Lean Supply Chains l l l Terminology Elements

Lean Supply Chains l l l Terminology Elements of being lean Ways we can reduce waste besides just having no inventory Lean chains can be fragile chains Toyota case

Terminology l l Lean / JIT / Toyota Production System (TPS) are terms that are often used interchangeably. You can produce just in time and not necessarily be lean – I have previously talked about car production. Many services fit this bill as well – think of a hospital. They have lots of inventory, excess capacity, and so on. Or Harley Davidson. TPS is a JIT system that continuously improves to have no waste of any form (not just inventory) A truly lean system is a waste free system

Getting beyond terms l l They key to Lean / JIT / TPS tends to be behaviors as opposed to names. Lean is both a philosophy and a tool box. l l Even if there are tools that don’t work in your setting – others will For instance JIT production with no inventory– requires steady demand patterns – generally of standardized goods. l This is not going to work in a job shop – which are bound to have WIP. Yet preventive maintenance works in all settings.

Key elements of a lean system l Continuously improve to reduce waste. l The ultimate production system from the Toyota perspective is one with the minimal amount of resources needed for production available at all times. l l Extra resources are a cost To few resources stop production Does not mean no inventory (or other buffers) – it means the lowest amount possible All forms of waste – capacity, skills, redundant tasks, and so on. Don’t fixate on the inventory

Other elements of lean l Workforce commitment and involvement – the people in the supply chain who know the most about key supply chain processes are the ones who perform them. l Managers get this within their own company and then drop the ball with suppliers l l Causes of non-conformance Payless shoes Deming’s 85% rule and the supply chain Focus on customer – let customers define value and waste.

More elements of lean l Zero defects – fixing defects is a form of waste – This is why “quality is free”. l l l This is arguably even more important in services with no ability to inventory. Think health care! This is the part of lean thinking that Harley Davidson inexplicably misses. Prevention verses abatement – don’t fix a problem if you can prevent it- this is absolutely critical – why?

Leaning out a supply chain l Removing buffers – many (most) chains have just in case buffers of inventory, capacity, and or time. l l Inventory is the one you are most familiar with – rock metaphor ? Additional lead time is another buffer that is often used to cover inefficiencies l l Just in case our project is late we schedule slack – and then what happens? Excess capacity – this room, extra people called in JIC we are busy and so on.

Reducing the number of suppliers l What does the number of suppliers per input have to do with being lean? l Are there sometimes good reasons to have more than one supplier for an input? l l Are you using the secondary supplier to mask a problem? Number used need not equal number who bid / are qualified

Reducing the number of activities in a chain l Redundant steps add waste and the opportunity for error l l This is one of the important reasons for ERP, EDI and so on. Single entry of data Minimizing number of touches / steps. l l l Win. Co and no back room Centralized purchasing Giving employees credit cards (huh – this is decentralized)

More process / step reductions l Reduce movement - goods l l l Cross docking is an obvious example Direct shipping Reduce movement - services l l My recent course change proposal – that was made better through IT Processing stuff at the social security administration l They may have more WIP than any organization I know

The whole point of smart car l The smart production system is designed to reduce the total number of steps and significantly eliminate movement. l Similar to system being used by GM in Brazil

Pollution prevention verses abatement l In the 80’s the main focus of waste reduction was fixing quality problems- we worked at reducing variance in our processes. l In the 90’s the focus was on moving from variance free to waste free. l The next step for most organizations is redefining waste to include pollution.

What are environmental issues ? l l I talk to lots of managers who claim they have no environmental issues because they don't have to deal with the EPA and or don’t release toxic chemicals. OSU is a service but we have massive environmental concerns / impacts / costs l Energy and water use – reductions go right to bottom line l Just beginning to monitor at the building level this year l Many MRO items –especially cleaning products are toxic l Coastwode labs in the MU l Paper – we use and then dispose of incredible amounts of paper l E-waste – we invested in lots of technology to reduce paper use – now we have to dispose of the computers

OK- that is wasted resourcesbut pollution prevention ? l l l l Interfaces case Louisiana Pacific Using less plastic and cardboard at Earth 2 O GP and ink recovery GPS / GIS and fertilizing crops Risk reduction – whose name is on the box? Services – go back a slide

Some of the empirical evidence l l l Pollution prevention pays – in general the publicly traded companies with the best environmental performance have better financial performance Investing in EMS leads to higher operational performance Small and family owned firms (in OR) who ignore these issues in strategic planning have lower economic performance than those who consider them.

To put this another way l l Should you be paying a supplier to use more energy than they need? Should you be paying a supplier to throw out a resource (this is what pollution is) ? Should you be buying something toxic from a supplier that you may one day have to deal with? Given the vagrancies of environmental regulation (some of which has been retroactive) do you want the risk?

Lean tools lead to prevention l l l l Prevent quality defects Prevent waste of all types Preventative maintenance Prevent supplier failures Prevent employee failures Prevent pollution (some of it) Does not lead to abatement – JIT organizations and environmental performance

Yet – lean chains are fragile? l A lean chain with a single supplier for most inputs and few if any buffers is: l l l Efficient Effective Going to stop dead if there is a major disruption l l l Supplier goes out of business Ship sinks (or a container falls off a ship) And so on

A simple way to think about risk l Disruptions can usually be described along two dimensions: l Frequency – from rare to frequent l l Number of occurrences Impact – from minimal to catastrophic l Business impact

So what do we do? l Should buffers be reinserted? l Are the savings from being lean more than worth the occasional disruption? l l Last years snow storm How do you mitigate risk?

Risk mitigation l One area of growing interest is risk of nonconformance due to financial conditions of the supplier – in many cases supplier selection now requires commercial credit reports as well l Customer selection to mitigate risk at Umpqua Bank

More risk mitigation l Know your own risks and the costs associated with them (nice place to simulate) l l Develop contingency plans for identified risks Know trade-offs associated with risks you have decided are worth taking Create exception management systems – return to reading one and the hurricane response Require key suppliers to: l l Identify possible risks during calculations of total cost Have a contingency plan for these risks

Even more mitigation l Buffers are the most common tool used l l Often for high frequency / low impact risks Would they be more appropriate for low frequency high impact risks? l l A back-up generator at Win. Co or in a Hospital might get used once a year (capacity buffer) Increased information flow / transparency is a risk reduction tool

A final thought on risk l Most companies are just starting to deal with this. l Many of them never really achieved lean supply chains- and are using this as an excuse to go back l The Lean leaders are not!

Conclusion l JIT / TPS / Lean – all about being waste free l Lean chains have the minimal amount of resources needed for production – but they usually have small strategic buffers l l Win. Co example of back-up generating. As a chain gets leaner it often becomes more fragile

Toyota case l Main goal- derive a solution to the seat problem l l Include recommendations for the short and long term Consider l l l Use of TPS principals for this problem Root cause of defects Supplier’s role in causing / solving the problem