Lean Supply Chain: Principles, Benefits and Limitations

INTRODUCTION

Supply Chain Management is used by every kind of business. The business can be as small as a corner shop to as large as Toyota Motor Company.

A supply chain is a network of facilities, functions and activities that are involved in fulfilling customer demand. According to Martin (1992) it is “the network of organisations that are involved through the upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hand of the ultimate customer”. The coordination within the entire chain is therefore very important. The supply chain according to Martin covers activities on the business process, procurement, production, inventory carrying, storage, handling and distribution within an organisation. Supply Chain Management is therefore, the integration of key business processes across the supply chain for the purpose of adding value for customers and stakeholders (Lambert, 2008). The size of the business determines the extent of Supply Chain Management it will get itself involved in. Companies invest heavily in Supply Chain Management to give their customers value for their money since supply chain management is essential to maximizing return on investment in a company.

THE SUPPLY CHAIN CYCLE

To improve a company’s competitiveness and overall profitability, modern day businesses have embarked on new supply chain concepts of Lean and Agile Supply Chain. Lean supply chain occurs when inventory moves so fast that firms basically holds zero inventory on hand. Supply Chain Management is expensive to operate and Companies are determined to cut costs to maximize their profits. . Fierce competitive market conditions are driving companies to adopt Lean strategies to improve corporate financial performance, Thus they practice Lean Supply Chain Management. Lean Supply Chain Management is one that makes the company produce just what is needed, when it is needed and where it is needed. This means the company will avoid wastage such as defective products, unwanted inventory and waiting time. The system also enhances value to the end user. Lean production with the appropriate product development phases, ensure readiness at product launch eliminating waste and reducing product development cycle times.

Core consideration questions for companies applying in Lean principles implementation include:

• What are the design requirements essential to Customer Value?

• Will a new product slot into an existing Product Family or will it constitute an entirely new Product Family?

• Will materials, components, parts, and assemblies be sourced from preferred’ suppliers qualified for pull-based Kanban fulfillment?

The right combination of core considerations depends on the company’s specific competitive practices.

THE LEAN SUPPLY CHAIN

It is believed almost worldwide, that Lean thinking originated from Japan (Toyota, specifically), but Henry Ford ( Ford Automobiles, U.S.A) had been using parts of Lean thinking as early as the 1920’s, as evidenced by his quote:

“One of the most noteworthy accomplishments in keeping the price of Ford products low is the gradual shortening of the production cycle. The longer an article is in the process of manufacture and the more it is moved about, the greater is its ultimate cost.” Henry Ford 1926

Lean is defined by many organisations as “A systematic approach to identifying and eliminating waste through continuous improvement, flowing the product at the pull of the customer in pursuit of perfection.”

Cappello (2006) argues that wherever lean principles are applied, they must be enforced by strong leadership. It is, “… a battle not only for minds, but for hearts as well.” Lean principle application requires that managers convince employees (and other supply chain stakeholders) that lean is not just a short-term campaign, but a long-term strategic proposition aimed at achieving a competitive advantage. This requires daily efforts to continually remind, educate, and enforce lean policies.

The principle for applying lean supply chain management is to maximise value for customers and profit for corporations by eliminating waste, “Muda”, through each stage of commerce and implementing business strategies that enable continuous and sustainable improvement throughout the supply chain. The main aim of a lean supply chain is to meet each customer’s demand the first time, at the lowest cost, at every time. This enables “flowing” the product through the chain in response to the pull of the customer in pursuit of perfection. This flow process is also known as “Kanban”. “Kanban” , a Japanese term, means card signalling. It is the information signal used to indicate the need for material replenishment in a pull production process. An effectively designed Lean supply chain delivers true value to the end customer at a reduced cost to the organisation.

Though there are many vital principles underlying the Lean thinking process, there are some key principles that serve as the driving force propelling the theory into practice in almost all organisations. These are demonstrated below with the primary focus as the customer driving the wheel of lean thinking and all principles being enabled through technology.

Fig.2 The Value of Lean Principles, an Oracle white paper, Nov.2003

Value and Identifying the Value stream: – Value in lean thinking can be simply defined as everything involved in supplying goods or services to a customer in a way that profitably meets or exceeds the customer’s requirements and expectations. The value stream is determined in two ways, the internal Value stream, which is the internal stream of activities to be performed to create a product and the second being the supply chain value stream, which is based on the business, its supplier and the customer. Value in its entirety can only be defined by the customer regardless of the amount of effort put into the product or service by the provider of the service or product.

Waste:- Waste in this context refers to all non-valued-adding activities that ultimately increase cost throughout the chain. There are eight main identified categories of waste pertaining to lean supply thinking:-Over production, Non Value adding Processes, Transportation, Delays, Excess motion, Unnecessary stocks/ inventory, Delays and Product& Service quality defects. The kinds of waste and how they affect organisations will be treated in detail in the following pages of this paper.

Flow production is a way of doing things in small quantities in sequential steps, rather than in large batches, lots or mass processing. Systematic and fluid movement of goods throughout the chain with minimal storage or inventory without allowing materials to idle in queues or stagnate at large stock points is key to the supply chain. From engineer to order all the way to repetitive and process manufacturing and delivery to the end customer, tremendous gains can be realized by using flow manufacturing principles. Examples of improvements include:

• Increased inventory turns

• Lowered manufacturing time

• Decreased component and finished goods defects

The “Kanban” is an underlying factor to both the flow process and the Pull process.

The Pull principle works on the theory that goods or services are “tugged” or derived from the supplier based on the demand from the downstream customer instead of suppliers “pushing” goods downstream. The idea behind the “pull” principle is to keep producing parts as close as possible to the time when the parts are needed. “Need” in a lean environment is typically associated with true demand by the market or a real live customer sales order. In a pull environment, finished goods inventories are extremely limited or almost non-existent

People:- Apart from the operational changes, adoption of the Lean methodology requires a significant organizational transformation. It requires formation of work teams, made up of multi-skilled workers who need to continuously improve upon performance and production processes.

Responsiveness to demand and to change deals with delivering quality products or services as promised, when required, and at the agreed-on price. However market or demand changes must be well anticipated to cater for adjustments in the supply chain

Pursuit of Perfection:- This is concerned with the continuous search for methods of improvement, causes of waste, and their elimination from eth supply chain. It is an effort by each member of the chain to improve upon skills and ideas and strive for “perfect leanness” in the organisation

All these underlying principles are directed toward one goal, that is, Total Customer Satisfaction. As Li (2008) observes, lean principles and lean policies are not only about eliminating waste, but also about human behaviour, culture, teamwork, leadership and executive force.

Benefits and limitations of implementing a Lean supply chain

The advantages of Lean Supply Chain Management cut across every kind of company. The biggest advantage is the reduction in cost to the company. The traditional way of reducing cost is through mass production. Although this requires an investment in very expensive equipment, through Lean Supply Chain Management, the company enjoys reduced cost by mass production. Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product.

A second advantage is reduced volume of transaction. This can be equated to speed and responsiveness to client demands. This means that supply chain is now faster and more efficient. The customer’s needs are met rapidly. Lean supply chain management makes the company action biased. Once a customer is delighted there is room to serve the next hence increase company revenue.

Lean Supply Chain Management relies heavily on outsourcing. Outsourcing is the contracting of certain essential components of the business to another organisation.1 The role of outsourcing in lean supply chain management reduces risk to the company as it hands over certain ill-performed tasks previously performed by the organisation to third party experts. The company is therefore in a better position to focus on its strengths in the supply chain, thus increasing value for the customer.

Yet another advantage of Lean Supply Chain is Customer Satisfaction. Lean supply chain management means that customer needs are satisfied in the shortest possible time. Lean supply chain management also makes it possible to incorporate current requirements into the production process bringing out newer versions of a particular well performing product on the market which makes the company look fresh (case of many electronic and automobile industries). The company gets more revenue and loyalty will increase as customers tend to purchase their needs from companies they can trust.

Lean thinking brings about many Operational benefits including:-

Lead Time (Cycle Time) reduction

Increase in Productivity

Reduction in Work-In-Process Inventory

Quality improvement

Reduction in space Utilization

Administrative benefits in organisations are noticed. Reduction in order processing errors & elimination of “putting customers on hold” by streamlining of customer service, improved product quality as well as product delivery function are brought about through lean management. Higher staff profiling standards and staffing and recruitment demands are reduced. This is achieved when the same number of staff is equipped with multi skills to handle larger numbers of orders that would have previously needed more staff. Documentation and streamlining of processing steps enables the out-sourcing of non-critical functions, allowing the company to focus their efforts core competencies and on customers’ needs.

The main aim of every organisation is to meet or achieve its strategic goal , that is ultimately Customer satisfaction the lowest possible cost to the organisation. Lean supply chain management with a stepwise advantage through the operation and tactical levels help organisations to meet their strategic aspirations.

Most organizations implement Lean principles based on the operational improvements, primarily because of the perception that Lean only applies to the operations side however benefits cut across the main decision making processes or departments of every organisation.

Even though Lean supply chain has many advantages, there are also limitations to apply its principles to each and every organisation. . Thought lean principles are good theoretically, it has not worked well for most companies.

Lean supply chain management is very expensive in the sense that the expertise needed at every level (since all staff are need to be multi skilled) come at a high investment premium.

Also, it relies heavily on outsourcing which has many disadvantages. Outsourcing comes at a cost because the third party is a business entity and will have to make profit on its operation. It also means that the organisation will have to stomach some initial costs. Some of which are redundancy costs and the costs in selling equipment. During outsourcing, when a fault slips through the checks in lean supply chain management, the company will have to bear the costs of production as products will have to be recalled. This has been evident recently with the pioneers of Lean Thinking, Toyota motor company facing multiple recalls.

Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product. To recover the enormous initial capital costs sunk into the product before it was produced, mass producers forecast and run long production cycles for each SKU(stock keeping unit). Consumer preferences and variety suffer in this scenario. Costs is minimized using lean theories but at the expense of what more sophisticated consumers now demand. Customer demands in recent times are focused on variety of products and this cannot be achieved on a solely “lean” platform.

One can therefore conclude that Lean thinking is not dynamic or aggressively change-embracing. Strictly using Lean principles may cause organizations to fail under the recently thriving environment of unpredictable and rapid change. This is not largely friendly toward the needs of the customer as new innovations based on customer needs are not implemented. Lean supply thinking is known to be quite inflexible to changing patterns and insensitive to the market. Customization demands in current markets by the consumers have been the main downfall of strict lean thinking. It is therefore being revisited to help improve its practicality in todays organisations.

APPLICATION OF WASTE AVOIDANCE TO AN ORGANISATION IN EFFORTS TO INITIATE A LEAN SUPPLY CHAIN

Waste refers to anything that uses resources, but does not add real value to the product or service. It ultimately increases cost throughout the chain. There are seven main identified categories of waste pertaining to lean supply thinking:-Over production, Non Value adding Processes, Transportation, Delays, Excess motion, Unnecessary stocks and Product& Service quality defects. Recently, the “Eighth deadly waste” has been added by Taiichi Ohno and Shigeo Shingo, as the waste of “Untapped creativity of all the employees in a company and supply chain”. This is increasingly gaining headway as the top worst of wastes in an organisation. Untapped creativity can lead to more revenue lost than ever imaginable. Employees in all organisations should be allowed or encouraged to share ideas and improvement strategies that can help move the organisation to a higher level.

Waste of overproduction deals with the manufacture of products in quantities that are well in excess of the actual customer demand.

Transportation waste particularly refers to the amount of travel the product endures as it passes through the supply chain. This provides no value but forms the bulk of costs incurred to the manufacturer and the end customer

Common examples of Non-value adding processes are:- reworking (the product or service should have been done correctly the first time), deburring (parts should have been finished properly)and multiple inspection at all stages of the supply chain (parts should have been produced using strictly adhered specifications and supervision to minimize the amount of inspection required).

Delays or Unnecessary waiting while products are queued through the supply chain as they undergo varied processes is another form of waste throughout the supply chain

Excess motion caused by poor housekeeping, work flow design, layout and inconsistent or poor documentation of work processes are frequently overlooked. These however play an increasingly problematic waste of valuable resources such as time throughout the chain.

Unnecessary stocks or inventory occur especially when an organisation holds a large quantity of inventory in a “just in case” scenario without accurate market demand analysis. These tie up much needed capital into goods sitting in stores or warehouses. Inventory beyond customer demands negatively impacts cash flow and uses valuable floor space.

Production defects and service errors are primary culprits in resource wastage. Firstly, material resources are consumed and thus must be replaced. Secondly, the manpower is wasted during the initial production process of the part or provision of the service) the first time cannot be recovered. Thirdly, manpower is again required to correct the defects in the product or service) and again to address any customer complaints and win back the customer’s trust.

Waste in industries and organisations are common but unfortunately ignored. It is regardless of the fact that they contribute to the major losses and the invariable shut-down of many industries worldwide. Over production, Non Value adding Processes, Transportation, Delays, Excess motion, Unnecessary stocks, and Product& Service quality defects. This paper seeks to bring to light how lean principles, particularly, avoidance of waste, can bring about a profitable lean supply chain.

The telecommunication industry in Africa is a booming business with millions of subscribers nationwide. In recent times however, the need to access fast and easily accessible mobile data service has been on the increase. Shin Lo electronics, a Chinese based supplier of data modems to countries in Africa has recently faced a downward turn in profits and customer patronage. Shin Lo has many distribution centres across the African continent, namely Nigeria, South Africa, Ethiopia and Zimbabwe. These distribution centres provide modems to Western & northern Africa, southern and eastern Africa respectively. The modems are shipped from the main manufacturer in China then to all these distribution centres after which they are retailed to the individual countries ,examples being, Ghana, South Africa, Morocco, Togo, Burkina Faso, Malawi, Zimbabwe, etc. Shin Lo has however faced a high number of modems being returned with defects and customer complaints due to product unavailability leading to loss of revenue. This has caused their primary competitors, Hauwei technologies, to climb up on the market. A critical analysis of the organisational structure and process brings to light the various forms of waste and how its avoidance can bring about a profitable lean supply chain in Shin Lo electronics.

The organisational supply chain structure was such that, all modem core layouts were manufactured in China, regardless of their destination. They were then shipped, by sea, to each distribution point. Each distribution point then undertook the assembly of auxiliary parts onto the core framework of the modems and then configured each modem to suit the regions. After this was done, it was then retailed to telecommunication providers to further apply their logos onto the modems and engage in secondary configuration steps to streamline the modem capabilities to the individual service provider. Eg. In Ghana, MTN, Vodafone, Tigo etc before selling it to the final consumer of the product. Engaging the Lean principle of waste elimination, the wasteful processes have been identified throughout the supply chain of the Shin Lo modem supply chain and the following are recommendations to employ the Lean principles of Waste elimination to its supply chain operations.

Waste of transportation was the first to be identified. Due to the number of distribution centres, Shin Lo has a scattered and ill prepared analysis of the cost of transportation and amount of movement the products were going through. Transportation costs from China to all the distribution centres has caused a huge financial gape into which all currently meagre profits are directed. The adoption of a single continental distribution point in South Africa would greatly reduce these transportation costs ( see Fig.3). Sea transportation can still be employed between China and South Africa. After which Air or road transportation can be employed to the various countries depending on the market demand and speed required.

Product shortages and delivery delays have been the major customer complaint in certain countries especially in Ghana and Malawi. This has been the cause of Shin Lo’s primary competitor-Huawei Technologies’ success in these two countries. This form of waste (ie delay) can easily be contained. Accurate market analysis of the continental market with software like the ERP at the single continental distribution centre can help adjust the rate and quantity of modems that should be directed to certain countries. The combination of these lean principles and software technology holds the promise of revolutionizing the way business is conducted. This avoids certain countries with slower markets from keeping the modems as inventory in storage while other countries run into shortages. Due to the bad storage facilities, products sold are normally defective due to wear and tear. This causes more modems to be returned for re-working and re-finishing and further increases loss of revenue to the organisation. Customers who face the task of returning goods through their unpleasant experience may not return and further causes loss of market for the products and the telecommunication provider as a whole.

Another major contributor of the downhill spiral of Shin Lo electronics is the number of modems returned with defects. This is an identified waste which can be managed from investing in the single distribution point in South Africa, where all assembling of modems to all parts of the continent will be done. That way, the primary cause of defects can be traced, identified and dealt with. This isn’t possible currently due to the multiple steps the modem goes through at the various locations and production processes.

Observably, the modems may have been going through multiple defects due to excess motion as well. This is also classified as waste. Modems are shipped and handled from China, further handled at the regional distribution points and then to the countries before getting to the customers. With no standard supervision across all distribution points, it is unclear if all the processes are performed to specification. The single distribution point in South Africa with the standardized process points before shipment to the countries will eliminate any excess motion or movement that the modems may be taken through.

Non-Value adding processes such as primary configuration of modems to the regional specifications at the distribution points are also unnecessary as well as time and cost consuming. Country configurations already include regional configurations and thus Shin Lo only need to ship the products after assembly to the countries for all configurations to be implemented. This also helps the telecommunication provider monitor all configurations and properly detect faults in programming scripts and other software related issues This will reduce lead time and cut cost of hiring personnel as well as buying software and equipment for the many distribution and configuration centres.

Although the lean principles of Lean supply chain can play many part in improving the supply chain of Shin Lo, the main principle on which the Lean supply chain thrives, elimination of waste, can greatly accelerate its return as market leaders in the provision of modems to telecommunication operators across the continent

Conclusion

As global competition continues to intensify across industries, companies are actively pursuing strategies that will enable them to compete more effectively and profitably. Lean Supply is greatly attributed to the success of many organisations. However in a thriving and unpredictable business world such as that today, modifications to Lean thinking is needed to accommodate for the rapid changes in demand in markets. As is the success of any business platform, constant improvements to all aspects and new innovations and lines of thinking are spearheading the success of businesses worldwide. Regardless of the supply chain however, it is universally accepted that Lean thinking and its principles play a large role in the success, efficiency and effectiveness of any business or organisation in all corners of the world.