Lean Systems in Supply Chain

What is Lean Systems?

Lean systems in supply chain management refer to a philosophy and set of principles aimed at minimizing waste and maximizing efficiency throughout the entire supply chain process. Originating from Toyota’s production system, lean principles have been widely adopted across various industries and sectors.

Shortened product lifecycles, demanding customers, globalization, and e-commerce have placed intense pressure on companies for quicker response and shorter cycle times. One way to ensure a quick turnaround is by holding inventory. However, inventory costs can easily become prohibitive, especially when product obsolescence is considered.

A wiser approach is to make your operating system lean and agile, able to adapt to changing customer demands. Collaboration along a supply chain can work only if the participants coordinate their production and operate under the same rhythm. Companies have found this rhythm in a well-respected but difficult-to-implement philosophy called lean production.

Lean production means doing more with less—less inventory, fewer workers, and less space. The term was coined by James Womack and Daniel Jones to describe the Toyota Production System, widely recognized as the most efficient manufacturing system in the world. The Toyota Production System evolved slowly over 20 years. Initially known as just-in-time (JIT), it emphasized minimizing inventory and smoothing the flow of materials so that material arrived just as it was needed or “just-in-time.” As the concept widened in scope, the term lean production became more prevalent. Now the terms are often used interchangeably.

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Basic Elements of Lean Production

Lean production is the result of the mandate to eliminate waste. It is composed of 10 elements:

• Flexible resources
  
  
• Cellular layouts
  
  
• Pull system
  
  
• Kanbans Small lots
  
  
• Quick setups
  
  
• Uniform production levels
  
  
• Quality at the source
  
  
• Total productive maintenance
  
  
• Supplier networks

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Implementing Lean Systems

Firms that have tried to implement lean by slashing inventory and demanding that their suppliers make frequent deliveries have missed the power of the system. Supplier deliveries and kanbans are some of the last elements of lean production to implement. Today, globalization and tough times have brought a new generation of manufacturers and suppliers into the lean fold.

The firms that are most successful in implementing lean production understand the breadth and interrelatedness of the concepts and have adapted them to their particular environment. This makes sense when you consider the essence of lean—eliminate waste, speed up changeovers, work closely with suppliers, streamline the flow of work, use flexible resources, pay attention to quality, expose problems, and use worker teams to solve problems.

None of these concepts or techniques are new or particularly revolutionary. How they are applied can differ considerably from company to company. What is unique and remarkable is how the pieces are tied together into a finely tuned operating system and how synchronized that system can be with both the external and internal business environments.

Lean applications on U.S. soil, whether in a Japanese or U.S. company, differ somewhat from the original Japanese versions. Lean U.S. plants are typically larger, deliveries from suppliers are less frequent, more buffer inventory is held (because of the longer delivery lead times), and kanbans are very simple compared to lean plants in Japan. Worker-designed feedback systems are different, too. At the Nissan plant in Tennessee, workers are reminded to change workstations along an S-shaped assembly line by the changing tempo of piped-in music (from country to rock).

Morning calisthenics is out for most U.S. plants, but the placement of ping-pong tables and basketball hoops alongside the assembly line for exercise during worker-designated breaks is popular. The slow pace of continuous improvement is hard to maintain for American workers. Thus, kaizen blitzes, intense process improvement over a week with immediate results, are easier and more energizing to conduct.

While not every company can achieve results at this level, lean production does provide a wide range of benefits, including the following:

• Reduced inventory
  
  
• Improved quality
  
  
• Lower costs
  
  
• Reduced space requirements
  
  
• Shorter lead time
  
  
• Increased productivity
  
  
• Greater flexibility
  
  
• Better relations with suppliers
  
  
• Simplified scheduling and control activities
  
  
• Increased capacity
  
  
• Better use of human resources
  
  
• More product variety

The drawbacks are: Lean production is not appropriate for every type of organization. It can also present problems when unexpected changes in demand or supply occur.

For example, a fire at one supplier’s brake factory shut down three Toyota plants one year, and the Japanese tsunami delayed the production of GM cars and Apple iPads for months. Add to that possible epidemics, natural disasters, financial meltdowns, terrorist attacks, and armed conflicts, and being completely lean is risky.

Thus, lean production must be compatible with a company’s products, processes, and customers. Companies must also assess risk and uncertainty in their business environment and adapt lean practices accordingly.

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Lean Six Sigma

A recent trend in quality management is Lean Six Sigma (also known as Lean Sigma), which integrates Six Sigma and “lean systems.” It is a systematic method for reducing the complexity of a process and making it more efficient by identifying and eliminating sources of waste in a process (such as materials, labor, and time) that hinder flow. Lean seeks to optimize process flows through the organization to create more value for the customer with less work; that is, to get the product through the process faster.

The lean approach to process improvement includes five steps. First, it is determined what creates value for the customer, that is, quality from the customer’s perspective discussed earlier in this chapter. Second, the sequence of activities (in the process) that create value, called the “value stream,” is identified, and those activities that do not add value are eliminated from the production process.

Third, waste (such as inventory or long process times) along the value stream is removed through process improvements. Fourth, the process is made responsive to the customer’s needs; that is, making the product or service available when the customer needs it. Finally, lean continually repeats the attempt to remove waste (non-value activity) and improve flow; it seeks perfection.

The common link between the two is that they both seek to improve processes and provide value to the customer; however, they go about it in different ways. The proponents of Lean Six Sigma believe the two approaches complement each other and that combining them can result in greater benefits than implementing them separately.

Bottom Line—profitability

The criterion for selecting Six Sigma projects by executives is typically based on the financial impact of the improvement expected from the project—how it will affect the bottom line. This focus on profitability for initiating quality improvement projects is one of the factors that distinguishes Six Sigma from TQM. Quality improvements result in increased productivity. As the quality of a company’s products or services improves, it becomes more competitive, and its market share increases.

Quality Costs and Productivity

Quality costs have traditionally served as the basis for evaluating investments in quality programs. The costs of quality are those incurred to achieve good quality and to satisfy the customer, as well as costs incurred when quality fails to satisfy the customer.

Thus, quality costs fall into two categories: the cost of achieving good quality, also known as the cost of quality assurance, and the cost associated with poor-quality products, also referred to as the cost of not conforming to specifications.

Cost of Achieving Good Quality

The costs of a quality management program are prevention costs and appraisal costs.

Prevention costs are the costs of trying to prevent poor-quality products from reaching the customer. Prevention reflects the quality philosophy of “do it right the first time,” the goal of a quality management program. Examples of prevention costs include:

• Quality planning costs: The costs of developing and implementing the quality management program.
  
  
• Product-design costs: The costs of designing products with quality characteristics.
  
  
• Process costs: The costs expended to make sure the productive process conforms to quality specifications.
  
  
• Training costs: The costs of developing and putting on quality training programs for employees and management.
  
  
• Information costs: The costs of acquiring and maintaining (typically on computers) data related to quality, and the development and analysis of reports on quality performance.

Appraisal costs are the costs of measuring, testing, and analyzing materials, parts, products, and the productive process to ensure that product-quality specifications are being met. Examples of appraisal costs include:

• Inspection and testing: The costs of testing and inspecting materials, parts, and the product at various stages and at the end of the process.
  
  
• Test equipment costs: The costs of maintaining equipment used in testing the quality characteristics of products.
  
  
• Operator costs: The costs of the time spent by operators to gather data for testing product quality, make equipment adjustments to maintain quality, and stop work to assess quality.

Cost of Poor Quality

The cost of poor quality (COPQ) is the difference between what it costs to produce a product or deliver a service and what it would cost if there were no defects. Most companies find that defects, rework, and other unnecessary activities related to quality problems significantly inflate costs; estimates range as high as 20% to 30% of total revenues. It can be categorized as internal failure costs or external failure costs.

Internal failure costs are incurred when poor-quality products are discovered before they are delivered to the customer.

Examples of internal failure costs include:

• Scrap costs: The costs of poor-quality products that must be discarded, including labor, material, and indirect costs.
  
  
• Rework costs: The costs of fixing defective products to conform to quality specifications.
  
  
• Process failure costs: The costs of determining why the production process is producing poor-quality products.
  
  
• Process downtime costs: The costs of shutting down the productive process to fix the problem.
  
  
• Price-downgrading costs: The costs of discounting poor-quality products— that is, selling products as “seconds.”

External failure costs are incurred after the customer has received a poor-quality product and are primarily related to customer service.

Examples of external failure costs include:

• Customer complaint costs: The costs of investigating and satisfactorily responding to a customer complaint resulting from a poor-quality product.
  
  
• Product return costs: The costs of handling and replacing poor-quality products returned by the customer.
  
  
• Warranty claims costs: The costs of complying with product warranties.
  
  
• Product liability costs: The litigation costs resulting from product liability and customer injury.
  
  
• Lost sales costs: The costs incurred because customers are dissatisfied with poor-quality products and do not make additional purchases. Internal failure costs tend to be low for a service, whereas external failure costs can be quite high.

Measuring and Reporting Quality Costs

Collecting data on quality costs can be difficult. The costs of lost sales, responding to customer complaints, process downtime, operator testing, quality information, and quality planning and product design are all costs that may be difficult to measure.

These costs must be estimated by management. Training costs, inspection and testing costs, scrap costs, the cost of product downgrading, product return costs, warranty claims, and liability costs can usually be measured.

Some common index measures are:

• Labor index: The ratio of quality cost to direct labor hours; it has the advantage of being easily computed (from accounting records)
  
  
• Cost index: The ratio of quality cost to manufacturing cost (direct and indirect cost); it is easy to compute from accounting records
  
  
• Sales index: The ratio of quality cost to sales; it is easily computed, but it can be distorted by changes in selling price and costs.
  
  
• Production index: The ratio of quality cost to units of ²nal product; it is easy to compute from accounting records.

Quality–cost Relationship

Prevention and appraisal costs are the costs of achieving good quality, and internal and external failure costs are the costs of poor quality. In general, when the cost of achieving good quality increases, the cost of poor quality declines.

Productivity

It is a measure of a company’s effectiveness in converting inputs into outputs. It is broadly defined as follows:

Productivity = output/input

Measuring Product Yield and Productivity

Product yield is a measure of output used as an indicator of productivity. It can be computed for the entire production process (or for one stage in the process) as follows:

Yield = (total input) (% good units) + (total input)(1 – % good units) (% reworked)

where

I = planned number of units of product started in the production process
%G = percentage of good units produced
%R = percentage of defective units that are successfully reworked

The manufacturing cost per (good) product is computed by dividing the sum of the total direct manufacturing cost and total cost for all reworked units by the yield, as follows:

Product cost = (direct manufacturing cost per unit )( input) + (rework cost per unit) (reworked units) / yield

where

Kd = direct manufacturing cost per unit

I = input

Kr = rework cost per unit

R = reworked units

Y = yield

Quality–productivity Ratio

Another measure of the effect of quality on productivity combines the concepts of quality index numbers and product yield. Called the quality–productivity ratio (QPR), it is computed as follows:

Quality Awards

The Baldrige Award, Deming Prize, and other award competitions have become valuable and coveted prizes for U.S. companies eager to benefit from the aura and reputation for quality that awaits the winners and the decreased costs and increased profits that award participants and winners have experienced.

They have also provided widely used sets of guidelines to help companies implement an effective quality management system (QMS), and winners provide quality standards, or “benchmarks,” for other companies to emulate.

Malcolm Baldrige Award

It is given annually to up to 18 organizations in six categories: manufacturing, services, small businesses, nonprofits (with less than 500 full-time employees), healthcare, and education. It was created by law in 1987 (named after former Secretary of Commerce Malcolm Baldrige, who died in 1987) to (1) stimulate U.S. companies to improve quality, (2) establish criteria for businesses to use to evaluate their quality-improvement efforts, (3) set as examples those companies that were successful in improving quality, and (4) help other U.S. organizations learn how to manage quality by disseminating information about the award winners’ programs.

Other Awards for Quality

The creation and subsequent success of the Baldrige Award has spawned a proliferation of national, international, government, industry, state, and individual quality awards. The American Society for Quality (ASQ) sponsors several national individual awards, including, among others, the Armand V. Feigenbaum Medal, the Deming Medal, the E. Jack Lancaster Medal, the Edwards Medal, the Shewhart Medal, and the Ishikawa Medal.

Prominent international awards include the EFQM (formerly the European Foundation for Quality Management) Excellence Award which recognizes outstanding businesses in European countries, with similar scope and criteria to the Baldrige Award, the UK Excellence Award, the Canada Awards for Excellence, the Deming Prize (Japan), and the Japan Quality Award.

ISO 9000

The International Organization for Standardization (ISO), headquartered in Geneva, Switzerland, has as its members the national standards organizations for more than 163 countries. The ISO member for the United States is the American National Standards Institute (ANSI).

The purpose of ISO is to facilitate global consensus agreements on international quality standards. It has resulted in a system for certifying suppliers to make sure they meet internationally accepted standards for quality management. It is a nongovernment organization and is not a part of the United Nations.

Standards

A standard is a document that provides requirements, specifications, guidelines, or other precise criteria that can be used consistently to ensure that materials, products, processes, and services are fit for their purpose.

ISO has over 19,500 published standards covering almost all aspects of technology and business. For example, the format for credit cards was derived from ISO standards that specify such physical features as the cards’ thickness so that they can be used worldwide.

Certification

Many companies around the world require that companies they do business with (e.g., suppliers) have ISO 9001 certification.

Implications of ISO 9000 for U.S. Companies

Originally, ISO 9000 was adopted by the 12 countries of the European Community (EC)— Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom.

ISO Registrars

A registrar is an organization that conducts audits by individual auditors. Auditors are skilled in quality systems and the manufacturing and service environments in which an audit will be performed. The registrar develops an audit team of one or more auditors to evaluate a company’s quality program and then report back to the registrar.

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Value Stream Mapping (VSM)

Value stream mapping (VSM) is a tool for analyzing process flow and eliminating waste. Maps of the current state and the future state of a system are created. VSM has several special icons, as shown in Exhibit 11.1, that differ from traditional flowcharts. These are related to lean production methods and include different types of kanbans, as well as material and information flows for both pull and push systems and “aha” kaizen bursts.

At the heart of the map are process icons with accompanying data boxes denoting the number of workers, cycle time (C/T), changeover time (C/O), and other relevant information about the process.

Process steps are connected with arrows and typically include inventory or waiting time icons between the steps. A stepped timeline of metrics placed under the process flow separates value-added from non–non-value-added time or resources. This provides a basis for the improvement initiative—that is, redesigning the process with a new value stream map that reduces or eliminates the waste and inefficiencies that have been identified.

Two steps of a process with both time and environmental metrics and a value stream map for an emergency room. While initially used primarily in manufacturing, value stream maps have become an essential tool for improvements in the service sector.

Creating the maps with a group of stakeholders helps create buy-in when process changes are proposed. The maps are created by “going to see” the process in action, rather than from memory. Value stream maps are also important tools for reducing energy and material consumption in a company’s sustainability efforts.

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Lean and Environment

Lean’s mandate to eliminate waste and operate only with those resources that are necessary aligns well with environmental initiatives. Managers and workers can be trained to identify environmental wastes and improvement opportunities alongside the many other wastes and improvement opportunities uncovered by Lean. This provides several benefits to business, industry, and consumers.

Environmental waste is often an indicator of poor process design and inefficient production. Applying lean concepts can significantly reduce material costs, energy costs, and regulatory compliance costs, as well as unnecessary risks to worker health and safety. Learning to see environmental wastes during process improvement efforts can open significant business improvement opportunities and further strengthen lean results.

In addition, as consumer and societal concerns about the environment increase, companies that provide products or services with fewer environmental impacts can gain market share and create a sustainable competitive advantage.

Recognizing the potential gains from integrating lean and environmental initiatives, the U.S. Environmental Protection Agency (EPA) recommends that companies:

• Commit to eliminating environmental waste through lean implementation. Add environmental waste to the seven wastes of lean.
  
  
• Involve staff with environmental expertise in planning for and implementing lean events.
  
  
• Find and drive out environmental wastes in specific processes by using lean process-improvement tools, such as the 5 Whys, visual control, and poka-yokes.
  
  
• Empower and enable workers to eliminate environmental waste in their work areas through 6S (e.g., 5S + safety) workplace evaluations.
  
  
• Recognize new improvement opportunities by incorporating environmental, health, and safety icons and data into value stream maps. Include environmental metrics in the lean metrics of a process.

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Lean Services

Most people who think of lean production as a system for reducing inventory do not consider the system to apply to services. However, you know that lean production consists of more than low inventory levels. It eliminates waste, streamlines operations, promotes fast changeovers and close supplier relations, and adjusts quickly to changes in demand.

As a result, products and services can be provided quickly, at less cost, and in more variety. Thus, we can readily observe the basic elements of lean production in service operations. Think about:

• McDonald’s, Domino’s, and FedEx, who compete on speed and still provide their products and services at low cost and with increasing variety;
  
  
• Construction firms that coordinate the arrival of materials “just as needed” instead of stockpiling them at the site;
  
  
• Multifunctional workers in department stores who work the cash register, stock goods, arrange displays, and make sales;
  
  
• Level selling with “everyday low prices” at Walmart and Food Lion;
  
  
• Work cells at fast-food restaurants that allow workers to be added during peak times and reduced during slow times;
  
  
• “Dollar” stores that price everything the same and simply count the number of items purchased as the customer leaves;
  
  
• Process mapping that has streamlined operations and eliminated waste in many services (especially in processing information);
  
  
• Medical facilities that have the flexibility to fill prescriptions, perform tests, and treat patients without routing them from one end of the building to another;
  
  
• JIT publishing that allows professors to choose material from a variety of sources and construct a custom-made book in the same amount of time off-the-shelf books can be ordered and at competitive prices;
  
  
• Lens providers, cleaners, and car-repair services that can turn around customer orders in an hour;
  
  
• Cleaning teams that follow standard operating routines in quickly performing their tasks;
  
  
• Supermarkets that replenish their shelves according to what the customer withdraws; and
  
  
• Retailers who introduce dozens of new clothing lines each year in smaller quantities.