A Lean Supply Chain Manifesto

In an age of extended global supply chains, when companies must be demand-driven and agile, what does Lean really mean?

Lean has hit the mainstream — sort of.

In a report issued earlier this year, Boston-based technology consultancy AberdeenGroup wrote that fewer than one in five manufacturing enterprises (18 percent) have fully embraced and implemented Lean Manufacturing principles. Nevertheless, 90 percent of the manufacturing executives surveyed said that their enterprises are committed to Lean and pursuing the well-documented benefits that Lean can yield, according to "The Lean Benchmark Report."

But with Lean becoming widely accepted — if not yet widely adopted — in both discrete and process industries, the question arises, "Is Lean Manufacturing good enough anymore?" If your competitors are all reading the same business books and attending the same conference sessions explaining how to do Lean on the plant floor, will just doing Lean within the "four walls" of your enterprise still give you a competitive advantage? Or is it merely the cost of entry into the market these days?

The time is right, it seems, to take Lean outside your company. It's time for Lean Supply Chain.

Necessary, But Not Sufficient

Of course, Lean Manufacturing has continued to prove its value over the years. For example, a study released in April by Manufacturing Insights, an advisory firm headquartered in Framingham, Mass., showed that companies with high levels of maturity in their Lean initiatives (as well as their Six Sigma programs) are achieving significant benefits and competitive advantage. "Lean companies are growing revenue more rapidly, at higher profit margins and with more productive asset usage," write Bob Parker and Jay Holman, authors of the report, "Lean Six Sigma, 1Q06 Update: Lean Continues to Show High Performance."

The Manufacturing Insights report included a case study that showed how DuPont was combining Lean with Six Sigma and the Supply Chain Council's Supply Chain Operating Reference (SCOR) model to sustain momentum in its productivity improvement. In fact, Lean has always been about the supply chain to some extent. In the 1980s, when the U.S. automotive sector began implementing just-in-time production based on Lean principles derived from the Toyota Production System, a major focus was "pulling" parts and assemblies onto the production line just at the moment they were needed. Building a smooth flow of material along a streamlined value chain to eliminate waste necessarily involved suppliers, who were expected to support the OEMs' Kanban replenishment initiatives.

But the focus in the automotive industry's Lean initiatives remained on optimizing within the OEM's plant. Stephanie Miles, who is vice president for commercial services at global trade management solutions provider Management Dynamics (East Rutherford, N.J.), offers a simple explanation for why this kind of internally focused Lean is necessary but no longer sufficient to compete in today's "supply chain vs. supply chain" market. "Lean can help you optimize and save five minutes out of the manufacturing process, but if it gets lost in the supply chain, you might lose five days in the delivery cycle time," says Miles. In other words, all the Lean Manufacturing in the world won't save you if you don't have your value chain in order downstream to your customer and back upstream from your suppliers. If your suppliers are holding excess inventory on a just-in-case basis to ensure that they can meet your just-in-time mandate, the cost of holding that inventory ultimately is going to get factored into the total supply chain cost for the finished product.

What Is Lean Supply Chain?

One of the challenges in discussing Lean Supply Chain is coming to an understanding of what exactly that phrase means. The problem is that while Lean Manufacturing has been fairly well defined as a strategy for eliminating waste through continuous improvement programs, Lean Supply Chain still means different things to different people, depending on their rank and role in the supply chain, according to Gary Latham, an APICS-certified, 20-year veteran of the automotive and transportation industries. Latham currently is director of industry marketing in the Automotive Group at WhereNet (Madison Heights, Mich.), a provider of radio frequency identification (RFID) and real-time location systems for tracking and tracing assets in the supply chain.

It's really a matter of which metrics matter most to any given player in the supply chain, Latham says. "For example, if you're in charge of materials at the plant, your key metric is that you have inventory available for your production schedule, and a secondary focus would be not having too much or too little inventory. If you're the person in charge of the inbound and outbound yard at the plant, you're worried about managing all the inbound trailers, having high asset utilization and velocity in the shipping yard, and high productivity in the work force. If you're a shipper, you want to make sure that a trailer shows up on time to pick up your materials and gets it to your customer on time so that you don't get penalized, and that your materials get there undamaged."

A common theme does run through these different perspectives, however: the elimination of waste. As in Lean Manufacturing, practitioners of Lean Supply Chain focus on eliminating physical waste (in the form of inventory) and process waste (which could be, for example, unnecessary steps in a value chain or time during which assets or goods are unnecessarily idle). But unlike the internally focused Lean Manufacturing, Lean Supply Chain focuses on driving waste out of the entire value chain for a product. "To have a truly Lean supply chain, you have to go outside your four walls," says Dominick Corigliano, vice president of sales and marketing with Supply Chain Consultants, a Wilmington, Del., provider of software and services for supply chain planning and forecasting. "You have to reach out to your suppliers because there are going to be constraints present at both your suppliers and your customers."

The Relationship Challenge

Corigliano says that a truly Lean supply chain is one that is fully optimized for profitability. His colleague, Sujit Singh, chief operating officer at Supply Chain Consultants, adds that "fully optimized" means that all the parties in the supply chain not only are implementing Lean principles, they also are reaping the rewards. "When a big company directs the terms of its relationships with smaller suppliers to its own benefit, that is not a truly collaborative relationship," Singh says, "but Lean Supply Chain requires a true relationship where there actually is benefit for both sides from operating Lean." Singh is pointing to the principal challenge in implementing Lean Supply Chain: Building the right kinds of relationships with all the right partners to support Lean requires both a great deal of coordination within the supply chain and a highly collaborative attitude toward one's suppliers.

Relationship-building is necessary in Lean Supply Chain because of the data-gathering and -sharing requirements necessary to do Lean. Companies need significant amounts of data to understand the current state of supply chain processes between them and their partners; to build "as is" and "to be" models of the supply chain; to uncover gaps or redundancies that create waste; to track progress toward implementing Lean and to ensure that they are optimizing fully across the supply chain rather than isolated segments; and to monitor re-engineered processes for continuous improvement. Coordinating the collection of all that information alone represents a significant hurdle to doing Lean. "Companies are struggling with how they can coordinate with hundreds of trading partners to aggregate all that data together — it's just an enormous task," agrees Management Dynamics' Miles. She recommends breaking a Lean initiative into incremental projects with separate sets of partners, rolling the initiative out over time rather than taking a "Big Bang" approach, as a way of handling the coordination issue.

A second aspect of the data challenge is simply agreeing on the metrics that partners are going to measure and share. Picking the right metrics is critical to ensure that one company is not optimizing to its own benefit and to the detriment of its suppliers or customers, explains Sridhar Tayur, CEO of Pittsburgh-based SmartOps Corp., a provider of supply chain and inventory optimization solutions. "There are many partners involved, and their metrics are different than yours," Tayur says. "Your metric might be inventory turns, but that could be a secondary metric to a dealer that focuses on on-time service for his customers. If your focus on inventory turns forces him to jack up his inventory, in the end the whole supply chain becomes 'fat.'" To address this issue, Tayur urges companies to work collaboratively with partners at the outset of a Lean initiative to establish a set of metrics that will truly reflect the efficiency of the supply chain as a whole.

Building Trust

That level of collaboration, however, may require that companies rethink their relationships with their partners. "Communication and sharing of information really is one of the keys to eliminating waste in the whole supply chain," says Darren Dolcemascolo, senior partner with EMS Consulting Group Inc. (Carlsbad, Calif.) and author of Improving the Extended Value Stream: Lean for the Entire Supply Chain (Productivity Press, 2006). "But you have to overcome the usual paradigm of adversarial relationships with your suppliers. Because once you start talking to suppliers about letting you see and understand their processes, they're going to say, ‘Hey, we don't want you in here looking at our process. None of our other customers are doing that.' It's difficult to overcome that, but you have to start by building trust with all the suppliers in the value stream."

Ron Nussle, Jr., C.P.M., who is president of ICR Enterprises, a Union City, Calif.-based procurement and supply chain consultancy, urges companies to apply the Golden Rule to their relationships with suppliers when working with them on Lean or any other initiative. "If your supplier thinks that you have its interests in mind as well, it will be more willing to work with you on continuous improvements and to make investments that help give you better quality, cost, service and on-time delivery," says Nussle, who is co-author, with Jim Morgan, of Integrated Cost Reduction (Reed Business Press, 2004).

That sounds like common sense, of course, but Nussle, who went through extensive supply chain transformations at Honeywell Aerospace, Cessna Aircraft Co. and Lam Research Corp., says it's all too easy to start out with best intentions and then slip back into the "take the savings and run" mentality as an initiative progresses. "You have to keep thinking about what your suppliers' business needs are and how they match your business needs," he says.

One best practice that Management Dynamics' Miles recommends for ensuring consistent alignment of metrics and goals among supply chain partners is to institutionalize regular forums to review the performance of the supply chain as a whole, as well as each individual partner's performance against agreed metrics. The goal, Miles emphasizes, is not to beat up one side or another for failing to meet any specific metrics, but to examine root causes and share best practices for getting that metric back on track. "You really need to engage with your partners to improve the process together rather than just pointing out which metrics were off the plan," Miles says.

The Case for Lean

Ironically, even as economic forces are pushing increasing numbers of companies to pursue Lean Supply Chain initiatives, other macro trends are making it increasingly difficult to be successful with such projects. Colin Snow, vice president and research director with Ventana Research, a performance management research and advisory services firm based in San Mateo, Calif., points to increased global sourcing as one such factor. "The minute you go global, you've increased distance and lead times," Snow says. The greater distances make it that much harder to coordinate with suppliers and keep them focused on Lean goals. The increased lead times force companies to constantly make trade-offs between different transportation modes: Putting your goods on a plane costs significantly more, but it reduces the idle time that the goods are in transit, whereas ocean freight costs less but can increase the overall amount of inventory in the supply chain and certainly increases the time that you're holding the inventory.

Colin Snow, vice president and research director, Ventana Research

Still, Snow believes that the imperative for companies to become more agile and flexible — so that they can respond more quickly to changes in demand — is making Lean Supply Chain a mandatory initiative for enterprises. "The consumer is more fickle, and demand is becoming more and more variable, and meanwhile, nobody wants to hold the inventory," he notes. That means that companies sourcing overseas must ensure that their suppliers are running as part of an integrated Lean supply chain, getting parts and products to the dock on time so that ocean freight is a realistic option. It also is true that some companies are revisiting their decision to move their supply base offshore and are instead "near-shoring" some portion of their operations back to nearby countries or domestic locations to meet the most volatile demand.

Advocates of Lean emphasize that it is a long-term, ongoing project, a journey, if you will. Lean Manufacturing can be hard enough to implement well because of the requirement to bring multiple functions together from across the enterprise to agree on a universal set of strategies, goals and metrics. Lean Supply Chain only increases the complexity and the difficulty. As WhereNet's Latham says: "These Lean Supply Chain theories have been around for a long time, and people have thought these things through and produced reams of data on how to do it. But the issue isn't that we don't have any ideas on how to do it. The issue is that there are too many parties in the supply chain that have to all agree."

Of course, if it were easy, anyone could do it, and the competitive advantage of doing Lean Supply Chain would disappear, just as the benefits of Lean Manufacturing are diminishing over time as more companies embrace it. For the time being, however, Lean Supply Chain still holds out the promise that it can provide a competitive edge to those enterprises willing to make the investments, and the changes, necessary to begin the journey. Easy? Not a chance. Rewarding? Most likely. A necessity? Absolutely.