Lean Supply Chain Management Principles and Practices

(1)

Lean

Enterprise

Value

Lean Supply Chain

Management Principles and

Practices

(2)

Lean

Enterprise

Value

Lean Supply Chain Management

Basics Learning Points

Lean supply chain management represents a

new way of thinking about supplier networks

Lean principles require cooperative supplier

relationships while balancing cooperation and

competition

Cooperation involves

collaborative relationships & coordination

mechanisms

Supplier partnerships & strategic alliances

represent a key feature of lean supply chain

management

(3)

Lean

Enterprise

Value

Theory: Lean Represents a “Hybrid” Approach to

Organizing Interfirm Relationships

“Markets” (Arm’s Length):

Lower production costs, higher coordination costs

Firm buys (all) inputs from outside specialized suppliers

Inputs are highly standardized; no transaction-specific assets

Prices serve as sole coordination mechanism

“Hierarchies” (Vertical Integration):

Higher production costs, lower

coordination costs

Firm produces required inputs in-house (in the extreme, all inputs)

Inputs are highly customized, involve high transaction costs or dedicated investments,

and require close coordination

“Lean” (Hybrid):

Lowest production and coordination costs; economically most

efficient choice-- new model

Firm buys both customized & standardized inputs

Customized inputs often involve dedicated investments

Partnerships & strategic alliances provide collaborative advantage

Dominant conventional approach: Vertical integration, arm’s length

relationships with suppliers

(4)

Lean

Enterprise

Value

Lean Supply Chain Management Differs

Sharply from Conventional Practices

ILLUSTRATIVE

CHARACTERISTICS

CONVENTIONAL MODEL

LEAN MODEL

Number & structure

Many; vertical

Fewer; clustered

Procurement personnel

Large

Limited

Outsourcing

Cost-based

Strategic

Nature of interactions

Adversarial; zero-sum

Cooperative; positive-sum

Relationship focus

Transaction-focused

Mutually-beneficial

Selection criteria

Lowest price

Performance

Contract length

Short-term

Long-term

Pricing practices

Competitive bids

Target costing

Price changes

Upward

Downward

Quality

Inspection-intensive

Designed-in

Delivery

Large quantities

Smaller quantities (JIT)

Inventory buffers

Large

Minimized; eliminated

Communication

Limited; task-related

Extensive; multi-level

Information flow

Directive; one-way

Collaborative; two-way

Role in development

Limited; build-to-print

Substantial

Production flexibility

Low

High

Technology sharing

Very limited; nonexistent

Extensive

Dedicated investments

Minimal-to-some

Substantial

Mutual commitment

Very limited; nonexistent

High

(5)

Lean

Enterprise

Value

Lean Supply Chain Management Principles

Derive from Basic Lean Principles

Focus on the supplier network value stream

Eliminate waste

Synchronize flow

Minimize both transaction and production costs

Establish collaborative relationships while balancing

cooperation and competition

Ensure visibility and transparency

Develop quick response capability

Manage uncertainty and risk

Align core competencies and complementary

capabilities

(6)

Lean

Enterprise

Value

A Set of Mutually-Reinforcing Lean Practices

Translate these Principles into Action

Design supplier network architecture

•

Design of supplier network driven by strategic

thrust

•

Fewer suppliers; “clustered control”

•

Supplier selection based on performance

Develop complementary supplier

capabilities

•

Ensured process capability (certification)

•

Targeted supplier development (SPC, Kaizen)

•

Greater responsibilities delegated to suppliers

Create flow and pull throughout

supplier network

•

Linked business processes, IT/IS infrastructure

•

Two-way information exchange & visibility

•

Synchronized production and delivery (JIT)

Establish cooperative relationships &

effective coordination mechanisms

•

Joint problem-solving; mutual assistance

•

Partnerships & strategic alliances

•

Open and timely communications

•

Increased interdependence & “shared destiny”

Maximize flexibility & responsiveness

•

Seamless information flow

•

Flexible contracting

•

Rapid response capability

Optimize product development

through early supplier integration

•

Integrate suppliers early into design &

development IPTs

•

Collaborative design; architectural innovation

•

Open communications and information sharing

•

Target costing; design-to-cost

Integrate knowledge and foster

innovation

•

Knowledge-sharing; technology transfer

•

Aligned technology roadmaps

This lecture highlights key enablers & practices by

ng on:

•

Synchronized production and delivery

•

Partnerships and strategic alliances

(7)

Lean

Enterprise

Value

Synchronized Production and Delivery

Throughout the Supplier Network is a Central

Lean Concept

Integrated supplier lead times and delivery schedules

Flows from suppliers pulled by customer demand (using

takt time, load leveling, line balancing, single piece

flow)

Minimized inventory through all tiers of the supply chain

On-time supplier delivery to point of use

Minimal source or incoming inspection

Effective two-way communication links to coordinate

production & delivery schedules

Striving for zero quality defects essential to success

Greater efficiency and profitability throughout the

supplier network

(8)

Lean

Enterprise

Value

Aerospace Firms Have Faced an Uphill

Challenge in Synchronizing Flow with Suppliers

PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO

W/O INCOMING OR PRIOR INSPECTIONS

10.7

42.2

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Defense (25)

Commercial (9)

(Year: 1993; N= Number of responding business units/c

Defense/Commercial

:

than 75% of sales to defen

or commercial markets

(9)

Lean

Enterprise

Value

Supplier Certification has been an Important

Early Enabler of Achieving Synchronized

Flow in Aerospace

PERCENT OF DIRECT PRODUCTION SUPPLIERS OF A TYPICAL AEROSPACE ENTERPRISE THAT ARE CERTIFIED (1991, 1993, 1995)

7.40 6.86 2.55 15.28 10.86 _10.38 5.63 19.62 23.19 20.11 15.63 36.33 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00

Industry (48) Airframe (13) Electronics (20) Engines and Other (15) (N=Number of respondents answering this question for all three years)

1991 1993 1995

(10)

Lean

Enterprise

Value

Closer Communication Links with Suppliers

Paved the Way for Synchronizing Flow

TYPES OF INFORMATION PROVIDED TO RESPONDING BUSINESS UNITS BY THEIR MOST

IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993

48.72 70.51 17.95 83.33 41.03 88.46 19.23 70.51 20.51 52.56 17.95 69.23 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 1989 (38,14,32,15,16,14) 1993 (55,65,69,55,41,54) (N=78:

Production Cost Data SPC Data

Performance Improvement Actions

Longer-term Business Strategies & Plans

Financial Information not Publicly Available

Feedback on Purc/Supplier Mgmts Operations

(11)

Lean

Enterprise

Value

Concrete Example: Engine Parts Casting

Supplier Worked with Customer Company to

Achieve Synchronized Flow

(12)

Lean

Enterprise

Value

Mastering & Integrating Lean Basics with

Prime was Necessary for Achieving

Synchronized Flow

6S -- Visual factory

Total productive maintenance

Quality control

Process certification

Mistake proofing

Setup reduction

Standard work

Kaizen

(13)

Lean

Enterprise

Value

Supplier Partnerships & Strategic Alliances

Ensure Substantial Performance

Improvements

Long-term relationships and mutual commitments

Intensive and regular sharing of technical and cost

information

Mutual assistance and joint problem-solving

Customized (relationship-specific) investments

Risk-sharing, cost-sharing, benefit-sharing

arrangements

Trust-building practices -- “one team” mindset;

collocation of technical staff; “open kimono”

Progressively increasing mutual dependence -- shared

fate discouraging opportunistic behavior

Self-enforcing contracting driving continuous

improvement

(14)

Lean

Enterprise

Value

Supplier Partnerships & Strategic Alliances

Bring Important Mutual Benefits

Reduced transaction costs (cost of information

gathering, negotiation, contracting, billing)

Improved resource planning & investment decisions

Greater production predictability & efficiency

Improved deployment of complementary capabilities

Greater knowledge integration and R&D effectiveness

Incentives for increased innovation (through

cost-sharing, risk-cost-sharing, knowledge-sharing)

Increased mutual commitment to improving joint

long-term competitive performance

(15)

Lean

Enterprise

Value

Major Lean Lessons for Aerospace Industry

Supply chain design linked to corporate strategic thrust

Fewer first-tier suppliers

Greater supplier share of product content

Strategic supplier partnerships with selected suppliers

Trust-based relationships; long-term mutual commitment

Close communications; knowledge-sharing

Multiple functional interfaces

Early supplier integration into design

Early and major supplier role in design

Up-front design-process integration

Leveraging supplier technology base for innovative solutions

Self-enforcing agreements for continuous improvement

Target costing

(16)

Lean

Enterprise

Value

Chrysler: Supplier Partnerships

Speed Development

Length of

Product

Development

Cycle

LH Cars (98E)

160 Weeks*

JA; Cirrus/

Stratus (95)

184 Weeks

Neon (94)

180 Weeks

LH Cars (93)

183 Weeks

Dakota

Truck (87)

232 Weeks

K-Car (81)

Minivan (84)

234 Weeks

(17)

Lean

Enterprise

Value

EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY

AEROSPACE

GRAMS: IMPACTS

ON PRODUCIBILITY AND COST

20.0

77.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Group A (With)

Group B (Without)

Firms facing producibility and cost problems

% of responding firms in Group A(4/20)

% of responding firms in Group B(7/9)

Numerator(s): N=4,7: Number of affirmative responses to this question (i.e., faced producibility and cost problem) in each group (i.e., Group A

and Group B)

Denominator(s):R=20,9: Total number of respondents to this question in each group

Sample Size: S=29: Maximum possible number of respondents to any question in the survey (Group A:20 ; Group B:9)

WITH

:

supplier involvement in IPTs

WITHOUT

: Without early supplier involvement in IPTs

EARLY: Before Milestone

Aerospace: Early Supplier Involvement in

IPTs Impacts Producibility and Cost

DEVELOPMENT PRO

PRODUCT

(18)

Lean

Enterprise

Value

Early Supplier Involvement: Key Success

Factors

FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S.

MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY

SUCCESS FACTORS

55.0 11.1 40.0 22.2 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0

GroupA (With)

GroupB (Without)

EARLY SUPPLIER INVOLVEMENT IN IPTS

Established co-located IPTsincluding suppliers Used commercial parts

Numerator(s): N=11,8 (Group A) ;1,2 ( Group B): Number of affirmative responses to this category of practice/implementation ( i.e., co-located IPTs, use of commercial parts) Denominator(s): R=20,9: Total number of respondents to this question in each group

Sample Size:S=29: Maximum possible mumber of respondents to any question in the survey (Group A:20 ; Group B:9) NOTES

(19)

Lean

Enterprise

Value

Evolution of Early Supplier Integration

in the Aerospace Industry

Arm’s length; interfaces totally

defined and controlled

Collaborative; but constrained by

prior workshare arrangements

Collaborative and seamlessly

integrated, enabling architectural

innovation

Virtual Team

w/o boundaries

Prime

Key Suppliers

Subtiers

“Old” Approach

“Emerging”

Lean

Prime

Key Suppliers

Subtiers

“Current”

Lean

Collaborative with rigid

organizational

interfaces

Prime

Key Suppliers

Subtiers

Rigid vertical

FFF interfaces

and control

ARCHITECTURAL INNOVATION:

Major modification of how components in a

system/product are linked together

•

Significant improvement in system/product architecture through changes in form/structure,

functional interfaces or system configuration

(20)

Lean

Enterprise

Value

Summary: Architectural Innovation Yields

Significant Benefits

Case Studies

Key Characteristics

Case Study A

(SMART MUNITION

SYSTEM)

Case Study B

(ENGINE NOZZLE)

MAKE-BUY; DESIGN

RESPONSIBILITY

• Early supplier integration into IPT • Teaming with key

suppliers to optimize design

• New joint design and engineering approach based on make-buy • Prime retains design control

SUPPLIER ROLE

• Collaborative design • Suppliers given design

responsibility and configuration control

• Part of joint design team • Component design

responsibility

• Joint configuration control

SUPPLIER

SELECTION;

AGREEMENT

• Competitive pre-sourcing • Commercial pricing • Long-term commitments • Long-term warranty

• Supplier downselect after joint preliminary design

period • CPFF • Not-to-compete agreements

PROCESS;

RELATIONSHIPS

• Collocated teams • Open communications; knowledge-sharing • Worksharing • Electronic linkages • Gov’t part of team

• Collocated teams • Concurrent engineering • Knowledge-sharing • Electronic linkages • Government involvement

MAJOR DRIVERS

Cost Performance

ARCHITECTURAL

INNOVATION

Guidance control unit redesigned from modular to integrated system architecture

Riveting, rather than welding, resulted in redesign of interfaces and how components are linked together

MAJOR BENEFITS

• Over 60% reduction in unit cost

• Cycle time:

• Five-fold reduction in unit cost

• Cycle time reduction not as 64 mo. down

(21)

Lean

Enterprise

Value

Summary of Key Practices Enabling

Architectural Innovation

Pre-sourcing; long-term commitment

Early supplier integration into IPTs; IPPD; co-location; joint

design & configuration control

Leveraging technology base of suppliers (key suppliers; tooling

suppliers; subtiers)

Workshare arrangements optimizing supplier core competencies

Retaining flexibility in defining system configuration

Open communications; informal links; knowledge-sharing

Target costing; design to cost

Supplier-capability-enhancing investments

Incentive mechanisms (not to compete agreements; long-term

warranty); maintaining trade secrets

Government part of the team; relief from military standards and

(22)

Lean

Enterprise

Value

Electronic Integration of Supplier

Networks:

Important success factors include:

Clear business vision & strategy

Early stakeholder participation (e.g., top management support; internal process

owners; suppliers ; joint configuration control)

Challenge: Electronic integration of supplier networks for technical

data exchange as well as for synchronization of business processes

Early Results

Migration/integration of specific functionality benefits of legacy systems

into evolving new IT/IS infrastructure

Great care and thought in

experimental

IT/IS projects into

fully-functional operational systems

Electronic integration of suppliers requires a process of positive

reinforcement --

greater mutual information exchange helps build increased

trust, which in turn enables a closer collaborative relationship and longer-term

strategic partnership

Close communication links with overseas suppliers pose a

serious security risk and complex policy challenge

(23)

Lean

Enterprise

Value

Fostering Innovation across Supplier Networks Ensures

Continuous Delivery of Value to all Stakeholders

Research:

Case studies on F-22 Raptor avionics subsystems -- what incentives,

practices & tools foster innovation across suppliers?

Major finding:

Innovation by suppliers is hampered by many factors. This seriously

undermines weapon system affordability.

Excessive performance and testing requirements that do not add value

One-way communication flows; concern for secrecy; “keyhole” visibility by

suppliers into product system architecture

Little incentive to invest in process improvements due to program uncertainty;

limited internal supplier resources; often narrow business case

Major subcontractors switching rather than developing subtier suppliers

Yearly contract renegotiations wasteful & impede longer-term solutions

Recommendations:

Use multiyear incentive contracting & sharing of cost savings

Improve communications with suppliers; share technology roadmaps

Make shared investments in selected opportunity areas to reduce costs

(24)

Lean

Enterprise

Value

Quick Review of Aerospace Progress

Aerospace industry has made important strides in supplier integration, but

this is only the beginning of the road

Production:

Supplier certification and long-term supplier partnerships

--process control & parts synchronization

Development:

Early supplier integration into product development critical

Strategic supply chain design is a meta core competency

Implementation efforts have required new approaches

Re-examination of basic assumptions (e.g., make-buy)

New roles and responsibilities between primes and suppliers

Communication and trust fundamental to implementation

Aerospace community faces new challenges and opportunities

Imperative to take “value stream” view of supplier networks

Focus on delivering best lifecycle value to customer

Need to evolve information-technology-mediated new organizational

(25)

Lean

Enterprise

Value

Lean Supplier Networks Offer Significant

Competitive Advantages

Exhibit superior performance system-wide

--greater efficiency, lower cycle time, higher quality

Not an accident of history but result of a dynamic

evolutionary process

Not culture dependent but are transportable

worldwide

Can be built through a proactive, well-defined,

(26)

Lean

Enterprise

Value

Key Questions for Aerospace

Enterprise Management

Does the size, structure and composition of the supplier network

reflect your enterprise’s strategic vision?

Has your enterprise created partnerships and strategic alliances

with key suppliers to strengthen its long-term competitive

advantage?

Are major suppliers as well as lower-tier suppliers integrated into

your enterprise’s product, process and business development

efforts?

Has your enterprise established mutually-beneficial arrangements

with suppliers to ensure flexibility and responsiveness to

unforeseen external shifts?

Does your enterprise have in place formal processes and metrics

for achieving continuous improvement throughout the extended

enterprise?

(27)

Lean

Enterprise

Value

Emergence of Strategic Supplier Partnerships has been a

Central Feature of Aerospace Industry’s Transformation

in the 1990s*

Survey: 85% of firms established production-focused supplier

partnerships involving long-term agreements (LTAs) with key

suppliers

Major reasons:

Reduce costs

97%

Minimize future price uncertainty

85%

Mutual performance improvement

85%

Chief characteristics:

One or more products, 3+ years

97%

Multi-year design/build

49%

On-going (evergreen)

24%

(28)

Lean

Enterprise

Value

Case study: Major producer of complex airframe structures

Months

REDUCED CYCLE TIME

(Main Product

Order-to-Shipment, months)

36

12

0

5

10

15

20

25

30

35

40

1989 1997

Percent of all

supplier

IMPROVED SUPPLIER DELIVERY

(Dock-to-Stock, w/o prior inspection)

0%

75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1989 1997

sh

ip

men

ts

1997

1989

REDUCED SUPPLIER DEFECTS

(Defects found at factory floor)

7.10%

2.90%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Rejectio

n

s as %

o

f all

incoming

sup

p

lier shipmen

ts

Case Study Results Show Significant Performance

Improvements by Building Integrated Supplier Networks

through Supplier Partnerships

(29)

Lean

Enterprise

Value

Supplier Partnerships Driven by Strategic Corporate

Thrust to Develop Integrated Supplier Networks

95

100.0

0

50.0

Established strategic supplier partnerships

Procurement dollars under long-term agreements(%)

“Best value” subcontracts as % all awards

75

83.0

0

76.4*

Improved supplier quality and schedule

Procurement (dollars) from certified suppliers

Supplier on-time performance (% of all shipments)

1.9

7

4.9

13

Improved procurement efficiency

Procurement personnel as % of total employment (%)

Subcontracting cycle time (days)

162

542

Reduced and streamlined supplier base

Number of direct production suppliers

AFTER

BEFORE

KEY PRACTICES

BEFORE: 1989 AFTER: 1997

*Refers to 1991

(30)

Lean

Enterprise

Value

Focus on Early Supplier Integration

Historic opportunity for achieving BEST LIFECYCLE VALUE in

aerospace weapon system acquisition through early supplier

integration into design and development process

Nearly 80% of life cycle cost committed in early design phase

Design and development of complex aerospace systems calls on core

capabilities of numerous suppliers, providing as much as 60%-70% of end

product value

Supplier network represents an enormous beehive of distributed

technological knowledge & source of cost savings

What are better ways of leveraging this capability for more efficient product

development in aerospace sector?

(31)

Lean

Enterprise

Value

Lean Difference:

Lean Difference: Significantly lower

development cost and shorter cycle time

Average engineering

hours per new car

(millions of hours)

Average development

cycle time per new car

(months)

Prototype lead time

(months to first

engineering protoype)

US

Japan

US

Japan

US

Japan

3.4

1.7

50%

61

45

11.8

6.5

26%

45%

Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 1985-89.

(32)

Lean

Enterprise

Value

Lean Difference: Auto Industry

Supplier Role in Design

Lean difference starts with significant supplier role in design and

development

1980’s

(1985-89)

1990’s

(1992-95)

US

Japan

3%

81%

16%

8%

62%

30%

58%

30%

12%

39%

55%

6%

Supplier Proprietary Parts

Supplier Designed

“Black Box” Parts

Assembler Designed

Detail-Controlled Parts