Extended Lean Can Make Your Supply Chain Hum

OEMs are ready to embrace Lean Manufacturing after the 2001 recession, but traditional approaches were designed for vertically integrated enterprises. The answer to their problem? Extended Lean and Statistical Kanban.


Kanban is a Japanese word that means signal or billboard. It is the most fundamental concept in Lean manufacturing used to describe a material replenishment process in which every stage of production signals the one preceding it when more material is required or an act of production has been executed and a new one is ready to begin. Unlike MRP systems, which push material through production according to a pre-determined schedule that is based on a potentially inaccurate forecast, kanban is a pull-production process that is based on true customer demand. Kanban eliminates all but a small reserve of inventory or safety stock that functions as a re-order point while enabling the manufacturer to respond to unexpected surges in demand or interruptions in supply. When material drops below this re-order point, a kanban signal is sent to replenish it.

OEM executives love Extended Lean in a downturn because the only inventory in the pipeline (besides a small safety stock) represents actual customer demand. But how does a Lean supply chain respond during an upturn? Can Lean contract manufacturers and Lean component suppliers respond quickly to an unexpected upsurge in demand? Or will Lean OEMs find themselves stuck in first gear while competitors race ahead? In other words, how responsive is Extended Lean since, by definition, it must orchestrate complex activities across multiple tiers in a supply chain in which the OEM has relinquished centralized control?

It is a fair question, and until recently it was the Achilles Heel of Lean as it applied to outsourcing and supply chains. That is why most proponents of Traditional Lean sequester themselves within the four walls of the factory. Traditional Lean makes sense in a vertically-integrated enterprise, or within the confined space of a factory where managers can remove wasteful steps and redesign the lines. But Traditional Lean does not work in a modern supply chain.

Extended Lean makes the supply chain responsive by using a new technique known as Statistical Kanban, which was developed by Gary Cortes and his colleagues at FlowVision. How does it work?

The Lowdown on Statistical Kanban

Statistical Kanban enables manufacturers to anticipate fluctuations in demand and meet virtually any guaranteed service level that a customer requires, says Cortes. Let's say we have to carry some level of finished goods inventory to guarantee a specific level of service required by an OEM customer. This is inventory that the OEM has ordered and agreed to purchase. We can statistically determine the ideal level of inventory that is needed at each stage of the supply chain based on historical usage patterns and trends, says Cortes.

Statistical Kanban is used to guarantee a service level for which a customer is willing to pay. For example, FlowVision is working with a company in San Jose, Calif., that makes complex electronics-based systems with a long supply lead time and for which there is high demand. The company wants to guarantee that it can meet 99.7 percent of orders within a short delivery schedule. Using Statistical Kanban, FlowVision calculates the amount of finished goods inventory required to meet 99.7 percent of orders within that company's guaranteed time-frame. Using Statistical Kanban, the company guarantees that at most it will miss only 3/10ths of one percent of orders. Its customers are delighted with that level of service.

In order to achieve that level of service, we need to have a certain amount of material in the pipeline, explains Cortes. At a minimum, all of our components must achieve a 99.7 percent service level. When we statistically size the inventory, whether for finished goods or components, we mathematically calculate the variation in historical usage of those components and that finished product. We also look forward to account for any future anticipated changes in demand. Then we size the inventory to achieve a specific confidence level for which the OEM customer is willing to pay. Obviously, the higher the confidence level, the more inventory we will require, and the higher the cost to the customer. But the customer knows that up-front and can choose according to different scenarios. What is the financial impact of moving from a 99.5 percent service level to a 99.7 percent service level? With Statistical Kanban you can tell exactly what those additional two-tenths percent of certainty are going to cost.

Properly applied, Statistical Kanban is the key to implementing Extended Lean throughout a supply chain. Once the OEM, contract manufacturer and supplier agree on a guaranteed service level, they can mathematically determine the level of finished goods inventory. At that point, the only time they produce more of that particular product is when there is a signal from the distribution center or wherever the finished goods reside that the OEM has reached a re-order point. Then and only then does the supply chain produce more.

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