to the rate of customer demand. Takt is German for "cadence" or "pace." "You need to know what the customer wants, but also the rate of demand or the rhythm of the customer," he says.
Martichenko stresses that DCs and similar operations' success depends on reducing variability in operations and standardizing processes. That means making efforts to take out peaks and valleys in product flow, for instance, and to ensure that the processes for the first shift are the same as those for the second. Those are important so that employees have a clear understanding of what their jobs are and what their work is expected to produce. That echoes Manrodt's arguments about how crucial the flow of information is in order to manage the flow of product,with the focus on the customer rather than throughput on one part of the supply chain.
"A key aspect of lean is understanding that a business is a system," Martichenko says. You will suboptimize the whole by trying to optimize the parts. To understand system thinking requires a collaborative effort. One of the most powerful tools is level flow, so the DC manager has visibility of inbound and outbound and can do some work planning for level loading. That requires starting conversations around batch sizes and economies of scale. He argues that in the right environment, teamwork toward problem solving evolves naturally. But he also asserts that incentives, compensation and metrics programs must align with broad business goals, and not performance within a function alone.
"Particularly in warehousing, a lot of metrics can in fact encourage behaviors we don't want," he says. "If you are measured on how many cases are picked, everyone wants to work on the order with small cases. If you have measures driven by economies of scale or by volume, you drive behaviors you don't want. From a lean perspective, metrics are a little less objective—things like plan-to-actual and what was the gap. A lean culture is a planned culture. If you focus on having a plan and measuring actual against plan, you can find the root cause for gaps, focus on waste identification, and measure these things."
Jeremy Davidson makes a similar point. Davidson, who manages major accounts including automotive customers for Fortna, a consultant and systems integrator, sees the lean approach as a critical way of looking at business issues. Rather than focusing on, say, picking productivity, it forces managers to look downstream at customer needs, he says.
"Sometimes it is counterintuitive," he says. "You may shift metrics, and daily mean cycle time may be the most important thing. You may throw out cost per unit. To get to a system process implies certain things, like cross-functional teams have to look at and be measured by the same measurement."
Further, business management has to take what may be a counterintuitive response to problems.
Martichencko contends, "You have to celebrate—you do not have to be happy about it—but you have to celebrate when you uncover the rocks, or waste, and deal with it. That's a mental shift you have to make. Your job is to expose issues and get rid of things that are hiding them."More articles by Peter Bradley
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