Applying Lean Manufacturing Principles to Optimize the Supply Chain

Supply chain management challenges are unique in very high-mix, low-volume and volatile demand manufacturing environments compared to very high-volume and low-mix environments. More and more, manufacturers are confronted with this problem today.

Traditionally, lean manufacturing practices are believed to be more suited for high volume, low mix manufacturing. This is a myth. This article shows that Lean manufacturing practices have many benefits to offer in all manufacturing environments, regardless of the product mix and volume.

The lack of proper education and training in an organization has been shown to be the biggest barrier to a successful Lean manufacturing implementation. Lead time in different areas of the supply chain is a main cause of inefficiencies. Through proper training, encouragement and participation at all levels, excellent results in supply chain optimization in high-mix, low-volume manufacturing environments can be attained. Value stream mapping has proved to be a very simple but extremely effective tool for identifying issues affecting the key metrics of a supply chain.

This article compares the supply chain challenges using two cases of manufacturing environments. It describes how the supply chain was optimized in terms of performance metrics with special emphasis on excess and obsolete (E/O) inventory and lead time (LT) reduction in the optical industry. The improvements in each of the metrics are shown to have a direct effect on the organization's ship-to-commit (STC) performance.

The article also describes the special tools developed to optimize different parts of the supply chain process and how some Lean manufacturing components — particularly Six Sigma and Kaizen — were deployed to optimize the supply chain metrics for a high-mix, low-volume manufacturing environment. The results of each practice are included.

High-volume/Low-mix vs. Low-volume/High-mix: The Supply Chain Challenge

All companies share the same end goals of on-demand order fulfillment and lower costs of goods sold. But the ability to realize gains from supply chain optimization is not the same among companies with different product mix and volume ratios.

A high-volume/low-mix manufacturer producing consumer electronics for a broad global market has different leverage points within the supply chain than does a low-volume/high-mix manufacturer that builds specialized technology products for a narrower market. When comparing supply chain metrics between these two types of manufacturing companies, a huge contrast becomes readily evident, as shown in Figure 1. Each metric is defined and measured on a scale of 1 to 5 in a metrics scorecard, where a rating of 5 is the optimal score relative to the industry. The criterion for the ratings is listed below in Table 1.

A high-volume/low-mix manufacturer producing standard PC motherboards, for example, can be expected to have relatively stable and predictable end-product demand. It will have a smaller supply base providing many standard ship-to-stock components and materials. High volumes can be leveraged to reduce the ordering frequency and subsequently run a more efficient supply chain operation with high inventory turns and little exposure to excess and obsolete inventory.

In contrast to the generally robust supply chain performance in the well established high-volume/low-mix businesses, the same is not true for the fiber optic components and subsystems manufacturers. They operate in a very low-volume/very high-mix environment, facing constant demand volatility as product forecasts oscillate. This type of manufacturer relies on a large supplier base, each providing unique components for specialized products, making the supply base and internal operations management unwieldy and exposure to excess and obsolete inventory a big challenge.

For the low-volume/high-mix manufacturer, supply chain optimization requires innovative approaches to match the performance demonstrated in high-volume/low-mix environments.

Table 1. Supply Chain Metrics Scorecard

Fabrinet: Reasons for the Changes

Fabrinet serves an industry characterized by very high-mix, low-volume production. It is a global engineering and manufacturing services provider of complex optical and electro-mechanical components, modules and bulk optics. The company serves data communications, telecommunications, networking, medical and automotive markets worldwide. It has over 20 different end customers, and each has unique requirements affecting the supply chain and manufacturing model. Each customer has its own factory within a factory at Fabrinet to safeguard its intellectual property.

Supply chain management is among the greatest challenges Fabrinet faces. Close to 90 percent of the product cost is made up of material used to manufacture the products. The company's growing product portfolio encompasses more than 23,000 top levels and subassemblies using over 36,000 components (Figure 2) purchased from over a thousand suppliers located in different parts of the world (Figure 3). Many of the suppliers in the burgeoning optics industry are small, with limitations in quality systems, reliability and overall maturity.

Technology in the optics industry evolves at a rapid rate. As OEMs develop new product designs, component and subsystem manufacturers compete to be the first in getting them to market. A supplier that wins the business must stay at pace with a program's demand shifts throughout its lifecycle or risk losing the business to competitors that are ready to deliver at the first opportunity. In this race to deliver, short-term production schedules swing up and down dramatically (Figure 4). Referred to as "demand churn," this schedule volatility stresses the supply chain to its extents. Drop-in demand — short-term upside spikes when customers have immediate new needs with "fill-or-kill" orders — need to be responded to with commitments instantly. Demand is also regularly "pulled-out," or removed from the short-term delivery window, leaving materials potentially exposed in the pipeline. In both cases, an immediate realization of the changes, response and appropriate actions are very critical.

A key metric for measuring success at Fabrinet is ship-to-commit (STC). Despite the long lead times of many materials and components used in optical technologies, customers continually demand that their orders be filled in ever shorter lead times. To accomplish this, Fabrinet requires a highly flexible supply chain management system. It must be able to deal with demand changes on the fly and ensure an uninterrupted, scalable supply of materials with continuous cost reduction. It is necessary to close the lead time gap between customer demand and supplier delivery without exposing the company or the customer to high levels of excess and obsolete (E/O) inventory.

The answer to these challenges lies in applying the principles of Lean manufacturing to the supply chain. Combined with new IT tools for intelligence and productivity, Lean manufacturing concepts are transforming Fabrinet's supply chain from the bottom up. By value stream mapping the supply chain processes, we identify opportunities where Kaizen and Six Sigma projects, processes and tools will enable staff to address the base objectives. These Lean practices add value by driving a second tier of objectives, which in turn lead to improved performance for the customer and an ultimate increase in business wins for Fabrinet (Figure 5).

Lean Manufacturing: Getting Started

One of the biggest challenges in implementing Lean manufacturing (LM) is convincing both management and staff at all levels of the power of Lean manufacturing tools. Many staff at Fabrinet envisioned Lean concepts as very complicated mathematical modeling of the process using complex math equations to find the optimal conditions and solutions for lowest cost, best quality and best STC. Others viewed Lean manufacturing to be more applicable for optimizing manufacturing shop processes. The problems in supply chain were seen to be insurmountable and beyond the scope of Lean manufacturing practices.

We had to get past the initial cynicism and notion that lean concepts were very complicated and only suitable for high-volume products, required special skill sets and were outside the scope of rank and file.

A series of classes including staff from all levels of the supply chain staff were held. Class material was designed without involving any mathematics to demonstrate that the overall concepts are simple and easy to understand. Different components of Lean manufacturing were reviewed and each component was explained in the simplest terms to ensure everybody understood the basics. The training and education initiative also was intended to show that not all of the LM tools are always applicable in all cases and that many are not always necessary.

To ensure everyone was on board, several small working groups were set up during working hours to encourage interactive discussion, ask questions and debate the pros and cons of the LM practices. The primary goal was to create teamwork, improve the confidence level of each individual and demonstrate that everyone can contribute to continuous process improvements.

As soon as employees realized Lean stands for waste reduction and not for eliminating people and jobs, Fabrinet accomplished a major milestone toward accepting and adopting Lean manufacturing practices throughout the supply chain organization. With practice, Fabrinet employees realized that Lean manufacturing was about cost and cycle time reduction and was a means toward providing the best value proposition to customers.

Supply Chain Optimization through Lean Manufacturing Practices

The Value Stream Process Map: Identifying the Problems

At Fabrinet, the supply chain (SC) optimization was divided into two separate efforts. First we had to address the common features of SC for all customers and then optimize the supply chain for specific customers as shown in the case study in the latter sections of this article.

To define the overall SC project and identify the problems, the team constructed a complete supply chain process map from the point of communication of demand from the customers through delivery of product. From a high level perspective, the supply chain process was divided into three discrete areas: demand management, strategic supply chain and logistics (Figure 6). The problems and their magnitude in each SC process area were identified together with a specific team of staff responsible for the improvements. Lead time was identified as the fundamental parameter for baseline measurement and improvement across the board. Low-hanging fruit was targeted for immediate improvement, while higher goals were slated for broader scope projects.

Figure 6: Value stream map of the existing process together with the problems identified in each area.

The x-bar and sigma values for each processes section were computed. In demand management and logistics, the actual lead time of the processes were measured over a 26-week period. The data for the strategic supply chain were based on the total fixed lead times of all purchased components.

The average lead time for the total SC process was identified to be 71.7 days, with a standard deviation of 34.5 days, making both the commitments and deliveries to customers very unpredictable. The following sections describe how the average and standard deviation were reduced to improve the overall STC.

Opportunities for improvements in each of the three main areas were divided into a series of Kaizen and Six Sigma projects. Six Sigma projects were identified as "high-hanging fruit" due to their complexity and duration. These projects required innovation, development and validation before they could be implemented. They could take anywhere from four weeks to six months for full implementation. Kaizen projects, on the other hand, were designated as "low-hanging fruit" and quick wins. These projects were considered much simpler and quicker to complete, taking anywhere from one week to four weeks for full implementation.

Demand Management: Problems and Opportunities for Improvement

To tackle the problems in demand management, the focus team looked at the detailed process and tools used in handling, analyzing and responding to customer demand. They found that demand churn in the two-week planning horizon was out of control and invisible. This was driving shortages, excesses and missed commitments. There was no way to quickly and accurately measure the effect of demand spikes. Recognizing that we needed to be flexible to support churn demand, it was decided to standardize the demand management process and develop analytical tools that would help them recognize, analyze and respond to demand churn before it was processed through MRP.

Table 2. List of projects identified to improve the demand management cycle.

Churn Analysis
The Churn Analysis project was a key step in improving the demand management process. The team realized that while some churn is inevitable (and even welcome in the case of doable upsides), other churn was unnecessary and could be controlled in the master production plan to avoid inventory problems or the creation of unnecessary, non-value-added work downstream in the planning process. The goal was to identify the unnecessary churn. The churn analysis turned out to be a far more powerful tool than first anticipated. Senior management of customers started using it for monitoring their own product lifecycle management and marketing forecasts. Previously, senior management focused more on the overall revenue numbers but not the churn mix, which was the major cause of E/O inventory.

The WHATIF MRP was an easy-win process development. Before this process was available, planners in various production business units had to wait for a single, weekly MRP run to see the total picture of their customers' new demand and materials position. While waiting, many would attempt to manually calculate materials availability in order to commit to the customer, resulting in inaccurate commitments and materials shortages. After implementation, a planner could run a full MRP on demand as a simulated production scenario, then identify availability and constraints, and provide feedback to the customer with accurate commitments. It allowed the planners to load the weekly scheduled MRP with a realistic demand plan, avoiding lots of errors and cancellations.

Max Kits Analysis
The Max Kits tool was a software application with multiple analytical uses. Primarily designed as a real-time available-to-promise (ATP) engine, it also functions as a means to identify finished assemblies that can be built with available E/O inventory. Prior to this tool, all assessment was based on time-consuming, manual data crunching and estimations. Now planners have an automated tool that provides an exact assessment for the total number of full kits and additional material required to build out the required demand or to eliminate total exposure to E/O.

12-Week Shortage Analysis
The 12-Week Rolling Shortage Analysis was a key early warning tool that addressed frequent material shortages. Prior to this tool, planners had no way to accurately predict when material shortages would affect production schedules. Designed for ease of use, planners could run the 12-Week Shortage Analysis tool and quickly identify problematic components. With these data available, business unit planners formed escalation teams with members of the Strategic Supply Chain group. Material shortage issues that could not be solved within the purchasing groups were escalated to management and then executive staff. Material shortages were reduced from frequent to rare.

Overall Results in Demand Management
With these automated, accurate tools for analyzing and responding to customer demand, the baseline lead time metric for demand processing improved from an average of 5.75 days and a d (delta) of 0.707 days to average of 2.75 days and d of 0.276 days. This resulted in direct STC improvements, upside opportunities in revenue and reduced E/O inventory. Additional benefits were gained downstream in the supply chain processes. Among them, buyers had more accurate and reliable schedules to manage, and stores had steadier throughput. Overall improvements in the SC metrics resulting from this work can be seen in the case study section.

Strategic Supply Chain: Problems and Opportunities for Improvement

Two teams were formed to identify and implement a series of actions (Table 3) to reduce the lead time for all material components to less than four weeks. Before this effort, lead times ranged anywhere from a few days to 28 weeks.

At Fabrinet, each customer has its own factory with a dedicated support infrastructure. The Strategic Supply Chain group, however, is centralized and provides services to all customers, while each customer business unit has its own dedicated planning and procurement group providing tactical support.

The Strategic Supply Chain team saw the supplier lead times to be the biggest opportunity for overall lead time reduction. They divided all purchased components into discrete commodities and the associated suppliers within each commodity. Meanwhile, a team of tactical planning and purchasing staff worked on tools to increase efficiency in order processing.

Table 3. List of projects and problems identified for improvements in the Strategic Supply Chain.

Current Lead Time Mapping
The lead times for each component are stored in the ERP system database. This was the lead time baseline used for this exercise.

In the first step of the mapping process, all the parts that had lead times of less than four weeks were segregated into one bucket. Most of these parts were already part of our existing vendor management inventory (VMI) hubs and fixed supply programs.

  • VMI: Vendor managed inventories are onsite hubs where vendors have established four- to six-weeks inventory at Fabrinet. Fabrinet pulls inventory from these hubs based on the kitting requirements for production. The vendors replenish the inventory based on the consumption and the 26-week forward rolling forecast provided by Fabrinet on a weekly basis.
  • Fixed Supply: The fixed days supply program was designed to manage the "C" class items that represent 80 percent of the purchase parts and 5 percent of the purchase dollars for a predefined period (usually one quarter). Each "C" class item is purchased using a dynamic 60-day supply rule. This allows the ERP system to manage the demand, and the buyers only have to place purchase orders twice per quarter.

Standardized procurement process

Vertical Integration



Long Term Contracts

Vendor Consolidation

Buyer Productivity Tools

  • The Auto Reschedule Interface allowed buyers to upload supplier commitments from a spreadsheet-based template to the ERP system en masse and saved significant time and manpower in maintaining the orders.
  • The Alternate Action Report employed custom logic to provide different order rescheduling and cancellation suggestions than the standard ERP system provides. This helps buyers more effectively manage their orders.
  • Custom Warnings and Notifications are customizations to the ERP system that help buyers identify exceptions like non-cancellable, non-returnable parts or alternate parts that are available as substitutes for the part they are buying. These warnings help the buyer identify exceptional situations where they should focus their time.
  • The Excess On Order Analysis is a custom intelligence tool that dynamically shows buyers where an open order might result in excess inventory.

Overall Results in Strategic Supply Chain

Logistics (Warehouse and Incoming Quality Assurance): Problems and Opportunities for Improvement

Table 4. List of projects and problems identified for improvements in the Logistics area of Supply Chain.

Smart Bins for Hardware

Consignment Process

Freight Consolidation

Barcode Label

Skip Lots

Overall Results in Logistics

  • The measured process lead time of five to nine days was optimized to a one- to two-day process.
  • Storage capacity in the warehouse increased by 40 percent within the existing facility.
  • Kitting lead time was cut to single digit hours.
  • Headcount costs dropped by 22 percent in the warehouse and IQA.
  • Over-time costs dropped by 40 percent in IQA and the warehouse.

Customer Specific SC Optimization: Case Study

Figure 7

  • Component demand was steadier requiring less order maintenance. This resulted in a 40 percent reduction in the day-to-day communication and administrative activities for the tactical purchasing team.
  • Fabrinet's tactical purchasing team was able to focus their activities managing the high-level "A" category items, NPI products and upside demand opportunities.

Figure 8

Overall Gains from Lean Implementation at Fabrinet

Figure 9

  • Demand churn, order cancellations and reschedules were brought into full visibility, allowing appropriate decisions.
  • As material lead times were reduced, they became more predictable.
  • The number of suppliers and purchase orders issued each week went down and buyers became more efficient.
  • IQA and warehouse throughputs improved.
  • Overall inventory turns went up.
  • Excess and obsolete inventory decreased while ship-to-commit performance improved to target levels.


About the Authors

Dr. Harpal Gill, Executive Vice President, Operations

Kevin Camelon, Senior Director of Supply Chain

Mark Lopus, Director of Business Systems