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Contents Table of Contents BackCover Lean Supply Chain Management - A Handbook for Strategic rocurement !

ore"ord #ntroduction $HAT%S #& TH#S B''() TH* C'&T*&TS A&+ ST,-CT-,* S*CT#'& #. The !oundations Chapter /. The urchasing0SCM *1ecutive as C*' M',* THA& A C'ST C*&T*, MA(#&2 TH* SL3 CHA#& C*' Chapter 4. The +isciplines of lanning +*5*L' M*&T '! ST,AT*2#C LA&S A&+ ACT#'&S #M L*M*&TAT#'& LA&S A&+ TAS( #+*&T#!#CAT#'& T,A&SLAT#&2 TH* 'B6*CT#5*S T' TH* LA& M'&#T',#&2 TH* ,'2,*SS '! TH* LA& Chapter 7. !orce 5ersus Skill TH* 8 B'39 #%M 2''+ 8 S3&+,'M* #S TH* LA3#&2 !#*L+ L*5*L) TH* *TH#CS '! B-S#&*SS $H*,* '$*, :S(#LL; #S +*,#5*+ T,A&S!',M#&2 !',C*S #&T' S(#LL TH* C'LLAB',AT#5* ,*LAT#'&SH# TH* !#&AL T,A&S!',MAT#'& T' S(#LL S*CT#'& ##. The Crisis *nvironment Chapter <. +efining the Crisis *nvironment T3 #CAL C,#S#S C'&+#T#'&S TH* BA+ &*$S '! C,#S#S &'T ALL &*$S #S BA+ (** #&2 ST,AT*2#C SH',T-T*,M ST,AT*2#C CHA&2*S B#2 A&+ SMALL (A#=*& A&+ (A#(A(Chapter >. Crisis lan Background and hase / - Ac?uisition Team !ormation ,* A,AT#'& MA&A2*M*&T ,*5#*$ #M L*M*&TAT#'& CL'S-,* TH* C,#S#S LA& *L*M*&TS C'ST #S TH* B'TT'M L#&* HAS* # - AC@-#S#T#'& T*AM !',MAT#'& +*!#&#T#'& #M L*M*&TAT#'& ,'C*+-,*

Chapter A. hase ## - rice Benchmarking HAS* ## - ,#C* B*&CHMA,(#&2 AS *CTS '! TH* HAS* ## ,'C*SS B-#L+#&2 A& A!!',+ABL* C'ST TA,2*T :ACT; M*AS-,#&2 TH* MA,(*T M'5*M*&T $HAT T' B*&CHMA,( A&+ H'$ T' B*&CHMA,( ,*CA #&2 TH* ,*S-LTS Chapter B. hase ### - Short-Term rocess #mprovement HAS* ### - SH',T-T*,M ,'C*SS #M ,'5*M*&T :S #; ,'C*+-,* (A#=*& 5*,S-S S # Chapter C. hase #5 - 5alue Analysis05alue *ngineering MA(#&2 TH* ,'C*SS $',( Chapter D. hase 5 - Lean Manufacturing MA(#&2 S*&S* '! L*A& S*CT#'& ###. The Standard *nvironment Chapter /E. +efining the Standard *nvironment H#ST',3 '! #M ,'5*M*&T *!!',TS B-#LT !,'M ST,AT*23 SCM AS A B-S#&*SS S3ST*M TH* ABCs '! B-#L+#&2 A ST,AT*2#C SCM LA& MA,,3#&2 TH* LA& T' TH* B-S#&*SS S3ST*M TH* *L*M*&TS '! A STA&+A,+ *&5#,'&M*&T SCM LA& Chapter //. Supply Base Management #M L*M*&T#&2 SL3 BAS* MA&A2*M*&T C'MM'+#T3 C3CL* LA&&#&2 C'MM'+#T3 ,' !',MA C'MM'+#T3 SSS-MMA,3 Chapter /4. Supplier @uality and +evelopment SSL#*, @-AL#T3 A&+ SL#*, +*5*L' M*&T LA& L#*, @-AL#T3 +*5*L' M*&T ST,-CT-,* L#*, *,!',MA&C* L#*, ,*LAT#'&SH# S L#*, B*&CHMA,(#&2 L3 BAS* +*5*L' M*&T A&+ MA#&T*&A&C*

#M ,'5#&2 SC-ST'M*,0S-

Chapter /7. Cost Management and Control ST,AT*2#C C'ST MA&A2*M*&T A&+ C'&T,'L /F C'ST C'&T,'L A&+ #M ,'5*M*&T 4F C'ST MA&A2*M*&T 7F C'ST TA,2*T S*TT#&2 <F 5AL-* MA&A2*M*&T >F SL3 CHA#& ,'C*SS #M ,'5*M*&T S-MMA,3 Chapter /<. Materials Management ST,AT*2#C MAT*,#ALS MA&A2*M*&T

/F #&5*&T',3 !L'$ A&+ ST',A2* 4F !AC#L#T3 -S* 7F L'2#ST#CS #&T*2,AT#'& TH* ,*S-LTS Chapter />. The Supply Chain 'rganiGation TH* ',2A&#=AT#'& *!!',TS ,'C-,*M*&T A&+ +*5*L' M*&T MAT*,#ALS MA&A2*M*&T *' L* A&+ S(#LL +*5*L' M*&T S-MMA,3 S*CT#'& #5. Coordinating SCM and Lean Management Chapter /A. +eveloping H #mplementing Lean !undamentals L*A& ACT#'& / SCM ACT#'& / L*A& ACT#'& 4 SCM ACT#'& 4 S-MMA,3 Chapter /B. Manufacturing #mplementation SCM S-MMA,3 Chapter /C. 'ngoing #mprovements SCM #M ,'5*M*&TS S-MMA,3 #nde1 #nde1IB #nde1IC #nde1I+ #nde1I* #nde1I! #nde1I2 #nde1IH #nde1I# #nde1I6 #nde1I( #nde1IL #nde1IM #nde1I& #nde1I' #nde1I #nde1I@ #nde1I, #nde1IS #nde1IT #nde1I-

#nde1I5 #nde1I$-3 #nde1I= List of !igures List of Tables List of Sidebars

Lean Supply Chain Management : A Handbook for Stategic Procurement by Jeffrey P. Wincel Productivity Press J 4EE< :4<E pages;

#SB&./>A74B4CD1

This book provides purchasers and supplier development professionals with the tools needed to transform procurement from a mere cost center to a profit generator.

Table of Contents

C:\Documents and Settings\Administrateur\Mes documents\ABCTemp $orewordC:\Documents and Settings\Administrateur\Mes documents\ABCTemp7484finalLiB000#!"tml %ntroductionC:\Documents and Settings\Administrateur\Mes documents\ABCTemp7484finalLiB000$!"tml
Lean Supply Chain anagement!" #andbook for Strategic Procurement SECT !" Chapte r& Chapte r+ Chapte rChapte r/ Chapte r0 Chapte r3 Chapte r4 Chapte r5 Chapte r6 Chapte r &7 Chapte r && Chapte r &+ Chapte r &Chapte r &/ Chapte r &0 Chapte r &3 Chapte r &4 Chapte r &5 %nde) # The $oundations ()ecutive as C(* ! The Purchasing'SC

! The ,isciplines of Planning ! $orce .ersus Skill # The Crisis En%ironment

SECT !"

! ,efining the Crisis (nvironment ! Crisis Plan 1ackground and Phase &!"c2uisition Team $ormation ! Phase %%!Price 1enchmarking ! Phase %%%!Short!Term Process %mprovement ! Phase %.!.alue "nalysis'.alue (ngineering ! Phase .!Lean anufacturing

SECT !"

# The Standard En%ironment

! ,efining the Standard (nvironment ! Supply 1ase anagement

! Supplier 8uality and ,evelopment ! Cost ! anagement and Control anagement

aterials

! The Supply Chain *rgani9ation

SECT !" & # Coordinating SCM and Lean Management ! ,eveloping : %mplementing Lean $undamentals ! anufacturing %mplementation

! *ngoing %mprovements

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List of Sidebars

C:\Documents and Settings\Administrateur\Mes documents\ABCTemp7484finalLiB0 $&!"tml

'ack Co%er ;nlike other strategic procurement guides< Lean Supply Chain Management considers an organi9ation=s >business condition> as a contributing factor in the development of a strategic procurement strategy. That is< rather than taking a >one!si9e fits all> approach< the author=s more individuali9ed approach illustrates techni2ues specific to organi9ations operating in a >standard> environment or >crisis> environment. %n addition< Lean Supply Chain Management is the only book that incorporates lean methodology as the key factor in its supply chain strategies. #ighlights include?

ethods for developing and tracking strategic procurement initiatives.

Planning in the >standard> and >crisis> environments.

Coordinating supply chain management and lean manufacturing.

Performance measurement tools.

Lean Supply Chain Management provides purchasers and supplier development professionals with the tools needed to transform procurement from a mere cost center to a profit generator.

Lean Supply Chain Management-A Handbook for Strategic Procurement


6effrey F $incel productivity press Copyright J 4EE< roductivity ress9 a +ivision of (raus roductivity 'rganiGation9 LtdF All rights reservedF &o part of this book may be reproduced or utiliGed in any form or by any means9 electronic or mechanical9 including photocopying9 recording9 or by any information storage and retrieval system9 "ithout permission in "riting from the publisherF Most roductivity ress books are available at ?uantity discounts "hen purchased in bulkF !or more information contact our Customer Service +epartment :CEE-7D<-ACAC;F Address all other in?uiries to. roductivity ress <<< ark Avenue South9 Suite AE< &e" 3ork9 &3 /EE/A -nited States of America Telephone. 4/4-ACA->DEE Telefa1. 4/4-ACA-><// *-mail. infoKproductivitypressFcom Composed by $illiam HF Brunson Typography Services Library of Congress Cataloging-in-Publication Data $incel9 6effreyF Lean supply chain management . a handbook for strategic

procurement 0 by 6effrey $incelF pF cmF /->A74B-4CD-L /F Business logisticsF 4F #ndustrial procurement-ManagementF #F TitleF H+7CF>F$>A 4EE7 A>CFB%4-dc44 4EE7E4//7/ EA E> E< E7 > < 7 4 / There is only one person I can dedicate this to - Heather. Not only are you my partner in life, but my partner in spirit too. ithout you, not only !ould this boo" ha#e ne#er happened, but neither !ould the $oy of li#ing life. Than" you and I lo#e you.

Fore ord
L!A" A"# S$PPL% CHA&" &MP'()!M!"*S
+uring the past 4E years9 many manufacturing organiGations in the -FSF have been "riting and studying all aspects of lean manufacturingF The maMority of these studies have been based on the famous Toyota roduction System :T S;F These lean efforts have taken us in numerous directionsF #n many books9 you can read about T S9 its various tools such as kanban and so on9 and improvement techni?ues such as kaiGenF 5ery little9 ho"ever9 has been "ritten concerning one of the primary success reasons for this great system-supply chain management and developmentF $e have heard about the "iritsu of the 6apanese '*Ms9 and assume this is another reason for success in 6apanF Many believe that the Moint o"nership :and control; of suppliers by big corporations in a kiritsu allo" companies such as Toyota to keep material prices and profits of suppliers do"nF This is one of our largest misunderstandings "hile studying lean manufacturingF Much more relevant is the constant Moint analysis of the total value chain9 and the rigorous effort to take "aste out of the total systemF These efforts are accomplished "hile sharing in the financial re"ards made possible by the improvements in ?uality and profitabilityF !e" have endeavored to put for"ard the value of utiliGing the entire system approach complete "ith the tools of T S and supply chain management in an understandable9 applicable "ayF Beyond reading about the supply chain approach from a successful company9 the best learning advantage "ould be to supply companies like Toyota and traditional :automotive; companiesF This "ould give an individual leader and teams the advantage of seeing and comparing the t"o methods9 traditional versus lean9 side by sideF This side-by-side comparison enables us to see "hat "orks and "hat does not "ork in the -FSF manufacturing environmentF This is e1actly the comparison that 6eff $incel brings to the table in his book9 Lean %upply Chain &anagementF $orking for the 8big three8 automotive purchasing and supply chain organiGations and maMor tierone suppliers9 6eff had learned first hand the differences of these companies in their approach to supply chain managementF 6eff used this as he set out to successfully incorporate the best practices into his team and their supply chain management effortsF #n this book9 6eff e1amines the

need to critically analyGe the current business environment "ithin a company and to recogniGe if a traditional :slo"; change is acceptable9 or if the company is in a crisis situation calling for rapid changeF *ach of these conditions "ill re?uire different skills and application of lean implementation and supply chain managementF There is a degree of frustration in many organiGations "orking to achieve the success of great companies like Toyota or HondaF This success includes improved ?uality9 delivery9 cost reduction9 and team member morale9 all aimed at the ?uest of improved profitabilityF There are continued efforts to study9 read books9 and employ consultants9 but many companies are not seeing the e1pected bottom line of these effortsF 'ne of the maMor problems "ith these efforts is the fact that leaders do not understand lean manufacturing as a total9 fully integrated system of manufacturing the product9 including the total material value chainF They tend to treat each tool of lean as an independent improvement potentialF A second problem is that9 all too often9 the lean manufacturing system is thought of as a manufacturing-floor proMect using items like 6#T9 kaiGen9 and andons9 but having little or no relationship to the total value chainF Like"ise9 in other corners of the company9 total supply chain improvements are being studied independently from the greater total manufacturing systems being implementedF 6eff is one of the first to tie the critical relationships of a total lean manufacturing system :including the plant floor level tools; "ith the "ork on total value chain and supply base improvementsF Again9 much has been "ritten about the total value chain and true gains to be made in a cradle to grave value analysis by taking the "aste out of the total systemF This is nothing ne"F #n the early /DEEs9 Henry !ord had a vision of accomplishing his mass production process "ith a vision of three days from ra" material to finished productF MrF !ord did this by understanding the total value chain from lumber9 elements9 and ra" material through the entire supply base and into final assemblyF He realiGed he could not achieve total cost reduction "ithout a full concentration on the complete value streamF By the "ay9 this "as not kno"n as a value steam in the /DEEs-it "as only sensible "ay to achieve total "aste reduction and profit improvements "hile reducing the price of the product to the customerF Like"ise9 if you look very deeply at the Toyota roduction System9 or any successful lean system9 you "ill need to realiGe that the company system goes far beyond the manufacturing floor and e1tends to the total value stream of suppliersF The system must incorporate the tools of lean manufacturing9 aimed at improving the strength of the entire group by the reduction of "asteF 6eff has "orked to incorporate many of these toolsF 6eff9 as the leader of purchasing and supply chain management for +onnelly Corporation9 "as very instrumental at "orking "ith the +onnelly roduction System9 also patterned after the Toyota system9 and "as highly successful at integrating the tools and techni?ues into the +onnelly distribution center and into the total supply chainF He used the annual planning system of lean to set targets for price reduction and other business improvement9 but then e1tended the effort to assist and educate suppliers in the methods of "orking together for both companies% successF He "as instrumental at ensuring that price reduction e1pectations "ere not a one-"ay streetF The only "ay for us to have been successful "as for both companies to succeedF Many maMor manufacturers in many fields have not begun to grasp the need to "ork cooperatively "ith their suppliers to achieve real improvementF Their approach to price improvement9 inventory control9 or any other improvement is for the supplier to absorb all the cost9 "ith the benefit only going to them as the customerF *ven today9 they are not seeing that this approach "ill not only destroy the supplier but also "ill not lead to cost reduction even in their o"n companyF 6eff "ants to take you in a completely different direction in his approach to understanding and approaching profit improvement through the total value chainF 'uss %caffede 5ice resident9 Manufacturing Tiara 3achts Holland9 Michigan

&ntroduction
+H% *H&S ,((- A"# +H% "(+.
$ith any ne" "ork9 the ?uestion that al"ays has to be ans"ered is- !hy( hy a ne" book on supply chain management and procurement) hy another book about lean systems) hy should "e care) #s there anything more important that "e can learn from the concept of lean supply chain management) hy a ne" book on supply chain management) The ans"er is simply because the "orks that e1ist tend to treat SCM as product movement and delivery9 and SCM is really something greater than thatF #n fact9 many books state that SCM is the same as logistics management9 N/O using the Council of Logistics Management definitionF ractitioners in SCM "ill undoubtedly tell you there are very uni?ue differences bet"een logistics and supply chain managementF Throughout this book "e revisit this difference and demonstrate ho" integrating SCM into other business elements delivers the greatest improvements of performance-"ith9 yes9 financial benefits as "ellP hy a ne" book on lean) Most books on lean systems center on manufacturing operations and material management "ithin that environmentF These books describe the tools and methods by "hich to implement lean initiatives9 the measures by "hich success is observed9 and the support needed to allo" for implementation successF $hat they don%t address is the pre-implementation events that need to occur in the supply chain to enable the lean efforts "ithin the four "allsF This is "here the value of practical e1perience comes to play in ho" this ?uestion is ans"eredF Linking supply chain efforts "ith lean efforts-really making them one and the same-is the "ay in "hich both efforts are optimiGedF So "hile this book addresses the use of lean tools and the integration "ith lean implementation internally9 it really creates a ne" definition and practice in leanF hy should "e care) Again9 the ans"er is simple9 cost Q or9 more important9 profitF #n a typical manufacturing firm9 procurement and supply chain costs make up about >E percent of C'2S :cost of goods sold;9 and manufacturing contributes 7E percentF #mprovement in these t"o factors can provide the single biggest opportunity for profit improvementF At a 4E percent gross profit9 it takes R> of improved sales to e?ual the profit effect of R/ of supply chain savingsF $hile most readers of this "ork "ill be either SCM practitioners or students9 the truth of this story needs to be heard by the e1ecutive management of our organiGations so that the appropriate focus and effort is placed hereF Typically9 organiGations rally around sales strategies or overhead reduction strategies for improving profit9 "ith this biggest piece of SCM being lostF !inally9 does this or any book provide the roadmap to integrate SCM strategy into the larger business strategy of a company) Many SCM initiatives have either been only moderately successful9 or have completely failedF $hy) They%ve failed because they haven%t been part of a corporate strategy other than saving moneyF The tendency is that these plans are stand-alone9 not usually an e1tension of the company%s manufacturing or technology plans9 and may in fact be in direct conflict "ith the company%s goals and approachF This book "as "ritten specifically to be used as a strategic planning tool in developing a "orld class supply chain and procurement planF This book doesn%t Mump immediately to implementation steps9 but builds the overall business and value systems that must be in place firstF #t addresses the different commercial and financial environments in "hich an organiGation might find itself9 and recommends specific approaches tailored to those conditionsF !inally9 the book concludes by focusing on the SCM steps and implementation order that facilitates the implementation of lean manufacturing "ithin your o"n organiGationF
N/O

+avid Simichi-Levi9 hilip (aminsky9 and *dith Simichi-Levi9 Designing ) &anaging the %upply Chain* Concepts, %trategies, and Cases9 4nd edF pF 11F :&e" 3ork. Mc2ra"-Hill0#r"in9 /DDD;

+HA*/S &" *H&S ,((-.


A number of maMor themes are covered throughout this book9 building on many of the current trends in SCM and integrating them into the plan and practice of "orld class SCMF Among these issues is the use of e-business tools to facilitate efficiency and improvement in the tactical transactions9 and strategic planning elements in delivering the plan to implementationF The promise of these e-business solutions often outpaces the reality of their effectiveness and availabilityF Ho"ever9 "hen the fundamentals of sound procurement and SCM practices are put into place9 there are a number of available tools that aid in the ease and availability of information to effectively deploy the SCM effortsF Another e1tremely important element that this book conveys is that there is a real and undeniable difference in SCM skill versus SCM po"erF 'ften9 the largest original e?uipment manufacturers :'*Ms; confuse the market po"er they e1ert over their suppliers "ith technical competency and skillF o"er can be a blinding addiction9 and only through the conversion to skill can sustainable improvements and positive supplier relationships be achievedF Chapter 7 specifically addresses this difference9 and the rest of the book provides the direction and tools to develop the skill setF rocurement efforts and procurement-based savings are the basis of this "orkF #t is through the integration of the procurement efforts and supply chain management that the greatest and most sustained cost and profit improvements can be achievedF Supply chain management is a significantly varied and e1panded discipline from logistics managementF $hile logistics is a maMor element of SCM9 it does not define SCM nor is it all encompassing of the SCM disciplinesF SCM drives deeper into the value chain by "hich products and services are designed9 developed9 manufactured9 purchased9 and movedF *ach of these elements and their contribution to total cost is part of our development of "orld class SCMF

*H! C("*!"*S A"# S*'$C*$'!


*ach of the maMor sections of the book has been organiGed to provide for an independent learning sessionF These sections have been created as stand-alone elements so that your organiGation can use the book and tools described9 based upon "here you are in development and maturityF An ongoing a case study "ithin each chapter provides a glimpse into the successes and challenges in implementing the SCM practicesF The case study company is a combination of a number of actual maMor tier-one automotive suppliers9 and the implementation e1tends over a five-year periodF Section & - *he Foundations0 This section e1amines the organiGational and cultural shift that must first take place to enable the use of lean tools9 particularly "ithin the supply chain organiGationF These changes create the environment in "hich an integrated SCM and company strategy can survive and flourishF $ithout these basics9 many organiGations "ill be unable to ade?uately address the need of the SCM and broader organiGation to ensure success of the SCM effortsF Section && - *he Crisis !nvironment0 Section ## e1amines the approaches and tools used "hen economic disaster is at handF 5arious change concepts are introduced that link short-term economic focus "ith longer-term sustaining effortsF +riven by financial demands9 these tools translate lean methods into specific actions focused on profit improvementF The key to this section is the development of the concept of short-term strategy9 "ithout losing focus on the broader and longer-term needs in an effort to meet short-term demandsF Section &&& - *he Standard !nvironment0 The third section provides the strategy and specific

tools for an integrated SCM effort in a 8normal8 industry and economic environmentF By their nature9 the standard environment tools offered here are more deliberate9 encompass a larger portion of the total SCM disciplines9 and base the efforts on a more balanced approach to cost9 ?uality9 delivery9 and technology :C@+T;F Section &) - Coordinating SCM and Lean Management0 This final section can be used as part of the profile of the rest of the book9 or as a stand-alone document regardless of the SCM strategies employedF The purpose of this section is to integrate the broader supply chain elements into the preparation for9 and the success of9 implementing lean manufacturing methods "ithin your o"n companyF The premise on "hich much of this book is based is derived from the author%s personal e1perience9 "hich is that SCM is an enabler of successful lean implementationF The SCM organiGation and its practices should not be treated as a stand-alone entity9 but an e1tension of the rest of the organiGationF AC-"(+L!#1!M!"*S As # finished the last page of the book9 # looked back on the e1perience that made it all possibleF # never "ould have made it this far "ithout the help and inspiration of many great peopleF +ave gave me the freedom to take as much rope as possibleS +ennis sho"ed me ho" to give it to othersS and +onn sho"ed me ho" not to hang myself - at least not fatallyF My supply chain teams did all the things # ever asked and developed truly "orld class SCM organiGations9 proving many topics from the bookF My dad9 ,alph sho"ed me ho" to develop a calm patience and allo" good to happen9 and not al"ays try to force thingsF

S!C*&(" &2 *he Foundations


Chapter /. The urchasing0SCM *1ecutive as C*' Chapter 4. The +isciplines of lanning Chapter 7. !orce 5ersus Skill

Chapter 32 *he Purchasing4SCM !5ecutive as C!(


*H! "$M,!'S MA-! *H! #&FF!'!"C!
Seasoned procurement professionals "ill tell you about the tremendous changes in their profession during the past /E to 4E yearsF Among these changes have been the increased professional respect members of the purchasing profession have gainedS the increase in the 8arms length8 transactions bet"een the buyer and the seller9 "hich is attributable to commercial relationships no" being based on capabilities instead of personal relationshipsS and most important9 the recognition by senior e1ecutives of the enormous contribution the supply chain management :SCM; organiGation can make to the company%s bottom lineF The change in perception and behavior came hand in hand "ith the introduction of computerbased analysis tools9 such as Lotus /-4-7T9 Microsoft *1celTF These tools began to shed light on the impact that material and supply chain savings could make to profit improvementF !igure /F/

represents the composite of cost of goods breakdo"n for a typical tier-one automotive component supplier based on the e1perience of the authorF These numbers are generally confirmed in many industry and procurement studiesF

Figure 303

M('! *HA" A C(S* C!"*!'


The fundamental mindset change that must be made is that procurement and supply chain organiGations should not be treated as cost center support services9 but as potential profit centersF This is possible only "hen e1ecutive management recogniGes the potential profit contribution of strategic SCM and understands that the improvement potential of such an organiGation far out"eighs its overhead costsF #t is then that true strategic SCM can be effectively employedF CAS! S*$#% 303 +S$ Corporation :a fictional company based on composite e1perience; is a manufacturer of

automotive electronics9 safety9 and body trim productsF #n /DD>9 +S$ had seen its revenue gro" by /> to 4E percent for the prior t"o years and anticipated continued gro"th like this for the ne1t three to four years based upon booked and likely anticipated salesF +uring the same period the annual gross profit had declined from 47 percent to /C percent and annual preta1 profit had declined from > percent to 7F4> percentF The forecast for the coming year 2 and preta1 "ere /B percent and 4FB> percentF Many of +S$%s customers "ere re?uiring annual price reductions of 7 to > percent9 disallo"ing full recovery of prototype and development costs9 and leveraging ne" competitors to determine price targetsF 'rganiGationally9 +S$ had moved to a customer-focused sales and marketing activity9 largely driven by the demands of its '*M customersF +S$%s manufacturing9 product development9 and supply chain organiGations "ere localiGed around individual product linesF +S$ "as evaluating the appropriate organiGational structure to support the gro"th pattern and the need to maintain0improve profitsF ! #! $! +uestions $hat can +S$ learn in managing its profits and SCM) $hat changes in organiGation might aid the efforts that need to be taken) $hat do the activities to date tell you about the focus of +S$)

So ho" does an SCM organiGation transform from a cost center to a profit center) 5ery simply9 the first step is to let the numbers speak for themselvesF Table /F/ sho"s the gross profit and preta1 improvements that can be achieved for every dollar of sales "ith a > percent decrease in costs9 or > percent increase in salesF The relationship bet"een improved sales versus decreased material cost is about a >./ relationship at gross profit :see Table /F4;F Simply put9 it takes R> in increased sales to have the same profit effect as saving Must R/ in material and supply chain costsF *able 3032 Cost and Profit &mprovement Standard Price4Profit Model Sales Material Labor0'H 2ross rofit 2ross rofit #mprovement S2HA :Sales9 2eneral H Administrative Costs; ,+H* :,esearch9 +esign H *ngineering Costs; reta1 rofit rofit #mprovement :RF/E; R/FEE :RF>E; :RF7E; RF4E 67 'eduction in Material Content R/FEE :RF<B>; :RF7E; RF44> U/4F>V :RF/E; 67 'eduction in Manufacturing Cost R/FEE :RF>E; :RF4C>; RF4/> UBF>V :RF/E; 67 &ncrease in Sales R/FE> :RF>4>; :RF7/>; RF4/ U>V :RF/E>;

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RFE>4> U>V

*able 3082 Profit &mprovement Per 93 Sales &ncrease or Material #ecrease Change per 93:: in sales Sales Material Labor0'H 2ross rofit 2ross rofit #mprovement S2HA ,+H* reta1 rofit rofit #mprovement :R /E; :R >; R> Standard Price4Profit Model R/EE :R>E; :R7E; R 4E 93 #ecrease to Material Content R/EE :R <D; :R 7E; R 4/ U >V :R /E; :R >; RA U 4EV 93 &ncrease in Sales R/E/ :R >EF>; :R 7EF7; R 4EF4 U /V :R /EF/; :R >FE>; R >FE> U /V

The second "ay to transform the SCM organiGation is to recogniGe the relationship bet"een the cost of the department to the total purchased dollars9 or to the improvement contribution by the organiGationF +ave &elson9 in his book Po!ered by Honda9N/O discusses the value calculations that he used in determining the staffing level needed to support the strategic SCM efforts at HondaF Honda calculated that for every incremental dollar spent in supplier development :manpo"er resources;9 the organiGation "as able to return RC in cost improvementF N4O 2enerally9 automotivebased procurement studies have pegged the total SCM S2HA budget at appro1imately /W percent to 4 percent of total purchased dollarsF !or the individual SCM contributor or employee9 this means that there should be about a C./ payback to annual salaryF #t is this very measurable performance indicator that drives 8C*' thinking8 into the SCM organiGationF Many procurement and SCM organiGations "ill target even higher payback levels9 some up to /> to 4E times annual salaryF
N/O

+ave &elson9 atricia *F Moody9 and ,ick Mayo9 Po!ered by Honda* De#eloping ,-cellence in the .lobal ,nterprise :&e" 3ork. 6ohn $iley H Sons9 /DDC;F
N4O

&elson et al9 Po!ered by Honda9 pF 4E>F

MA-&"1 *H! S$PPL% CHA&" C!(


CF ,ay 6ohnson in his book C,/ LogicN7O discusses the idea of successful e1ecutive and functional managers thinking and acting like a C*'F His idea is that it is only by this 8e1pansive8 thinking that any e1ecutive is going to be able to understand the dependence and interdependency of their actions to the rest of the company9 and ultimately to the company%s profitabilityF He lists the necessary thoughts and attributes of the budding 8C*'98 and ho" his or her o"n area of responsibility can achieve its greatest successF Among 6ohnson%s lists of actions is to focus on the customerF N<O The main reason for this is obvious9 sales e?uals product and product e?uals profitF Although SCM e1ecutives should consider the ultimate product buyers to be their customers9 internal customers are more likely to be their focusF -sing the C*' idea9 SCM e1ecutives can integrate their strategies into the broader needs of the organiGation9 be more certain of focusing on the critical needs of the company9 ensure broader support of their efforts9 and be able to clearly articulate SCM%s success

and contribution to the organiGationF *1amples of this integration are demonstrated throughout this book9 especially in the discussion on performance9 strategic SCM plans9 and9 finally9 in the launch of lean systemsF This book also discusses the importance of tracking key performance measures and the role they play in determining the success of the supply chain organiGationF Here especially9 the procurement or supply chain e1ecutive must transcend the normal vie" of performance and think like a C*'F A key measure that the C*' looks at is earnings per share :* S;9 and often this single measure determines the success or failure of the C*'F Like"ise9 the supply chain e1ecutive must also translate the contribution of his activities to * SF !igure /F4 sho"s the method by "hich +S$ translated its hard cost supply chain savings to * SF +S$ "as a publicly traded company "ith 4>9EEE9EEE fully diluted outstanding shares of stockF

Figure 3082 +S$ Corporation 8Hard8 SCM Savings H * S Contribution ,eflecting the savings in this manner is necessary to fully understand the broad contribution that the SCM organiGation is making to the companyF The gro"th in gross savings and * S contribution demonstrated by +S$%s SCM organiGation reflects the various steps taken in creating a lean supply chain and those that are the basis of this bookF #t is through the practices outlined in this book that actual and significant savings can be madeF !or e1ample9 in !igure /F49 the savings obtained in the 8international plan8 and 8international actual8 "ere largely obtained through the tools and practices described in the Crisis *nvironment section outlined in Chapters < through DF The savings listed under the 8domestic plan8 and 8domestic actual8 represent savings achieved using the tools described in the Standard *nvironment section in Chapters /E through />F CAS! S*$#% 308 +uestions 30 $hat can +S$ learn in managing its profits and SCM) 80 $hat changes in organiGation might aid the efforts that need to be taken) ;0 $hat do the activities to date tell you about the focus of +S$)

Ans ers 30 +S$ recogniGed the importance that SCM played as a percentage of its total cost of goods soldF #n the case of +S$9 SCM content represented appro1imately AE percent of total C'2SF The historic performance of SCM savings "as very small9 thus enabling some immediate identification of improvements "hich could be undertakenF Based on its cost and balance sheet structure9 for every R/ saving in SCM savings9 appro1imately RFC>-RFDE flo"ed to the preta1 levelF Additionally ho"ever9 the reduction in material assets reduced the property ta1 liability as "ell9 so in some cases the preta1 effect may have been greater than R/ to R/ at preta1F 80 The SCM organiGation at +S$ stepped through three distinct stepsF The first "as the integration of a single domestic SCM organiGation responsible for all aspects of SCMF #n the case of +S$9 this included procurement9 supplier development9 traffic and transportation9 and distributionF The second step "as the integration of a single international SCM organiGation responsible for managing the company%s non-&orth American SCM needsF The final step "as the integration of these t"o regional groups into a single global activityF ;0 Like many of the other companies in this industry9 +S$%s activities reflected the focus on sales0marketing and ne" product developmentF $hile these are undoubtedly critical elements is business survival and gro"th9 the benefits achieved "ere not sufficient to sustain the profitability but only revenue gro"thF This is a very typical situation in this industryF

N7O

CF ,ay 6ohnson9 C,/ Logic* Ho! to Thin" and 0ct Li"e a Chief ,-ecuti#e :!ranklin Lakes9 &6. Career ress9 /DDC;F
N<O

CF ,ay 6ohnson9 C,/ LogicF

Chapter 82 *he #isciplines of Planning


&#!"*&F&CA*&(" (F ()!'A'CH&"1 (,<!C*&)!S
The first step in the implementation of lean SCM practices is the identification of the needs and obMectives for "hich these activities "ill occurF To ensure that there is a method behind the madness9 or at least an obMective behind the action9 the clear identification of the ends support the means by "hich "e are going to arriveF $ithout these end markers in mind9 SCM and lean manufacturing :and anything else; ring hollo" "ith the 8flavor of the month8 feelF The team members "ithin an organiGation are unable to rally around the activity because they often do not understand the purpose of the activity9 the activity itself9 or the value in the ne" approach versus the current methodsF 'f the many planning approaches that e1ist in business today9 management by planning :MB ;9 N/O or hoshin planning9 is unparalleled in its ability to articulate the obMectives to be delivered9 the plans by "hich the obMectives "ill be delivered9 the o"nership of the team in delivering the obMectives9 and management%s responsibility in aiding the team in meeting these obMectives :see !igure 4F/;F #n Michael Co"ley and *llen +omb%s book9 1eyond %trategic 2ision* ,ffecti#e Corporate 0ction !ith Hosbin Planning9 the authors articulate the clear differences bet"een MB and operational or strategic planningF CAS! S*$#% 803

+S$ concluded its annual planning process as it did every year9 right on time-//04 months after the start of the fiscal yearF #ncluded in its annual performance goals "as to achieve an increase in preta1 profits by /> percent9 to reduce total costs by /E percent9 increase sales by /> percent9 and improve customer performance by 4> percentF As the organiGation "as put to "ork to implement these goals9 there "as an undercurrent of confusionF &ot necessarily confusion over the goals themselves9 but confusion in ho" these goals "ere any different than the goals of the past three yearsF 'ver the past three years the goals had been largely the same9 and in all the past three years the goals "ere never metF There al"ays seemed to be a mismatch bet"een the desired outcomes and those by "hich individual performance "as measuredF +uestions Ho" "as the e1ecutive management at +S$ going to 8institutionaliGe8 the goals and their attainment for the ne" fiscal year) #! $here in the goal setting process did +S$ need to bring in its team members to ensure achievement of the goals) $! $hat does +S$ need to recogniGe as the most important element:s; in actually meeting the ne" fiscal year goals) !

'perational planning typically focuses on short-term :less than one year; and financial measures9 and strategic planning typically focuses on only the broadest issuesF N4O The failure of both operational and most strategic planning lies in the fact that the plan becomes more important than the planning processF This is the do"nfall of 8management by obMective8 :MB';F #n MB'9 the stated obMective becomes the focus and not the process by "hich the obMective is achievedF By contrast9 in M B the goal is to become a learning organiGation through the activity of planning and the implementation of these plansF As Co"ley and +omb state9 MB :hoshin; is really the application of the plando-check-act : +CA; cycle to business activitiesF N7O Applying MB to the integration of lean SCM and activities first involves identifying common overarching obMectivesF 'verarching obMectives simply are the highest-level obMectives based directly on the strategic intent of the companyF These obMectives are stated in "ays such as. 8#ncrease shareholder value by 1 percent per year98 or 8#mprove customer ?uality levels from 1 to y98 or 8#mprove employee satisfaction inde1 from y to GF8 These overarching obMectives are often set by identifying the fe" key strategies and e1pressing them as a simple phrase or shared logoF !or e1ample9 He"lett- ackard%s core businesses are measurement9 computation9 and communicationF #ts M B overarching obMectives are centered on this 8H XMC 48 themeFN<O SCM and lean manufacturing intersect most significantly in profitability obMectives9 customer satisfaction obMectives9 and ?uality obMectivesF #t is typically these three areas and the resulting strategic activities that drive the coordinated operational actionsF

Failures of *raditional Planning Activities !orecasts are unrealistic and no process e1ists to recogniGe gaps and adMust planF Arbitrary obMectives

Advantages of M,P

'rganiGational obMectives arise from the company%s strategic visionF Specific methodologies e1ist to define 8breakthrough8 actions on the

Failures of *raditional Planning Activities are often set "ithout consideration to 8need9 means or feasibility8 of achieving goalF There are often too many goals to focus on the 8highleverage8 or high-impact itemsF #ncorrect goals are often set9 and there is no process to link goals to activitiesF 8There is no shared vision of the organiGation%s future98 and therefore to o"nership of plansF The ongoing activities are not based on achieving the goals9 causing the goals to become a 8"ish listF8 'ngoing revie"s of activities do not occur to evaluate progress to"ard goalsF $here revie" of goal attainment occurs9 the punitive nature of the

Advantages of M,P

key obMectivesF All activities occurring in the organiGation are focused around the 8overarching8 obMectivesF All levels of the organiGation feel 8o"nership8 of the activities and the obMectivesF The implementation system is e1tremely firm and fle1ible at the same timeF A 8supportive revie" system8 e1ists9 "hich allo"s correction to the plan during the action implementationF The process is based upon learning and ongoing correction or is described as 8adaptive and self-healingF8

Failures of *raditional Planning Activities revie" causes a 8C3A8 approachF Because management has not mastered effective planning9 past failures inhibit future planningF lanning teams do not understand the difference bet"een operational planning and strategic planningF The plan is the goal9 not the planning :and learning; processF 'bMective measures and factual data often do not e1ist during planning cycle ', the converseplanning suffers analysis paralysisF lanning departments and not the functional managers do the planningF

Advantages of M,P

Figure 8032 lanning Method Comparison !inally9 as the basis of MB 9 the overarching obMectives are defined by the senior management

team and are based upon stakeholder needsF +epending upon the company culture9 the stakeholders may be any or all of its shareholders9 customers9 employees9 suppliers9 community members9 or othersF By basing the strategic intent and overarching obMectives on the shareholder needs9 all the effected constituents "ill be considered in the daily activities of the organiGationF
N/O

8Management by lanning8 "as first used by #ntel9 %etting The Direction* &anagement by Planning9 Catherine 6ohnston and Mark +aniel9 /DD7F
N4O

Micheal Co"ley and *llen +omb /DDB9 1eyond %trategic 2ision* ,ffecti#e Corporate 0ction !ith Hoshin Planning :Burlington9 MA. Butter"orth-Heinemann9 /DDB;9 pF 7F
N7O N<O

Co"ley H +omb9 1eyond %trategic 2ision9 pF >F Co"ley H +omb9 1eyond %trategic 2isionF pF 4EF

#!)!L(PM!"* (F S*'A*!1&C PLA"S A"# AC*&("S


These highest-level overarching obMectives need to be distilled to real life activities and goalsF The typical focus at this point becomes financially-based operational plansF !inancial measures alone9 ho"ever9 are not sufficient to prepare the organiGation for the "ork to follo"9 especially keeping in mind that one of the premises of MB is that learning from the planning and implementation process is as important as the plan itselfF !ocusing only on financial obMectives limits the organiGation from making critical changesF The concept of strategic learning suggests that the companies that are the most successful in the broadest terms have mastered strategic thinking versus strategic planningFN>O To appropriately define a balanced mi1 of financial and nonfinancial measures9 the use of a Balanced ScorecardNAO is recommendedF The Har#ard 1usiness 'e#ie! describes the methods and advantages by "hich the balanced measures can be selectedF These balanced obMectives support the overarching goals arising from the MB processF -sing an M B tool called a goals and action :2HA; matri19NBO SCM and manufacturing operations managers can clearly articulate their obMectives "ith reference to the overarching goalsF The 2HA matri1 also allo"s the alignment of potentially conflicting obMectivesF !or e1ample9 an SCM obMective may be to reduce inbound transportation costs "hile a manufacturing obMective may be to improve inventory turns or increase delivery fre?uencyS the SCM goal "ould pursue decreased delivery fre?uency "hile the manufacturing goal "ould pursue increased delivery fre?uencyF The development of the 2HA goals9 and the supportive revie"s of the activity progress highlight such conflictsF !ormatting the strategic intent9 highest-level obMectives9 and second-level :functional or departmental; goals are more an e1tension of the e1isting business than a change to a ne" "ay of operatingF #n a learning organiGation9 it is critical to take the best of the current practices into future plansF Ho"ever9 it is out of the e1isting failures or obstacles that plans for change are developedF *arlier "e discussed the potential failure of the planning process through the lack of o"nership of the ne" direction by all levels of the organiGationF To rally all levels of the organiGation around the ne" direction9 the shared vision must be flo"ed from level to levelF This can be most effectively done through a process called catchball9 "hich is discussed in the follo"ing sectionF
N>O

Henry MintGberg9 The ,ise and !all of Strategic lanning :&e" 3ork. !ree ress9 Macmillan9 /DD<;9 pF 4ED-4/E
NAO

,obert (aplin H +avid &orton9 8The Balanced Scorecard-Measures that +rive erformance98 Har#ard 1usiness 'e#ie!9 6anuary-!ebruary /DD49 ppF B4F Author%s note. Since the /DD4 HB, article9 (aplan H &orton have e1panded balanced scorecard theory to a management system :Har#ard 1usiness 'e#ie! 6anuary-!ebruary /DDA "hich is essentially the adoption of management by planning :hoshin; practicesF
NBO

6effrey $incel9 8A ractitioners 5ie" of Strategic rocurement98 %upply Chain &anagement

'e#ie!F :Summer /DDC;9 pF A79 e1hibit <F

&MPL!M!"*A*&(" PLA"S A"# *AS- &#!"*&F&CA*&("


So no" the senior management team has identified a strategic direction and intent for the company and the highest-level goals have been set9 but ho" does the rank and file "orker gain the vision) Ho" do "ork teams at all levels of the organiGation gain the vision) Catchball is the collaboration method "here the "ork strategies are selected by understanding the strategic vision and obMectivesFNCO The "ork team leader first tosses the ball :the ideas; to his team members by articulating the overarching obMectives and the team-level :department; goals associated "ith the overarching obMectivesF $here there is uncertainty or needed amplification9 the team tosses the ball back to the team leaderF This process continues until there is e1treme clarity of the strategic intent and the specific "ork elements that "ill drive to"ard that intentF *very team member fully understands e1actly ho" their daily "ork is related to the team goal9 the overarching goal9 and strategic intent9 ultimately for the satisfaction of the stakeholdersF :See !igure 4F4F;

Figure 8082 lanning rocess 'utline :4EE4 Magna +onnelly Corporation "0 permission; #n this analysis9 tightly coordinated "ork activities are necessary to deliver the optimal outcomes for lean manufacturing and SCMF Tasks that occur at the most basic levels must be outlined in a "ay in "hich there is no misunderstanding as to "ho "ill be doing "hatF This clear-cut Mob definition is especially important in activities "ith shared or cross-functional responsibilitiesF The primary interface bet"een supply management and manufacturing operations in a lean environment is materials management responsibilitiesF $here manufacturing material handling "ill be looking for material flo" improvements9 procurement must ensure that the supply base is prepared to support the operational needs in significantly different "ays :"hich is discussed in greater detail in a later chapter;F The entire supplier management :and "here necessary supplier

development; issue is often overlooked as each group assumes the other responsibleF The responsibility matri1 in !igure 4F7 is an e1ample of the clear definition of multigroup interface and o"nershipF

'esponsibility Matri5-Launch 'evie Areas of concern L'' ?launch readiness revie @ responsibility +evelop L,, rocess +efine individual module components for L,, *stablish target date for L,, :derived from A @ ; Communicate e1pectations to supplier Schedule L,, at supplier%s location Conduct L,, at supplier%s location Communicate revie" findings to appropriate parties !ollo"-up and close-out open issues as a result of revie" findings
N)O N)O N)O

Plant =uality 4 A>!

*actical supplier =uality engineer

Program team

Strategic S>!

Supplier =uality management

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,esource Lead Support

Figure 80;2 ,esponsibility Matri1 Specific "ork elements and processes to be follo"ed e1ist in each area of responsibilityF This

matri1 does not detail those "ork elements9 but identifies the person or activity responsible for delivering the action for the shared "orkF $hile this e1ample is not a shared SCM lean manufacturing "ork element9 it does e1emplify a cross-functional responsibility affecting supply management9 manufacturing9 and program managementF !inally9 regular supportive revie"s by the senior management team must be an ongoing part of the processF #t is through these revie"s that the implementers are able to e1amine their activities9 learn from the progress9 and adapt as necessaryF Managers are able to verify that the shared vision is really shared at all levels9 and that the actions the organiGation is taking are in support of the highest-level obMectivesF Adopting lean manufacturing disciplines can be among the most difficult activities a company can undergoF Managing them concurrently "ith the implementation of advanced supply chain techni?ues re?uires even more attentionF The supportive revie" process aids in all of this by identifying the factors that inhibit for"ard momentum and "orks to ?uickly eliminate themF #f the management team can%t break do"n the barriers9 no one "ill be able toF
NCO

Co"ley H +omb9 1eyond %trategic 2isionF ppF 4C-4DF

*'A"SLA*&"1 *H! (,<!C*&)!S *( *H! PLA"


Translating the obMectives into a plan is the single obMective of MB or hoshin planning :often called hoshin "anri;F Hoshin planning by its definition is policy deploymentF #n fact9 $omak and 6ones in their book Lean Thin"ing define hoshin as 8a strategic decision-making tool for a firm%s e1ecutive team that focuses resources on the critical initiatives necessary to accomplish the business obMectives of the firmF8NDO The methodology generally recommended to translate and deploy the overarching obMectives is a visual method similar to ?uality functional deploymentF N/EO Sometimes called a 8goals and action matri198 this format represents the cascade of the select fe" key measures to department obMectives to individual "ork tasksF !igure 4F< represents a supply chain 2HA matri19 including procurement9 supplier ?uality9 process9 etcF

Figure 80A2 A Supply Chain 2oals and Action Matri1 The highest-level overarching obMectives must first be strategically selected by the e1ecutive management team and represent the increases or improvements in value as perceived by the customerF These are often defined as a mi1ture of product customer demands9 but more often as

constituent demands of "hich customers are oneF The need to differentiate bet"een customers and constituents is driven by the reality of businessF #n most real "orld environments9 businesses have to ans"er to all of their constituents-that is9 their customers9 shareholders or lenders9 employees9 and others-not Must to the people or organiGations "ho buy their productsF *1ecutive management must define the obMectives "ith "hich improved or increased value can be delivered to these constituentsF !igure 4F> sho"s the right side of the 2HA matri1 in "hich the overarching obMectives are identifiedF These obMectives should address each of the constituents as "ell as business fundamentalsF

D C B A > < 7 4 /

/EEV implementation of #S' /<EEE >EV improvement of supplier delivery to C>EE >EV improvement of supplier ?uality to /4EE >EV national average for lost "ork incidents >>th percentile on system > climate rating >EV reduction to AEE short ships >EV reduction in C M to /A/ M M

/>V compounded gro"th in sales ,+A of AV "AA( Fiscal %ear (bBectives

Figure 8062 2 H A Matri1 'verarching 'bMectives This e1ample demonstrates obMectives aligned "ith stakeholder or constituent needsF !or e1ample9 obMectives / H 4 are directly related to shareholder re?uirementsS obMectives 7 H < are customer value obMectives9 in this case ?uality and satisfaction re?uirementsS obMectives > H A are employee basedS obMectives B H C are supplier relatedS and D is interpreted here as serving the community constituentF !igure 4FA translates the overarching obMectives into departmental obMectivesF The 81%s8 on the left upper side of the matri1 represent "here the overarching obMectives are being supported by the departmental obMectivesF #t is at this intersection "here you can begin to see the purpose of individual department efforts9 "hy they are being put in place9 and "hat their broader purpose isF #t is also here that the first series of catchball activities occurF The translation of the overarching obMectives to "orkable organiGational obMectives is a critical element in understanding the purpose and ingrained philosophy by "hich the company "ill be runF Lean concepts are an e1ample of the philosophyF

1oals and Action Matri5-F% Materials L C !3 #mplement procuremen t card program ,educe freight as a />V

!3

1oals and Action Matri5-F% Materials V to purchase receipts A !3 =ero CA,%s past due@SDEEE audits Achieve annual plan budget >>th percentile on system > climate ratings >EV reduction in supplier delivery to C>EE M >EV reduction in supplier ?uality to /4EE M Achieve 5 of 4V savings :less customer glass; Material fiscal year obBectives B>V

>

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Figure 80C2 2 H A Matri1 +epartment 'bMectives Also present in the matri1 is an 8'S8 column that represents outstanding performanceF The outstanding performance can be represented as some percentage increase over the baseline planF This is often 4> percent or more and may represent levels possible "ith "ai"a"u. 3ai"a"u is radical change efforts that "ill be discussed laterF $here incentives play a role in managerial compensation9 it should be these obMectives and stretch obMectives that are the basis for the incentive payoutsF !inally9 the right side of the matri1 :!igure 4FB; represents the translation of the departmental obMectives to individual actionsF Again9 catchball plays a big role in being certain that the individual tasks and support of the departmental obMectives are clearly understoodF The upper right 81%s8 sho" the intersection of the individual actions to the departmental obMectivesF Through these intersections9 individuals can see ho" their daily efforts support the highest-level obMectives9 obMectives that may have previously been hard to communicateF

3 8

Certify tooling suppliers +evelop procurement and card pilot program Ship direct from manufacturin g #mprove inventory accuracy #mprove A approval #ncrease suppliers V @SDEEE certification Achieve L,,%s /EEV #ncrease minority supply base #ncrease LTAs ,educe supply base

1 1

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1 1

1 1

1 1

Figure 80D2 2 H A Matri1 #ndividual Actions


NDO

6ames F $omack and +aniel TF 6ones9 Lean Thin"ing* 1anish 4our Corporation :&e" 3ork. Simon H Schuster9 /DDA;9 pF 7EAF
N/EO

aste and Create

ealth in

$omak H 6ones9 Lean Thin"ing9 pF 7EBF

M("&*('&"1 *H! P'(1'!SS (F *H! PLA"


Although kno"ing ho" to link individual actions to departmental obMectives and ultimately to overarching obMectives is e1tremely important9 it has no value if you are unable to achieve resultsF Historically9 annual obMectives "ere rolled out9 implemented9 and then put a"ay until the ne1t planning or revie" cycle a year laterF &ot much "as done in the "ay of actually understanding ho" "ell planned actions "ere being implementedF #f midyear revie"s did take place9 it normally

"as an unpleasant dressing do"nF MB implementation varies significantly in that regular revie"s are part of the process-again reflecting the idea that the process is Must as important as the plan itselfF These supportive revie"s reflect the idea that the individual actions are critical to the overarching obMectives9 and provide for the allocation or reallocation of the necessary assets9 or to break roadblocks to allo" for the successful accomplishment of the goalsF Again from Lean Thin"ing9N//O the performance monitoring aspect of MB unifies and aligns resources and establishes clearly measurable targets against "hich progress to"ard the key obMectives is measured on a regular basisF8 $hile there are many methods for measuring progress9 !igure 4FCN/4O sho"s a method by "hich each of the key obMectives are tracked for monthly performance9 year-to-date performance9 pareto of reasons for success or failure9 gap analysis "ith actions9 and responsible individuals "ith target completion datesF Through the incorporated use of radar charts9 management can ?uickly identify those areas that re?uire revie" and those "here progress is on target :!igure 4FD;F

Figure 80E2 Action erformance Summary Chart

Figure 80F2 MB ,adar Chart

CAS! S*$#% 808 +uestions 30 Ho" "as the e1ecutive management at +S$ going to 8institutionaliGe8 the goals and their attainment for the ne" fiscal year) 80 $here in the goal setting process did +S$ need to bring in its team members to ensure achievement of the goals) ;0 $hat does +S$ need to recogniGe as the most important element:s; in actually meeting the ne" fiscal year goals) Ans ers 30 The goals "ere institutionaliGed by the development of 8'verarching 'bMectives8 designed to address the e1pressed needs of the various 8stakeholdersF8 80 +S$ brought in the team members in the setting of the department level goalsF These goals "ere set based upon support and achieving the over-arching obMectivesF ;0 There "ere a number of 8most important factors8 "ith some of those being. i; making available the tools and resources needed to support the individual and departmental obMectivesS ii; the use of e1ecutive level supportive revie"s to break any obstacles in achieving goalsS and iii; directly tying team and personal goals to the business plan obMectives for performance evaluationsF

N//O N/4O

$omak H 6ones9 Lean Thin"ing9 pF 7EBF -sed "ith permission Magna +onnelly Corporation9 /DDDF

Chapter ;2 Force )ersus Skill


()!')&!+
Supply chain organiGations often have their business style driven by pressures from other parts of the organiGation or by other players in their industryF The form in "hich SCM professionals interact "ith the supply base is one of the clearest e1amples of ho" company vision and business ethics translate to daily behavior and professional performanceF *ach business method has a greatly varying impact on supplier relationships and performanceF $hile the ultimate obMectives of achieving improvements in cost9 ?uality9 and other business indicators may be similar9 the sustainability of these improvements and their impact on suppliers have very different effectsF This chapter e1amines the effects of buyer-supplier relationships and proposes a rediscovery of business ethics and corporate moralityF #n defining buy-sell relationships beyond a traditional vie"9 the foundations of SCM improvements that are made possible by the tools defined throughout the book are put into placeF $ithout a philosophical basis on "hich to build supplier relationships9 these tools simply become another collection of initiatives9 and not a bolder business strategyF CAS! S*$#% ;03 +S$ had finaliGed its participation in an online auction for its maMor customer9 "hich should result in the a"arding of R<> million in annual sourcing for a maMor ne" programF This sourcing should happen because +S$ "on the competitive auction for price9 delivery9 tooling9 and productivity terms :annual price do"ns;F The uncertainty is simply a built in part of '*M sourcing processF Although +S$ "as "inning on all the key re?uirements of the sourcing package9 at the source confirmation meeting there "as one final re?uirementF +S$ "as given the opportunity to secure the business9 provided they further reduced the current price of an unrelated9 current production part beyond the contract committed rateF By increasing the annual price reduction from < percent to AF> percent9 +S$ "ould receive the ne" businessF +uestions. Ho" should +S$ respond to its customer "ith respect to the sourcing proposal considering that the current part "as sourcing "ith /C percent gross profit and 7F> percent preta19 and "as t"o years into a four-year contract "ith < percent annual price reductionsS and that the ne" part "as ?uoted at /B percent and 7 percent profits rates and 7F> percent annual price reductions) #! To meet the annual customer price reductions9 "hat can +S$ do to reduce its cost structure) $! $hat does +S$%s customer%s purchasing organiGation believe about its ability to negotiate the ne" product sourcing and potentially achieve incremental reduction on e1isting business) !

*H! G,(%H &/M 1((#G S%"#'(M!


The typical profile of a ne" production buyer at the automotive original e?uipment manufacturers :'*Ms; is a high-flying MBAF They are selected based on their ability to understand the comple1ities of cost and profit structures and their desire to make a mark in the organiGation and progress rapidly9 and also because of the regular availability of a ne" class of employeesF These characteristics serve the '*Ms "ell by providing the critical analysis skills and aggressiveness in dealing "ith sourcing issuesF The mi1 of skill and desire create a competitive attitude in "hich "inning becomes the main goalF Training and development is provided as a regular part of the orientation of the ne" buyersF #ncluded "ith that training is the idea of partnerships and "in-"inF These concepts are designed to eliminate the confrontational nature of the buy-sell relationshipF &ovice and seasoned buyers alike believe that they e1ercise the concepts of fairness "ith their suppliers as they negotiate and source businessF The achievements they make in negotiated cost reductions9 sourcing belo" target9 and achieving annual improvements are made in the conte1t of training9 e1perience9 and partnership perspectivesF 'bviously9 the buyers must be good to get these improvements9 creating the 8boy9 # must be good8 beliefF

&S *H! PLA%&"1 F&!L# L!)!L.


Success is based on achieving "inning results by understanding the rules of the game9 playing better than the competition9 and getting the outcome you desireF #n the sourcing activities of SCM9 the rules seemed to change often-at least in the automotive "orldF More often than not9 the rules in the buy-sell relationship are solely determined by the biggest guy on the block :the guy "ith the most leverage;-usually the '*M customerF 'ften the '*Ms either don%t recogniGe the reality of this playing field tilt9 or they don%t admit to itF !igure 7F/ demonstrates the effects on profitability in a buy-sell relationship bet"een a maMor tierone supplier and one of its biggest customersF Because of confidentiality reasons9 the companies can%t be identified9 but the information is taken from publicly available dataF The data sho"s a seemingly direct correlation bet"een the average annual part price reductions9 the increase in the customer%s preta1 profits9 and a corresponding decline in the supplier%s preta1 profitsF $hile the supplier%s reductions individually do not represent the increase in the customer%s preta1 profits9 it does reflect the average reductions given across the entire supply baseF

Figure ;03

*H! !*H&CS (F ,$S&"!SS


2enerally9 the companies "ho have embraced and implemented lean methodologies try to model themselves after the e1ample of the Toyota roduction System :T S;F 'ne of the hallmark features of the lean methods of T S is that there e1ists an underlying philosophy that guides individual practices and efforts-that is9 clearly defined ethics drive behaviorF #t is the critical nature of these business ethics that enables the successful implementation and ongoing success of lean practicesF The drive to "in in the supply chain relationship determines the behavior e1hibited by the SCM professionalsF SCM professionals in &orth America generally believe that the tactics they employ are not only ethical9 but positively contribute to the buy-sell relationshipsF The "ay to validate the truth in that belief is to e1amine the individual behaviors and their impact on relationship buildingF By moving from destructive to constructive behaviors9 the ethical and philosophical backbone of the SCM strategy can be established9 enabling a positive "in strategyF +rF +avid ,F Ha"kins9 in his book Po!er #s. 5orce-The Hidden Determinants of Human 1eha#ior9 describes the effects of these t"o methods of influencing others on personal9 professional9 and commercial relationshipsF +rF Ha"kins "rites that 8po"er arises from meaningF #t has to do "ith motive9 and it has to do "ith principalF8N/O #n contrast to the positive aspects of ethics in po"er9 force depends on the lo"est basic behaviors9 appealing to crass influence actionsF N4O Like #saac &e"ton%s la" of physics9 forces in commercial relationships have a counterforce fighting against them9 "hereas positive po"er derived from ethical behavior 8energiGes9 gives forth9 supplies9 and supportsF8N7O So the determining factors the SCM professionals need to e1amine in evaluating the ethics by "hich they interact professionally are the behaviors they e1hibitF
N/O

+avid ,F Ha"kins9 MF+F9 hF+F9 Po!er #s. 5orce* The Hidden Determinants of Human 1eha#ior :Carlsbad9 CAF. Hay House #ncF9 /DD>;9 pF /74F
N4O

Ha"kins9 Po!er #s. 5orce9 ppF /74-/7<F

N7O

Ha"kins9 Po!er #s. 5orce9 ppF /74-/7<F

+H!'! P(+!' ?S-&LL@ &S #!'&)!#


+rF Ha"kins describes strong and "eak behaviors that influence relationshipsF N<O The follo"ing list represents a small sampling simply to allo" readers to assess their behavior and ethics in professional SCM. Authoritative0dogmaticF A"are0preoccupiedF Candid0calculatingF Conciliatory0infle1ibleF Confident0arrogantF +efending0attackingF +iplomatic0deceptiveF *?ual0superiorF *thical0e?uivocalF Honest0legalF #ngenious0schemingF Leading0coerciveF 'bservant0suspiciousF o"erful0forcefulF ,e?uesting0demandingF 5aluing0e1ploitiveF The first "ord in each pair represents the positive po"er characteristicF The second represents the force characteristicF *1hibiting behaviors reflective of the first of these pairs leads to the ethical basis and underlying philosophy that "ill deliver the greatest possible success in implementing lean SCMF The transition from force to skill is based on learningF This is not necessarily learning in the educational seminar sense9 but learning in the e1periential sense9 especially on the losing sideF *ducational learning provides a set of finite tools that can be employed as techni?uesF Typically these tools are used as part of a game plan to drive to"ard that "inning eventF *1periential learning provides the insight to the underlying relationships in SCMF Through the use of these tools9 the rules of the game are dramatically changed from "inning9 to mutual benefitF $illiam -ry9 from Harvard -niversity School of La" is one of the leading e1perts in negotiating to mutual benefit of the partiesF MrF -ry created t"o landmark "orks on negotiations9 .etting to 4es and .etting Past No. Collectively these "orks provide the archetypical roadmap on ethics-based business relationships "hile still achieving the desired benefit as an outcome of negotiationsF
N<O

Ha"kins9 Po!er #s. 5orce9 ppF /<>-/<BF

*'A"SF('M&"1 F('C!S &"*( S-&LL


The transformation from force-based supply chain management to skill-based SCM is based on t"o seemingly simple actions. ac?uiring the skill and tools through education and e1perience9 and

the evolution of the professional relationship bet"een the various parts of the supply chainF *ducation is the simplest aspect of the e?uation to achieveF The only re?uirement is the desire to achieve the learning and accessing the resources of course"ork9 books9 and other training resourcesF *1perience is a little more difficult because it re?uires more than Must putting years behind youF *1perience is the process of building on and learning from the progression of business encountersF #n a simple sense9 this means that there needs to be the individual gro"th of possessing /E or 4E years of e1perience9 not / year of e1perience /E or 4E timesF #n every aspect of SCM9 e1perience in negotiating is probably the most critical success factorF $hile the purchasing side of SCM kno"s of the 8trained professional negotiator98 many of the other SCM disciplines do notF #n fact9 in Bill -ry%s .etting Past No9 he describes the reality of "hat the vie" is by many in negotiating9 "hich also applies to SCM relationshipsF 8$e may all be negotiators9 yet many of us don%t like to negotiateF $e see the negotiations as stressful confrontationF $e see ourselves faced "ith an unpleasant choiceF #f "e are soft in order to preserve the relationship9 "e end up giving up our positionF #f "e are hard in order to "in our position9 "e strain the relationship or perhaps lose it altogetherF8 N>O #n transforming the force to skill9 there are a number of key e1perience gro"th factors that affect SCM and relationship managementF The first of these is the shift in dealing "ith the SCM issuesF According to -ry9 8there is an alternative. Moint problem solvingF #t is neither e1clusively soft nor hard9 but a combination of eachF #t is soft on the people, hard on the problem F #nstead of attacking each other9 you attack the problemF #n short9 you turn face-to-face confrontation into side-by-side problem solvingF8NAO This approach on issues versus people leads to a second and e?ually important area of business maturation9 that being the truth in the nature of the relationshipF
N>O

$illiam -ry9 .etting Past No* Negotiating 4our ay from Confrontation to Cooperation 9 ,evised *dition9 :&e" 3ork9 &3F9 Bantam +oubleday +ell ublishing9 /DD7;9 pF >F
NAO

$illiam -ry9 .etting Past No9 pF AF

*H! C(LLA,('A*&)! '!LA*&("SH&P IDJ


#n most industries9 SCM professionals describe their approach to supplier relationships as being based on a partnershipF rofessional and industry Mournals publish volumes on the approaches that companies takeF Ho"ever9 many suppliers "ould call the relationship anything but a partnershipF &early any dictionary "ill define partnership as a relationship bet"een t"o or more parties that share the risks and re"ards of a business ventureF #t may go on to add to the definition that a partnership includes engaging in activities to"ard a common goalF The only thing in this type of definition that applies to most buy-sell relationships is that the parties are engaged in a business ventureF Beyond that9 there is limited shared risk and re"ard9 and limited common vision of the ultimate goalF The seller often sees the buyer as forcing all the risk and "orking to achieve all the re"ardF Ho"ever9 there does e1ist an ine1tricable relationship bet"een the buyer and sellerF #n addition9 to ma1imiGe the benefit to all parties9 the relationship has to be one greater than the confrontational 8"in at any cost8 approach that is often found in businessF Business relationships in the largest range of the supply chain :iFeF9 the levels belo" retail; re?uire successful collaboration to provide for the production9 technology9 delivery9 and competitive cost of a product :or service;F Still9 these collaborators typically have competing obMectivesF Balancing the need for collaboration and the competitive obMectives can be an effective and cooperative method on "hich to build a business relationshipF This concept is called competitive collaborationF Competitive collaboration builds on the concepts of Bill -ry described earlierF #n addition to separating the people from the issue9 it also recogniGes the real "orld factors by "hich business ventures are motivatedF The cooperation has to be based on the ans"er to the follo"ing three ?uestions :from both the customer and seller standpoint;.

! #! $!

$hat is the need that must be satisfied :iFeF9 the part9 service9 etcF;) Ho" can the potential source satisfy that need) $hat%s in it :iFeF9 the sourcing solution; for the buyer or the seller)

#t%s the ans"er to that third ?uestion that drives the nature of the relationshipF # believe that competitive collaboration provides the best solution to the need for cooperationF Competitive collaboration involves both customers and suppliers "orking together to. Consider their o"n stakeholder needs and present them as the starting point of the buy-sell arrangementF Their competing self-interests thus serve as the basis of the customersupplier relationshipF *stablish obMectives and metrics on "hich to base successF These metrics :"hich could include cost0price9 design9 ?uality9 etcF; become the obMective basis on "hich the value of the relationship is measuredF +evelop product and program for the mutual success of each companyF #ndividually measure the obMectives and self-interests along the "ay to validate the ongoing benefit of the relationship Base the ne1t agreement9 product9 or program from the outcomes of the previous competitive collaborative agreementF Both customers and suppliers must obMectively evaluate the overall success and value of maintaining the relationshipF Customer management and selection is e?ually important to supplier management and selectionF
NBO

6effrey $incel9 8Competitive Supplier artnerships98 /ptimi6e &aga6ine9 :August9 4EE4;F

*H! F&"AL *'A"SF('MA*&(" *( S-&LL


The final transformation from force to skill is a construct of the integration of ethics-based business relationships9 the use of positive po"er tools9 separation of the issues from the people9 and the ackno"ledgement of the true nature of buy-sell relationshipsF Lean supply chain management re?uires these characteristics to be in place to allo" for the successful implementation of lean SCM toolsF Lean SCM tools9 their use9 and the anticipated results are the focus of the ne1t t"o sections of this bookF #n setting up for these tools9 # "ant to go back to the "ork of Bill -ryF Table 7F/ describes the bridges that can take the customer-supplier :or any; negotiation efforts from competitive to cooperative9 from people to issues9 and from one "inner to all "innersF Bill%s breakthrough strategies are simple but e1tremely effective9 and learning these in detail is "orth the readF *able ;032 -eys to "egotiation *he 1oal2 <(&"* P'(,L!M S(L)&"1 eople Sitting Side by Side !acing the roblem ,eaching a Mutually Satisfactory Agreement ,A''&!'S *( C((P!'A*&(" 3our ,eaction Their *motion Their *motion Their +issatisfaction Their o"er Strategy2 ,'!A-*H'($1H "!1(*&A*&("S 2o to the Balcony Step to Their Side ,eframe Build Them a 2olden Bridge -se o"er to *ducate

Adapted from $illiam -ry9 .etting Past No9 pF /7 #t is in this mindset that lean SCM is basedF Breakthrough lean SCM strategies capable of delivering dramatic and sustained improvement are both at once simple and comple1F They are

simple in the structure and use of the tools9 but comple1 :not difficult; in the "ay in "hich these tools are used for a comprehensive supply chain strategyF CAS! S*$#% ;08 +uestions 30 Ho" should +S$ respond to its customer "ith respect to the sourcing proposal considering that the current part "as sourcing "ith /C percent gross profit and 7F> percent preta19 and "as t"o years into a four-year contract "ith < percent annual price reductionsS and that the ne" part "as ?uoted at /B percent and 7 percent profits rates and 7F> percent annual price reductionsF 80 To meet the annual customer price reductions9 "hat can +S$ do to reduce its cost structure) ;0 $hat does +S$%s customer%s purchasing organiGation believe about its ability to negotiate the ne" product sourcing and potentially achieve incremental reduction on e1isting business) Ans ers 30 +S$ agreed to the incremental reduction on the e1isting business9 believing that it had no choice if it "anted to secure the future sourcingF +S$%s plans for this incremental reduction "ould include reductions in overhead and prime costs in attempt to drive gross and preta1 margins to acceptable levelsF 80 To meet the annual customer price reductions +S$ accelerated a re-engineering effort in reducing its overhead cost structure :read here 8do"nsiGing8;F These efforts "ould directly affect the program support the customer "ould receiveF ;0 The customer%s purchasing organiGation e1pressed no reservations about the tactics it employed for this sourcing activityF #n fact9 "hen ?uestioned regarding the approach they used9 they responded "ith the statement that this "as the changing nature of business relationships and to continue to be a 8preferred8 supplier meant complying "ith the approachF

S!C*&(" &&2 *he Crisis !nvironment


Chapter <. +efining the Crisis *nvironment Chapter >. Crisis lan Background and hase /-Ac?uisition Team !ormation Chapter A. hase ##- rice Benchmarking Chapter B. hase ###-Short-Term rocess #mprovement Chapter C. hase #5-5alue Analysis05alue *ngineering Chapter D. hase 5-Lean Manufacturing

Chapter A2 #efining the Crisis !nvironment


()!')&!+
+efining a crisis environment in procurement and SCM can be a difficult propositionF #t%s difficult because our profession often seems to be in crisis for a number of different reasonsF Simply said9 in many industries9 times may al"ays be difficult or in crisis9 and the difficulty al"ays continuesF Crisis can be caused because of the lack of availability of critically needed production components9 such as the semiconductor shortages in /DDC and /DDDF Crisis can be caused because of a loss in market and industry confidence e1emplified by the technology and communications slo"do"ns in 4EE/ and 4EE4F Bad corporate investments or bad corporate management can also cause crisisF #n e1amining the SCM tools available for managing these crises9 the cause of the crisis "ill make little differenceF $hat "ill be of importance is recogniGing the need for a uni?ue set of tools through "hich to navigate the crisis environmentF

*%P&CAL C'&S&S C("#&*&("S


*ffective SCM becomes more important "hen the crisis that a company is trying to "eather is a financial oneF #t "ill be this assumption of financial crisis on "hich the SCM tools "ill be builtF +efining a crisis environment is pretty straightfor"ardF *conomically9 these difficult times are characteriGed by slo" or no revenue gro"thF The cause of the Gero gro"th can be driven by either general economic slo"do"n affecting all competitors in a particular market or segment9 or is brought about due to poor corporate managementF CAS! S*$#% A03 To offset the decline in the net preta1 profits of the company9 +S$9 at the urging of its main customers9 began to e1pand its business holdings in foreign marketsF Through a combination of greenfield e1pansion and company ac?uisition9 the product line9 manufacturing capacity9 and customers served "ere greatly e1panded for +S$F +S$ believed that its customers "ould commit substantial business gro"th opportunity because of the ne" global presencehaving follo"ed the customers to their ne" marketsF Although the organic and ac?uisition gro"th strategies "ere based upon strict business plan payback evaluations9 "ith its e1panded international presence +S$ found itself in serious financial troubleF T"o concurrent issues brought about this crisisF The first "as that the due diligence evaluation +S$ conducted on its ac?uired businesses "as overly optimistic "ith respect to debt load9 product profitability9 and opportunity for e1pansion in the ac?uired marketsF The second issue "as a general industry and economic slo"do"n resulting in a stagnation of business gro"th opportunities and a decline in current product demandF ! +uestions* $hat other business realities might have contributed to +S$%s financial problems9 challenging their ability to solve them)

#! $!

Ho" "ould you anticipate +S$ focused its efforts on resolving these business issues) $hat "ould be the supply chain response or involvement in managing the financial crisis at +S$)

2enerally9 the financial impact of the slo" or Gero revenue gro"th is that the organiGation%s overhead and S2HA costs have not slo"ed in parity "ith the revenue slo"do"nF This imbalance effectively reduces the gross profit absorption of the overhead costsF #n contracting markets9 this impact is amplified to an even greater e1tentF &e" business opportunities by "hich to offset these impacts are greatly limitedF #t is often due to these environmental and situational conditions that SCM organiGations are faced "ith increased material and transportation cost re?uestsF The ability to offset the re?uests through business leverage opportunities is limitedF

*H! ,A# "!+S (F C'&S&S


T"o universal features affect SCM in crisisF As previously mentioned9 the first of these is that the revenue gro"th conditions do not allo" an organiGation to sell its "ay back to profitability9 or to leverage-buy its "ay to profitabilityF Most companies attempt to use a sell approach to increase gross profit and preta1 margins by better allocating e1penses over a larger baseF The buy side of this solution gains focus "hen the other methods fail to "orkF Ho"ever9 "ithout the volumes9 many SCM professionals seem not to understand the direction they need to head to achieve the needed savingsF SCM employees often take on an increased importance in an organiGation "here sales and profits are being s?ueeGed or are decliningF This second universal effect of crisis often comes out of desperation from e1ecutive management "hen nothing else seems to "orkF There comes an increased and immediate pressure on the supply chain organiGation to achieve savings through "hatever means possibleF The need to achieve immediate and substantial savings often overtakes the longer-term need of remaining focused on fundamental business practices and on future as "ell as immediate needsF The ability to retain a strategic focus is compromisedF $hen the crisis is being driven from industry or segment slo"do"ns9 t"o additional truths e1istF The first of these is that as your competitors face and react to the same factors driving you9 they typically are aggressively eyeing your business to achieve their o"n sales gro"thF #t is here that the character of a company%s ability to implement successful strategies to "eather the storm is testedF #f the competition remains calm9 implements effective slo"-do"n strategies9 and focuses efforts for both the long and short term9 it is they "ho "ill undoubtedly gro" despite the adversityF #f the opposite is true9 then the competition "ill need to react to your effortsF -nfortunately9 Must as you are affected by the economic factors of a slo"ing economy or segment9 so to are your customersF $hereas the pursuit of cost and price reductions has regularly occurred from your customers9 it is no" likely to be acceleratedF The ability to reduce your cost base is lessened by the loss of gro"th opportunity9 so reducing overhead and S2HA costs becomes even more importantF Also9 "ith a lessened ability to achieve price reductions via cost savings9 resourcing-based cost savings gain more importanceF

"(* ALL "!+S &S ,A#

The key to any business challenge is not to panic and to find the uncommon and creative solutions to the most challenging problemsF $ith every set of bad ne"s items9 there al"ays e1ists the good ne"sF That holds true in a business crisisF The first piece of good ne"s in a crisis borne of an industry or segment slo"do"n is that you are not in this aloneF 3our competitors are faced "ith the same challenge9 trying to avoid the same profit and pricing s?ueeGeF Being the most prepared for these events by having established system approaches capable of reacting to varying business conditions can help you outlast the competitionF Although a company does not have the ability to increase leverage through increases in sales or purchases9 the e1isting business that is procured :"hether product9 service9 or transportation; becomes far more important to the incumbent9 suppliersF The leverage opportunities e1ist not in the ability to gain significant ne" pieces of business9 but in the opportunity to keep e1isting businessF 6ust as the bad ne"s is that your competitors are chasing your business9 the good ne"s is that your suppliers are chasing each other%s businessF *conomic and industry slo"do"ns need be vie"ed as a market shift9 "ith the appropriate marketbased tools used to capture these shiftsF $here capacity becomes more readily available and drives do"n the price9 the ac?uisition strategy has to adapt in recognition of these movementsF The approaches taken here can be either confrontational "ith a 8"hipsa"8 -like effect9 or collaborative using supplier resources as inputs to capture the efficiencyF Crisis challenges can be seen as a positive basis for change9 not a negative condition in "hich traditional approaches fail to "orkF Although all the maMor industries% SCM professionals "ant to vie" themselves as enlightened and creative9 the truth lies more in the tried and true strategiesF The tried and true9 ho"ever9 typically fail in the most challenging environments and the fallback usually becomes ultimatums and a general negative spiral into confrontationF So the good ne"s is that since the easy gains are gone and the simple approaches no longer "ork9 the SCM group can develop and e1plore ne" and creative "ays of meeting the companies% demands and improvement re?uirementsF The tools described in the follo"ing chapters represent some of those creative "aysF !inally9 because the situation can be so critical9 any improvement beyond the e1isting plan is vie"ed as good ne"sF This reality provides for the necessary positive reinforcement of even the smallest of stepsF By using the opportunity for change9 and reinforcing the moves by ackno"ledging the contribution9 the SCM organiGation can institutionaliGe these ne" approaches as the strategic basis for its daily activitiesF

-!!P&"1 S*'A*!1&C
A fundamental part of human nature seems to be to fall back on the easiest activities "hen faced "ith a challengeF That is9 those actions that are the simplest to define9 the simplest to implement9 and the simplest to measure are usually the ones "e apply to a business in crisisF These efforts usually include staffing reductions9 supplier consolidation9 elimination of longer-term strategic initiatives9 and an intense9 but limited9 focus on the immediate short-term demandsF Because most organiGations accept these short-term problem resolution efforts9 there is often a loss of sight of the strategic effortsF This reality results in companies going from one short-term crisis to another9 never preparing the business processes capable of dealing "ith the issues automaticallyF $ith each ne" challenge comes a ne" set of limited approaches to deal "ith the challengeF $hat "as done last time may or may not be done this time9 and "hat needs to be done in the future never happensF This entire approach is typified by the annual business plan activity of most -FSF companiesF Last year%s efforts9 "hich have never really been pursued9 are tossed out for a ne" set of initiatives that become the ne" marching ordersF

$ith all this in mind9 is it likely or even possible that an organiGation has the ability to keep a strategic focus in a time of crisis) The ans"er is simply yesF The ability to do so re?uires a shift in thinking from short term to short-term strategicF

SH('*-*!'M S*'A*!1&C
The idea of strategy in the short term is probably foreign to most businessesF $hile strategic tools or initiatives might be used9 the concept of strategy is usually thought of in terms of actions and obMectives to be taken in the distant future9 having very little to do "ith the presentF Short-term strategic makes use of some of the common short-term tools9 and incorporates them into multiphased SCM :or other business; strategiesF -ltimately the efforts are designed to provide the needed short-term improvements "hile maintaining the business systems and focus on the longer termF Lean manufacturing and lean supply chain techni?ues are based on the idea of changespecifically9 change in the sense of continued improvement and efficiency efforts incorporated into the daily operating practice of a companyF T"o types of change affect the timing and focus of the lean initiatives pursued by an organiGation. kaiGen :traditional change; and kaikaku :radical change;F These change elements lend themselves to the needs of long- and short-term strategic effortsF #t is the selection of the appropriate change methodology that enables a company to remain committed to broader business needs and strategies9 "hile dealing "ith the reality of the short-term crisisF

CHA"1!S ,&1 A"# SMALL


Anyone "ho has been faced "ith an organiGational crisis has probably personally e1perienced or "itnessed some sort of hero syndromeF The hero syndrome is the idea that "ith one heroic act9 one maMor effort9 or Must one home run an individual or team can solve the problems of the companyF !or e1ample9 the hope is often that everything "ill be fine if the sales group gets the one ne" big contract or negotiates the big price increasesF Administratively9 as mentioned before9 the approach might be to take care of everything "ith one large staffing or overhead cost reductionF And in SCM9 this is seen by the big cost and price reduction activityF These so-called heroic efforts themselves don%t necessarily pose the problemF The problem lies in the fact that in difficult times the tendency is only to s"ing for the fencesF These efforts represent the radical short-term efforts most organiGations use in dealing "ith crisisF Large or radical changes are not necessarily a bad thingF #n fact9 "hen used appropriately9 these change efforts can provide for a fresh "ay of thinking and a creative avenue to better changeF $hen these techni?ues are used e1clusively to resolve crisis9 they can inhibit stability and may foster confusion as to the path to the futureF Along "ith the radical change9 there needs to be a tempering balance of traditional change and improvement techni?uesF By balancing these efforts9 both short- and long-term SCM improvement and savings strategies can occurF The change theories of kaiGen and kaikaku can keep balance in pursuing the needed changes and improvementsF

-A&K!" A"# -A&-A-$


An underlying methodology and philosophy should bind the change concepts "e%ve been talking about in their implementation and e1ecutionF Change for change%s sake is not normally vie"ed as a "orth"hile pursuitF Change for a purpose9 and change "ith structure and intent are normally vie"ed as the most effectiveF Ho"ever9 all change "ill have its naysayersF By utiliGing structured approaches to change9 the naysayers "ill have less audience in their complaints and resistanceF Anyone "ho has been around &orth American manufacturing during the past /E years has probably heard this "ordF (aiGen :reprensented by !igure <F/; is part of the 6apanese manufacturing philosophy that simply means making continuous improvements :usually small increments; in ?uality9 cost9 productivity9 delivery9 etcF Most purchasing improvement plans are based on using some variations of kaiGen to achieve improvements in performance9 cost savings9 and so onF #t is likely ho"ever9 that many9 if not most SCM practitioners are una"are of the kaiGen philosophies by "hich they are planning for and implementing their strategyF N/O (aiGen is generally the preferred method of identifying opportunities for change and implementing them in a controlled mannerF Literally9 kaiGen means change for the betterF #n 3asuhiro Monden%s book9 he describes kaiGen as the method to reduce organiGational slack through the 8continuous implementation of smaller improvement activitiesF8 N4O

Figure A032 (aiGen Crisis9 on the other hand9 is characteriGed by a critical need to make rapid and marked improvementsF Ho"ever9 even these changes can occur in a managed environmentF #n fact9 managing large or radical change re?uires an even more structured and focused approach to ensure success and sustainabilityF Although commonly used in many manufacturing environments9 T S practitioners may not use kaikaku9 or perhaps not be a"are of the term9 preferring to remain "ith traditional change effortsF This is certainly true of most supply chain professionalsF (aikaku :represented by !igure <F4; is also a description of change9 but it refers to radical or dramatic changeF The reason the lean practitioners may not be a"are of the term is that radical change is not necessary in an environment "here incremental improvement has been a "ay of life9 and success is engrained in the nature of businessF (aikaku really only becomes necessary "hen the hole you are in is too deep to dig out ofF Literally9 the term means reformation9 renovation9 or reorganiGationF The T S master may kno" this concept as radical kaiGen or a similar termF erhaps in a business sense the easiest understanding of "hen and "hy kaikaku is needed can be demonstrated in !igure <F7F

Figure A082 (aikaku

Figure A0;2 !rom ,adical to #ncremental Change $hen the situation demands radical action9 kaikaku is a planned method designed to achieve the critical business improvementsF #n many cases the improvements are needed to save the businessF lanned "ell9 kaikaku activities can move the business to "here the more traditional kaiGen methods can be employedF The structuring of a turn-around plan based on kaikaku and kaiGen concepts provides a structured approach during a time "hen there is a tendency to thro" caution to the "indF CAS! S*$#% A08 +uestions 30 $hat other business realities might have contributed to +S$%s financial problems9 challenging their ability to solve them) 80 Ho" "ould you anticipate +S$ focused its efforts on resolving these business issues) ;0 $hat "ould be the supply chain response or involvement in managing the financial crisis at +S$) Ans ers 30 'ther business realities at +S$ included a very traditional vie" on company value directly related to stock priceF Although a clear earnings to price relationship "as difficult to establish9 a pursuit of immediate cost reductions "as determined necessary to raise stock priceF The organiGation "as not structured in either organiGation or business approach to react to the needed reductions "hile maintaining a gro"th and improvement strategyF Also9 the belief that customers "ould re"ard the e1pansion into the ne" markets "as not backed by any customer commitment and did not provide the revenue to support the infrastructure that "as put into place to support the moveF

80 +$S%s initial reaction to the crisis "as largely "hat might be e1pectedF There "as pricing shot across the bo" "ith the customers9 re?uesting :or even demanding; price increases that "ere not grantedF The ability to get the increases "as severely limited by the lack of +S$ to be able to implement any action in the event that the increases "ere not grantedF 'rganiGationally9 +$S planned for and implemented a staffing reduction plan that largely proved to be ineffectiveF $hile the savings in operating costs appeared to have had a positive effect on the income statement9 the severance costs associated "ith the do"nsiGing significantly reduced the available capital for other investment needsF #n addition9 much of the "ork re?uired at +S$ could no longer be accomplished9 and "ithin /4 months a significant number of the eliminated positions "ere refilledF #nitially the e1ecutive team had pushed the SCM organiGation do"n the traditional road of demands9 threats9 and unilateral price reductions "ith its suppliers9 "ithout any consideration for the backdrop by "hich these price reductions "ould need to occurF The SCM organiGation "as able to resist this initial effort and develop and deploy a crisis planF ;0 After resisting the initial e1ecutive management push to the tried and true but failed cost and price improvement practices9 the SCM organiGation "as able to develop and implement a multiphased cost improvement plan utiliGing kaiGen and kaikaku SCM conceptsF The resulting improvements provided a net > percent improvement in cost "ithin the first /4 to /C months9 achieving record savings levelsF This "as accomplished in a collaborative "ay "ith ne" and e1isting suppliers9 and provided for improvements in ?uality and delivery in addition to costF

N/O N4O

6effrey $incel9 8A ractitioners 5ie" of Strategic rocurement98 SCM,F

3asuhiro Moden9 Toyota Production %ystem-0n Integrated 0pproach to 7ust-in-Time 9 *ngineering H Management ress9 7rd *dition9 /DDC9 ppF /DDF

Chapter 62 Crisis Plan ,ackground and Phase 3Ac=uisition *eam Formation


*H! 1'($"#+('-I3J
A simple fact of strategic plans is also an unfortunate fact-that is9 most strategic plans die on the dra"ing board because they lack an implementation profile to deliver the plan and resultsF Before detailing the crisis plan it is more important to describe ho" to develop an implementation strategyF The ideas are simple but critical to successF The organiGations described9 such as supplier development9 may have different names :or may not e1ist at all; in individual companies9 but the disciplines they represent re?uire critical thought processesF The follo"ing sections outline the steps to make a purchasing0SCM plan "ork.
N/O

Ackno"ledgement needs to be given to MrF Steve Alsbro in the initial development of the basis of the plan strategyF MrF Alsbro "as a colleague at T,$ #ncF9 and is currently director of global commodity development for $hirlpool CorpF

P'!PA'A*&("
The buyer and supplier development representatives meet to discuss each supplier%s individual situationF This team revie"s the supplier%s commodity the supplier%s history for cost reductions9 long-term agreements9 and current cost reduction positionF #t is e?ually important to gauge the supplier%s attitude and business relationship "ith you as a customerF #f the plan is to be a success9 an open and honest relationship must e1ist "ithin the "orkforce and team membersF The team identifies the types of opportunities at each supplier9 and "hich of the cost improvement tools "ould "ork bestF

MA"A1!M!"* '!)&!+
The supplier is invited to participate in a management revie" meetingF This meeting is scheduled for about one hour at the buyer%s locationF A senior management team is e1pected to represent the supplierF The agenda should include. ! The program conceptF #! The value e1pected to be derived for both you and the supplierF $! The steps9 or procedure that "ill be follo"edF 4! The program guidelinesF &! The shared cost reduction strategyF +uring the course of the meeting buyers and suppliers should discuss. ! Timing and schedulingF #! #dentification of a supplier championF $! Any potential implementation costs incurred by the suppliersF 4! Ho" those costs "ill be handledF &! The supplier%s commitment at all levelsF The supplier "ill be e1pected to come prepared to discuss these issuesF The goal of the meeting is to establish a clear and mutually agreeable approach to reduce costs for both partiesF

&MPL!M!"*A*&("
*ach of the tools used in the crisis plan "ill have a different implementation profileF This "ill be discussed in detail for each toolF +uring this step the supplier may be re?uested to perform tasks that must be completed in a timely fashionF 'nce the commitment has been made at the management revie" it is e1pected that a program "ill move for"ard "ithout delayF Because this section deals "ith single events9 or campaign style programs9 it is critical that both you and the supplier meet the program timing as it is definedF

CL(S$'!
'nce the proMect is completed9 and the changes made and proven9 the buyer "ill be responsible for authoriGing the price reductionF The buyer does this in "riting to the supplierF The buyer "ill issue a part change notice or purchase order amendment and the price change "ill be in effectF These items represent a brief outline of ho" to handle and manage the overall crisis programF $hile it may seem elementary9 e1perience has demonstrated that "ithout detailing the steps of implementation9 the results are greatly MeopardiGed and credibility can be lost both internally and e1ternally :"ith suppliers;F 'f e?ual importance to the success of the plan is clearly defining "hat needs to be done9 "hat steps and processes are going to be used9 and "hat the e1pected outcomes areF #f these elements are not clearly understood by the internal team or by the supplier9 the process needs to immediately stopF *1pediency in finishing the plan in spite of a lack of clarity is not something that can be overlookedF CAS! S*$#% 603 The international SCM organiGation at +S$ had only limited success in integrating its "orld"ide operations9 and using its global influenceF The development and implementation of its crisis plan "ould re?uire the integration of its various global activitiesF $hile the development and implementation of the SCM plan "ould re?uire significant resources in personnel9 there remained the need to run the day-to-day business operationsF &e" product sourcing and program launch activities continued to occur9 along "ith the need to meet customer demands on current production partsF +uestions Ho" could +S$%s supply chain organiGation effectively coordinate its global activities9 and "hat roadblocks might they encounter) #! $hat methods or mechanisms could +S$ put into place to balance the needs of the plan implementation "ith the daily re?uirements) $! $ho "ere the key players or organiGations in the +S$ "ork) !

*H! C'&S&S PLA" !L!M!"*S


The individual crisis plan elements can be grouped into five phasesF hases # through ### can be e?uated "ith kaikaku approachesF These include. '! Ac?uisition team formationF ''! rice benchmarkingF '''! Short-term process improvement :S #;F They tend to be largely se?uential and are critically time dependantF hases #5 and 5 are the kaiGen steps. '(! 5alue analysis0value engineering :5A05*;F (! Lean manufacturingF hase #5 begins concurrent "ith the final steps of hase ###F #t is in this overlap "here the kaikaku-kaiGen transition really takes holdF hase 5 is the implementation of T S-like production systems at the supplier9 or the introduction of flo" kaiGen "ithin the entire operationF !igure >F/ sho"s the relationship bet"een the crisis plan action and the change strategy associated "ith the actionF

Figure 603 'nce you begin to enter phases #5 and 59 a more traditional approach to procurement strategies can be takenF #n both the kaiGen and kaikaku actions9 the need to follo" through on the plan elements is critical to optimal successF #t is easy to lose opportunities as time is e1tendedF Leverage opportunities are created through the implementation of the plan elements9 but they can be ?uickly and easily lost if not capitaliGed on immediatelyF !igure >F4 provides the timing elements of each of the plan steps and reflects the serial or parallel nature of the change activitiesF

Figure 608

C(S* &S *H! ,(**(M L&"!


The very nature of the crisis itself re?uires that the SCM plan deliver significant and immediate cost savingsF The linking of short- and long-term efforts through kaiGen and kaikaku provides for different cost improvement featuresF 'rganiGations that have some level of strategic supplier and commodity development activity usually e1perience an associated cost improvement curve "ith these effortsF #n a time of crisis9 the level :iFeF9 the amount; of cost improvement9 the timing of cost improvement9 and the sustainability of cost improvement become critical issuesF

A typical tier-one company can generally e1pect a savings profile of / percent to 7 percent annual price improvement from its supply baseF The ma1imum savings level is achieved in appro1imately year 79 "ith declining savings in years < and >FN4O The incorporation of kaikaku actions pulls ahead a portion of the savings potential into years E and /9 and provides a contribution for increasing the ma1imum savings potentialF The kaiGen actions provide the balance on the increase to ma1imum savings potential and e1tend the sustainability beyond the three-year averageF !igure >F7 demonstrates the traditional savings curve "hen supplemented "ith kaikaku savings onlyS supplemented "ith kaiGen savings only9 and finally supplemented "ith both kaiGen and kaikaku savings for ma1imum benefitF

Figure 60; The traditional savings profile is typically based on achieving market-based savings onlyF These saving are achieved by resourcing actions9 consolidation efforts9 and perhaps even by multiyear price improvement contractsF The crisis plan includes market mechanisms9 but also addresses process9 design9 and system costs in developing price reduction ideasF
N4O

The savings profile described here and in !igure >F7 are derived from observed savings patterns for automotive tier-one suppliers from the period of /DD7-4EE4F

PHAS! &-AC>$&S&*&(" *!AM F('MA*&("


#n the beginning of this chapter9 # discussed the importance of having an implementation plan to achieve the ma1imum benefits of the crisis strategy The rest of this chapter focuses on phase # of the crisis plan9 ac?uisition team formation9 including a description and the procedure by "hich it occursF Chapters A9 B9 C9 and D e1amine the remaining phases of an SCM crisis planF The goal of these chapters is to provide information that "ill help SCM professionals ensure the clarity of the strategy9 provide a clear roadmap by "hich the process can be implemented9 and e1plain the verification process9 "hich provides closure to the savings identifiedF

#!F&"&*&("
(aikaku teams is a concept borro"ed from lean manufacturing practices "here problem specialists are assigned to assume control of and attack significant manufacturing issuesF $hile seldom used9 these teams represent a crisis management team "here daily operating control of all or part of an organiGation is turned over to specialistsF These specialists have the single responsibility to identify and correct the issues causing the crisisF Typically using radical change methods9 these teams maintain responsibility until the changes are "ell under"ay9 and then transition back to the operating teamF The purchasing application of kaikaku teams is called ac?uisition teamsF The purpose in defining these teams as ac?uisition teams is to ensure the full consideration of all ac?uisition-related issues9 not simply priceF Among these issues are ?uality and manufacturing capability features9 design capability9 location and logistics9 and othersF These teams assume the control and management of critical commodities to achieve significant cost improvement9 ?uality improvement9 and supply base consolidationF

&MPL!M!"*A*&(" P'(C!#$'!
The ac?uisition team fully assumes the daily commodity planning and sourcing responsibilities from the local purchasing team and constructs a compressed improvement planF The daily purchasing responsibilities and part availability remains "ith the local teamF The team includes a procurement or commodity planning specialist and a supplier development or ?uality engineer as permanent team membersF The procurement team member serves as the team leader and remains independent of previous commodity and supplier development historyF The need for this independence is to ensure a fresh approach that isn%t subMect to the historic baggage that the commodity or individual suppliers may presentF The change process and ac?uisition process need to be the primary driver of the action9 not anecdotal or subMective decisionsF As needed9 team members may include product engineering9 tooling engineering9 program management and customer support9 manufacturing9 and the e1isting commodity buyerF This team conducts the individual supplier and commodity analysis and plan development discussed previouslyF $eekly local revie"s and monthly management revie"s verify the implementation action and pace of the activities defined by the ac?uisition teamF The team has full authority for all commodity pricing9 sourcing9 and consolidation activities as approved by the purchasing or supply chain e1ecutiveF 'nce the plan is significantly in place9 implementation responsibility is returned to the local purchasing groupF CAS! S*$#% 608 +uestions 30 Ho" could +S$%s supply chain organiGation effectively coordinate its global activities9 and "hat roadblocks might they encounter) 80 $hat methods or mechanisms could +S$ put into place to balance the needs of the plan implementation "ith the daily re?uirements) ;0 $ho "ere the key players or organiGations in the +S$ "ork) Ans ers 30 +S$ broadened its implementation of a 8matri18 organiGation "hereby the planning process and sourcing strategies "ere centraliGed "ithin a global structureF The regional implementation provided

matri1 reporting to the local operating management to ensure that the daily re?uirements of customer support "ere addressedF Additionally9 the global resources "ere used to staff the ac?uisition teams "ithout the need for adding or redeploying staffF Through the development of strategic and transactions sections of the organiGation9 +S$%s ability to service the needs of the global organiGation "as enhancedF 80 The structure of the ac?uisition team allo"ed +S$ to maintain its daily responsibilities "hile freeing up resources to focus on the crisis managementF #nitially this proved to be a challenge for +S$F *1ecutive management9 "hile "anting the focus to be on resolving the company%s financial crisis9 had difficulty appreciating the value of having multiple teams responsible for various aspects of the same companyF ;0 erhaps the most difficult issue to accept "as that the current commodity buyer or program buyer "as no longer responsible for the critical sourcing decisions9 but for a time relegated to an entirely transactional roleF Ho"ever9 the buyer remained a key player in that the final delivery of the plan elements "ould fall back to this buyerF 'ther maMor players included supplier development9 ?uality9 manufacturing9 and customer0program managementF

Chapter C2 Phase &&-Price ,enchmarking


()!')&!+
Ho" often has a supply chain organiGation had its strategic plan put on hold because of the need of the company%s economy9 "ith one priority in mind-the money) Chapter > described the economic factors that create a business crisisF #n this crisis it%s necessary to ?uickly deliver improvements to the bottom lineF But ho" is this done "ithout giving up the future) $hen immediate savings are needed9 the procurement side of supply chain management often gets laGyF The typical practice is "hat # call 8dialing for dollarsF8 The purchasing e1ecutive fires off a letter to all the suppliers demanding a price reduction "ith either the subtle or not so subtle threat of loss of businessF The buyers and managers then follo" up "ith the calls to the account managers and sales 5 s pursuing the savingsF #n some industries9 the suppliers may not even have a choiceF #n 4EE/ a maMor automotive '*M not only demanded an across-the-board > percent price reduction9 but implemented it unilaterally "ith an automatic purchase order price reductionF 'nly through supplier threats of supply interruption :by those suppliers big enough to make the threats; "ere some of the reductions lessened or reversedF CAS! S*$#% C03 +S$%s corporate organiGation "as structured to support business in t"o maMor industry groupsF Both of the product groups "ere e1tremely sensitive to market fluctuations9 and "hile these fluctuations "ere cyclical in nature9 the timing of the cycles could not accurately be predictedF #n addition9 segment / had delivered the maMority of the profits for the company allo"ing investment and gro"th into the unrelated segment 4F Ho"ever9 the segment / prices and profits "ere deteriorating ?uickly9 MeopardiGing +S$%s ability to gain market leadership into segment 4 Must as it "as in an up"ard s"ing in its business cycleF To improve the overall profitability9 all the segment / businesses "ere given significant immediate cost reduction targetsF $ithin the supply chain activity9 this included supplier

pricing reductions and total cost of ac?uisition reductions :eFgF9 ?uality improvements9 freight reductions;F +S$%s supply chain organiGation already had a strategic plan in place in "hich total supplier capabilities :including price competitiveness; "ere being revie"ed and "ere to be the determinants of the 8permanent8 supply baseF Ho"ever9 the implementation of the plan "as over a three-year period9 and this timing did not support the immediate financial needsF Therefore9 the strategic plan "as put on holdF +uestions #n pursuing the immediate cost savings9 "hat steps did +S$ initially take "ith its suppliersthat is9 "hat alternatives did they have to choose from) #! $hat could the anticipated level of success be "ith each of the possibilities identified in ?uestion /) $! $hat steps "ould the +S$ supply chain e1ecutive need to take "ith respect to maintaining a future focus) !

PHAS! &&-P'&C! ,!"CHMA'-&"1


Some"here in the development of supply chain management9 assessing the market became a 8bastardiGed8 approach "here any company "ith a pulse "as considered to be a viable source9 and any price from those suppliers "as considered legitimateF #t "as unlikely that this 8alley shop8 approach "as going to yield ne" suppliers9 but the prices they reported "ere used to 8"hipsa"8 the prices from the e1isting suppliersF This approach served to make any evaluation of market shifts seem sinisterF rice benchmarking is a structured method to evaluate shifts that have occurred in the marketplace since the initial sourcing of the productF !actors such as market demand and associated available capacity9 introduction of ne" or advanced manufacturing technology9 additional entrants to the market9 and other commercial considerations affect the 8correct8 current market priceF

#efinition
urchase price benchmarking is the practice "hereby market analysis9 cost estimating tools9 affordable cost targeting9 and design0manufacturing analysis are used to establish the fair market drive priceF

&mplementation Procedure
To ?uantify the near-term price reduction potential9 the ac?uisition team establishes a componentlevel price benchmark for current production itemsF A price benchmark is a composite value of affordable cost targets :prices to "hich you can afford to purchase the part to achieve internal profitability targets;9 design- and manufacturing-based cost estimates :the cost plus estimate of prices;9 and market-driven factors such as inflations9 commodity market prices movements9 and currency fluctuationsF The "eighting of each of these factors is subMectively determined by the ac?uisition team and applied to the final price targetF

ASP!C*S (F *H! PHAS! && P'(C!SS


/; The identification of manufacturing difficulty and comple1ity stratificationS 4; an assessment of source change potential-iFeF9 the feasibility of source changes based on conditions such as proprietary rights9 customer directives9 comple1ity of tooling9 etcFS 7; the development of affordable cost targetsS and <; competitive market test resultsF #ncumbent suppliers "ill be included in the market test "ith opportunity to retain business at target priceF $here supply relationships "arrant9 the incumbent supplier "ill be given a last right of refusal to the market priceF -pon the availability of the price benchmark data9 price negotiations to the benchmark level occurF The prevailing benchmark price plus amortiGation of tooling and source change costs establishes the ma1imum price payment level for any componentF #ncumbent suppliers unable to achieve the benchmark pricing levels are phased outF The ac?uisition team remains responsible for any resulting resourcing activity9 including9 but not limited to. material bank calculations and developmentS tooling refurbishment plansS e1it A :production part approval process; and CMM :coordinate measuring machine; layoutS dra"ing revision to manufactured accepted part designsS on-site tooling transfer9 both pick-up and deliveryS process set-up and approvalS initial part trials and tuningS level 5 A S N/O and first shipment for productionF
N/O

Level 5 A refers to an automotive industry standard for production part approval process based on the standards established by the Automotive #ndustries Action 2roup :A#A2;F A level submissions are determined individually by customer re?uirements and may vary depending on action taken re?uiring approvalF

,$&L#&"1 A" AFF('#A,L! C(S* *A'1!* ?AC*@


The development of an affordable cost target seems to be a fundamentally simple task9 ho"ever9 most procurement organiGations seem at a loss to ade?uately structure an approachF Most use a cost estimate in place of an ACT9 essentially follo"ing a 8cost plus8 processF #n this practice9 the value of material9 labor9 machine time9 etcF are estimatedS an 8appropriate8 mark-up appliedS and a price derivedF The fallacy "ith this process is that it assumes the estimated values from the suppliers% processes and business practices have any relation to best-in-class cost structuresF Also9 this process fails to take in customer perceived value of the product :or service; being providedF 'verengineering or overprocessing results in a higher cost9 but if the customer does not perceive the value and is un"illing to pay for the premium9 the cost estimate is meaninglessF The follo"ing cost setting process represents only one of many approaches that could be used to arrive at a similar endF This cost setting approach uses the value content of a costed bill of material :B'M; as a percentage of the cost of goods9 and links it to gross margin ratesF The follo"ing e1ample "ill demonstrate ho" to derive an ACT on an e1isting base of partsF The process can be Must as easily applied to a ne" part using a surrogate comparisonF !5isting Part2 Current Sales rice Total Cost of 2oods Sold Total Costed B'M Current 2ross Margin ://>-/EE;0//> Target 2ross Margin R//> R/EE R >> :>>V of C'2S; /7V 4>V

,(M Components Component Y/ Component Y4 Component Y7 Component Y<

Price R4> R/4 R/E RC

7of ,(M <>F>V 4/FCV /CF4V /<F>V

7of C(1S 4>V /4V /EV CV

To achieve a target margin of 4> percent "ith fi1ed sales price of R//>9 total C'2S must X 1. ($115-x)/$115=.25 $115-x= .25
*

$115

$115-x = $28.75 $115-$28.75=x $86.25=x Based on this calculation the total C'2S cannot e1ceed RCAF4> to reach the target gross margin of 4> percentF T"o methods of calculation can no" determine the costed B'M totalF ! !rom the initial calculation9 material content is >>V of C'2S or R<BF<< of the ne" C'2S total :>>V Z CAF4> X R<BF<< - a reduction of RBF>A;F #! !rom the calculation there needs to be a reduction in C'2S from R/EE to RCAF4> or a R/7FB> reductionF At >>V content9 RBF>A needs to be reduced from the material cost :>>V Z R/7FB>;F To calculate the ne" target component prices9 either the percent of ne" C'2S or B'M Cost can be usedF The follo"ing numbers sho" both methods maintaining the B'M and C'2S relationship from aboveF ,(M Components Component Y/ B'M Based C'2S Based Component Y4 Component Y7 Component Y< "e Price 7of ,(M <>F>V <>F>V 4>V 4/FCV /CF4V /<F>V /4V /EV CV 7of C(1S 4>V R4/F>A R<BF<< RCAF4> R/EF7> R CFA7 R AFDE

The method Must presented makes a number of obvious assumptionsF Among these is the assumption that the shortfall to gross margin is e?ually shared by material and other factors in a C'2S calculationF This becomes a significant factor "hen determining a price benchmark targetF #f in initial sourcing an ACT setting process "as used and achieved9 the repeating of this process may be unfairly be targeting supplier content for profit attainmentF 'perational variances in labor and overhead may be the primary factor in missing gross margin targetsF Ho"ever9 even if purchase cost targets "ere initially met9 it is possible that the market driven sales price for your product has declined "ithout similar adMustments in the component pricesF #n this case9 the reestablishment of affordable cost targets reflects actual changes and is appropriateF The flo"-through of market demands reflects customer e1pectations and needs to be evident in all aspects of the supply chainF The development and use of affordable cost targets should become an integral part of supply chain management and all sourcing activitiesF !igure AF/ demonstrates ho" an ACT process can become an imbedded piece of a total market-based pricing methodologyF The use of targets and

design for assembly and design for manufacturing :+!A0+!M; models enables a company to provide a product that satisfies customer demands at profit rates "hich meet or e1ceed internal re?uirementsF

Figure C03

M!AS$'&"1 *H! MA'-!* M()!M!"*

The second primary factor in the development of price benchmark targets is the evaluation of market conditionsF Here9 too9 e1ist various methodologies9 including monitoring producer price inflation : #; or deflation ratesSN4O utiliGing standard inde1es to gage potential price movements9 such as metals9 plastics9 etcS and gathering supply and supplier intelligence from industry and professional publicationsF All of these sources and methods are validF $hat they are limited to9 ho"ever9 is often a macro vie" of marketF 'ften9 a missing piece of market intelligence is the gro"th and cost improvement levels "ithin your o"n businessF Adding a micro element to the definition of market movement helps you understand more intimately the factors driving your business environmentF A micro economic understanding of your market begins "ith gathering information on commodityspecific gro"th ratesF This information provides you "ith a gauge of "hat the potential leverage opportunities could or should have been had the information been recogniGedF Through this understanding9 gro"th-related cost structure improvements "ithin the commodity supply base could have been obtainedF Mapped against these gro"th rates should be the average price improvement obtained during that period in each of the same commodity groupingsF !inally9 this information should be distilled do"n to the supplier level to measure gro"th versus performanceF !igure AF4 represents industry data on historic commodity gro"th and cost savings trendsF This information demonstrates a mismatch bet"een the achieved savings levels and ne" business opportunitiesF ,eferring to the ACT process9 "here ACTs may have been used during initial sourcing9 the organic commodity gro"th opportunity not captured in continuing cost savings "ould make it appropriate to reestablish the price baselineF

Figure C08 !igure AF4 demonstrates some revealing commodity planning issuesF The chart pairs gro"th patterns for three commodities "ith savings patterns for the sameF The commodity "ith the highest aggregate spend9 and demonstrating a >/ percent gro"th over the five-year period9 sho"ed the lo"est savingsF The commodity "ith the lo"est total buy had the highest savings trendF And the commodity "ith the highest gro"th pattern-over //E percent-had the mid-level of savingsF There needs to be a lot of research into these patterns9 but at a minimum they demonstrate that the procurement team did not capture the volume efficiencies in the sourcing gro"thF The high savings in the lo"-gro"th commodity "ould tend to reflect a dynamic market influence9 perhaps related to overcapacity issues9 etcF Micro evaluation also helps determine "hether appropriate efforts have been historically made9 or the appropriate levels of improvement achievedF !igure AF7 sho"s a areto of commodity e1penditures for a given fiscal year9 "ith the associated savings percentages achieved in that periodF This real-"orld e1ample demonstrated that the efforts "ere being focused on the "rong commodities in "orking to"ard cost improvementF #n the development of the price benchmark

targets9 these factors need to be taken into consideration in addressing the market factorsF

Figure C0;
N4O

Specific commodity level historic # rates can be located at http.00"""FblsFgov for material price movement in the -FSFF These inde1es allo" for information at a summary level9 or at a specific configuration detailF

+HA* *( ,!"CHMA'- A"# H(+ *( ,!"CHMA'Assessing the market movements is not the only obMective in price benchmarkingF A procurement organiGation also needs to consider ho" to respond to a supplier%s :or suppliers%; inability to meet the actual or perceived market changesF Many9 if not most9 buying companies are small or midcap-siGed tier-t"o or belo" organiGations9 "hich usually do not possess natural supply leverage and are unable to demand market conformanceF The ability to create leverage generally lies in the opportunities to source9 or9 more important here9 to resource businessF !or price benchmarking to be effective9 the ?uoting organiGations :"hich include the incumbent supplierNsO; need to recogniGe not only the pure market shift in cost and supply structure9 but also the understanding that a competitive assessment is the primary determinant of future :or continued; sourcingF Supporting the creation of this competitive environment is the appropriate selection of the universe of partsF +uring the price benchmarking process9 the maMority of parts selected must generally be those that are the simplest to manufacture9 "ith the simplest tooling line-ups9 and that are the easiest to moveF Simplicity is needed to facilitate any re-sourcing of parts and relocation of production tooling to a ne" supplierF $here part and tooling comple1ity is too high9 the ability to re-source is greatly diminished9 and "ith it9 the actual or perceived po"er of negotiation leverage is also diminishedF The seriousness "ith "hich the supply base perceives the actions and potential outcomes is almost entirely dependent on the ability to substitute parts or suppliersF *very event of the realiGation of an empty threat e1ponentially diminishes leverage potentialF The ho"-to of benchmarking is fairly straightfor"ardF The ac?uisition team prepares the list of these easy-to-make or resource parts9 gathers detailed tooling lineups for each part9 prepares a standard ?uote package "ith target prices identified9 and delivers it to the chosen suppliersF $ith the standard package9 the team includes a description of the effort9 the options to "hich the suppliers should ?uote :single parts or package ?uotes;9 and the actions to be taken upon ?uote recapitulation :recap;F The rest is up to the suppliersF

2enerally9 the first commodity addressed in this "ay faces the most challenges of being taken seriously by the supply baseF This is often due to the lack of preparation by the SCM organiGation in communicating a strategy that does not ring of a flavor of the month9 but one that is actually part of a broader processF 'nce the ne"s of the organiGation%s efforts travels bet"een suppliers9 the subse?uent commodity efforts proceed "ith much greater easeF

'!CAPP&"1 *H! '!S$L*S


The results from the benchmarking study are not cherry picking the lo"est price sources9 but balancing cost9 capabilities9 and supply base planningF Supplier selection in price benchmarking should be seen as the first step in a consolidated supply base strategyF -sing competitiveness in an aggregate sense across a multitude of parts establishes the future benchmark levels for ongoing supply competencyF $ith supplier price attributes understood9 SCM efforts can move for"ard to cost containment and capabilitiesF !igure AF< sho"s the typical data consolidation from a price benchmarking recapF The key features are recogniGing the total savings by sourcing to the lo"est cost supplier in all cases :ma1imum savings; as "ell as the savings by selective sourcingF The selective sourcing can be based on the ne" incumbent supplier prices only :minimum savings;9 a ne" source total package price9 or other decision-model-based choicesF !igure AF< represents the results from an actual price benchmark study "ith minimum savings represented by incumbent pricing analysisF

Figure C0A2 rice Benchmarking ,esults

CAS! S*$#% C08 +uestions 30 #n pursuing the immediate cost savings9 "hat steps did +S$ initially take "ith its suppliersthat is9 "hat alternatives did they have to choose from) 80 $hat could the anticipated level of success be "ith each of the possibilities identified in ?uestion /) ;0 $hat steps "ould the +S$ supply chain e1ecutive need to take "ith respect to maintaining a future focus) Ans ers

30 'ne of +S$%s operating groups set aside its SCM effort and pursued a 8scorched earth policy98 "hich included "ith universal price concession demands9 massive market test and resource efforts9 and some unilateral demandsF A second operating group follo"ed a price benchmarking e1ercise9 establishing market-based ACTs for nearly A> percent of its total buy :Y of parts9 not R;F 80 The first group achieved a gross savings level of appro1imately >F> percentF &etted from that "as appro1imately /F4> percent for tooling adaptation costs9 recertification costs9 etcF9 for a net total of <F4> percentF Supplier relations "ere greatly deterioratedF The second group achieved a gross savings level of C percent on those commodities that used the price benchmarking processF There "ere not incremental tooling or certification charges9 as the ?uote package re?uired that these costs must be borne by the supplier as part of the sourcing packageF 'nly appro1imately > percent of the total parts ?uoted re?uired any resourcing effortsF The net savings on total dollar buy basis "as AF4> percentF ;0 +S$%s supply chain e1ecutive needed to consolidate the various operating unit procurement activities to follo" a single business process pathF The market cost factors "ere captured on only a portion of the total buy9 re?uiring a re-verification on the missing partsF $ith this information9 +S$ could move on to other cost and capabilities evaluationsF

Chapter D2 Phase &&&-Short-*erm Process &mprovement


M()&"1 F'(M *H! MA'-!* *( *H! PLA"*
*1amining each of the value chain cost elements in a se?uenced manner provides the broadest evaluation and control of total product costF #n many cases the efforts in SCM fail to recogniGe the importance9 and significance9 that the manufacturing processes and efficiencies play in overall cost containment and controlF hase ### of the crisis improvement plan uses this approach9 and more fully adopts lean practices into the SCM processF The adaptation of the lean manufacturing techni?ues in this phase is the use of point kaiGen effortsF The application of point kaiGen "ill be e1plored in greater detail later9 but the term generally applies to process improvements made to distinct processes around a contained production cellF $hile kaiGen usually implies slo" systematic improvement9 # have included it in the kaikaku elements as this particular application strives for immediate and significant improvement in a radical "ayF $omak9 et alF say that radical improvement is a key element to ?uick success. 83ou%ll need a change agenda plus the core of lean kno"ledge :not necessarily from the same person;9 some type of crisis to serve as a lever for change9 a map of your value streams9 and a determination to kaikaku ?uickly to your value-creating activities in order to produce rapid results "hich your organiGation can%t ignoreF8 N/O CAS! S*$#% D03 rocess-based improvement efforts "ere not ne" to +S$F There "as an ingrained

philosophy of continuous improvement in the manufacturing environmentF This process "as e1clusively an internal one9 and had not yet been taken to the supply baseF #n preparing for a launch of these efforts "ith the suppliers9 trained lean implementers "ere permanently assigned to the SCM teamF +uestions #n preparing for the launch of the process improvement program "ith suppliers9 "hat key elements did the lean implementers need to take into consideration) #! Ho" "ould +S$ establish its credibility "ith suppliers "ith respect to the ability to identify and implement change) $! Ho" "ould +S$ capture the savings opportunities to realiGe the immediate savings opportunities) !

N/O

$omak and 6ones9 Lean Thin"ing9 pF 4<B

PHAS! &&& - SH('*-*!'M P'(C!SS &MP'()!M!"* ?SP&@ P'(C!#$'! #efinition


S #%s emphasis is to obtain the most process-based improvements "ith the least amount of e1penditure in the shortest period of timeF There is a beginning and an end to each event9 "ith a focus on specific manufacturing processes or suppliersF -sing a point-kaiGen-based effortS the program focuses its efforts on suppliers "ho e1hibit the follo"ing traits. A lack of neatness and orderliness9 poor and insufficient measures of productivity9 high scrap rates in e1cess of industry standards9 or e1cessive inspection indicating a process that is out of controlF Suppliers e1hibiting significant process-based opportunities9 unprepared to fully implement lean manufacturing systemsF #n such a case9 time spent training the supplier to implement lean manufacturing principles could be a non-valued-added use of timeF Ho"ever9 the opportunities for short-term gain should not be overlookedF :This "ould distinguish point kaiGen efforts from flo" kaiGen effortsF; Business levels insufficient to "arrant a full flo" kaiGen implementation9 yet e1hibiting opportunity on current parts suppliedF !or e1ample9 if each kaiGen event costs appro1imately R7E9EEE :travel9 time9 training9 etcF;9 the payback :or ,'#; should e1ceed the total cost by four or five timesF Many suppliers "ho demonstrate improvement opportunities may not have a R/EE9EEE potentialF This mechanism captures that opportunity9 using the least amount of e1penditures possible by creating a larger and0or viable ,'#F !or e1ample. a supplier providing R49EEE9EEE in annual sales "ith a >E percent material cost9 7E percent fi1ed 'H and profit9 leaves 4E percent or R<EE9EEE to the effects of S #F #f you achieve a 4E percent productivity improvement on the manufacturing cost basis9 the potential savings is RCE9EEEF Have been identified by the buyer or S+* :supplier development engineer; as having good and0or great potential in a certain area of their processF Again9 this could be based on a supplier%s cost structure or process as compared to other comparable suppliersF

&mplementation procedure
S # is a highly focused approach on a limited number of processes at a given time9 usually one9 no more than t"oF The process contains three stages9 "hich "ill take a total of appro1imately one month to completeF *ach of these is discussed in the follo"ing sectionsF

Stage &2 &dentification and Preparation ?; days@


The ac?uisition team revie"s the lean manufacturing and S # obMectives "ith the lean facilitatorsF Taking into consideration the factors for S # potential candidates9 a list is developed based on the results of a supplier brainstorming processF This list is broken do"n into kaiGen and S # potential suppliersF !rom that list a proposed timeline is developed based on available resourcesF The three days necessary for this can be identified as follo"s. Day 8. Brainstorming session9 potential candidate list developmentF Day 9. Schedule development9 prioritiGation based on resourcesF Day :. Buyer contacts suppliers% management9 gets buy-in to conduct S #F

Stage &&2 &mplementation ?3

eek@

+uring this phase9 the company%s and supplier%s team members implement an accelerated version of point kaiGenF The key here is that the team develops and agrees on the measurables of productivity and stays focused to the intent of S #-that is9 short-term focus on a specific portion of a processF #f the team identifies broader opportunities they may e1tend their length of the stay and perform several S #s as neededF A typical event "ould consist of the follo"ing events by day. Day 8. (ickoff meetingF 'btain information on historical productivity measurements9 lean manufacturing kno"ledge base9 operator brainstorming9 brief lean manufacturing "orkshop and training session9 and revie" line in operationF Day 9. *stablish baseline calculations and prioritiGation of brainstorming sessionF Move to line for detailed analysis and revie"9 keeping brainstorming ideas at handF *stablish prioritiGation of implementationF #mplement first t"o to three ideas9 monitor and evaluate changesF Day :. Measure productivity as pieces per operator hour to capture throughput and labor efficienciesF AnalyGe scrap data9 compare to prior process to ensure e?ual or better performanceF Day ;. Continue to measure productivityF Consider implementing one to t"o more ideas if possibleF #f productivity measurements are not clear at this point9 do not try to implement additional changesF Day <. ,evie" final measurements of productivity9 agree on the results :including total financial impact; and Mointly publish a report using the lean manufacturing process summariesF ,evie"9 follo" up ideas9 set dates for completion9 and assign responsibility for reporting and documenting those resultsF

Stage &&&2 Closure


+uring this part of the process "e "ant to accomplish t"o key itemsF 'ne is to document the results of the S # eventF T"o is to initiate a purchase order amendment to input the applicable price reductionF #n the introduction and launch of this program9 your company needs to define the savings sharing mechanismF !or e1ample9 a program may e?ually divide the savings >E0>E based on total savings identifiedF The supplier may then be given one of three options. do nothing and e?ually divide the savingsS implement savings ideas "ithout assistanceS or implement the savings "ith the assistance of your lean facilitatorsF 2enerally9 kaiGen initiated savings have some slippage in the gained efficienciesF This reality may enter into the discussion on the division of savings9 or postimplementation recoveryF Ho"ever9 since the definition of total savings is based on concurrence of the total savings potential9 there usually already e1ists some e1tra savings not captured in the reported and divided amountF #deally9 stage ### should be completed "ithin one "eek of the conclusion of stage #F #f this is not accomplished9 you risk losing the focus on the implementation of the efforts9 as "ell as the savings opportunities identified by your S # programF

-A&K!" )!'S$S SP&


Although point kaiGen techni?ues are being employed here9 the process is identified as short-term profit improvement for a very specific reasonF (aiGen is an institutionaliGed element of a broader lean philosophy that is championed in a top-do"n fashion9 but implemented as a bottom-up processF #n implementing point kaiGen efficiencies9 the people think9 eat9 and sleep lean9 continually generating improvement ideasF !or living kaiGen to be effective9 all levels of management must buy in to the underlying lean philosophy9 not only in verse but in their actionsF S # on the other hand is a process that is both implemented and championed top do"nF #n some applications of this kind of short-term effort9 the program may force-feed process if necessaryF 2eneral Motors% program #C'SN4O is clearly an e1ample of a force-fed S # program9 "hereas Chrysler%s SC',*N7O program "as notF This "as an effort "here the operators and0or supplier themselves may not have been brought into the entire process9 but "here 2M process e1perts made the changes9 documented the results9 and reported the savingsF The application of S # outlined here is not intended to be a force-fed processF By using the point kaiGen disciplines9 S # engages the suppliers in a participative effort designed to deliver mutual improvementF $hile S # may not necessarily represent a fundamental plant or company-"ide paradigm shift to lean techni?ues9 it can provide the basis of change in that directionF CAS! S*$#% D08 +uestions 30 #n preparing for the launch of the process improvement program "ith suppliers9 "hat key elements did the lean implementers need to take into consideration) 80 Ho" "ould +S$ establish its credibility "ith suppliers "ith respect to the ability to identify and implement change) ;0 Ho" "ould +S$ capture the savings opportunities to realiGe the immediate savings opportunities) Ans ers 30 The issue of credibility "as the main consideration that needed to be made in the application of S # "ith the suppliersF ast e1perience for the suppliers led them to be skeptical of any cooperative effortF By building this effort as part of an integrated supply strategy9 the acceptance of the "ork "as greater than e1pectedF Also9 significant preparation needed to be made in training the participants in the application of the tools and techni?ues in use for the S # effortF The order of tasks and timing of implementation needed to remain per plan "ithout variation to provide for program integrityF 80 The primary credibility "as established through +S$%s o"n internal implementation of point kaiGen effortsF Lean techni?ues had become the method of business for +S$ throughout its international facilitiesF By conducting a portion of the orientation of both the internal and supplier teams at +S$ 8model8 locations9 the suppliers "ere able to vie" implementation9 progress9 and sustained improvementF $hile S # "as not intended to be a fully integrated lean effort9 its roots are from the point kaiGen lean integration effortsF ;0 The savings "ere captured through an immediate >E0>E split of the documented net line savings potentialF urchase order reductions "ere taken9 "ith implementation support available as neededF #n some cases9 the supplier savings portions "ere applied to previously committed9 but not yet obtained9 price reductionsF The effort resulted in a net 7F> percent cumulative first year savings on total buy9 "ith actions occurring over a nine-month periodF

N4O

#C'S "as a process improvement program utiliGed by 2eneral Motors in the late /DCE%s and early /DDE%sF The process "as a 8standalone8 effort9 not coordinated "ith any other lean effortsF
N7O

SC',* "as a total cost savings program utiliGed by Chrysler Corporation prior to its ac?uisition by +aimlerF This program generated all types of savings ideas9 usually offered by the suppliers9 and Mointly implemented "ith ChryslerF At the time9 SC',* "as vie"ed as the model for all automotive industry supplier suggestion programsF

Chapter E2 Phase &)-)alue Analysis4)alue !ngineering


*H! ,!1&""&"1 (F *H! -A&K!" !FF('*S
!rom the beginning of this book the importance of maintaining a vie" to the future has been repeatedly stressedF The need to balance short- and long-term cost and price improvements has been highlightedF #n phase #5 of the crisis improvement9 the transition to the longer-term horiGon begins to take placeF 5alue analysis and value engineering :5A05*; moves the cost evaluation to the ne1t logical place in the value stream. designF +epending on your industry9 design-based cost improvements can either be an easy and ?uick introduction or encompass a lengthy validation and prove-out effortF 5alue analysis generally refers to design refinements to e1isting production components9 "hereas value engineering means designing improvements into ne" products based on cost and other performance obMectivesF #n our crisis scenario9 the efforts focus on 5A onlyF Some of the design opportunities can be captured and incorporated into ne1t generation 5* efforts9 but those "ill not bear out the immediate savings re?uired in a crisisF CAS! S*$#% E03 5alue analysis and value engineering "as a formaliGed process at +$SF Led by its engineering organiGation9 +S$ supplemented its supplier-based material cost improvement by targeting specified levels of 5A05* savingsF The 5A05* task "as divided by product category and operational unit9 giving specific goals to each of the engineering managersF The value of the annual target "as based upon a gap analysis derived from the shortfall of annual plan kno"n savings to re?uired profit levelsF Supplier participation in the +S$ 5A05* effort "as by re?uest9 and typically involved ra" material utiliGation versus component part change participationF Much of the resistance to supplier participation concerned the proper crediting to 5A results :iFeF9 "ho "ould get the credit for the savings;F +uestions $hat other factors may have limited supplier involvement in +S$%s 5A05* effort) Ho" could or should +S$ begin to engage its suppliers in this effort) $hat e1pectations may the suppliers hold "ith respect to participating in 5A05*) $! Could the internal +S$ 5A process gain any improvements through observing supplier participation in 5A05* or in their o"n programs) ! #!

#efinition

5A05* is a planned9 clean-sheet approach to problem solving9 focusing on specific design and process characteristicsF 5alue analysis is used to improve value after the start of production9 "hereas value engineering is used during the initial product design phase before costly e1penditures are incurredF The scope of the application can go from a single process9 or program9 to multiple programs involving the supplier%s design-driven processes and operationsF Typical applications "ould include. ! ,a" material fle1ibilityF #! Stalled process changesF $! Tolerancing and specification reliefF 4! rocessing fle1ibilityF &! ost start-of-production revie"sF

&mplementation Procedure
There are three uni?ue approaches to the 5A05* process "ith the supplierF They are supplier based9 commodity based9 and ongoingF *ach of these is discussed in the follo"ing sectionsF Supplier based This is a highly focused9 kaikaku style approach to 5A05*F Conducted either at a supplier%s location or other off-site location9 this event typically lasts three to four daysF #ncluded in this multiple-day design revie" "ould be the follo"ing agenda. Conduct process re#ie!F This revie" should cover the supplier%s processes that are specifically driven by part design characteristicsF This revie" is not a point kaiGen process effort9 but an evaluation of the link bet"een design and manufacturingF 1rainstorm design alternati#esF This activity should include participants representing a diverse cross section of functional e1pertiseF Sometimes called BrainTeaming9[N/O this group-based problem-solving approach provides the greatest degree of input and creativity in balancing design9 manufacturing9 and commercial needsF Prioriti6e the ideasF The prioritiGation effort can be based on ease of implementation9 impact of cost savings9 simplicity of product validation9 or any other characteristicF The choice of the prioritiGation factor should be driven by the integration factors to the rest of the business or SCM plan being implementedF 'e#ie! similar processesF This step is to capture the lessons learned from the initial 5A effort and apply them in the greatest scope possibleF #t can be from this step that 5* considerations affecting operations can be taken into account for the ne1t-generation proMectF 'eturn #isitsF As re?uired9 the 5A team should return to the supplier location as a follo"-up to the initially generated 5A idea listF Although potential ne" ideas should be e1plored9 the team%s primary focus should be the full implementation of the initial ideas and driving these ideas through the approval systemF Commodity based Commodity-based 5A05* is a concentrated effort focused on a specific commodity or commodity subgroup9 rather than on a single supplierF The campaign is designed to take one "eek to generate and define the ideasF Three to four suppliers that "ould like to participate in this program are selected based on current technology mi19 long-term agreements9 and history "ith your companyF Commodity-based efforts include the follo"ing stages. %tage 8F The first three to four days of the "eek "ill follo" the agenda belo" for each of the selected suppliersF The final day of the "eek your company%s participants "ill meet and revie" all of the gathered ideasF %tage 9F All of the commodity suppliers "ill receive a package identifying the ideas from their buyerF *ach supplier "ill need to calculate the cost reduction9 for them9 associated for each of the identified ideasF %tage :F 3ou then prioritiGe the ideas9 selecting the first five to ten to start the implementation processF As each of the ideas are completed9 the ne1t one on the list "ill be started until all of the feasible ideas are implementedF

Agenda
C.EE am- C./> am #ntroduction0,evie" agenda

C./> am- D.EE am D.EE am-//.7E am

Competitive analysis revie" :if availF; ,evie" elements of cost ! #! $! 4! &! )! material design processing labor overhead scrap

,rainstorming

Comparison to similar products0processes $orking lunch *valuate ideasS *stablish theoretical costs !ill out 5A forms rioritiGe ideas

//.7E am-/4.7E pm /4.7E pm- 4.7E pm 4.7E pm- 7.EE pm 7.EE pm- <.EE pm

(ngoing The third option is not a concentrated program9 but rather a continuous processF This process provides a significant opportunity for the development of 5* actionsF There are five categories that ongoing supplier 5A re?uests "ould generally fall intoF They are. ! 'a! material fle-ibilityF ,a" material fle1ibility involves situations in "hich suppliers are re?uired to validate individual ra" material suppliers on specific ra" material brandsF 'ften a supplier%s standard practices "ould allo" the use of a broader supplier base or material selectionF 'ften driven by customer suggestions or demands or in place because of convenience9 specific materials and suppliers are specified versus performance characteristics of the part or materialF Material fle1ibility targets this issue and 8un-paints8 the supply organiGation from its corner of single source onlyF #! %talled process changesF Most organiGations contain a process change procedure managed either through its technical or operational staff for the purpose of managing internal and e1ternal change re?uestsF #n instances "here a supplier has re?uested a process change through these normal channels9 and that change is either stalled or has been denied "ithout Mustification9 a supplier should submit a 5A re?uestF The 5A re?uest refocuses the organiGation%s change management efforts to correspond "ith the cost crisis at handF $hile not necessarily designed to replace the standard process9 the 5A submission approach helps relieve the system of convenient back-shelving of ideas considered to be of lo" priority by engineeringF $! Tolerancing and specification reliefF All industries have seen overengineering efforts put in place to address specific9 but often historic or anecdotal problemsF +riven to correct some perceived performance problems9 designers often specify part performance characteristics in e1cess of normal parametersF The effect is to introduce significant inspection and detections costs "ithin a supplier%s operationF !ocused supplier development and improvement activities provide for significantly improved process performance to >9 A9 and even B sigma9N4O providing statistically reliable and repeatable processesF $hen a supplier can demonstrate that its process is in control and that the process mean is centered :or that the process "ould not be < to A sigma capable even if the mean "as centered;9 then the supplier should re?uest a changeF There are t"o avenues for the supplier to pursue in this situationF The first option is a dra"ing change re?uestF This "orks best for single

4!

&!

componentsF The second option is a 5A re?uestF This "orks best for families of parts or "hen the first avenue has been tried and denied "ithout sufficient MustificationF Processing fle-ibilityF &on-value-added costs have been introduced to many suppliers through regulating their processing fle1ibility "ith the validation re?uirementsF There are many industries "here banks of identical machinery are used interchangeably to run productionF #n some cases the need to constrain the process to a single machine or to only ?ualified machines is Mustified9 but there are other cases "here it is notF The elimination of process infle1ibility can contribute to a significant savings potential by freeing up machining capacity utiliGation plans9 and through the optimiGation of available laborF Post start-of-production re#ie!sF rogram management processes provide for milestone revie"s at "hich critical program or product issues are revie"ed at key phases during development and launchF 'ften ignored are the issues identified during the launch and ramp-up phases of product introductionF 'ften9 program teams have already been disbanded or reassigned by the time full production is in placeF The issues identified during launch provide the basis for significant 5A potentialF A module :assembly; or part-level design revie" may occur after the start of productionF Suppliers "ho manufacture the maMor assembly components are invited to come together to revie" issues that have arisen since the start of productionF A supplier 5A team "ould be formed9 or the program development team "ould be reconstituted for the effort to facilitate a system revie"F This programspecific revie" process allo"s for the immediate capture and potential implementation of lessons learned during a program production launch phaseF

N/O

BrainTeaming[ is a proprietary approach to group problem solving developed by 5alue #nnovations9 LtdF #nformation regarding BrainTeaming[ and 5alue #nnovations9 LtdF can be found at http.00"""FinnovatevalueFcomF
N4O

Si1 sigma performance relates to the number of standard distributions around the mean :or targeted; specification re?uirementF *ach increase in standard distribution results in significantly reduced reMect levelsF At si1 sigma the appro1imate reMect rate for the specified process0characteristic "ould be A M :parts per million;F

MA-&"1 *H! P'(C!SS +('The primary challenge in the development and implementation of a 5A05* effort is designing the process by "hich suggestions are submitted9 processed9 and approvedF This effort is no small challengeF #n introducing a 5A05* process9 limited resources that are engaged in other activities are asked to redirect their efforts to cover ground they feel has already been addressedF Also affecting the processes% ability to function properly are the personal effects and attitudes that individuals or groups face "hen forced to recogniGe that the initial design and development efforts may not have been the bestF !igure CF/ demonstrates the comple1ity in simply designing a ne" supplier-based 5A05* effortF The various process flo"s sho" the multiple functions9 revie"s9 and evaluations necessary in implementing a 5A programF The flo" through the process re?uires involvement9 forms9 and systems from engineeringS purchasingS suppliersS manufacturingS financeS technical services :testing;S and othersF Monthly status revie"s and implementation progress revie"s must occur to ensure continued performanceF

Figure E03

CAS! S*$#% E08 +uestions 30 $hat other factors may have limited supplier involvement in +S$%s 5A05* effort) 80 Ho" could or should +S$ begin to engage its suppliers in this effort) $hat e1pectations may the suppliers hold "ith respect to participating in 5A05*) ;0 Could the internal +S$ 5A process gain any improvements through observing supplier participation in 5A05* or in their o"n programs) Ans ers 30 +S$ did not have in place the mechanism by "hich suppliers could submit suggestions9 or by "hich suggestions could be evaluated9 processed9 or implemented9 nor a method for applying credit to supplier effortsF The recognition of this re?uired a significant amount of "ork to move the 5A05* efforts from a program to a process :iFeF9 short-term efforts to a long-term sustaining process;F 80 +S$ "as able to engage its suppliers in the 5A process by building the traditional material savings strategy into a total cost management activityF $hile the appearance may have been initially received as a no-choice proposition9 it "as based upon and reflected the changing industry dynamics of total cost managementF The suppliers "ere given commodity- and supplier-specific targets9 "ith performance monitored against these :and other; criteriaF A portion of the savings "as retained by the supplier9 "ith the remainder applied to their annual target obMectivesF ;0 By designing and implementing a supplier suggestion program similar to the one outlined in !igure CF/9 +S$ recogniGed the need to more fully manage the process through monthly revie"sF By evaluating ne" and e1isting ideas9 +S$ could ensure that the pipeline for ideas remained fullF +S$ "as also able to monitor the submission to implementation rate and "ork to"ard moving the noise of bad ideas out of the systemF By monitoring specific supplier performance9 the +S$ supplier development and procurement team could assist suppliers "ho appeared either unable or un"illing to contribute to the design-based improvementsF

Chapter F2 Phase )-Lean Manufacturing


M()&"1 ($* (F C'&S&S-S$PPL&!'-,AS!# L!A" MA"$FAC*$'&"1
Moving to"ard lean manufacturing practices and systems in the suppliers% operations represents the final phase of the crisis planF This final phase9 ho"ever9 does not end9 is not a program9 and represents a fundamental shift in business managementF Lean-based manufacturing9 usually e1emplified by the use of Toyota roduction System :T S; methodologies9 takes the art of kaiGen to a different levelF $hereas "e%ve so far discussed kaiGen as an event9 lean efforts transform kaiGen to a process encompassing the entire business enterpriseF This concept creates flo" kaiGen "here the flo" of material9 information9 design9 manufacturing9 and administration are all parts of continuous improvement effortsF Taking lean disciplines to the supply base re?uires practical e1perience and kno"ledgeable facilitators from your organiGationF Academic understanding of lean systems is by no means sufficient to begin an implementation effort "ith the suppliersF The information in this chapter defines Must one of many methodologies of beginning a lean enterprise implementation plan for the suppliersF The important lesson here is that there needs to be a "ell-thought-out9 and9 even more important9 "ell-e1ecuted deployment of leanF $ithout planning and e1ecution perfection9 the credibility of the practice and of the facilitators comes into ?uestionF The lean practice never becomes an institutionaliGed business approachF The follo"ing lean SCM definition is a simplified version for the purposes of introducing the concept to SCM professionalsF Lean Thin"ing9 by $omack and 6ones is an e1cellent resource for more fully defining lean and lean efforts9 including kaikaku approachesF articularly appropriate for this section is a ?uote from Lean Thin"ing regarding the 8radical pathF8 8There is an alternative9 radical path to perfection9 a total value stream kaikaku involving all the firms from start to finishF8N/O #t is e1actly such an approach # am speaking of "hen # recommend supplier lean implementation as part of an SCM strategyF

#efinition
Lean manufacturing is a continuous improvement program taken in small stepsF #t improves the process by eliminating "aste9 standardiGing "ork9 and creating fle1ible manufacturingF #t is typically focused on the production process9 "orking to evolve it9 rather than Must change itF Typical tools used to achieve this improvement include. line smoothing9 the !ive Ss :sort9 set in order9 shine9 standardiGe9 sustain;9 cycle time reduction9 and "ork area reconfigurationF The application of Toyota roduction System :T S; or similar methodologies is also usedF

&mplementation Procedure
The lean manufacturing program is a highly focused tool deployed "ith a limited number of suppliers at a given timeF $ithin each supplier a pilot or sho"case line is chosen for the implementation of leanF The process can be vie"ed as happening in t"o "avesF *ach "ave contains three phasesF The first "ave "ill take appro1imately one year to 8completeF8 N4O CAS! S*$#% F03 +S$ had already implemented lean methodologies in its o"n manufacturing operations throughout the "orldF The implementation9 ho"ever9 had been one of internal focus onlyF The supply chain had not been tapped for its ability to support the lean effortF Lean facilitators had

been trained and deployed throughout the companyF +S$%s SCM group had recently ac?uired four lean facilitators throughout its "orld"ide SCM operationsF #n developing its strategic initiatives9 the SCM group "as struggling "ith the best "ay to deploy these resourcesF The advent of the crisis situation complicated this deployment ?uestion9 as these very kno"ledgeable and e1perienced resources "ere not provided the environment in "hich to fully utiliGe their skillsF +uestions 2iven the need to respond to the crisis situation9 ho" should +S$ deploy its lean SCM resources) #n "hat "ay could the lean facilitators contribute to the crisis plan) #! $hen deploying lean initiatives "ith its suppliers9 in "hat area should +S$ focus its initial efforts) $! $hy "ould +S$ "ant to deploy lean "ith its suppliers) $hat advantage can be gained in @C+ :?uality9 cost9 delivery; from these lean efforts) !

+ave (ne
$ave 'ne is the aided implementation of lean manufacturing systems "ith primary suppliers9 and usually encompasses comple1 or high value componentsF Critical to $ave 'ne%s success9 and facilitating the ability to move to a second "ave of implementation is capturing on learning both internally9 and at the suppliers% locationsF Phase &2 #eveloping the plan ?three months@ This phase is divided into three stagesF *ach stage is about one month in durationF 3our company and the supplier need to "ork closely together during this phaseF +uring Stage / your lean facilitators "ould have residence at the supplier location during $eeks / and <F The facilitator%s presence during $eeks 4 and 7 "ould be periodic based on the event%s needsF Stage 1 (one month): ee" 8* 3ic"-off =one to three days>. The kick-off phase includes training the team in lean vocabulary9 philosophy of lean in business9 and methods improvement and measure9 etcF9 baseline calculations of e1isting production :or other; operations and efficienciesS brainstorming changes as needed9 and prioritiGation of implementation effortsF ee" 9* Preparation =one to ten days>. This phase includes scheduling of implementation efforts9 maintenance of facility and e?uipment in preparation for additional changes9 ordering e?uipment and supplies9 and "hatever must be completed to start implementationF ee" :* Implementation =t!o to four days per implementation tas">. $eek 7 is the hands-on revision to the gemba :"orkplace; by implementing the lean changesF The length of the changes may significantly e1ceed this time periodF Like all lean efforts9 implementation really has no end9 Must continuous refinementF ee" ;* &easure producti#ity =three to fi#e days>. Lean efficiency measures are manyS ho"ever9 the most important is the direct measure of manufacturing productivityF The definition of productivity is. output in pieces times AE minutes divided by "orking hours times the number of operatorsF This and other efficiency measures defined in $eek / need to be updated and reportedF Hoshin planning and management by plan :MB ; are effective tools for monitoring and reporting progress to"ard obMectivesF Stage 2 (one month)F +uring this stage "e "ill evaluate the effects of the changes9 improve the initial ideas9 and reprioritiGe those ideasF The lean facilitators "ill have an onsite presence during this stage of appro1imately one "eekF Stage 3 (one month). This stage is for measuring productivity and reporting improvementsF Lean facilitators "ill have an on-site presence of appro1imately one "eekF This time should be used by the e1ecutive team for a supportive revie" that is part of the hoshin0MB processF

Phase &&2 &mplementing the plan ?nine months@ This phase is divided into three stages9 but unlike hase #9 the timing for each stage depends on each supplier%s uni?ue situationF 3our presence during this stage "ould involve periodic one-day visits to support the supplier and monitor progressF Stage 1. This is the point at "hich the supplier begins to fully take the lead of the lean implementation effortsF The supplier continues to implement and deploy the ne1t set of lean obMectivesF *fficiency gains are continually measured from the ongoing implementation and translated to cost improvementsF These savings are reported back to the buyer as they are measured and verifiedF Stage 2. At Stage 4 in hase ##9 the supplier has completed the initial implementation of lean practices of the targeted process :the pilot line or process; and no" looks to apply the ideas and principles realiGed on the first effort to other processesF The supplier "ill report cost savings back to the customer%s buyer as they are measured and verifiedF Stage 3. At this point the supplier has completed implementing the lean manufacturing process on similar processes and starts applying the program to other product lines and processes9 and may include administrative as "ell as manufacturing processesF Phase &&&2 Learning and verifying results hase ### is a formal supportive revie" by the supplier "ith the customerF The revie" is made to a cross-functional management group from those functions that normally interact "ith the supplierF rogress to"ard implementation9 efficiency and cost improvements9 roadblocks9 and other issues are revie"ed in detail "ith support assigned as necessary9 including detailed continuation plansF hase ### also represents the transition to the ne1t "ave of application at the supplierF

+ave * o
$ave T"o of the implementation of lean systems "ithin the supply base focuses on t"o main elementsF The first of these is to formally e1pand the lean initiatives beyond the manufacturing process at the $ave 'ne suppliersF #n this effort9 the suppliers take a fresh look at the processes addressed in hase #S e1amine the lessons learnedS modify the process as necessaryS and move to other functional operationsF Many si1-sigma programs focus on the nonmanufacturing processes in effort to define and deliver improvementsF (aiGen for administration is also a commonly deployed methodology used for this purposeF
N/O N4O

$omack and 6ones9 Lean Thin"ing9 pF D/F

8Complete8 is enclosed in ?uotation marks as it is an accepted understanding "ithin lean deployment that no process is actually ever complete9 but phases of improvement have been accomplishedF

MA-&"1 S!"S! (F L!A"


The definition and process identified here only skims the surface of the breadth of lean manufacturing and lean systemsF To be able to utiliGe the process outlined above9 your organiGation "ill re?uire practical lean e1perience and educationF The e1periments that you make in implementing lean are best made "ithin your four "allsF $ithout this e1perience and education you "ill be unable to anticipate the suppliers% implementation issues and be unable to guide the supplier to"ard solutionsF A significant element included in the implementation process is the inclusion of specific measures of cost performanceF $hile operational efficiency measures ultimately translate to cost and profit improvement9 traditional lean measures do not include cost performanceF Lean systems implementation :"ith suppliers; as part of a SCM effort uses specific cost measures as a primary elementF $ith this measure9 it becomes unfortunately easy to let lean become a cost savings

programF By this # mean9 the drive for cost improvements becomes the force leading lean implementation9 not lean implementation defining cost improvementF #n bringing together a total cost improvement plan9 lean efficiencies become the ongoing ability to continuously achieve savingsF #t is these savings that ensure market competitiveness in the long termF This "ill be discussed more in Chapter /EF CAS! S*$#% F08 +uestions 30 2iven the need to respond to the crisis situation9 ho" should +S$ deploy its lean SCM resources) #n "hat "ay could the lean facilitators contribute to the crisis plan) 80 $hen deploying lean initiatives "ith its suppliers9 in "hat area should +S$ focus its initial efforts) ;0 $hy "ould +S$ "ant to deploy lean "ith its suppliers) $hat advantage can be gained in @C+ :?uality9 cost9 delivery; from these lean efforts) Ans ers 30 The lean resources "ere provided initially as a preparation force leading the development of the lean implementation plansF Building on their "ork as participants on the ac?uisition teams9 the lean resources provided the continuity from the prior phases into the lean development effortF $hile the prior phase and lean preparation "ork didn%t fully utiliGe the lean skills9 the presence of additional human resources facilitated a sustained focus on cost improvementF 80 The initial focus of lean efforts "as based a traditional areto analysis of spendingF This techni?ue "as used throughout the crisis plan in prioritiGing the commodities and suppliers "ithin the commodities to "hich the efforts "ere going to be initially appliedF #n addition9 it "as "ith those suppliers "ho "ere deemed long term or to have long-term potential that lean efforts "ere deployedF Short-term or transitional suppliers "ere not included in the lean effortsF ;0 +S$ deployed its resources to its key suppliers to build a long-term efficiency plan9 "orking to achieve productivity improvementsF These efforts resulted in multifaceted cost improvement efforts through operational efficiency gainsS reduced ?uality reMect costsS and improved delivery and schedule attainment9 resulting in ongoing cost improvements for +S$F

S!C*&(" &&&2 *he Standard !nvironment


Chapter /E. +efining the Standard *nvironment Chapter //. Supply Base Management Chapter /4. Supplier @uality and +evelopment Chapter /7. Cost Management and Control

Chapter /<. Materials Management Chapter />. The Supply Chain 'rganiGation

Chapter 3:2 #efining the Standard !nvironment


()!')&!+
+efining the standard environment is far more comple1 than defining the crisis environment as in Section ##F The comple1ity is that because each industry provides for such a diverse business environment9 standard becomes a relative termF !or our purposes "e "ill define standard as the traditional environment in "hich business is conductedF $hile the regular challenges and stresses of business still e1ist9 the factors "e previously described as crisis are not presentF Also the standard environment provides some lu1ury of timeF The ability to develop and implement business strategies and approaches is not unduly constrained by e1pediencyF The standard environment is also hallmarked by a broad focus on business systems and systems integrationF 2enerally businesses manage their efforts and strategies through the development9 implementation9 and utiliGation of strategic planning methodsF #n the standard environment9 SCM organiGations "ork to support broader corporate strategies as "ell as developing uni?ue supply chain strategiesF This integration is key to achieving overall corporate obMectivesF CAS! S*$#% 3:03 The supply chain efforts at +S$ have had varying degrees of success throughout its various divisionsF There has been a history of achieving cost improvements9 supporting re?uirements determined by the company%s corporate financial officeF The various divisions pursued the re?uired improvements through loosely coordinated effortsF Collectively9 the SCM efforts in the divisions have delivered roughly 7 percent gross savings from previous pricing levelsF 'ffsetting this savings is a / to 4 percent inflationary impact to commodity materialsF +uestions Ho" "ould +S$ determine if the SCM%s contribution to the company%s financial improvements "as sufficient) $hat factors "ould or should +S$ include in this evaluation) #! $hat "ays could the +S$ SCM organiGation better coordinate its divisional efforts) Ho" do these efforts vary depending on +S$%s vie" on centraliGed or decentraliGed SCM) $! $ould +S$ have any alternative in the "ay it manages inflationary effects on purchase content) Ho" does the industry in "hich +S$ operates affect the approach to inflationary effects) !

H&S*('% (F &MP'()!M!"*
The standard environment in SCM also means that there e1ists an ongoing history of cost :and other @C+; improvements achieved through supply base management effortsF These savings may be limited9 or spotty in nature9 but represent evidence that some level of professional effort

has been madeF The importance in this is that "e are not starting at ground GeroF !uture efforts can focus on building upon the achievements and formulating ne" approaches based on "hat has been learned from the past :both bad and good;F 'ften the history of improvement is driven by the demands of groups outside of SCMF 2enerally9 these demands come from the financial staff dictating a specific cost improvement level that must be obtainedF This tactic is not necessarily bad and is often driven from the lack of commitment coming from the SCM organiGationF The vision must be the self-determination of the SCM organiGationF SCM must have the ability to predict the improvement levels that "ill be obtained9 the market environment driving the changes9 and the commercial parity "ith improvements in customer pricingF Learning from the improvement history and penning the future plan must drive this visionF

!FF('*S ,$&L* F'(M S*'A*!1%


To achieve the greatest level of success9 the efforts of the supply chain management group must be integrated "ith and supportive of broader corporate obMectivesF The ability to accomplish this lies in the methods in "hich SCM obMectives are developed and implementedF Through strategic procurement and SCM implementation9 these obMectives can be identified and achievedF Strategic procurement and SCM is the effective integration of procurement0SCM tasks "ith other organiGational obMectivesF Supply chain tasks are balanced "ith other functional tasks to create a supply chain or procurement roadmapFN/O $ith this roadmap9 strategic procurement and SCM is further defined through the use of a business management system designed to pull all the elements togetherF Chapter 4 described hoshin planning0MB as a business management system effective in integrating various strategic initiatives "ith individual performance tasksF The importance of using a business system to process the SCM efforts cannot be understatedF $ithout this discipline9 the strategies tend to become individual tasks appearing to have a flavorof-the-month feelF The success or effectiveness of strategic procurement is measured in broad supply chain and business measuresF These measures differentiate strategic efforts from tactical performanceF Tactical measures usually are only those centered on costF Strategic performance obMectives must e1tend to the business systemsF #n addition9 all stakeholder needs must be included in supply chain plans and measuresF
N/O

8 roductivity ,oadmap8 is a purchasing tool used by the !ord Motor Company &orth American purchasing operations during the middle and late /DDEsF The multidimensional supplier cost reduction plans identified as part of the productivity roadmap "ere used to determine purchasing strategies in delivering the identified cost reductionsF

SCM AS A ,$S&"!SS S%S*!M


#t is uncommon for organiGations to consider supply chain management as a business systemF The common vie" is that SCM is a collection of effortsF (eeping "ith the strategic vie" of SCM it is critical to change this paradigm from a collection of efforts to a business systemF #n practice9 this vie" is no different than the vie" of lean manufacturing as a business systemF The necessity of the system vie" is based on the fact that standalone SCM activities cannot be

successful in the long termF Stand-alone activities are seen as events rather than as ongoing processesF Short-term events typically are not sustained and do not provide long-term direction or resultsF Strategic procurement must be vie"ed as an e1tension of a company%s manufacturing strategy9 marketing strategy9 financial strategy9 and customer strategyF A business systems approach shifts the vie" from events to processes9 from limited to sustaining9 and from short to long termF A holistic vie" must be taken of the procurement and SCM strategies9 incorporating the various actions into a single initiativeF The holistic approach is the development of the vision roadmap9 "hich guides the process for"ardF

*H! A,Cs (F ,$&L#&"1 A S*'A*!1&C SCM PLA"


$hen building the strategic procurement plan "ithin a business system9 the system must support fle1ibilityF This is necessary because of the dynamics that are faced throughout a fiscal or planning yearF lans that are trapped by infle1ible systems "ill not provide the responses necessary to maintain progress to"ard the long-term obMectivesF The follo"ing factors must be considered in the development of a lean supply chain strategic plan. Procurement professionals must recogni6e the business situation present and plan for those conditionsF Too fre?uently procurement plans are developed independent of the environment in "hich they need to operateF Long-term strategic is different than short-term strategic in scope and planning F #nherent biases cause most business-people to associate strategic efforts "ith the long termF *?ually important is to understand and embrace the concept of short-term strategic-that is9 those efforts designed to be a building block for a complete SCM strategyF These efforts can be accomplished "ithin a compressed period of timeF :Much of the crisis plan efforts described in the prior chapters are based on short-term strategic conceptsF; %trategic procurement as part a business process depends on the use of a pro#en business systemF *ntering into a strategic supply chain plan often represents a significant departure from the status ?uoF Attempting to simultaneously launch an SCM effort and develop an overall business system represents an unreasonable demand of business maturationF ?sing recogni6ed approaches #ersus homegro!n methods pro#ides ready-made tools to help dri#e processesF *1amples of proven business processes include hoshin planning or balanced scorecardF These methods9 and the success of their implementation9 have been the subMect of many professional and academic "orks that provide prepared tools to enable ease of implementationF

MA''%&"1 *H! PLA" *( *H! ,$S&"!SS S%S*!M


The successful incorporation of the strategic supply chain effort into the overall business environment depends upon the ability to link individual performance9 organiGational efforts9 and management support of supply chain initiatives to the rest of the organiGationF To accomplish this task the development of the plan needs to consider9 and the business system needs to demand9 the interdependency of these obMectivesF Building upon the content of Chapter 49 the marriage of these t"o obMectives can be accomplished through considering the follo"ing factors. Plan %C& initiati#es from corporate #ision points or o#erarching ob$ecti#es F This means that all efforts in supply chain management :or any other functional department; are based on a set of universal e1pectations and performance efforts determined at the highest level in the organiGationF ,nsure coordination !ith other operational and functional ob$ecti#es F 'ften individual obMectives come into direct conflict "ith other departments% effortsF The coordination of the

SCM obMectives "ith these other obMectives ensures the future cross-organiGational support often re?uired for success as "ell as providing for a coordinated effort in achieving the overarching obMectivesF 1uild the plan around stretch goals, but allo! for successes during milestone re#ie!s F Because of the historic bias to"ard financial business plans9 success isn%t kno"n until the completion of the planF Although ?uarterly goals may be identified9 milestone progress revie"s outside of that are not "idely usedF !re?uent revie"s allo" you to keep the plan on track9 but also to encourage the organiGation by recogniGing the important progress that has been made to"ard the completion of a process itemF ,nsure that measures address the business needs as defined by the business systems, broad-based financial and nonfinancialF Typical SCM measures are financially drivenF Chief among these measures is purchase price variance : 5;F $hile 5 is acceptable9 the SCM measures need to broadly evaluate organiGational contribution and effectivenessF 5 alone shifts actions to short-term financial measures onlyF Supply chain management should encompass supplier ?uality and development as "ell as the traditional purchasing9 logistics9 and distribution functionsF

*H! !L!M!"*S (F A S*A"#A'# !")&'("M!"* SCM PLA"


The elements that follo" represent one of many outlines for a strategic SCM planF The areas outlined represent the priority items that facilitate the most significant improvement9 and9 ultimately9 contribution to the bottom lineF The plan outlines si1 maMor areas of initiative "ithin SCMF These areas represent the maMor elements of cost9 ?uality9 delivery9 and support9 as "ell as an internal focus on organiGational skills and trainingF %upply base managementF Broad supply base and commodity planning activities e1emplified by. ! #dentification and selection of fully capable suppliers to meet needs in product development :as appropriate;9 production and delivery support9 and financial performanceF #! Benchmarking and supplier consolidation activities to identify and select best-inclass suppliersF %upplier @ualityF 'perational ?uality and development efforts "ith the follo"ing activities. ! +evelop and implement integrated supplier ?uality e1pectations and measuring techni?uesF #! Support benchmarking activities "ith focus on ?uality systemsF $! *stablish supplier stratification methodology based on obMective measures :eFgF9 M9 A 9 CA,9 commercial and delivery;F 4! -tiliGe ?uality planning tools to support operational re?uirements :@'S0T@M9 A @ 9 C+9 etcF;F Cost managementF +eveloping costing approaches affecting longer term cost structure and ne1t-generation pricing efforts9 such as the follo"ing. ! *stablish affordable cost target mechanism to achieve corporate profitability and customer target price obMectivesF #! #dentify value management techni?ues to improve current product cost structuresF $! -tiliGe process improvement techni?ues :eFgF9 kaiGen9 kaikaku9 etcF; to assist supplier cost improvementF Cost impro#ementF &ear-term and e1isting products cost improvement and price reduction actions9 including. ! !ocus near-term efforts on resourcing opportunities generated from benchmarking and consolidation activitiesF #! !ocus long-term efforts on implementing partnership actions and multiyear productivity reductionsF $! +evelop annual commodity value management opportunity list and drive implementationF

4! -tiliGe ACT on ne" part contentF Distribution, transportation, and logisticsF This includes material movement and handling improvement efforts such as. ! +evelop visual factory scheme "ithin "arehouse and distribution operations to support improved order fill rateF #! *stablish meaningful measurement method to monitor customer service and "arehouse performanceF $! +rive inbound transportation costs do"n"ard9 targeting /E percent cost improvementF /rgani6ationF Matching the performance e1pectations to necessary skills through evaluation and gap analysis "ith appropriate compensation and promotional opportunities9 including. ! *valuate classification and pay range structure for all materials positionsF #! *stablish specific position performance e1pectations and conduct gap analysis for all associatesF $! +evelop and implement a comprehensive training curriculumF CAS! S*$#% 3:08 +uestions

30 Ho" "ould +S$ determine if the SCM%s contribution to the company%s financial improvements "as sufficient) $hat factors "ould or should +S$ include in this evaluation) 80 $hat "ays could the +S$ SCM organiGation better coordinate its divisional efforts) Ho" do these efforts vary depending on +S$%s vie" on centraliGed or decentraliGed SCM) ;0 $ould +S$ have any alternative in the "ay it manages inflationary effects on purchase content) Ho" does the industry in "hich +S$ operates affect the approach to inflationary effects) Ans ers 30 +S$ conducted an analysis of its total SCM costs including production parts costS non-production parts costS in-bound transportation costs :outbound is generally paid for by customer;S supplier related inspection9 detection9 and containment cost for ?uality issuesS and organiGational e1pensesF This analysis e1amined a gro"th-adMusted total cost trend as compared to the gro"th-adMusted customer price reductionsF Based on the material content contributed to the cost of goods9 the e1pectation "as for a /EE percent offset of SCM cost as a percentage of C'2SF 3ear over year net dollar savings and givebacks "ere compared9 "ith givebacks resulting in an appro1imate 7F> percent revenue lossF $ith SCM cost appro1imately A> percent of C'2S9 appro1imately 4F7 percent of the 7F> percent needed to be offset by SCM savingsF The historic savings of net /F> percent :7 percent savings-/ percent to 4 percent economics; falls nearly a full / percent short of the needed offsetF The translation of this offset level is that the re?uirements on +S$ from its customers are more stringent than +S$ to its suppliersF +S$%s SCM organiGation achieves only A> percent of the needed savings to maintain parity "ith its customer demandsF 80 +S$ had generally embraced a decentraliGed SCM structureF The effect of this "as a lack of coordination in common commodities9 suppliers9 and pricing approachesF To counteract this effect9 "hile maintaining divisional responsibility in SCM9 +S$ developed a hybrid organiGation in "hich common SCM services :such as freight9 travel9 etcF; "ere managed centrallyS cross-divisional commodity teams "ere developed9 "ith an assigned commodity champion managing the commodity and supplier strategy for the entire company9 and "ith a centraliGed strategic procurement and supplier development groupF Tying into the corporate overarching obMectives as part of the MB efforts9 +S$ developed a single set of departmental obMectives consistent "ith its strategic plan effortsF The single set of obMectives

re?uired a better coordination of all SCM effortsF Coupled "ith the hybrid structure9 +S$ "as able to create a single face to its supply base9 as "ell as internallyF ;0 +S$%s primary product sales are in automotive and aerospace industriesF $ithin the automotive sector :"hich represented BEU percent of +S$ sales; economic risk lies entirely "ith the supplierno economic increases "ere passed throughF #n this vein9 +S$ adopted the same policy9 contractually re?uiring the suppliers to manage all their o"n economic e1posureF The effect of this "as to increase the net savings level and increase the ability to plan for procurement performance throughout the fiscal yearF

Chapter 332 Supply ,ase Management


-"(+&"1 +HA* %($ +A"*
Among the many differences that -FSF automotive companies e1hibit from Asian-based companies :in addition to the lean approach "e discussed so far; is the time spent in preparation and planning prior to the attempted e1ecution of individual tasksF #n the traditional +CA :plan-docheck-act; cycle approach to operational planning9 the tendency in -FSF business is to spend little time on the 8 8 :plan; phase9 and get to the 8+8 :do; phase as ?uickly as possibleF The need to demonstrate progress is driven by the ?uarterly financial focus versus the long-term focus of many non--FSF firms :particularly 6apanese companies;F #n lean supply chain management9 the time spent in the planing phase must e1pand beyond the normal to provide the proper understanding of e1actly "hat it is that needs to be accomplishedF $ithout this planning effort9 a significant amount of time is often spent on developing and implementing strategies to secure performance that your company many not even needF #ntegrating the supplier-based capabilities "ith the real company needs provides the greatest value from the supply chainF The perceived need for various supplier capabilities is an e1ample "here planning can provide valueF Many companies may believe that there is a need to develop 8full service suppliers8 N/O :!SS;F The service provided by !SS suppliers :largely design and validation; includes a cost premiumF Ho"ever9 the purchasing company often never utiliGes these !SS servicesF Many laborhours can be devoted to identifying and developing !SS organiGations9 validating the cost premiums for such suppliers9 "ith the company never actually using or needing these capabilitiesF This chapter focuses on planning the supply base strategy and kno"ing e1actly "hat is re?uired from those suppliersF
N/O

8!ull service supplier8 is a term used by !ord Motor Company in defining suppliers "ith the capabilities to develop subsystem design parametersS the ability to integrate and manage lo"er tier suppliersS and9 generally the ability to absorb a significant portion of the design9 development9 testing9 and prove out of products "hich had previously been done by !ordF #n classifying suppliers as 8!SS8 suppliers9 there "as an increased level of capabilities necessary from the normal suppliers9 as "ell as an e1panded evaluation and certification procedureF

&MPL!M!"*&"1 S$PPL% ,AS! MA"A1!M!"*


6ust as the planning activities in the crisis plan follo"ed a specific structure9 so too does the planning in the standard environmentF To ensure that the plan is consistent "ith and in support of the overarching corporate obMectives9 the standard plan specifically addresses the strategic initiative as "ell as the implementation plan for each of the plan%s elementsF !rom these plan definitions9 the individual tools for delivering the performance are created and utiliGedF The implementation plan and the associated tools are "here the 8rubber hits the road8 in translating plans to actionF CAS! S*$#% 3303 +$S recogniGed the need to develop a central organiGation that "as responsible for the development of a single supply base strategyF This strategy and supply base "ould be designed to support the various operating divisions "ith a common supplier ?uality system and development effortF The centraliGed team "ould also be responsible for the roll-up of total commodity savings9 including the negotiations of multiyear sourcing and pricing agreementsF To secure the broadest base of support of the selected supply base9 the SCM organiGation recruited the support and participation of other functional department personnelF The other participants "ere responsible for helping to define the supply base needs and supplier ?ualificationsF +uestions $hy "ould it be necessary to enlist the support of other organiGations to accomplish tasks that "ould clearly be SCM responsibilities) $hat is the risk in getting :or not getting; this support) #! Ho" "ould +S$%s SCM organiGation accurately determine the needs of the company "ith respect to supplier capabilities) Ho" "ould these capabilities be valued) $! #s there a method by "hich +S$ could be sure to include a supply base evaluation beyond the typical vie" of production suppliers only) $hy is this important and ho" do you ?uantify the impact) !

Strategic &nitiative
The strategic initiative should be to provide a competitive advantage to company performance by developing a self-sufficient supply base capable of providing "orld class designs9 products9 ?uality9 and customer supportF Through benchmarking of supplier capabilities9 supply consolidation and base reduction "ill allo" for improved customer of choice service and responseF The services should specifically include the follo"ing. *ngineering capabilities able to provide component design and product development as re?uired by commodity demandsF 5alue chain management capabilities capable of delivering price improvement and cost containment resulting in annual purchase order price reductionsF 'rganiGational and managerial fle1ibility to respond to changes in cost control and price improvement9 increasing ?uality re?uirements9 and technology and design advancementF

&mplementation Plan
The plan outlines a supply base benchmarking and consolidation strategy aimed at optimiGing the supply base to meet the competitive cost needs9 design re?uirements9 ?uality e1pectations9 and customer service supportF To this end9 a structured approach includes. 0 commodity cycle planF This is a planning tool detailing purchase information9 specifically forecasting future year purchases9 pricing levels9 and total commodity ac?uisitionF

Commodity benchmar"ing techni@uesF The development of an approach and tools for evaluating and comparing supplier capabilitiesF 1enchmar"ing and comparati#e analysisF This is a cross-functional capabilities assessment and force ranking of commodity suppliersF This activity drives stratification9 consolidation9 and future sourcing patternsF %upply base selection and redefinitionF This uses the data from the benchmarking efforts and establishes a specific methodology for determining retained and ne" suppliers into the commodity and supply baseF Consolidation and cost sa#ings opportunitiesF This involves ?uantifying and planning cost improvement roadmaps for individual suppliers and commoditiesF ,-ecution of long-term agreementsF This involves establishing pro forma contract re?uirements detailing economic curtailment and price improvement terms covering multiyear sourcingF Definition of commercial and @uality e-pectationsF This involves establishing ongoing supplier performance measures designed to drive supply base stratification and sourcing decisionsF /ngoing supply base maintenanceF This involves providing methodologies of entry into and elimination from the supply base9 using industry standards for ?uality and operating systemsF

C(MM(#&*% C%CL! PLA""&"1


+ata ac?uisition and analysis is key in planning any effortF The lean SCM "ork derived from the standard environment is based upon the future profile of the aggregated product and service purchasesF Traditionally9 historic data is used in determining supply base commercial performance and e1pectationsF -nfortunately9 this data can be vie"ed as interesting9 but unimportantF The information is interesting in that it provides a glimpse of past performance9 but is unimportant in that it provides little vision of the future re?uirementsF A commodity cycle plan :CC ; is a commodity level detailed vie" of aggregated buy9 both current and future forecastF The importance of this information is that it provides a basis upon "hich the SCM organiGation can build an e1pectation of improved financial performance through buy gro"thS provides the basis on "hich point leverage N4O negotiation opportunities can be defined and capitaliGed onS and provides economic impact forecasts9 "hich can be used in the financial planning and performance processF !igure //F/ is a simplified e1ample of a CC F The primary elements of the CC are. Supplier level summariesF #ndividual program :or material type if bulk or commodity materials; listingF urchase content per vehicle or program :a roll-up of all parts on specific platform;F Annual e1tended cost per program per year for four-year planning horiGonF Total purchases per year per supplierF Aggregate purchases for all suppliers "ithin the commodity for each year in the planning horiGonF Commodity 3 Commodity Cycle lan Supplier 3 Prog 3 Prog 8 R05ehicle R7AFEE R7AFEE 4EE7 R<974E9EEE R7AE9EEE 4EE< R79<4E9EEE RB4E9EEE 4EE> R79<4E9EEE RDEE9EEE 4EEA R79<>A9EEE RDB49EEE

*otal2 Supplier 8 Prog ; Prog A Prog 3: Prog 6 *otal2 Supplier ; Prog A Prog 3 Prog 8 Prog C *otal2 Supplier A Prog D Prog E Prog F *otal2 1rand *otal2 R05ehicle R4DFEE R7DF<E R05ehicle R7/F4E R7>F4E R7>F4E R7BFAE R05ehicle R44F<E R<7FEE R7AF4> R4EFCE

R<9ACE9EEE 4EE7 R>9B/49EEE R/79B/B9EEE RE R494D<9C44 R4/9B479C44 4EE7

R<9/<E9EEE 4EE< R4944C9CEE R/49C>B9EEE RE RE R/>9EC>9CEE 4EE<

R<974E9EEE 4EE> RE RE R79A4>9EEE RE R79A4>9EEE 4EE> RD9DC<9EEE RA9ACB9DDB R/9BAE9EEE R/E9<449B4E R4C9C><9B/B 4EE> R79D>C9>EE RACD9>EE R<9A<C9EEE 9A3HAADHD3D

R<9<4C9EEE 4EEA RE RE RD9EA49>EE RE RD9EA49>EE 4EEA RD9DC<9EEE RA9B>C9<EE R/9DEE9CEE R/E9>B/9A/A R4D94/<9C/A 4EEA R79DBE9/EE RACD9>EE R<9A>D9AEE 9ADH;CAHF3C

RC9<<C9EE RBE<9EEE RD9/>49EEE 4EE7

RA9ACB9DD< R/9<EC9EEE R>9/7A9D/4 R/794749DEA 4EE< R/9DC79AEE RACD9>EE R49AB79/EE 9;6H3;3HE:C

R4D>9>EE R4D>9>EE 9;6HE63H;88

Figure 33032 Commodity Cycle lan The tool provides a snapshot vie" of the coming sourcing pattern9 and helps to identify additional sourcing opportunities available in consolidation effortsF &ot identified in the e1ample9 but of tremendous benefit9 is the identification of future unsourced partsF Through the use of cost estimates9 the unsourced parts and programs provide for negotiation planning "ell in advance of sourcing actions9 furthering the point leverage approachF
N4O

oint leverage is a techni?ue used to create buy leverage in environments in "hich 8natural8 leverage does not e1istF The natural leverage is absent primarily due to the lack of significant siGe in transaction ?uantitiesF The point leverage approach creates for a short time a similar siGe component allo"ing a negotiating advantageF

C(MM(#&*% P'( F('MA


+irectly tied to the future forecast data of the commodity cycle plan is an overvie" of commodity performanceF The commodity pro forma provides a complete commodity financial summary9 including annual buy data9 forecasted savings per year attributed to long-term agreements and consolidation efforts9 as "ell as a summary of targeted suppliers "ithin the supply base and the effect of inflationary offsetsF The roll-up of the individual commodity pro formas provides a total

ac?uisition savings summary that can be used as the basis for corporate financial planningF !rom the reported levels9 the gap from the re?uired annual performance to the rolled up total provides the specific levels that need to be bridgedF !igure //F4 sho"s a completed commodity pro formaF The highlighted fields represent the areas re?uiring buyer intervention and completion9 "hile the balance of the document is programmed to be auto-calculatedF Commodity 8 Total current sources. Target Y of sources. A < 8::; Y Suppliers LTA Coverage Annual ,uy A 4>V R//9AAE97DB 8::A > 4>V R/4974/9</< 8::6 > B>V R/<9EAE9<7D 8::C < D>V R/A9CEA9</C

Forcasted !conomic !5posure ?F%:;-:C@ Material. Labor. 'verhead. Total economic e1posure !orcasted annual buy U e1posure R/4D9>/4 R<C9DB< R/A/9B7E R7<E94/> R/49EEE9A/4 R/E79C4E R<>9C7A R/BE9CDC R74E9>>< R/49A</DAB R//C9<B7 R>497E> R/D>9E/C R7A>9BDA R/<9<4A947> R/</9A// RA49>4E R4779/E> R<7B947A R/B94<79A><

Planned Cost Savings and Avoidance Savings2 &et productivity ,esourcing0negotiate Total savings Avoidances2 Material Labor 'verhead Total avoidances Total savings and avoidances "et Fiscal %ear &mpact >V cap R7497BC R<C9DB< R/A/9B7E 4<79EC/ R<<B9/7C R:/EA9D47; R4>9D>> R<>9C7A R/BE9CDC R4<49ACD R<>C97/7 R:/7B9BAE; RCC9C>> R>497E> R/D>9E/C R77A9/BC R/9EB<97>/ R:BEC9>>>; R/7<9>7E RA49>4E R4779/E> R<7E9/>> R/9><B9BC4 R:/9//E9><A; <F>V 4F>V R/7/9/BD RB49CBB R4E<9E>B R/7C9A/A RBB9EED R4/>9A4> R<B<9><E R4A79A77 RB7C9/B7 RB/C9<B< R7DD9/>4 R/9//B9A4B

Figure 33082 Commodity ro !orma This planning document demonstrates the increasing level of savings achieved each year through increased long-term contract coverage9 savings obtained in consolidation driven by decreasing the supply base9 and incremental offsets to inflationary factorsF The cap listed in the absorbed

economics portion represents the high end of the inflationary move that the suppliers are contractually bound to acceptF +riving the programming of this document is a fairly in-depth level of inflationary forecasts for material9 labor9 and overhead factorsF

C(MM(#&*% S$PPL&!' ,!"CHMA'-&"1


Benchmarking techni?ues usually imply measuring your o"n processes against others to assess performance9 and perhaps identifying best practices :assuming the participants have best practices in place;F -nfortunately for the buying organiGations9 most suppliers have not participated in a full system benchmarking activity and are unable to obMectively provide comparison to competitorsF Commodity benchmarking serves to provide this service for the suppliersF 'f consideration in developing a benchmarking activity is the belief that institutional ?uality certifications such as #S'DEEE9 @SDEEE9 etcF9 do not provide for a certainty of capability9 but simply adherence to internal "ork instruction proceduresF Benchmarking9 by contrast9 evaluates and ranks various determinants of capabilities in relation to an e1pected standard as "ell as in contrast to others evaluatedF !igure //F7 provides a "orkflo" analysis of a benchmarking processF The initial steps rely on the information in the CC in determining the needed number of suppliers based on annual e1penditures as "ell as commodity comple1ityF #t is from this basis that the analysis selects the supplier neededF #n addition9 the effort relies on a cross-functional team for determining the supplier base as to create 8our suppliers8 vsF 8purchasing%s suppliersF8

Figure 330;2 Benchmarking and Consolidation -pon the completion of the benchmarking evaluations9 a force ranking is completed to select the targeted number of suppliersF These suppliers are debriefed "ith respect to the observed results9 and are provided anonymous comparisons to others that have been revie"ed to provide benchmarking data that is other"ise unobtainableF #t is on the results of the benchmarking visits and observations that ongoing improvement efforts are basedF Suppliers falling short of the benchmark force ranking level are debriefed and details are given as to the reason for their elimination from the supply baseF +uring the debrief process the opportunity for incremental business through consolidation and open sourcing is utiliGed to secure agreement to specific terms of business9 including agreement to annual price improvements9 management and absorption of inflationary economics9 and adherence to other commercial and ?uality re?uirementsF This point of negotiation is "here the ma1imum leverage e1ists9 and it should be "isely utiliGed in securing the most favorable commercial agreementsF

Supplier benchmarking is not an ongoing process9 but a point process that is used on an infre?uent basisF Conducting such a process is typically beneficial only every four to five years9 or if there is a maMor shift in product or manufacturing technologyF 'ther maintenance systems are put into place to manage the ongoing evaluation and stratification effortsF These systems are revie"ed in the follo"ing sectionF

S$PPL% ,AS! #!)!L(PM!"* A"# MA&"*!"A"C!


The supplier benchmarking activity leads into a closed loop supply base management systemF $hereas benchmarking is a point process9 the supply base management system is designed to provide for ongoing supplier managementF !igure //F< sho"s the "ay in "hich supply base management takes on dynamic management by providing for entry assessments9 performance measures and stratification9 elimination plans9 and annual strategy revie"sF

Figure 330A2 Supply Base +evelopment +ynamic supply base management means that methods are established to e1pand and contract the number and mi1 of suppliers in response to changing product and business needsF The use of supplier scorecards or other measures ensures that the performance of e1isting suppliers is sufficient to meeting the gro"ing and changing demands of businessF The use of industry accepted evaluation processes provides the ability to ?ualify and introduce ne" suppliers "here and "hen necessary :!igure //F< reflects automotive standards from S@DEEE re?uirements;F The annual supply strategy revie"s puts these actions into place "hen defining future sourcing strategiesF

S$MMA'%
Supply base management is the backbone process upon "hich other strategic SCM efforts can buildF $ithout a clear understanding of "ho9 ho" many9 and in "hat "ay suppliers are managed "ithin an SCM organiGation9 there is limited success in structurally achieving sustained improvement in any of the ?uality9 cost9 and delivery metricsF AnalyGing internal buy data9 supplier performance9 and methods of evaluation provides a clear basis "ith "hich to move for"ardF CAS! S*$#% 3308 +uestions* 30 $hy "ould it be necessary to enlist the support of other organiGations to accomplish tasks that "ould clearly be SCM responsibilities) $hat is the risk in getting :or not getting; this support) 80 Ho" "ould +S$%s SCM organiGation accurately determine the needs of the company "ith respect to supplier capabilities) Ho" "ould these capabilities be valued) ;0 #s there a method by "hich +S$ could be sure to include a supply base evaluation beyond the typical vie" of production suppliers only) $hy is this important and ho" do you ?uantify the impact) Ans ers 30 Historically9 +S$ "as victim to finger-pointing "hen suppliers failed to perform in either program launch or production supportF !unctional groups "ithin the organiGation "ould blame the supplier selected by purchasing9 or selected by engineering9 or someone else for the problems that "ere being e1periencedF The perception "as that if 8they8 :iFeF9 the functional groups; had had the chance to provide input into sourcing or make the decision9 these issues "ould not have occurredF #ncluding the maMor functional areas in the benchmarking and selection process gave each group input into "hich supplier made up the ne" supply baseF Because of this9 "hile any specific individual may not have selected a specific supplier9 someone representing their interests and part of their organiGation did participateF The supply base no" becomes 8our suppliers8 versus anything elseF The risk of not including these other functions is not only in a lack of acceptance9 but may actually result in creating failure of performanceF 80 The preparation phase or pre-benchmarking activity brought an analysis of the historic issue in part and supplier performanceF #n addition9 an assessment "as completed of the anticipated technology and usage shifts for future commodity applicationsF #t "as on the basis of this information that the scope of re?uired supplier capabilities "as determinedF #n some cases design capabilities "ere re?uired of the suppliers9 and in other commodities they "ere not re?uiredF The capabilities "ere valued in a total cost of ac?uisition model9 contrasting internal costs "ith procured costsF #nternal profitability rates "ere set for all processes9 and through a classic makebuy analysis "ere evaluated for each ac?uisition planF Affordable cost target methods "ere implemented to ensure cost creep did not occurF ;0 +S$ e1panded its vie" of SCM to encompass all elements of the value chainF By changing its vie"9 all ac?uired goods and services affecting product value9 "hether production or not9 "as subMect to the same scrutiny and strategic initiativesF The importance of this scrutiny lies in the fact that most organiGations "ill have an incremental cost base of 4> to 7> percent above the production cost levelF Savings achieved from this base may actually e1ceed production savings due to the ne"ness of evaluation-the lo" hanging fruit hasn%t been harvested yetF

Chapter 382 Supplier >uality and #evelopment


>$AL&*% )!'S$S #!)!L(PM!"*
'rganiGations that embrace supplier ?uality responsibilities as part of SCM generally approach the issue "ith a focus on ?uality resolutionF Simply fi1ing supplier related ?uality issues to provide immediate containment in support of operational concerns usually does not provide systemic resolution to the underlying cause of these problemsF Because of this dichotomy of effort to resolution9 distinguishing bet"een supplier ?uality and supplier development is an important issueF Supplier ?uality is the organiGational effort re?uired to contain supplier problems9 "orking to"ard a permanent corrective actionF The problem resolution approach in a supplier ?uality organiGation is generally reactive in nature9 responding to situations that have already occurredF Significant labor hours are spent in containment and detection of ?uality issues measured and reported typically in parts per million : M; defect levelsF By contrast9 little time is spent on prevention9 and assistance to suppliers not hitting the radar screen is often none1istentF Supplier development includes a longer-horiGon vie" of supplier supportF The developmental activities are geared to"ard aiding in the construction of robust manufacturing and ?uality systems to eliminate the potential for product failuresF +evelopment efforts "ork almost entirely on the prevention of ?uality problems9 seeking to institutionaliGe the ability to detect and contain random reMect occurrencesF Allocation of supplier support time is based upon the output of commodity and supplier analysis9 performance stratification9 and commodity team determinationF

S$PPL&!' >$AL&*% A"# S$PPL&!' #!)!L(PM!"* PLA" Strategic initiative


The strategic initiative here is to develop a self-contained supplier ?uality assurance :S@A; department "ithin the corporate materials functionF The strategic focus of this activity is to develop best-in-class supplier ?uality e1pectations and performance measuring methodologiesF Through these efforts supplier manufacturing ?uality capabilities "ill be driven through @SDEEE re?uirements9 standardiGation of performance to A#A2 methods and standards9 and '*M ?uality e1pectationsF

&mplementation Plan
The implementation plan starts "ith the application of defined ?uality metrics : M9 A 9 +CA,9 delivery9 commercial9 etcF; to stratify the supply base based on ongoing performanceF The @SDEEE @SA can be used as a supplier audit methodology to verify supplier capability and improvement gainsF +epartmental structure reflects the varying needs for supplier ?uality supportF Tactical :daily operational; support monitors and corrects immediate production support issuesF A submission9 +CA, resolution9 and postreadiness revie" launch support is maintained "ithin the operation facilities by supplier ?uality engineers :S@*; and supplier ?uality technicians :S@T;F Strategic development support is geared to"ard systemic supplier ?uality problem resolutionF Through the application of ?uality planning tools :eFgF9 A @ 9 @!+9 C+9 etcF;9 and through the

application of ongoing performance indicators9 strategic supplier development engineers serve as technical consultants to "ork "ith and resolve reoccurring supplier ?uality issuesF CAS! S*$#% 3803 'rganiGationally9 +S$%s supplier ?uality staff reported through the purchasing organiGation "ith a ?uality engineer reporting directly to a commodity buyerF The plant level activities such as part inspection and approval "ere independent from the on-site supplier containment effortsF *ach of the operating units individually determined their desire for and need of supplier ?uality supportF $hile determining the integrated SCM strategy9 +S$ began to consider the efforts that "ould be re?uired to represent ?uality functional obMectives9 along "ith post-benchmarking efforts re?uired to perpetuate a greatly enhanced supply baseF +uestions #s the organiGational structure supporting supplier ?uality at +S$ sufficient to assist the SCM organiGation in moving its supply base for"ard) #f not9 "hat alternative e1ists to do this) #! Ho" are development activities accomplished "ithin organiGations structured as +S$ is structured) -nder this scenario9 ho" is the division of supplier improvement tasks accomplished) $! $hat should be the ongoing role of supplier ?uality or supplier development in +S$) !

S$PPL&!' >$AL&*% #!)!L(PM!"* S*'$C*$'!


&either supplier ?uality nor supplier development is generally considered part of supply chain managementF art of the issue is the definition of supply chain management as discussed in Chapter /9 in "hich supply chain management is generally considered material movementF The more likely reason is that ?uality is generally considered an operational responsibility and not a supply chain elementF -nfortunately9 in the hierarchy of redress for ?uality concerns9 supplier issues are treated like the 8ugly redheaded stepchild8 by the ?uality organiGationF Customer issues receive highest priorityF #nternal ?uality issues come second9 "ith supplier issues a distant thirdF The third place attention only comes "hen resources may be availableF 'rganiGational options geared to"ard supporting both tactical and developmental responsibilities are normally constrained by limited resourcesF Most companies cannot increase staffing levels to accommodate developmental effortsF !igure /4F/ provides an e1ample of using limited resources in multiple roles to create the skill and kno"ledge base capable of providing the developmental supportF This organiGational option clearly delineates bet"een tactical and developmental responsibilitiesF The purpose of this differentiation is to ensure that the limited developmental resources are not diverted into daily problemsolving activitiesF

Figure 38032 Supplier +evelopment

&MP'()&"1 S$PPL&!' P!'F('MA"C!


#n "orking to"ard achieving long-lasting development efforts9 the SCM development team must focus on three fundamental areas. performance stratification of the supply base9 development of specific corrective actions9 and the use of process specialists to attack systemic ?uality issuesF #n each commodity9 supplier development identifies and measures performance characteristics on "hich development focus and sourcing preference "ill be basedF The data accumulation and resulting ranks provide obMective sourcing plans9 consistent "ith industry re?uirements :such as approved supplier lists;F The stratification of the supply base can be based on the follo"ing criteria. Preferred partner. These suppliers meet the highest performance measuresF They achieve all commercial and ?uality supplier re?uirements as "ell as all program development milestones and launch re?uirementsF These suppliers can generally be considered selfsufficient9 re?uiring little or no specific development effortsF 0ssociate partner. These suppliers have generally consistent ?uality practices and e1hibit predictable product9 delivery9 and support performanceF 'ccasional ?uality problems result in lo"ered stratification scores9 re?uiring a greater level of development supportF #t is generally this classification to"ard "hich the maMority of development efforts are gearedF Probationary partner. This stratification level indicates a supplier "ith obvious deficit performance9 but that has been identified as necessary for the supply basesF Suppliers under this classification retain e1isting business but are ineligible to be considered for additional businessF Supplier ?uality activities are present in this level over development effortsF The focus on containment and specific problem resolution occupies the improvement effortsF Transition supplier. Transition suppliers are those "ith deficit performance9 "ith no development plans in placeF These suppliers "ill be phased out either through active resourcing or attrition of e1isting partsF The second primary area of focus is the development of specific corrective action strategies for each category of stratification defined in the preceding listF This effort balances the tactical ?uality

effort and resources "ith the development effort and resources9 creating a targeted focus versus a random approach to effort allocationF The third area in supply base development is the use of supplier ?uality engineers and supplier development engineers as process specialists to attack and correct systemic ?uality issuesF By leveraging resources9 the assignment of ?uality or development champions provides significant improvements across the entire supply baseF

C$S*(M!'4S$PPL&!' '!LA*&("SH&PS
Among the most difficult issues to resolve in supplier ?uality and development is the definition of the relationship bet"een the customer and supplierF The naming convention of the stratification levels is designed to convey the intent behind each of the levelsF At those levels in "hich support activities are to be provided9 the stratification identifies the suppliers as partnersF $hile this is an overused and seldom follo"ed term9 partners imply a cooperative effort in obtaining performance improvementsF +epending on the siGe and comple1ity of the customer9 direction and communication to the supplier can often provide mi1ed messages concerning the e1pected performance and nature of the relationshipF There are a number of simple relationship steps that can be taken to facilitate improved communication and relationship bet"een supplier and customerF Among those are. #dentify a supplier ?uality assurance commodity specialist to facilitate single point ?uality contact :iFeF9 to be a liaison bet"een the customer and supplier;F #mprove the consistency of direction to the supplierF -se published industry ?uality standards as the basis for supplier ?uality standardsF +evelop and implement a supplier recognition program for key measurablesF +rive A :production parts approval process; to level # and #5 self-certificationF *ach of these points creates a simple means to improve communication and recognition of supplier performanceF CAS! S*$#% 3808 +uestions 30 #s the organiGational structure supporting supplier ?uality at +S$ sufficient to assist the SCM organiGation in moving its supply base for"ard) #f not9 "hat alternative e1ists to do this) 80 Ho" are development activities accomplished "ithin organiGations structured as +S$ is structured) -nder this scenario9 ho" is the division of supplier improvement tasks accomplished) ;0 $hat should be the ongoing role of supplier ?uality or supplier development in +S$) Ans ers 30 $hile an integrated SCM approach led by a commodity buyer may have benefit9 this organiGation "ould not provide the ?uality functional leadership necessary to ensure the kno"ledge base re?uiredF +S$ incorporated a supplier development director as a direct report to the 5 of SCM9 creating a peer relationship "ith purchasing and distribution0logisticsF The effect of this move "as to create matri1ed partners assigned by the commodity group and strategic or tactical supportF 80 2enerally9 supplier development activities are not accomplished "ithin organiGations like +S$%s

initial structureF There really is no division of labor9 as the entire focus is on reactive supplier ?uality versus long-term supplier developmentF ;0 The ongoing role of supplier ?uality and development should be one in "hich resources are utiliGed in support of the overall SCM initiative9 and by association "ith the corporate overarching obMectivesF $hile ?uality progress is rarely translated in profit impact9 +S$ chose to ?uantify the improvement to demonstrate the contribution to the company%s bottom lineF

Chapter 3;2 Cost Management and Control


C(S* MA"A1!M!"* )!'S$S C("*'(L
The procurement arm of SCM is traditionally the part of the organiGation responsible for delivering cost improvement in SCMF Historically this activity has come full circle from annual open ?uoting9 to long-term contracts "ith built-in reductions9 back to open ?uoting via electronic auction sitesF $hile the technology of achieving this type of savings has progressed9 the underlying philosophy has notF This simple process relies almost entirely on market forces9 treats all suppliers the same regardless of performance or capability9 and takes very little thought or creativity in deploymentF This approach isn%t entirely bad9 and may be effectively applied in pure commodity market purchasesF The application isn%t nearly as simple "ith custom and engineered productsF 'ften9 industry ?uality standards limit the universe of suppliers able to ?uote9 as in the case of automotive "here @SDEEE re?uires an approved supplier list on "hich sourcing must be basedF Because of this9 the open ?uote approach fails either because of the limited participants or because of the inclusion of nonapproved suppliers for the sole purpose of "hipsa"ing priceF The acceptance of open ?uoting is driven by its simplicity9 but also by the vie" of responsibility regarding cost improvementF $here cost reduction is seen solely as a purchasing issue9 all other SCM efforts disconnect from the cost obMectiveF *1panding the vie" of cost from price to complete value chain-or total cost of ac?uisition :TCA; or total cost of o"nership :TC';-re?uires a broader and more inclusive approach to cost managementF #t is "ith this broader vie" that the various approaches can be separated into cost management and cost controlF Simply stated9 cost management includes those activities that affect the basic cost structure of a productF Cost control includes those activities that result in the reduction of the cost or price of e1isting productsF These can be seen as having long- and short-term effectsF -sing analogies from our lean discussion9 cost management e?uals kaiGen9 "hereas cost control e?uals kaikakuF

S*'A*!1&C C(S* MA"A1!M!"* A"# C("*'(L


The business plan initiative for cost management and cost control encompasses a variety of elementsF The initative is a straightfor"ard articulation of the desired effort9 but the implementation plan needs to take on individual subelements to deliver the obMective resultsF #n the implementation profile there are five maMor subsets. /; immediate cost control initiatives :"hich is the most closely tied to short term profit improvement;S 4; cost management initiativesS 7; cost target setting process creation :"hich "ill be used as a subset of cost management;S <;

value management initiativesS and >; process improvementsF #t is the combined use of these five elements that affect the multiple functional areas "ith "hich institutionaliGed cost reductions can be achieved in an ongoing fashionF

Strategic &nitiative
The strategic initiative here is to develop cost management practices that institutionaliGe cost reduction and ?uality improvement throughout the supply baseF The implementation and e1ecution of these initiatives is completed through a cooperative effort "ith the supply base9 to ensure e?uity and participationF CAS! S*$#% 3;03 The supply chain management organiGation "ithin +S$ had structured its organiGation to support the various internal customer demands related to supply availability9 delivery9 ?uality9 and priceF #n these areas substantive improvement had been achieved9 "ith increasing levels in the rate of improvementF $ith the development of the obMectives of the organiGation9 the siGe and deployment of the personnel resources had increasedF $ith the ne" scope of responsibility9 the financial contribution that the SCM organiGation "as making also increasedF Ho"ever9 "hile there "as an increase in the procurement contributions9 there "as not a clear understanding of the impact9 if any9 that other parts of the SCM organiGation "ere making to"ard cost improvementF Because of this the organiGation started to come under fire from other departmentsF +uestions #n "hat "ays could the supply chain organiGation contribute to the cost management and cost improvement of the company) #! $hy "as the SCM group unable to articulate the full level of savings contribution that "as being made) $hat could be done differently to better articulate the full scope of savings) $! +S$%s 5 of Supply Chain Management "as concerned about the overemphasis on the financial impact of the SCM contributionsF $hat can be done to alleviate these concerns) !

&mplementation Plan
The follo"ing list e1amines the elements of an effective cost management and cost control implementation plan. Cost control and impro#ementF This includes. ! Specific and precise identification of increasing annual price improvement and cost reduction tasks consistent "ith industry and commodity conditions :iFeF9 individualiGed commodity strategies;F #! (aikaku-focused :near-term; efforts primarily driven from resourcing opportunities generated as outcomes of benchmarking and consolidation activitiesF $! (aiGen-focused :longer-term; efforts on implementing collaborative supplier improvement actions and multi-year sourcing agreements :including ?uality9 cost9 and delivery improvement re?uirements;F 4! Annual value chain analysis identifying annual commodity improvement "ith achievable implementationF Cost managementF This element involves. ! -sing affordable cost target :ACT; based sourcing processesF The ACT sourcing methodology is based upon achieving program-specific corporate profitability obMectives and meeting customer program-level target price re?uirementsF #! Launching a supplier development process deploying kaiGen- and kaikaku-based techni?ues to assist suppliers% ability to deliver immediate and sustained cost improvementF Cost target settingF This involves. ! Creating target-setting methodologies for use in source selection efforts :cost

management initiative;F Creating a supplier cost database :supply data "arehouse; to identify and record surrogate target prices and target conformance success to enable financial goal setting for future programsF $! Through design for assembly0design for manufacturing :+!A0+!M; modeling9 deploying a process to capture design and production cost-reduction opportunitiesF 4! #n conMunction "ith target setting methods9 using a multidimensional logic-based detail ?uote analysis and pricing techni?ues for final source selectionF 2alue managementF This involves. ! *valuating full supply value stream cost elements to identify supply chain savings opportunitiesF #! -sing 5A05* "orkshops to facilitate identification of design-based savings9 and using data to enable opportunity forecasting in like-product platformsF $! #nstitutionaliGing value management data retention to a linkage methodology to retain lessons learned for ne1t-generation product designF 4! #ncorporating supplier value management goals into commercial e1pectations and supplier performance monitoringF %upply chain process impro#ementF This involves. ! #ntroducing process improvement techni?ues :kaiGen0kaikaku; to the supply base9 providing process facilitation throughout the supply and value chainF #! Creating an institutionaliGed process improvement focus through the incorporation of cost control methods into the MB systemF $! Modeling all supply base process improvement initiatives to an internal lean methodology standard ensuring coordination in lean effortsF #!

*ach of these elements is e1amined in more detail in the follo"ing sectionsF

30 C(S* C("*'(L A"# &MP'()!M!"* Annual Cost 'eductions


#n many industries cost control :meaning regularly occurring and planned cost reductions; is achieved by the rapid development of technologyF This is especially true in computer9 telecommunications9 and other technology industriesF -nfortunately not all industries share a similar fortune9 "ith many fighting to achieve cost and price improvements over timeF Standard environment supply chain plans need to include an element of price improvement by necessityF Although many industries do not e1perience the effects of technology driven savings9 the marketplace in "hich products are sold continues to face do"n"ard price pressure driven either from consumer demands or from products imported from lo"er-cost global regionsF AnnualiGed price reductions have historically been targeted in a random fashionF The method of determining "hat the re?uired level of cost improvement should be in total9 by commodity or by supplier9 has often been one of guessing9 hope9 and prayerF There generally is little business logic behind these levels9 although there are some very simple "ays in "hich to put sense behind the demandsF !igure /7F/ demonstrates one such approachF This tool incorporates enterprise-"ide cost reduction needs9 general market conditions9 and commodity specific factors to derive a specific supplier level cost improvement targetF #n addition to these market factors driving price reduction9 this format also includes consideration of previously achieved reductionsF The combination of these elements provides a logical basis for supplier- and commodity-specific cost or price reductionsF

Figure 3;032

5 Target !orm

-aikaku2 ,enchmarking and Consolidation


#n the standard environment9 short-term cost savings can be achieved through managing market forces as defined in the previous paragraphs or through active interventionF Like the establishment of the annualiGed price improvement9 these interventions can often lack the obMective bases for decisionmakingF Consolidation in supply chain management occurs in nearly every industry9 usually "ithout reasonF Capabilities benchmarking9 like that detailed in Chapter // and sho"n in !igure //F7 defines a process that uses comparative data and support tools to target specific levels of supply base structureF !rom these specific consolidation plans9 a targeted savings level can be pursued for incorporation into a near-term savings initiativeF As discussed previously9 kaikaku actions focus on structured radical change for the purpose of achieving improvement in the short termF Benchmarking and consolidation fit precisely "ith this definitionF !igure /7F4 sho"s typical timing of implementing a benchmarking processF #n this process9 evaluation9 consolidation planning9 cost improvement9 and beginning steps of actual

consolidation occur for maMor commodity groupings "ithin /4 monthsF Concurrent commodity revie"s can occur based on the resources availableF

Figure 3;082 Benchmarking Timing

-aiLen Actions2 Long *erm Savings and >uality Agreements


art of the cost control actions resulting from benchmarking and consolidation includes the ability to achieve multiyear agreements outlining improvements in price9 ?uality9 delivery and other commercial termsF The resourcing opportunities identified as part of the consolidation actions9 along "ith a narro"er supply base9 create leveraged ongoing sourcing opportunities and an environment in "hich the re?uired improvements can be capturedF This redefining of the commercial environment provides the bridge bet"een shorter-term cost improvement and longerterm cost managementF By building in a kno"n savings threshold9 the SCM organiGation is able to provide definitive information to the annual financial plan on "hich profit forecasts can be basedF !igure /7F7 sho"s the importance of secured multiyear price reduction agreements on net cost impactF This form sho"s the increase in contract coverage :as a percentage of purchase price; resulting in an average 7F> percent per year price reductionF Also9 the contracts typically re?uire full supplier responsibility of economic movementsN/O further contributing to the net savings amountF !inally9 the reduction in the number of suppliers in the base drives increases in annual e1penditures under contract9 as "ell as e1penditures available for consolidation and resourcing savingsF Like the e1ample in the crisis environment9 target prices used during the price benchmarking allo" for incremental savingsF !igure /7F7 sho"s an average 7 percent saving on resourcing effortsF Commodity 8 Total current sources. A Target Y of sources. 4 8::A Y Suppliers LTA Coverage Annual ,uy A >EV R8::6 < A>V R<94<49/<> 8::C 7 C>V R>9BA>9>/4 8::D 7 /EEV RA94/<9BB/

?:::/s@ Forcasted !conomic !5posure ?F%:A-:E@ Material. Labor. 'verhead. Total economic e1posure !orcasted annual buy U e1posure R4DD9D7C R/E49A7A R///9<77 R>/<9EEB R/BA9D4/ RCC9B7B R/EC9BB> R7B<9<77 R4//9/>< RBC RD> R4//974B R/BA9D4/ RBC RD> R/BB9ED7

R>/<9EEB

R<9A/A9>BC

R>9DBA9C7D

RA97D/9CA<

Planned Cost Savings and Avoidance Savings2 &et productivity 7F>V ,esourcing0negotiate 7FEV Total savings Avoidances2 Material >V cap Labor 'verhead Total avoidances Total savings and avoidances "et Fiscal %ear &mpact R/<D9DAD R/E49A7A R///9<77 R7A<9E7C R7A<9E7C R/<D9DAD R//<9DDC RCC9B7B R/EC9BB> R7/49>/E R<D/9B</ R://B97EC; R/BD9<C/ RBC RD> R/BD9A>< RA<C9/DC R:<7A9CB/; R/BA9D4/ RBC RD> R/BB9ED7 R>C/9E>7 R:<E79DAE; RE RE RE RDA9>ED RC49B44 R/BD947/ R/B/9>4< R4DB9E4/ R<AC9><> R4/B9>/B R/CA9<<7 R<E79DAE

Figure 3;0;2 LTA #mpact


N/O

The economic increase due to labor and overhead changes are assumed never to be considered customer responsibilityF !igure /7F7 sho"s offsets increasing due to ra" material price changes9 "ith increasing absorption based on greater contract coverageF

80 C(S* MA"A1!M!"*
Cost management differs greatly from cost control in that cost management focuses on the longterm institutionaliGation of supply chain business practices aimed at achieving and maintaining cost savings trendsF The efforts undertaken here represent fundamental business practices versus individual cost savings actionsF The importance of this distinction is to provide clarity of

action "ithin the SCM group "hen determining individual "ork elementsF The timing9 implementation9 and use of the cost management tools has a very different profile than the cost improvement actionsF

AC*-based Sourcing
The importance of the affordable cost target :ACT; methodology in cost management is that the practice provides a direct link bet"een procurement costs and individual program profitabilityF The practice drives the internal organiGation and the supplier organiGations to a price-based costing relationshipF Through these efforts9 the kno"n affordable price determines the allo"able costs and results in improvement and development efforts aimed at delivering the re?uired cost levelsF $hile the levels are not al"ays achievable9 they do provide a specific goal and not a generaliGed directionF Many purchasing organiGations are reluctant to use cost targets "hen ?uoting suppliers9 often believing that the result may be higher ?uoted pricesF This vie" of the target as the 8floor8 is generally incorrectF $here cost targets are realistically created9 and "here these targets are coupled "ith continued competitive ?uoting9 the prices ?uoted often come in belo" the targetF The target becomes the ceiling of the ?uotes received from the suppliersF The risk in this approach is often driven by financial organiGations "here the targets become so aggressive they do not reflect any real or achievable priceF All credibility of the target pricing process can be lost9 so SCM leaders need to take the lead role in maintaining the integrity of this processF

Supplier #evelopment Cost Management


Chapter /4 outlined the performance improvement characteristics of a robust supplier development processF *?ually important to the effects on ?uality9 delivery9 and responsiveness is the effect these actions have on cost improvement and managementF $hile supplier ?uality efforts resolve immediate issues9 supplier development efforts affect total performanceF Most SCM organiGations fail to recogniGe the financial impact that these efforts have and get caught up in fire fighting versus planningF The breadth of the lean efforts described in this book can be applied to lo"er-tier suppliersF The problem becomes the availability of resources to define9 train9 and implement lean SCM action "hen total company revenues fall belo" :or never rise to; a level in "hich these support services can be affordedF !igure /7F< represents an actual company e1perience "here supplier development efforts "ere focused on systemic improvementF Although not perfect9 as evidenced by increases in M in the last t"o years9 the efforts targeted a >E percent year-over-year improvementF

Figure 3;0A2 Supplier @uality0Cost #mprovement The savings directed back to the supply base by these efforts are a simple calculation of the total

turnover multiplied by the M rate9 resulting in a reMect savingsF The internal impact includes these9 plus detection and prevention costs9 including customer return and "arranty costsF The savings due to reduced ?uality reMections for a R> billion annual buy "ould be nearly R77 millionF The savings achieved through the efforts of the company%s supplier development organiGation can be captured commercially through the incremental commodity and supplier specific obMectives as defined earlier in this chapterF The internal inspection9 detection9 prevention9 and "arranty savings are easily e?ual to this amountF $hile not able to eliminate these internal tasks9 the resource allocation to them can be reducedF ,eductions in supplier product nonconformance represent only a small portion of the development opportunitiesF *?uivalent lo"er-tier savings actions are attainable9 as "ell as the internal implementation of lean manufacturing techni?uesF The supplier development efforts9 "hile focused on improved process9 must not lose sight of the contribution the organiGation can make in overall SCM cost management activitiesF

;0 C(S* *A'1!* S!**&"1


Among the cost management strategies described "as the use of a cost target sourcing methodF ,ather than Must vie"ing the targeting process as a tool9 there must be recognition of the importance of setting the appropriate methodologies and usage9 as "ell as an understanding of ho" to capture and manage the data for the greatest useF The cost management information and the price benchmarking in the crisis section discussed ho" and "hy to use a target processF This section details "hat to capture and "hat to do "ith the informationF

Supply #ata +arehouse


The target development process that "as sho"n in Chapter A provides individual definition for each program and program bill of materialsF Also important to the process is the development of a surrogate data base as sho"n in !igure AF/F A supplier cost database in "hich like parts drive a surrogate starting point9 ensures a commonality of price targets and continued improvement through incremental cost reductionsF The need to capture past "ork as a basis for current and future pricing efforts re?uires the ease of reference that such a data base can provideF Through ebusiness and e-procurement tools9 data management or data mining allo" financial goal setting for future programs to be based on realistic product costing and cost improvement assumptionsF

#FA4#FM Modeling
+esign for assembly and design for manufacturing models provide the ability to link product design features to production efficienciesF This link e1tends the concept of supply chain management into value chain management by recogniGing the constraints in manufacturing efficiencies and design%s contribution to these constraintsF Motorola%s early "ork in Si1 Sigma "as centered on the effects of design on production ?uality conformanceF Like the efforts in supplier development9 improvements gained and retained through +!A0+!M "ork contribute to cost structure improvementF +!A0+!M modeling packages generally include economic factors related to specific material and labor usage9 overhead costs for specific manufacturing processes9 and assembly comple1ity factors to derive additional assembly level cost or price targetsF #n conMunction "ith the supply data "arehouse surrogates and cost targeting process9 these various pieces of data provide the broadest level of pricing data available for the determination of program level financial performance targetsF The actual versus forecasted performance to the +!A0+!M obMectives provides additional data "ith "hich to capture and retain design and manufacturing improvementsF

Logic Model Sourcing

Logic model sourcing is a colorful "ay to say that sourcing is based on more factors than priceF By using multidimensional data factors9 including cost9 ?uality performance9 delivery performance9 and others9 sourcing decisions are made "hich support the "idest scope of organiGational needs at the best valueF rice is only a single factor of the sourcing decisionF !igure /7F> is one such logic-based sourcing modelF #n addition to the various cost factors and relation to target pricing9 the model includes transportation factors through pro1imity measures and other supply chain factorsF The decision is driven through a variable scoring method to specifically defined stratification standardsF #n addition9 the sourcing model provides a recapitulation summary in "hich appropriate sourcing approval can be securedF This provides a single format in "hich multiple supply and value chain elements can be evaluated9 as "ell as providing a variable "eighting scheme to accurately reflect the variations in commodity re?uirements and sensitivityF

Part Sourcing Matri5 *arget Price2MMMMMMMMMMMMMM MMMMM +eight Suppl ier Pri ce A:7 Cost * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF To be seen by Criter a ,elati E E E E E E E E E E E E Part "umber2MMMMMMMMMMMMMMMMMM Part "ame2MMMMMMMMMMMMMM MMMM 8:7 #eliv ery * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF Criter a *nter E E EFE E E EFE E E EFE E E EFE E E EFE E E EFE /EE U ,ating X Best E ,ating X -nsuitable *ot al Poi nts 'ema rks

8:7 >ualit y * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF Criter a / ppm E E

67Loca tion *vF ts F *vF ts F *vF ts F *vF ts F *vF ts F *vF ts F Critera E-/X /EE E E E E E E E E E E E E

3:7 Produc tivity *v F t sF *v F t sF *v F t sF *v F t sF *v F t sF *v F t sF Critera \>V X /EE <F> E E E E E E E E E E E E

67 Paym ent * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF * vF t sF Criter a AE E E E E E E E E E E E E

E E E E E E E E E E

Part Sourcing Matri5 *arget Price2MMMMMMMMMMMMMM MMMMM +eight Suppl ier Mana ger +irect or 5 urch asing Pri ce A:7 Cost on to price targetF #f no target or cost estim ate use lo"est price ?uote Part "umber2MMMMMMMMMMMMMMMMMM Part "ame2MMMMMMMMMMMMMM MMMM 8:7 #eliv ery delive ry rating from most recent period *ot 'ema al rks Poi nts +ate IIIIIIIIIIII I Signature IIIIIIIIIIII IIIIII

8:7 >ualit y X /EE A7 ppm X DE 7/C ppm X CE 4BEE ppm X BE \4BEE ppm X AE

67Loca tion /EE 4>E X D> 4>E >EE X DE >EE B>E X CE B>E />EE X BE />EE U X AE

3:7 Produc tivity - >V X DE 7F> <F>V X CE 4F> 7F>V X BE / 4F>V X AE E /V X >E

67 Paym ent pro1 X /EE <> pro1 X DE 7E pro1 X CE &et 7E0dis c X BE &et 7E X AE

Figure 3;062 Logic Sourcing Matri1

A0 )AL$! MA"A1!M!"*
5alue management :5M; broadly defines the various efforts to capture and retain improvements at each step of the value and supply chainF Cost management9 supplier management9 logistics management9 design management9 and manufacturing management all have elements attributed to value managementF $ellkno"n tools e1ist in each of these9 and "hen utiliGed as part of an overarching operating philosophy create a change- and improvement-focused organiGationF #n SCM9 value management becomes the most significant intersection of the internal customer organiGations that SCM supportsF 'rganiGational success is based on integrating internal and e1ternal relationships by creating a seamless organiGationF Many professionals define value as function0cost :5X!0C;F

)alue Stream Mapping


5alue steam mapping is a visual process developed to provide an analysis tool that defines operational inefficiencies as "ell as ideal end state mapsF #n the book Learning to %ee9 Mike ,other and 6ohn Shook provide a simple methodology for e1amining the internal value stream "ithin an operationFN4O 6im $omack and +an 6ones defined the methods in "hich to e1pand this effort to the entire value chain in their book %eeing the hole* &apping the ,-tended 2alue %treamN7O The e1tended value stream is often synonymous "ith value chain9 the difference in focus being a high-level initial evaluation in the relationship dynamics bet"een the players in the chain in the value chain focusFN<O

5alue stream mapping disciplines provide a roadmap on efficiency opportunities to "hich SCM organiGations can develop continuous improvement plans and "ork to identify an ideal end stateF The opportunities identified through the mapping process are incorporated into the lean SCM practices and overarching corporate obMectives to create a detailed strategic plan and individual performance obMectivesF

)A4)! +orkshops
5alue analysis and value engineering "orkshops are focused value management tools used to improve design related cost structuresF Ho"ever9 for 5A05* efforts to have long-lasting effectiveness9 short-term 5A efforts must be coordinated "ith long-term 5* effortsF To accomplish this9 5A and 5* must be a Mointly managed effort9 "ith specific product9 commodity9 or supplier initiatives capturing the data for current and future applicationsF

)alue #ata Management


Similar to supplier data management9 value data management is critical in retaining the learned improvementsF Through formal linkage efforts9 actions taken in design9 process9 logistics9 and other value factors can be directly associated "ith specific teams9 suppliers9 parts9 or programsF The importance of this effort is to eliminate the three steps for"ard9 t"o steps back reality that often happens during points of transitionF The points of transition can either be changes in programs or designs from one generation to the ne1tS changes in personnel9 "hether supply chain9 engineering9 program management or otherS changes in sourcingS or any of a hundred other change factorsF The integration and management of data in value management has been greatly simplified "ith the advancement of soft"are solutions dedicated to enterprise intelligenceF Companies such as SASN>O provide technology solutions for data analytics and business intelligenceF Soft"are and service providers such as i49 Ariba9 Baan9 and others offer similar data management productsF The management of the value management data ultimately needs to be driven back to the SCM of individual supplier performanceF The final chapter in the value management efforts is the integration of performance back into supplier and customer e1pectationsF #t is only though this coordination that the efforts transcend individual tasks to become living processesF reviously defined stratification measures and annual improvement targets define the process in "hich this performance can be includedF
N4O N7O

Mike ,other and 6ohn Shook9 Learning to %ee9 Lean *nterprise #nstiture #ncS :+ecember /DDD;F

+an 6ones and 6ames $omack9 %eeing the hole* &apping the ,-tended 2alue %tream 9 Lean *nterprise #nstitute #ncS Spiral edition :&ovember 4EE4;F
N<O N>O

HaGel AF Beck9 5alue #nnovations LtdF

SAS #nstitute is a leading supplier in data analyticsF Many of its platforms are dedicated to capturing and managing performance and intelligence data to support decision makingF #nformation on supplier relationship management and data analytic tools from SAS can be found at http.00"""FsasFcomF

60 S$PPL% CHA&" P'(C!SS &MP'()!M!"*


#n our discussion of cost management9 one of the opportunities identified "as the incorporation of supplier development actions to drive cost improvementF #n most of these supplier development actions9 the focus is on individual suppliers and supplier processesF 6ust as %eeing the hole "as an e1pansion of Learning to %ee9 the efforts of supplier development can also be e1pandedF #n addition to improving discrete processes9 supplier development should also focus on improving the supply chain processF Through the use of kaiGen and kaikaku tools9 suppliers and customers can gain improvements in the "ays in "hich business is conducted9 not Must in the application of

the lean SCM toolsF This chapter calls for integration of data into business practicesF Like"ise9 the performance and business practices have to be incorporated into the overall business system described throughout this book-such as the MB processF The performance in cost containment should reflect the individual contributor actions9 the departmental obMectives9 and ultimately the overarching obMectivesF $ithout evidence of direct contribution to these goals9 a reevaluation of the performance9 of the obMectives9 or of SCM practices must occurF The nature of the "ork and the effort of the "ork must provide the results that are determined to be the most beneficial to the companyF

S$MMA'%
Cost management and cost control are often the e1clusive focus of a supply chain organiGation9 and even more so of procurement "ithin SCMF The ability to achieve financial improvement in SCM re?uires efforts affecting the entire value chain and relies on the efforts of nonprocurement resources :such as supplier development and engineering;F !inancial improvement in the supply chain is a reality of modern businessF The approaches to achieve these savings need to be structured9 reliable9 and based on ethical business relationshipsF As described in Chapter 79 being hard on the issues :such as price improvement; is acceptable in business9 provided the basis of the relationship includes a delineation of business re?uirements and ramificationsF CAS! S*$#% 3;08 +uestions 30 #n "hat "ays could the supply chain organiGation contribute to the cost management and cost improvement of the company) 80 $hy "as the SCM group unable to articulate the full level of savings contribution that "as being made) $hat could be done differently to better articulate the full scope of savings) ;0 +S$%s 5 of Supply Chain Management "as concerned about the overemphasis on the financial impact of the SCM contributionsF $hat can be done to alleviate these concerns) Ans ers 30 The supply chain organiGation had developed and implemented plans to provide hard cost savings :iFeF9 documented cost reductions; in both production and nonproduction materials through the use of price targeting and consolidation effortsF The consolidation targets "ere based on the use of comparative benchmarking assessmentsF #mmediate resourcing based savings and commitments to ongoing price reductions "ere achieved during the consolidation activitiesF Soft cost savings :iFeF9 cost avoidances9 administrative cost reductions9 etcF; "ere developed and implemented in supplier development activities9 especially related to variation reduction and supplier-based part per million : M; reMect reductionsF These savings "ere translated into a hard number contribution e?uivalent9 including labor-related savings as measured by full time e?uivalents :!T*s;F The hard and soft cost savings totals "ere related to overall contribution to +S$ in terms of earnings per share :* S;F +S$ had />E million outstanding shares of stock9 so each R/9EEE9EEE in savings X RFEEA * SF Therefore9 savings of R>E9EEE9EEE X RF7E * SF This measure could be directly compared to * S contribution due to incremental sales and other cost reduction activities9

and allo" for a valued assessment of SCM effortsF 80 #nitially the SCM organiGation did not ?uantify the nonprocurement savings it "as achievingF The focus of the effort "as on the underlying improvements in ?uality and other supply chain activitiesF @uantifying the value of these improvements "as secondary to the efforts and actual improvements madeF -ltimately the SCM "as able to articulate the full scope of savings by translating the value of soft savings into hard savings e?uivalentsF By benchmarking the ratio of overhead cost supporting supply chain management to the total savings level9 the organiGation "as able to sho" the competitive value it contributed to the organiGationF ;0 The concern of +S$%s 5 of Supply Chain Management "as that the overemphasis on the financial impact "ould divert the efforts from delivering improvement to reporting improvementF $here the sole measure of success becomes financial measures9 individuals "ithin the organiGation find creative methods to make those measures look goodF 'ne actual incident occurred "hen a purchasing manager allo"ed buyers to issue purchase orders at a price higher than the ?uote9 only to receive the overage rebated at the end of the yearF The purpose of this "as to achieve the increasing financial obMectivesF The concerns "ere lessened by the use of balanced performance measures in "hich financial evaluation "as one of five measuresF The use of balanced measures through hoshin planning enabled the organiGation to recogniGe the value of financial measures e?ual to other ?uality9 cost9 and delivery indicatorsF #ncreased audit and governance "as put in place to discourage creative reporting and goal attainmentF

Chapter 3A2 Materials Management


#&S*'&,$*&("H *'A"SP('*A*&("H A"# C$S*(M!' S!')&C!
The distribution9 transportation9 and order fulfillment impacting physical product movement often defines supply chain managementF $hile in reality supply chain management is much more9 these elements undoubtedly e1istF #n lean supply chain management9 the implementation of these efforts as a strategic initiative involves the incorporation of elements of lean manufacturing systemsF Here9 the obMective is not only the successful movement of the product9 but also the implementation of highly visual and efficient systems by and through "hich the product is movedF Like the efforts of supplier development described in the last t"o chapters9 materials management provides for the opportunity of improved performance9 including cost reductionsF ,ecogniGing this aspect of supply chain management as an e?ual contributor to overall lean efforts and success addresses the last element of the value chainF Ho"ever9 in addition to the product movement and order fulfillment is the added responsibility of customer serviceF $hile perhaps difficult to define in so many industries "ith so many varying demands9 customer service and satisfaction is becoming an increasing supply chain responsibilityF This chapter describes the integration of lean methodologies into materials handling and management activitiesF rocess and cost improvements continue to be the basis on "hich the strategic initiatives are builtF

S*'A*!1&C MA*!'&ALS MA"A1!M!"*


The strategic materials initiative is geared to"ard three primary elementsF The first element is to develop a visual factory-like structure using fi1ed inventory locationsF The second is to distinguish distribution operations from "arehousing and storage operations to create material efficiency measuresF The third element is to provide for improved transportation costsF

Strategic &nitiative
The strategic initiative here is to ma1imiGe order fill rate and reaction time for all end item componentsF The goal should also be to increase "arehouse facility utiliGation to enable incoming consignment opportunities and to integrate logistic operations :transportation9 distribution9 and customer service; into a single multidisciplinary activityF

&mplementation Plan
The follo"ing elements make up the implementation plan for this initiative. In#entory flo! and storage. ! *stablish visual factory inventory managementF #! $ith production operations9 establish min0ma1 kanban production pull methodologyF $! #dentify fi1ed inventory locations for high use itemsF 4! +edicate customer lanes for product inventory9 staging9 and distributionF 5acility useF ! *liminate e1cess returnable rack inventory through evaluation and customer returnF #! Streamline material flo" methods to eliminate redundant movementF $! Manage space allocation by customer-driven demandsF 4! *valuate direct ship and space lease opportunitiesF Logistics integration* ! Create customer service and distribution teams in lieu of functional segregation and product alignmentF #! #dentify a single point logistics managerF $! #ncorporate release through shipment planning as a single material management functionF CAS! S*$#% 3A03 Customer order entry through *+# :electronic data interchange; release comes into +S$ through its distribution operationsF All orders from its automotive9 aerospace9 and defense customers are then processed to the individual manufacturing centersF ,egional distribution centers consolidate products for staging and mi1ed-load shippingF +S$ maintained a regional delivery fleet and a limited national over-the-road delivery fleetF 5arious product configuration and order re?uirements allo" direct full truckload shipments9 other are mi1ed loads "ith multiple part numbersF #nventory storage is based on free location managed through bar-coding :free location meaning storage to any open inventory location;F +istribution operations have appeared to ma1 out space availability9 yet often seem to be short of the re?uired components needed to complete shipmentsF Customer re?uirements allo" for changes of shipment up to t"o hours prior to pickup timeF +elivery is often se?uenced orders for color and configuration as "ell as Must-in-time fre?uenciesF +uestions $hat lean techni?ues can be borro"ed from the manufacturing environment to aid in the efficient operations in +S$%s distribution operations) #! Ho" could +S$ improve overall material management operations in an effort to improve !

$!

order fulfillment rates) $hat measures "ould best represent the pace of improvements "ithin the distribution operations given the delivery pattern)

*ach of these elements is e1amined in more detail in the follo"ing sectionsF

30 &")!"*('% FL(+ A"# S*('A1!


+istribution operations are fre?uently a hive of activity representing controlled chaosF Automated systems often provide relief from error through automated pick systemsF These systems economically apply to high-volume distribution systems e1hibiting common packaging configurationsF +istribution operations "ith vastly different package siGes and lot fre?uencies don%t al"ays lend themselves to automated systems9 nor do lo"er-volume operationsF 5isual factory techni?ues :"here product and facilities are bound to specific locations and volumes; provide a calming effect to the transactions9 ?uantities9 and locations of materials "ithin the distribution operationsF By more precisely managing the storage and movement of material9 a closer relationship can be established bet"een the production operations and distribution and customer demandF Manufacturing scheduling control and refinement can be managed through visual verification of demand fluctuation9 "hich may not be captured in automated information systemsF $hereas retail consumer product demand and delivery systems can provide accurate real-time demand changes9 industrial manufacturing for nonretail customers have not benefited from the same systemsF The first step in visual factory implementation is the distribution e?uivalent of the manufacturing marketplaceF #n manufacturing9 ra" material and components are stored in fi1ed inventory locations "ith limited inventory capacityF Similarly9 finished goods storage is fi1ed to a specific physical location address and limited in ?uantity storedF Minimum and ma1imum :min0ma1; inventory levels are established based upon customer demand analysis and production capabilities-such as order response and production lead timeF Any spillage above the ma1 level provides a signal back to operations to curtail production or to reassess production schedule methodsF Shortages beyond minimum provide a similar evaluation pointF $hen implemented to its ultimate application9 the management to the marketplace min0ma1 levels can provide production pull signals to manufacturingF The use of kanban signals based on the distribution re?uirements provides the closest link bet"een actual demand and productionF +emand and lot siGe planning disciplines used in planning for ra" material and component ac?uisition applies similarly in this scenarioF The kanban signals can be cards9 electronic9 or many other formats as supported by the logistics or manufacturing net"ork configurationF

80 FAC&L&*% $S!
!acility form :iFeF9 the physical structure and its use; often does not match the function for "hich it is usedF !or e1ample9 in industries "here the maMority of demand is uni?ue to each customer9 the inventory storage and management often reflect product type and not customerF This typically results in e1cessive or redundant product move to re-aggregate the parts by customerF 'rder picking and staging becomes a comple1 net"ork of people and assetsF #n contrast9 if storage and

processing in these industries is based on customer demand and usage-inventory9 staging9 and shipment are more efficient9 resulting in improved labor usage and lo"ered total costF Actual physical space allocation provides the lean interface bet"een the distribution facility and the manufacturing siteF $here facility allocation is determined by part level demand and arranged by customer9 control over supply versus demand match is reinforcedF Continuing to support the visual factory concept9 total customer demand trends are more easily recogniGed by this facility allocation methodF Lo" value and slo" moving items also gain increased attention because of the availability :or lack of; valuable distribution spaceF !inally9 unless significant incremental sales "arrant a need for increased distribution space9 facility availability should be vie"ed as limited and unobtainableF This vie" re?uires continued improvements in efficiency and planningF The time from distribution receipt to shipment staging and transaction should continually be reducedF #n some circumstances9 distribution does not have to mean a physical transfer of parts from the manufacturing operation9 but can mean virtual distribution handling from direct manufacturing site to customer shipmentsF The industrial sector drop-ship approach still has the ability to serve the efficiency efforts in consolidated product response and customer order fulfillmentF

;0 L(1&S*&CS &"*!1'A*&("
rofessional program and proMect management has provided a good e1ample of ho" logistics operations can be integrated as part of the supply chain effortF #n program management9 a single manager oversees and coordinates the efforts of various functional employees to deliver a single product to the customerF The functional 8chimneys8 are broken do"n to deliver the best product and product value to the customer in a team environmentF Logistic integration as part of materials management and SCM can benefit from the same approachF Traditionally9 distribution managers9 shipping managers9 and scheduling managers individually manage the various functional tasksF By re-creating the vie" of logistics operations9 customer order fulfillment and satisfaction can be improved through a single point vie" of the materials tasksF As a single point leader for the various functions9 the logistics manager facilitates all materials efforts from order receipt through delivery9 providing the customer one face for all issuesF #n addition9 the logistics team leader becomes the single point liaison for internal contact as "ellF $ith this second role the individual customer-based needs identified by the organiGation can be captured and implemented uniformly throughout the logistic streamF Logistics managers from various customer teams can share best practices to improve all materials effortsF

*H! '!S$L*S
Like the ?uality9 cost9 and delivery improvements in SCM9 materials management also provides measurable improvementsF The most obvious of these is reduction in transportation costsF Transportation rate negotiations9 routing efficiencies9 and move fre?uency are all contributors to this area of cost savingsF $hen a materials organiGation focuses only on cost9 manufacturing efficiencies can be disruptedF This is especially true in routing and fre?uency considerationsF As pointed out in one of the early chapters9 the competing improvement obMectives in operational efficiency :such as lo"er inventory; and reduced costs must be consciously considered "hen

"orking to optimiGe total cost structuresF A balance must be struck bet"een the potentially competing obMectivesF Cost savings in rate9 routing9 and fre?uency can easily range bet"een C to /> percent from traditional cost levelsF erhaps not so obvious are the savings from the facility and visual factory changesF Many distribution facilities rely solely on computeriGed storage data accessible through ,! :radio fre?uency; bar code scanning to manage inventory availability and placementF The approach often results in a random storage of product9 "ith storage locations selected simply by "hatever open space is availableF #n these cases9 load picking and staging can often represent a chaotic9 random "alk throughout the facility in "hich multiple and distant inventory locations must be accessed for the same partF By utiliGing visual storage methods9 shipment staging times can be reduced by more than 4> percent9 resulting in labor savings and increasing order fulfillment rates "ith a fi1ed labor forceF Through the fi1ed and se?uenced storage of inventory9 manual pick operations become more controlled and efficientF 'ften the pick list can be se?uenced to coordinate "ith the storage location so that a single progression "ithin the "arehouse can occur9 eliminating backtrackingF Computer-based inventory management or other nonvisual methods can result in inaccurate inventory counts9 creating customer shortages "hen shipments are stagedF Because inventory can e1ist in random locations9 any system failure or processing oversight has no "ay to flag potential shortagesF $ithin a visual environment9 the management of fi1ed inventory and min0ma1 storage levels can like"ise improve short shipments to customers by >E percent or moreF The efficiency gained in pick-stage-load operations by eliminating "ork interruptions can be significantF The magnitude of this savings is based on the rate of occurrence9 and reaction procedure9 but is typically e?ual to /> percent of associated labor costF *ach of these materials management efforts either directly or indirectly support the efficiency of the manufacturing operationsF By limiting inventory space9 the manufacturing operations can more accurately produce product to actual demandF By eliminating part shortages9 the material management activity cannot 8e1ercise8 the organiGation to immediately respond and shift production priorities-enabling fi1ed production schedulesF 'ther similar improvements can be defined throughout the materials management efforts and can provide links to overarching obMectives of financial performance and customer satisfactionF CAS! S*$#% 3A08 +uestions 30 $hat lean techni?ues can be borro"ed from the manufacturing environment to aid in the efficient operations in +S$%s distribution operations) 80 Ho" could +S$ improve overall material management operations in an effort to improve order fulfillment rates) ;0 $hat measures "ould best represent the pace of improvements "ithin the distribution operations given the delivery pattern) Ans ers 30 +S$ implemented three primary lean efforts. /; visual factory "ith fi1ed min0ma1 inventory levels9 4; kanban pull signals from finished goods delivery9 providing production scheduling per lean manufacturing structure9 and 7; local delivery assets used as a heiMunka pace setter driving receipt to staging time reductionsF 80 +$S completed facility and organiGation changes to create customer-based teams9 each "ith a single team leaderF The teams and facilities became responsible for all multifunctional logistics and materials management activitiesF By having a materials 8cradle to grave8 o"ner9 the company created 8subMect matter8 or customer e1perts "ho could provide a greater focus on individual customer needsF Like"ise9 the facility "as organiGed so that all customer product "as located in dedicated and contiguous "arehouse space9 enabling the use of various lean management toolsF

;0 Customer satisfaction "as generally driven by order fulfillmentF Ho"ever9 due to the fre?uency of shipments9 and need for part se?uencing9 stringent measures in e1cess of customer demand "ere put into placeF Shipments that did not contain the appropriate mi1 or ?uantity of parts on a specific truck9 but "ere delivered during the same day9 "ere counted against the material and plant performance indicatorsF This measure of 8shortships8 generally "as far tougher than the customer measures9 "hich re?uired shipment "ithin the one day delivery "indo"F Like other measures at +S$9 this and more "ere incorporated as the hoshin planning measures for the materials operationsF

Chapter 362 *he Supply Chain (rganiLation


()!')&!+
This final chapter of Section ### is a brief discussion of the organiGational fit bet"een the strategic lean supply chain efforts and the resources available to deploy themF Any structure can be successful9 "hether single line9 matri19 functional9 operational9 etcF ,e?uired skills and training are far more important than the reporting structure in "hich they resideF Lean supply chain management re?uires a vastly different set of skills from traditional supply chain managementF Lean supply chain management re?uires both the technical ability related to lean supply chain initiatives as "ell as the relationship skills "ith "hich to deploy them to the supply baseF

(rganiLational Structure
'rganiGational structure is seldom considered a strategic initiative9 e1cept perhaps in the human resources departmentF #n SCM the strategic initiative is based on the value a particular organiGational structure and skills training providesF

Strategic &nitiative
The strategic initiative here is to enhance the capability and efficiency of the supply chain organiGation by developing lean-based improvement strategies "ithin procurement9 supplier development9 and materials management9 thereby increasing the focus on the strategic management of information and communications :via e-business systems; to support supply base management and customer service re?uirementsF This can be done by implementing training methods to support the achievement of business plan initiatives and overarching hoshin obMectives9 highlighting action deployment and sustained improvementF CAS! S*$#% 3603 Concurrent to the launch of its initial lean supply chain efforts9 +S$ had entered into a company"ide organiGational assessmentF #n an effort to improve its functional performance9 increase customer satisfaction9 and improve profits9 +S$ "as striving to understand "hat appropriate changes should be madeF 'perationally the company had very strong and independent divisions9 each possessing its o"n functional organiGationsF A small corporate staff served to mediate the differences in functional practices bet"een the organiGations9 and "as no" being asked to take a more direct role in these effortsF

+uestions -nder "hat organiGational structure could +S$%s supply chain organiGation increase its lean supply chain efforts through synergy of effort and resources9 "hile maintaining the divisional independence and control) #! Ho" "ould the SCM organiGation insure its employees possess the appropriate skills necessary to initiate lean supply chain efforts9 and ho" "ould it plan for promotions and succession) $! $hat arguments might be e1pected from the divisional general managers and the supply chain employees against a revised SCM structure9 and ho" "ould the SCM group counter these arguments) !

At fully staffed levels9 salary structure needs should be evaluated9 and opportunities to consolidate or restructure responsibilities to improve needed budget allocation should be identifiedF 2lobal purchasing re?uirements can be integrated into a single "orld"ide procurement strategy or organiGationF

&mplementation Plan
The follo"ing elements make up the implementation plan for this strategic initiative. /rgani6ation =see Table 8<.8>. *able 36032 (rganiLation Alternatives Activity 2lobal procurement operations Supplier development Current Structure &o formal global organiGation-regional functional focus only @uality-based9 procurement dependent structure Proposed Structure #nternational procurement manager to coordinate efforts and opportunities +evelopment-based9 procurement supportive organiGationF Commodity and discipline e1pertise

+istribution9 !unctionally driven Customer-based logistics teamstransportation and separate activities-8chimney incorporated materials functions customer service organiGations8 ! Assess resource deployment and determine appropriate program team support "hile continuing to optimiGe core competenciesF #! !ocus purchasing and supplier development resources on developing a supply base that provides a competitive advantage in cost9 ?uality9 and technologyF $! !ocus materials and logistics resources on effective inventory management and customer order fulfillmentF 4! !acilitate benchmarking9 supplier development9 and strategic analysis using data analysis toolsF &! +efine global purchasing strategies and staffing needsF People. ! +evelop training curriculum and courses for all Mob classificationsF #! +evelop gap analysis skills evaluation for all employees :including team leaders and managers;F $! *1pand training for supervisors to focus on leadership9 employee training9 skill enhancement9 and successor planningF

*H! ('1A"&KA*&(" !FF('*S

#n any business environment9 a team-based structure provides the greatest opportunity to deliver the desired results and changesF #ndividual teams allo" for a sense of entrepreneurial spirit even in classic corporate environmentsF By breaking the "alls of functional responsibility9 team members share hats in Mob assignmentsF All members have a shared e?uity in the success or failure of the proMect9 and therefore break from the normal 8not-my-Mob8 mentalityF The organiGational development of a lean supply chain team must carefully consider the "ays in "hich limited human resources can be most appropriately applied in a global organiGation to optimiGe performanceF Targeting resources often means moving people outside of their functional comfort GoneF

P'(C$'!M!"* A"# #!)!L(PM!"*


#n supporting lean SCM9 procurement and development resources need to be initially targeted on the development of supply base capabilitiesF $hile this often conflicts "ith the desire for immediate cost reductions9 it provides long-term sustainability of reduction efforts :as discussed in previous chapters;F 2lobal coordination of procurement and supplier development efforts needs to include a recognition of the varying social and political environments in "hich the businesses operateF Through a global analytical assessment9 tailored regional commodity deployments ma1imiGe system"ide benefitsF The use of global commodity managers :or lead buyer structures; allo"s for a balance bet"een tactical and development responsibilities as "ell as the consideration of specific regional deployment needsF #n any region9 the global application of lean supply chain elements facilitates the competitive and price benchmarking efforts leading to a consolidated commodity strategyF Supplier and commodity development activities arising out of these evaluation tools create the basis for globally coordinated effortsF #nternal and e1ternal organiGations ?uickly recogniGe the single-voice approach bet"een operations9 divisions9 and "orld regions9 minimiGing the divide-and-con?uer efforts suppliers often e1hibitF

MA*!'&ALS MA"A1!M!"*
Material and logistics staff9 again organiGed as teams9 are directed in the management and integration of lean techni?ues in support of inventory management and reduction9 along "ith improved order fulfillmentF Chapter /< provided the applications of the techni?ues to this staffing structureF The operational efficiencies gained through lean deployment can be ?uantified to support total supply chain savingsF $hen various materials management activities9 such as production planning9 logistics9 transportation9 and customer service are integrated9 the organiGation deconstructs the functional inefficiency typically e1hibited in material movement activitiesF !ocus shifts from individual tasks to customer satisfactionF The tasks are designed to support broad customer satisfaction and therefore construct a ne" paradigm to"ard Mob performanceF

P!(PL! A"# S-&LL #!)!L(PM!"*


(ey to the successful delivery of lean SCM initiatives is the capable "orkforce to do soF #t is unlikely that most organiGations already possess the developed lean supply chain skills outlined in this bookF To develop those skills9 the supply chain manager must provide specific kno"ledge and training re?uirements and have the ability to measure competency "ithin those skill setsF Through the development of a skills and development matri1 as sho"n in !igure />F/9 the supply chain manager can clearly articulate to his or her staff and to the broader organiGation the level of mastery of lean SCMF !igure />F/ categoriGes skills by areas of mastery-e-technology skills9 business development skills9 and lean kno"ledge skillsF $ithin each of these skill sets9 the re?uired level of mastery is defined9 along "ith the evaluated level of each of the employeesF The deviation of these t"o indicators provides the gap assessment that drives employee developmentF

Figure 36032 Skills Matri1

Coupling e1perience and performance "ith skill mastery creates the environment in "hich factbased succession planning can be derivedF By formal use of skills mastery and annual performance revie"s9 each successive level of Mob classification can identify a successor or promotional opportunityF Through this9 each employee can be certain of the path he or she is on9 and "here he or she needs to head to progress in his or her careerF As there are many forms of succession planning methods9 this book "ill not offer a ne" oneF Selecting and using one that is already kno"n "ill satisfy your organiGation%s skill development needsF

S$MMA'%
This chapter has provided a ?uick glimpse of the need to consciously address organiGational coordination to support lean supply chain needsF &ot only does the traditional organiGational design need to take place9 but9 more important9 the analysis of actual employee skill to re?uired skill level must be doneF Training and education in these lean elements are more important than the structure in "hich they operateF !inally9 succession planning needs to occur to ensure ade?uate 8bench strength8 in the SCM organiGationF By specifically targeting needed training elements9 an SCM staff can be created that has the ability to operate in any of the many supply chain positionsF CAS! S*$#% 3608 +uestions 30 -nder "hat organiGational structure could +S$%s supply chain organiGation increase its lean supply chain efforts through synergy of effort and resources9 "hile maintaining the divisional independence and control) 80 Ho" "ould the SCM organiGation insure its employees possess the appropriate skills necessary to initiate lean supply chain efforts9 and ho" "ould it plan for promotions and succession) ;0 $hat arguments might be e1pected from the divisional general managers and the supply chain employees against a revised SCM structure9 and ho" "ould the SCM group counter these arguments) Ans ers 30 +S$ employed a 8hybrid8 organiGation in "hich tactical or functional SCM remained fully "ithin the operating division9 and a strategic supply chain group "as formed as part of the corporate functionF The centraliGed group "as responsible for the selection and development of all long-term suppliersS "as the lead negotiator for all multiyear agreementsS "as responsible for cross-division commodity group savingsS and acted as a commodity council leader for all divisions that purchased a particular commodityF The corporate SCM e1ecutive "as responsible for the performance assessment9 Mob assignment9 and development of all SCM personnelF +aily Mob reporting "as determined by employee deployment9 "ith divisional managers responsible for functionally deployed SCM personnelF $hile not a matri1 organiGation "ith dual formal reporting relationships9 +S$%s hybrid organiGation relied on the daily manager :"hether tactical or strategic; to provide performance direction and evaluationF 80 The SCM management team identified the curriculum of necessary skills for all positions and all levelsF *ach manager completed a skills assessment for each employee and developed an individualiGed training planF The general training matri1 outlined not only the re?uired and recommended skills for each position9 but provided a clear indication of the skills re?uired at all levels9 so that employees could pursue the skills re?uired for promotional opportunitiesF !inally9 the individualiGed training matri1 "as used as part of the annual performance revie" processF

;0 The divisional general managers e1pressed concern "ith "hat "as perceived as a loss of control for a maMor cost element of their profit and loss responsibilitiesF By having the commodity level savings performance targeted by9 and controlled by9 the centraliGed supply chain group9 the general managers felt that they "ould not receive the attention necessary for them to meet or e1ceed their profitability targetsF The SCM e1ecutive e1plained that the product sourcing "ould occur "ithin the division9 "ith the tactical buyer negotiating the initial priceF The strategic group "as responsible for using SCM tools9 such as multiyear productivity agreements9 5A improvements9 etcF9 to ensure continual cost reduction activityF Additionally9 the strategic group "ould also provide e1tended supplier development support to assist the divisions "ith their most problematic suppliers9 allo"ing the divisional ?uality resources to focus on internal and customer ?uality improvementsF 'ther concerns included determination of resource levels and personnel deployment9 performance evaluations9 pay and promotion decisions9 concern over conflicting directives from the divisions and the central organiGationS etcF *ach of these issues had to be addressed "ith an ongoing dialogue bet"een the divisional managers and the corporate managersF #t re?uired recognition that each of the groups "as striving to provide the best results for the benefit of the entire companyF 'nce the ego control issues "ere put aside and the common efforts recogniGed9 both teams "ere able to successfully operate "ithin the ne" organiGationF The most significant key element in 8forcing8 the facilitation and resolution of the concerns "as e1ecutive corporate support and their championing of the concept of lean supply chain initiativesF The company%s highest management recogniGed and endorsed the importance of the contribution SCM could makeF The SCM employees e1pressed only t"o main concerns. /; to "hom "ould they reportS and 4; ho" "ould they be measured on performance) The first of these "as addressed by clearly defining that "hen deployed in an operational position9 they "ould report directly to the divisional manager "ho "ould determine 8"hat and "hen8 supply chain activities needed to be undertakenF The issue of 8"ho and ho"8 the supply chain Mob "as to be done "as under the direction of the corporate supply chain managerF The performance issue mirrored the reporting issue in that the corporate manager "as ultimately responsible for the performance evaluationF Ho"ever9 "hen operationally deployed9 >E percent of the evaluation "as based on operation performance as determined by the operational managerF After initial concern9 the employees embraced the ne" organiGation as it allo"ed for a better match bet"een skills and Mob tasksF *mployees "ho e1celled in the operational and tactical side of supply chain management "ere relieved of the distractions of attempting to define strategic initiativesF Like"ise9 SCM strategists "ere provided an environment in "hich they could focus on long-term initiatives "ithout the daily interruptions of production support issuesF The organiGation also provided for Mob rotation and development9 allo"ing for movement bet"een various divisions as "ell as tactical and strategic assignmentsF

S!C*&(" &)2 Coordinating SCM and Lean Management


Chapter /A. +eveloping H #mplementing Lean !undamentals Chapter /B. Manufacturing #mplementation

Chapter /C. 'ngoing #mprovements

Chapter 3C2 #eveloping N &mplementing Lean Fundamentals


All the material presented so far loosely assumes that lean manufacturing techni?ues are already in place9 enabling the launch of lean supply chain effortsF Section #5 sho"s ho" to implement internal lean manufacturing efforts and lean supply chain activities simultaneouslyF This is accomplished by pairing the internal implementation steps "ith supplier readiness stepsF The follo"ing material takes the basic lean manufacturing initiatives and matches those efforts to supply chain support initiativesF The in-depth focus is on the supply chain aspects of this pairing9 not on the lean manufacturing aspectsF

&MPL!M!"*&"1 *H! MA*!'&ALS FL(+ S*'A*!1%


The first real coordination effort bet"een the launch of lean manufacturing and SCM is in the materials flo" strategyF #t%s at this starting point that the procurement activities have to be ready to support manufacturing%s first steps to"ard lean implementationF The follo"ing sections sho" the correlation bet"een the lean initiatives and SCM activitiesF

L!A" AC*&(" 3
Like the manufacturing process itself9 the implementation of lean manufacturing techni?ues can be follo"ed as material flo"s into the plantF A materials flo" strategy begins "ith the receipt and storage of ra" material and componentsF Before any discussions begin regarding 6#T deliveries9 line-side shipments9 etcF9 ra" material and component storage processes must be establishedF #n a lean manufacturing environment9 this material storage is based on the concept of marketplace material storageF CAS! S*$#% 3C03 +S$%s &orth American operations began the implementation of lean manufacturing methods appro1imately /C months prior to the development of the lean supply chain effortsF Many of the key elements "ere beginning to take hold9 ho"ever9 supplier performance in ?uality and delivery had seemed to deteriorateF As driven by the lean manufacturing efforts9 delivery fre?uency "as increasing "hile lot siGes and on-hand inventory "ere decreasingF The rest of the +S$%s "orld"ide organiGations had yet to implement the lean manufacturing efforts9 and "ere Must beginning implementation plansF Customer demands for cost reductions and ?uality improvements "ere driving +S$ to"ard a more rapid implementation than had occurred in &orth AmericaF Additionally9 a recent 8noncore8 ac?uisition "as causing a serious financial drain on the entire company9 both limiting the available cash for improvement initiatives and re?uiring immediate cost reductionsF +uestions Based on +S$%s "orld"ide lean implantation efforts and progress9 and its current financial situation9 "here should +S$ focus its SCM efforts9 and in "hat areas)

Based on the implementation focus9 "hat impact might +S$ see in commoniGing a global approach to lean SCM efforts) Ho" "ould the SCM organiGation get in step &orth American lean manufacturing efforts)

#n this marketplace concept9 each received material or component has it o"n highly visible storage location9 much like that in a grocery storeF The purpose of this method is to precisely manage the location and movement into the manufacturing environmentF Ho"ever9 ,other and Shook in Learning to %ee caution about the use of supermarket pull systems bet"een processes until continuous flo" has been introduced in as many processes as possibleF N/O $hat # am proposing here is a supermarket only bet"een incoming material and the first production processF This is the key interface bet"een the lean manufacturing environment and supply chain managementF
N/O

,other and Shook9 Learning to %ee9 pF <<F

SCM AC*&(" 3
#n support of the marketplace material storage concept9 procurement must be prepared to ready its suppliers for the changeF #n most marketplace settings9 the inventory locations are designed for package-siGe storage versus pallet storageF #n addition9 to provide simplified material handling systems9 the handling racks are normally limited to standard siGesF $ith these re?uirements SCM has to prepare its suppliers for packaging planning and lot-siGe complianceF By establishing and verifying the use of standard package-siGe and lot-siGe compliance9 procurement can support manufacturing in smoothly introducing marketplace inventory management "ith minimal storage rack redesignF Lot-siGe compliance also aids in min0ma1 inventory level managementF

L!A" AC*&(" 8
*ither concurrent "ith the development of marketplace storage9 or immediately follo"ing it is the development of incoming inventory ?uantity controlF #n a lean manufacturing environment this is accomplished through identifying minimum and ma1imum inventory levels for each incoming materialF This min0ma1 inventory control system is key to the visual nature of lean manufacturingF This concept ensures that deviations from the planned process are easily visually identified in that they fall outside of the norm structureF The basis for the minimum and ma1imum levels is derived from the customer demandF A main lean manufacturing tenet is the concept of level productionF #n this level production system9 inventory belo" the minimum level MeopardiGes the plant%s ability to manufacture product uninterruptedF #nventory levels above the ma1imum represent "aste in the systemF #n this case cash is being outlaid to procure and store material that is not needed in the planned manufacturing scheduleF $hile the fundamental process of establishing min0ma1 inventory levels applies to the entire material flo" process throughout a lean manufacturing setup9 it is at material incoming :or line-side if selected; in "hich coordinated efforts need to occur "ith procurementF

SCM AC*&(" 8
$ith the establishment of min0ma1 inventory levels9 the fre?uency of inbound material shipments begins to changeF The replenishment of min0ma1 levels seldom corresponds to a single "eekly or monthly shipmentF $ith increased shipping fre?uencies there are a number of cost factors that may increase on the supply sideF To ade?uately evaluate these elements9 SCM must conduct formal shipping fre?uency planning and cost evaluationsF Component suppliers often base their unit price on the planned "eekly volumes9 "ith cost based on production run siGes and limited inventory holdingF #ncreasing the shipping fre?uency may result in suppliers attempting to increase unit priceF $ith ade?uate evaluation and alternative planning9 such cost changes can be eliminatedF Also9 increased shipping fre?uencies can drive up the cost of inbound transportationF Active planning and consolidation of the no" smaller and more fre?uent shipments can eliminate the added costsF Milk-run consolidation9 cross-dock activities9 or other consolidation efforts can be utiliGed for these effortsF This issue is much more complicated in the *uropean market9 "here inbound cost is often born by the supplierF

S$MMA'%
This chapter briefly summariGed the paired actions necessary do lean "ork "ithin a companyF The paring of lean and supply chain preparation efforts includes the follo"ing activities. Lean action 8F The development of marketplace material storage9 "hich. *1ists bet"een receiving and first manufacturing processF +oesn%t start bet"een processes until continuous flo" achievements have been madeF #s the key interface bet"een the lean environment and SCMF %C& action 8 :directly supportive of lean action /;F The preparation of the supply base material delivery systems9 including. Lot siGe identification and complianceF Standard packaging development or enforcementF Lean action 9F The demand-based setting of incoming inventory control levels during "hich. Min0ma1 levels are driven from level production9 "hich is the key to the visual nature of lean manufacturingF Scheduling problems or supplier nonconformance are readily identifiedF %C& action 9F The implementation of increased shipment fre?uencies "here. Smaller lot siGes are driven by closer control of manufacturing space and asset utiliGationF The need for formal fre?uency planning and cost evaluation becomes clearF Milk-run consolidation9 cross-dock9 and other logistic issues are addressedF These primary elements serve as a critical foundation on "hich production implementation of lean manufacturing systems can beginF $ithout them9 there can only be limited success and a likely retracing of initial efforts as later systems are not supportedF CAS! S*$#% 3C08 +uestions

30 Based on +S$%s "orld"ide lean implantation efforts and progress9 and its current financial situation9 "here should +S$ focus its SCM efforts9 and in "hat areas) 80 Based on the implementation focus9 "hat impact might +S$ see in commoniGing a global approach to lean SCM efforts) ;0 Ho" "ould the SCM organiGation get in step "ith the &orth American lean manufacturing efforts) Ans ers 30 +S$%s supply chain organiGation recogniGed the need to implement its lean SCM efforts in both &A and rest of the "orld regionsF Ho"ever9 this recognition included an understanding that the business9 customer9 and economic conditions differed in each areaF !or its &orth American deployment9 +S$ selected the 8standard environment8 initiatives9 but also accelerated the initial preparation steps in support of the e1isting lean effortF #n the rest of the "orld9 +S$%s lean SCM deployment follo"ed a crisis modelF A critical focus of this deployment effort "as on immediate savings and cost reductionsF 80 The supply chain organiGation recogniGed that there "as no driving need to have an identical lean implementation profile in each of its regional areasF The need for commoniGation "as determined to be in the tools9 strategy9 and philosophy of lean SCM deploymentF Making every regional SCM group a learning organiGation "as an important obMectiveF As such each region "as encouraged to create a uni?ue lean supply chain environment9 but coordinated "ith other global effortsF ;0 The SCM organiGation "as able to get in step "ith the &orth American lean manufacturing efforts by accelerating the first lean supply chain actionsF By creating a lean material flo"9 delivery9 and inventory system9 delivery performance and ?uality improvements "ere addressedF The suppliers "ere provided the reasoning for the process changes9 the tools to support the ne" actions9 and the training to implement the tools in a collaborative mannerF $hereas previous process changes had been implemented through edict to the supply base9 the lean supply chain efforts "ere addressed through various formal and informal communication9 discussion9 and decision-making eventsF The participative approach helped +S$ refine its lean SCM efforts9 and to facilitate a broader acceptance by the suppliersF

Chapter 3D2 Manufacturing &mplementation


The implementation of the lean manufacturing process typically occurs on a single product or product line at a timeF #t is unusual and not recommended to attempt to lean the lines of an entire production facility simultaneouslyF The lessons learned during the first attempt provide the basis for the second attempt and simplify the third attempt9 until the facility as a "hole e1hibits lean manufacturing techni?uesF The ne1t paragraphs briefly outline some of the primary actions taken during the manufacturing rolloutF Again9 the importance is to understand the process and timing of lean manufacturing and ho" changes in supply chain management can support these effortsF

L!A" MA"$FAC*$'&"1
To enable all the do"nstream lean manufacturing activities9 the first action "hich must occur is to determine the re?uired manufacturing time necessary to meet customer demandsF Takt time9 as the lean manufacturing literature calls it9 is simply the calculation of available labor hours divided

by the customer demandF ,other and Shook describe this as the initial activity in the development of the lean value streamFN/O 3asuhiro Monden offers detailed methods of translating available "ork time9 customer demand9 and other capacity constraints into takt time calculations in his bookF N4O Takt time is such a critical factor because its purpose is to ma1imiGe the time utiliGation of the production labor9 or stated differently9 to use only the time needed to make a partF #t is the first step in identifying and eliminating labor "asteF !rom the development of takt time9 the process of continuous flo" manufacturing arisesF Simply stated9 this methodology removes inventories from bet"een the manufacturing processes and delivers a product to the ne1t value-added operation e1actly "hen it is neededF The level of staffing and the "ork order to be performed is determined by the development of standardiGed "orkF StandardiGed "ork is a detailed description that tells employees the order in "hich parts are manufactured to support takt time calculationsF +eviations from standardiGed "ork result in variance from the takt time9 and inhibit the trace-ability of product defect causesF Monden%s book details the benefits obtained by standardiGed "ork9 and the resulting smoothed production and reduced inventoriesFN7O 'f all the lean manufacturing processes9 this ne1t one is the most "idely kno"nF Commonly called Must-in-time9 the timely availability of the right material9 at the right time9 in the right ?uantities9 certainly is a cornerstone in lean manufacturingF Although 6#T is commonly used in reference to material delivery from a supplier or to a customer9 6#T "ithin an operation is e?ually importantF #n a successful lean environment9 kanban-based material movements facilitate this ontime material availabilityF (anban is most easily described as a visual signal sent to the supplying operation that goods are neededF The kanban signal should be used as the basis of kicking off continued production or material deliveryF This kind of material movement is necessary "here continuous flo" processing is not feasible or "hen the supply operation is too distant or unreliableF (anban systems are used most effectively "ith the use of supermarket or inventory storage bet"een processes9 and can provide tremendous advantages over traditional M, 9 especially "ith outside suppliersFN<O
N/O N4O

,other and Shook9 Learning to %ee9 pF <E 3asuhiro Monden9 Toyota Production %ystems 9 7d *dF :Hingham MA. (lu"er Academic ublishers9 /DDC;9 ppF 7E<-7EBF

N7O

Monden9 Toyota Production %ystems 9 ppF A7-BEF Author%s note. $hile production smoothing is a distinct item in T S practice9 "hich is not detailed here9 the ability to achieve production smoothing is greatly dependent on standardiGed "orkF
N<O

Monden9 Toyota Production %ystems 9 ppF B/-B7F

SCM
The changes seen "ithin operations often mirror those "ith the suppliersF #n the development of the material flo" strategy9 the first element discussed in the lean environment "as the placement of a marketplace for incoming components and materialsF #n the manufacturing implementation9 6#T delivery and material availability via a kanban call system "ere introducedF &o" the t"o can be beneficially pairedF $ith conformance to the packaging specifications9 lot compliance9 and production smoothing9 a supplier kanban can be introduced to achieve component0material 6#TF The entire purpose for this is to eliminate a push system of material delivery9 and create a pull systemF $hile M, can represent a pull-type system9 it does not reflect manufacturing usage and need in a real-time environment as supplier kanbans doF @uoting Monden9 8Although the kanban system is a very effective means to realiGe the 6#T concept9 it should not be applied to suppliers "ithout corresponding changes in the overall production system of the user companyF N>O As the component production gets further removed from the ultimate customer9 the ability to

ensure good product becomes more difficultF The tier one supplier must listen to the final customer9 and clearly kno" the customer%s concernsF #n the automotive industry customers have been given the ability to "arrant the production%s ?uality and usabilityF Ho"ever9 at the same time9 the supplier hasn%t yet demonstrated the repeatability to provide acceptable productF The ne1t step in SCM has to be to certify supplier ?uality through obMective ?uality performance indicatorsF The ability to do this eliminates the incoming inspection point and delivers the material directly from dock to stockF The development of the obMective ?uality measures :parts per million reMect rate9 delivery performance9 etcF; should drive a supplier stratification methodology NAO that supports the lean manufacturing environmentF The follo"ing t"o SCM initiatives don%t necessarily directly correlate to lean manufacturing itemsS ho"ever9 the resulting actions provide improved operational support and profitabilityF The first of these items is the systematic commodity and supplier revie" activityF As outlined previously9 there are many methods by "hich to accomplish thisF The critical factor is driving continued cost9 ?uality9 and delivery improvementsF *ach of these factors increases the level of operational performanceF aired "ith these continued improvements9 and often as a part of systematic commodity strategies9 is the consolidation of component and material suppliersF By planning for a controlled and appropriate number of suppliers "ithin a commodity9 limited resources can be focused on communicating performance e1pectations and assisting in driving supplier performance improvementF Competitive benchmarking assessments are detailed in Chapter //F Supplier ?uality performance is often not considered part of SCM responsibility or at least very little is "ritten or mentioned about it in SCM literatureF # hold the steadfast position that supplier ?uality management is as critical in SCM as is purchasing9 logistics9 and materials managementF oor performance or the lack of root cause resolution leads to a number of do"nstream SCM activities :iFeF9 e1pediting activities9 premium freight routing9 customer containment activities9 etcF;F #t is for this reason that daily supplier ?uality resolution must be considered a critical element in the Moint implementation of SCM and lean manufacturingF #n an SCM organiGation9 a supplier ?uality or development activity serves to assist the operational ?uality organiGation in providing for permanent corrective action "hen additional assistance is neededF $hile an S@A or S+* activity is not intended to "ork all the operational supplier issues9 their role is to 8deep dive8 systemic supplier ?uality problems to protect the operations from a reoccurrence of specific problemsF These activities support the implementation of lean manufacturing in that they allo" the manufacturing operation to focus its efforts on improving its o"n activitiesF
N>O NAO

Monden9 Toyota Production %ystems 9 pF 7BF $incel9 8A ractitioners 5ie"98 pF >DF

S$MMA'%
!igure /BF/ sho"s a side-by-side pairing for the manufacturing implementation of early lean and SCM stepsF Similar comparisons can be established for the materials flo" strategy and the ongoing improvementsF Through these pairings9 the implementation of the true initial efforts of internal lean manufacturing launches can successfully occurF

Manufacturing &mplementation Lean manufacturing actions Takt time calculation +evelopment of standardiGed "ork instruction for all operations #mplementation of 8pull systems8 bet"een processes utiliGing kanban SCM &mplementation actions 6#T delivery via kanban system 8+ock to stock8 part certification :the elimination of incoming inspection; Systematic commodity and supplier

Manufacturing &mplementation Lean manufacturing actions SCM &mplementation actions revie" activity Supplier development focus

Figure 3D032 Manufacturing airings

Chapter 3E2 (ngoing &mprovements


$ith the careful introduction of the elements described in Chapter /B9 lean manufacturing is no" in placeF Although the steps provide the operational basis for lean9 continued refinement "ill be necessary for lifeF Supply chain management efforts support the lean rollout9 and on their o"n accord are providing additional benefits to the organiGationF &o" the focus moves to improving the fine pointsF These elements include "orking on improving performance measures9 trying ne" e?uipment9 reinforcing the basics9 learning ne" techni?ues9 and learning ho" to further create a competitive advantage over the competition in the markets servedF

L!A" MA"$FAC*$'&"1
There is no one in American manufacturing "ho hasn%t heard of kaiGenF #n Monden%s book9 he describes kaiGen as the method to reduce organiGational slack through the 8continuous implementation of smaller improvement activitiesF8 N/O The organiGational slack is the e1cess amounts of defective product9 unused labor time9 idle inventories9 and other forms of "aste or mudaF The kaiGen activities employed in a lean manufacturing environment are the "ay to achieve continuous improvement in product setup9 product ?uality9 "orkplace organiGation and cleanliness9 customer satisfaction through delivery performance9 and safer "orking conditionsF #mprovement in each of these areas provides the opportunity for added profit and business gro"thF Many of the main lean manufacturing principles center on the foundation of level productionF The ability to achieve this is based on many things9 including comprehensive kno"ledge of customer demand9 robust and proactive demand planning systems9 and material availabilityF $ith the implementation of marketplace pull systems and the use of kanban9 it is important to validate the accuracy of material demand signalsF (anban cards become the link bet"een meeting the customer demands and the material available for productionF As these systems gro" there arises the need to manage the kanban card countF Manufacturing must address this issue to ensure that the cards in the pull system reflect the current demand and level scheduling planF Loss of cards or overabundance of cards can create a shortage or oversupply of materialF (anban card readers are an effective tool for validating the appropriate number of cards in the systemF #n e1amining the lean manufacturing and SCM co-dependency9 it%s appropriate to look at the Moint manufacturing and supply issue of marketplace and in-process inventory reduction as an ongoing manufacturing improvementF $ith the lean manufacturing environment9 inventories are among the most visible areas of potential "aste and improvementF The image of lo"ering the "ater in the stream to reveal the stones of opportunity for improvement is a common one applied to inventory reductionF #mprovements in manufacturing efficiencies as a result of the lean techni?ues provide

the opportunity to reduce the safety stock on handF !igure /CF/ graphically represents the lean manufacturing building blocks utiliGed by automotive supplier +onnelly CorporationN4O in the 8+onnelly roduction SystemF8 The building represents the base9 pillars9 and encompassing roof symbolic of the initiatives of a lean manufacturing implementationF +eveloped by ,uss Scaffede9 former Senior 5ice resident of 2lobal Manufacturing 'perations at +onnelly9 and based on his e1perience as 5ice resident of o"ertrain 'perations at Toyota Motor Manufacturing in 2eorgeto"n9 (entucky9 the symbols in this graphic drove the various steps of lean implementation at the companyF

Figure 3E032 +onnelly Lean roduction System


N/O N4O

Monden9 Toyota Production %ystems 9 pF /DDF

+onnelly Corporation is no" part of Magna #nternational9 "ith the resulting division being called Magna-+onnellyF

SCM &MP'()!M!"*S Purchasing


As the manufacturing operations move beyond the lean manufacturing implementation phase to sustained ongoing improvements9 the supply chain management activity is positioned to enter into long-term agreements "ith its supply baseF The definition of a manufacturing strategy and the implementation of SCM strategies define the rules of business in such a clear manner that the

risk involved "ith many multiyear agreements is greatly reducedF These multiyear agreements provide for supplier sourcing continuity "hich is a benefit for both the supplier%s business planning and the operation%s process stabiliGation efforts9 and for ongoing purchase cost0price improvement initiativesS they also demonstrate the sincerity of supply partnershipsF *1tending from the multiyear contracts is the ability to select pre-sourced suppliers for ne" production programsF This ability e1ists through the clear definition of preferred supply base participants9 clarity of manufacturing e1pectations9 ?uality and price e1pectations9 and Mointly planned supplier gro"th plansF re-sourcing simply is the SCM e?uivalent of capacity planningF By "orking "ith suppliers as "ell as internal customers9 efficient use of supplier labor9 engineering9 financial9 and manufacturing resources can be achieved for the benefit of all partiesF

Logistics and #istribution


6ust as the optimal lean manufacturing layout includes a single customer demand pacing location9 SCM becomes truly integrated into a lean manufacturing environment "hen its distribution activity becomes the pacemaker processF The process of verifying the customer demand and adMusting associated min0ma1 inventory locations can provide the opportunity for the distribution location to become the pull for the rest of manufacturingF By this action9 the production demand process is as close to the customer as it can getF $aste is s?ueeGed out of the system throughout the entire value chain9 and the process stands or falls based upon its abilitiesF Material arrives at the distribution point closer to the needing staging "indo" to meet the customer demand9 sending back the kanban signal as the material shipsF $ith the use of the distribution site as the pull signal location9 the buildup or shortfall of inventory is isolated in a single visual point throughout the factory9 fullfilling the single-piece flo" aspects of lean manufacturingF #n this situation9 the ability to recogniGe needed changes in inventory level9 especially reductions9 more ?uickly occursF The savings associated "ith these inventory adMustments can be readily achievedF

Supplier >uality
Again9 recogniGing that supplier ?uality is often not thought of as a part of supply chain management9 there are ongoing improvement activities that can occur in this area that "ill affect both traditional SCM activities and manufacturing operationsF The first of these is the refinement and implementation of specific supplier performance improvement and measurement metricsF The ability to obMectively measure past and current supplier performance in support of the lean and SCM efforts and to proactively address potential shortfalls drives continued improvement in each areaF 'ne of these improved SCM activities is the use of metrics to stratify the commodity supply bases9 and to use the stratification in ne" product source selectionF Such stratification provides a direct re"ard to those suppliers "ho perform to the highest levelsF #n addition9 the stratification highlights those suppliers "ho can potentially cause system performance problems9 thus enabling proactive corrective measures to be takenF

Product and Program #esign


Much of the SCM discussions here are based upon the introduction of a supplier product into series productionF Ho"ever9 ongoing SCM improvement must also include the upstream opportunitiesF The product engineering element cannot be ignoredF Through prelaunch value engineering activities9 both SCM and manufacturing operations benefit from improved ?uality levels and product performanceF By establishing and meeting component and material performance targets9 the need to maintain safety stock and process is minimiGedF To accomplish these9 the SCM activities must employ supplier management evaluation and preparation skills to position the suppliers to fully participate in the activitiesF Similar value analysis initiatives must also occur and are analogous to the kaiGen activities in the production environmentF

S$MMA'%
$hen implementing lean processes9 many manufacturing organiGations begin "ith the steps described in this chapter instead of ending "ith themF The desire to eliminate "aste throughout the organiGation9 and by connection improve cost9 is the driving factor behind thisF The danger is that the fundamental skills necessary to support these improvement efforts are not in placeF The reductions in organiGational slack as evidenced by the elimination of muda :"aste;9 the implementation of kaiGen efforts9 and manufacturing process refinement are all the elements driving lean improvementF Some of the additional manufacturing continuous improvement areas include the refinement of material demand signalsS reductions to inventoryS and better planning mechanisms and technologies9 such as automated card readersF These elements continue to match up "ith changes in SCM such as multiple process improvements in procurement9 supplier development9 logistics and distribution systems9 and product designF The total value chain :or value stream; is e1panded beyond the internal environment in these lean refinement actionsF #n addition to those mentioned here there are many other lean initiatives and SCM activities that organiGations can take advantage ofF The key is in understanding the entire value chain or material flo" system and ho" to complement the t"o disciplines "ith the focus on improving the value chain for bottom line resultsF S$MMA'&K&"1 L!A" &MPL!M!"*A*&(" A* #S+ As +S$ refined the efforts under"ay "ithin its supply and manufacturing operations9 the company began to be recogniGed as a leader in both lean manufacturing and supply chain initiativesF !re?uently9 customer organiGations "ould use +S$ as a model not only for their other suppliers9 but also for their internal operations as "ellF Training for customer employees "ould often occur at the +S$ facilities9 demonstrating the successful implementation of lean initiativesF Throughout the +S$ organiGation SCM and manufacturing personnel "ere fre?uently asked to speak at industry and professional conferences to detail the approaches they usedF A number of +S$ managers and e1ecutives no" lead their o"n businesses in assisting others to implement lean effortsF *ven "ith this attrition9 +S$ has been able to retain its focus in lean initiatives as both the SCM and manufacturing actions are based on robust processes and not on single individualsF The lean implementation efforts enabled the company to achieve significant and sustained improvement throughout its divisions9 and throughout its "orld"ide operationsF $ithin supply chain management9 +S$ has been able to improve net purchase price through the use of its lean supply chain toolsF The average reduction has increased each year for the past seven years9 and normally e1ceeds the industry average by 4 to 7 percent per yearF The net reductions have no" reached BU percent per year9 "ithout forcing suppliers to take the reduction from their o"n operating marginsF #n many cases9 as the cost structures have improved and allo"ed for lo"er prices9 the suppliers% profit margins have increasedF Like"ise9 supplier ?uality has improved by over CE percent during the same periodF Coupling the supplier ?uality improvements "ith similar internal ?uality improvements9 +S$ no" achieves 8"orld-class8 ?uality levels-actually moving to"ard Si1-Sigma levelsF The inclusion of supplier ?uality and development as a strategic lean supply chain effort has enabled the creation of a 8self-sufficient8 supply base9 capable of servicing +S$ lean re?uirementsF !inally9 +S$%s other SCM areas such as logistics9 distribution9 etcF9 have recogniGed their place in overall company efficiency and performance9 and have been able to deliver specific * S :earnings per share; contributionF All SCM efforts no" "ork to treat the supply chain organiGation as a potential profit center versus a traditional cost centerF +S$ continues to refine its lean supply chain effortsF $hile not every attempt is successful9

even the failures provide a learning tool for continued improvementF Like every company initiative9 daily events occasionally take focus a"ay from the lean SCM effortsS ho"ever9 the underlying philosophy of every action continues to be a strategic vie" of supply chain managementF

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Ac?uisition team formation in price benchmarking9 C<-C> responsibilities9 AC-AD specialists re?uired in9 AD ACT-based sourcing9 /AC-BE Affordable cost target :ACT;9 BA-BD9 C/9 /4C9 /A49 /AC-BE Agreements9 44< Alsbro9 Steve9 A/n American manufacturing9 44/ Annual cost reductions9 /A< salary9 B A @ 9 /4C9 />/ Ariba9 /BB Asian-based companies9 /77 Automotive-based procurement studies9 B Automotive #ndustries Action 2roup :A#A2;9 BAn9 />E Automotive industry9 4/B-/C Availability of components9 <B

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Baan9 /BB 1alanced %corecard-&easures that Dri#e performance, The :(aplin H &orton;9 /B-/C Beck9 HaGel9 /BA Benchmarking competitive assessments9 4/C

evaluations9 /<4 standard environment and9 /4B-4C of supplier capabilities9 /7A9 /AA timing9 /AB %ee also rice benchmarking 8Bench strength98 4EE 1eyond %trategic 2ision* ,ffecti#e Corporate 0ction !ith Hoshin Planning :Co"ley H +omb;9 /<9 />n9 /Dn Best-in-class cost structures9 BB suppliers9 /4B9 />E Bill of material :B'M;9 BB 8Boy9 #%m good8 syndrome9 77 Brainstorming design alternatives9 DD-/EE for potential suppliers9 D4 "ith suppliers9 //4 Brain Teaming9 DD Breakthrough strategies9 </ Business ethics9 7/9 7<-7>9 7A gro"th9 444 maturation9 7C system9 /4<-4> Buyer-supplier relationships constructive behaviors in9 7> philosophical basis for9 7/ See also Competitive collaboration

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Capabilities9 C>9 /7A9 /AA Capacity planning9 44< CA,9 /4C Catchball definition9 /D generally9 /C9 4> C,/ Logic :6ohnson;9 B 8C*' thinking98 B9 D Change opportunity for9 >4 purposeful9 >< Chrysler Corporation9 D< CMM :coordinate measuring machine;9 BA CollaborationF %ee Competitive Collaboration

Commodity cycle plan9 /7A9 /7B-7D financial summary9 /<E groupings9 /AA gro"th patterns and rates9 C/9 C4 pro forma9 /<E supplier benchmarking9 /<E-<< supply base stratification9 44> systematic strategies9 4/C 5A05* and9 /EE-/E/ Company culture9 /B Compensation9 /4D Competitive collaboration9 7D-<E Competitors9 >E Component maMor assembly9 /E7 production9 4/B Computer-based analysis tools9 7 inventory management9 /DE Contained production cell9 CD Continuous flo" manufacturing9 4/A Continuous improvementF %ee Crisis plan. Lean Manufacturing Contracts9 44< Coordinate measuring machine9 BA Corporate financial planning9 /<E management9 <B9 <D morality9 7/ obMectives9 /4/ vision9 /4A Cost as bottom line9 AA-AB center9 <-B containment9 C> drivers9 < history of9 /44 improvement9 AA9 DB9 //>9 /479 /4C9 />D management9 /4C non-value-added9 /E7 performance9 //> savings9 //>9 /CD-DE target setting9 /BE9 /B4-B< Cost estimate9 BBF %ee also Affordable cost target Cost management and control ACT-based sourcing and9 /AC-BE implementation plan9 /A4-A7 improvement in9 /A<-AA kaikaku and9 /AE9 /A49 /A79 /A<9 /A> kaiGen and9 /AE9 /A49 /A7 strategic initiative for9 /AE9 /A4 supplier development in9 /BE-B4 supply chain process improvement in9 /BC target setting9 /A4-A79 /B4-B<

Cost of goods composite9 7-< sold :C'2S;9 BB-BD 8Cost plus8 process9 BB Cost setting process9 BB-BD Co"ley9 Michael9 /<9 />9 /Dn Crisis environment bad ne"s of9 <D->E characteriGation of9 >> hero syndrome in9 >7->< positive aspects of9 >E->4 reasons for9 <B strategic focus and9 <D->E target prices and9 /AC typical conditions of9 <B9 <D %ee also Ac?uisition team formationS Crisis plan. Crisis lanS Lean manufacturingS (aikakuS (aiGenS rice benchmarkingS Short-term process improvementS 5alue Analysis05alue *ngineering Crisis plan buyers and suppliers in9 A4 closure of proMect9 A7 elements of9 A<-A>9 AB-AC implementation9 A/9 A7 kaikaku in9 A<9 A>-AC kaiGen in9 A>9 AA-AB management revie"9 A49 A7 preparation for9 A/-A4 Crisis lan. Lean manufacturing deployment9 //E implementation9 //E-//9 //7-/< "ave one period9 //4-/< "ave t"o period9 //< %ee also Lean manufacturing Cross-dock activities9 4//9 4/4 functional responsibility9 4E organiGational support9 /4A Customer9 D demand9 /CC9 4/E9 4449 44<-4> final9 4/B order fulfillment9 /CD perceived value9 BB satisfaction9 444 service9 /C7

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+aimler9 D<n +aniel9 Mark9 /7n

+ata ac?uisition and analysis9 /7B management or data mining9 /B7 "arehouse surrogates9 /B7 +CA,9 />E +efect causes9 4/A +eflation rates9 BD +emand planning systems9 444 +epartmental goals formatting9 /C individual actions and9 4> matri1 for9 4< overarching obMectives and9 4> +esign for assembly and design for-manufacturing :+!A0+!M;9 BD9 /A79 /B7-B< +esign revie" module :assembly;9 /E7 multiple-day9 DD-/EE part-level9 /E7 8+ialing for dollars98 B7 +istribution9 /C7-C<9 44<-4> 8+ock to stock98 4/C9 4/D +omb9 *llen9 /<9 />9 /Dn +onnelly Corporation9 447 roduction System9 447 +S$ Corporation9 D-/EF See also case studies in each chapter

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*-business and e-procurement tools9 /B79 /D<9 /DC *conomic movements9 /AC9 /B7 *conomic slo"do"n9 <B9 <D9 >E9 >/ *ducational learning9 7B 8C+98 /4C9 />/ *ngineering9 /BD9 44AF %ee also 5alue Analysis05alue *ngineering * S :earnings per share;9 D *thics9 7/9 7<-7>9 7A *uropean market9 4// *1ecutive managementF %ee Senior Management *1periential learning9 7A-7B

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!acility allocation9 /CC !airness9 77 !inancial organiGations9 /BE planning9 /<E ?uarterly focus9 /77 summary9 /<E total impact9 D7 !ive Ss9 //E !i1ed inventory9 /C<9 /CB !le1ible manufacturing9 //E 8!lo" kaiGen98 A>9 /ED !orce9 7>9 7A-7C9 <E !ord Motor Company9 /47n9 /7<n !ull service suppliers :!SS;9 /7< !unctional goals9 /C

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2ap analysis9 4C9 /4D9 /D> 2eneral Motors :2M;9 D<-D> 2eorgeto"n9 (entucky9 447 .etting Past No9 :-ry;9 7B9 7C9 </ to 4es9 :-ry;9 7B 2lobal organiGation9 /DA procurement and development9 /DB purchasing re?uirements9 /D> 2oals and action :2HA; matri1 conflicting obMectives and9 /C department obMectives9 4<9 4> individual actions9 4A for overarching obMectives9 449 4<9 4> supply chain9 47 2ro"th9 <D

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Har#ard 1usiness 'e#ie!9 /B-/C Harvard -niversity School of La"9 7B Ha"kins9 +rF +avid9 7>9 7A Hero syndrome9 >7->< He"lett- ackard9 /> History of cost9 /44 Honda9 B Hoshin "anri9 4/ Hoshin planningF %ee Management by planning

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i49 /BB #mprovement achieving annual9 77 buyer-supplier relationship and9 7/ change and9 >< continuous9 >>9 /ED9 4/C9 44A cost9 A critical business9 >B history of9 /44-47 incremental9 >A minor9 >4 process-based9 DE profit9 A9 C sustained9 </ #nbound material shipments9 4/E-// #ncentives9 4> #ncumbent suppliers9 BA9 C> #ndustry confidence9 <B ?uality standards9 />A9 />D #ndustry slo"do"nF %ee Slo"do"ns #nstitutional ?uality certifications9 /</-<4 #ntel9 /7n

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as encompassing process9 /ED e?uals cost management9 /AE 8flo"98 A>9 /ED in 6apanese9 >> literal meaning of9 >> long term savings and9 /AA9 /AC ?uality agreements and9 /AA9 /AC radical9 >A short-term strategic and9 >7 turn-around plan and9 >B %ee also oint kaiGen (anban production pull methodology in inventory flo" and storage9 /C< on-time material availability in9 4/A-/B SCM implementations and9 4/D signals in9 /CB9 4449 44> (ey obMectives9 4C-4D (ey performance measures9 D

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Lean facilitators9 D79 //49 //7 initiatives9 >7 practices9 CD SCM tools9 <E-</ Lean concepts customers and9 D incremental improvements9 >A overarching obMectives and9 4> T S9 in9 7<-7> Lean manufacturing :T S; adopting disciplines9 4E change basis of9 >7 coordinated "ork activities in9 /D definition9 //E do"nstream activities9 4/>9 4/C kaikaku teams9 AC paired actions necessary in9 4//-/4 as savings techni?ue9 A> SCM and9 />9 444 %ee also Crisis lan. Lean manufacturingS 6#TS Takt timeS Toyota roduction System Lean supply chain management mindset of9 </ SCM tools and9 <E techni?ues9 >7 Lean Thin"ing :$omack H 6ones;9 4/9 4C9 CD-DE9 //E Learning organiGation9 /C Learning to %ee :,other and Shook;9 /BA9 /BC9 4ED9 4/>n

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Magna +onnelly Corporation9 4Cn9 447n Magna #nternational9 447 Management by obMective :MB';9 /> Management by planning :MB ; advantages of9 /A basis of9 /B definition9 /4< in overall business system9 /BC premises of9 /B productivity and9 //7 radar chart9 4C-4D single obMective of9 4/-44 strategic planning arid9 /7-/> Manpo"er resources9 B Manufacturing continuous flo"9 4/A materials handling9 /D pairings9 4/D productivity9 D79 //4-/7 Market competitiveness9 //> conditions9 BD9 C/-C4 confidence9 <B environment9 /47 *uropean9 4// forces9 />D shift9 >/ Marketplace materials storage9 4ED9 4/E Material availability9 444 fle1ibility9 /E/-/E4

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ackaging9 4ED areto9 4C art performance characteristics9 /E4 price reductions9 7< shortages9 /D/ artnership9 779 7C-7D ayback levels9 B9 D/ erformance monitoring9 4C-4D ersonnel development9 /D>9 /DC-DD hysical space allocation9 /CC #C'S9 D< lan-do-check-act : +CA; cycle9 />9 /77 lanning process outline9 /D9 4E oint kaiGen contrasted "ith S #9 D< definition9 CD

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List of Figures
Chapter 32 *he Purchasing4SCM !5ecutive as C!(
!igure /F/ !igure /F4. +S$ Corporation 8Hard8 SCM Savings H * S Contribution

Chapter 82 *he #isciplines of Planning


!igure 4F/. lanning Method Comparison !igure 4F4. lanning rocess 'utline :4EE4 Magna +onnelly Corporation "0 permission; !igure 4F7. ,esponsibility Matri1 !igure 4F<. A Supply Chain 2oals and Action Matri1 !igure 4F>. 2 H A Matri1 'verarching 'bMectives !igure 4FA. 2 H A Matri1 +epartment 'bMectives !igure 4FB. 2 H A Matri1 #ndividual Actions !igure 4FC. Action erformance Summary Chart !igure 4FD. MB ,adar Chart

Chapter ;2 Force )ersus Skill


!igure 7F/

Chapter A2 #efining the Crisis !nvironment

!igure <F/. (aiGen !igure <F4. (aikaku !igure <F7. !rom ,adical to #ncremental Change

Chapter 62 Crisis Plan ,ackground and Phase 3-Ac=uisition *eam Formation


!igure >F/ !igure >F4 !igure >F7

Chapter C2 Phase &&-Price ,enchmarking


!igure AF/ !igure AF4 !igure AF7 !igure AF<. rice Benchmarking ,esults

Chapter E2 Phase &)-)alue Analysis4)alue !ngineering


!igure CF/

Chapter 332 Supply ,ase Management


!igure //F/. Commodity Cycle lan !igure //F4. Commodity ro !orma !igure //F7. Benchmarking and Consolidation !igure //F<. Supply Base +evelopment

Chapter 382 Supplier >uality and #evelopment


!igure /4F/. Supplier +evelopment

Chapter 3;2 Cost Management and Control


!igure /7F/. 5 Target !orm !igure /7F4. Benchmarking Timing !igure /7F7. LTA #mpact !igure /7F<. Supplier @uality0Cost #mprovement !igure /7F>. Logic Sourcing Matri1

Chapter 362 *he Supply Chain (rganiLation

!igure />F/. Skills Matri1

Chapter 3D2 Manufacturing &mplementation


!igure /BF/. Manufacturing airings

Chapter 3E2 (ngoing &mprovements


!igure /CF/. +onnelly Lean roduction System

List of *ables
Chapter 32 *he Purchasing4SCM !5ecutive as C!(
Table /F/. Cost and rofit #mprovement Table /F4. rofit #mprovement er R/ Sales #ncrease or Material +ecrease

Chapter ;2 Force )ersus Skill


Table 7F/. (eys to &egotiation

Chapter 362 *he Supply Chain (rganiLation


Table />F/. 'rganiGation Alternatives

List of Sidebars
Chapter 32 *he Purchasing4SCM !5ecutive as C!(
CAS* ST-+3 /F/ CAS* ST-+3 /F4

Chapter 82 *he #isciplines of Planning


CAS* ST-+3 4F/ CAS* ST-+3 4F4

Chapter ;2 Force )ersus Skill


CAS* ST-+3 7F/

CAS* ST-+3 7F4

Chapter A2 #efining the Crisis !nvironment


CAS* ST-+3 <F/ CAS* ST-+3 <F4

Chapter 62 Crisis Plan ,ackground and Phase 3-Ac=uisition *eam Formation


CAS* ST-+3 >F/ CAS* ST-+3 >F4

Chapter C2 Phase &&-Price ,enchmarking


CAS* ST-+3 AF/ CAS* ST-+3 AF4

Chapter D2 Phase &&&-Short-*erm Process &mprovement


CAS* ST-+3 BF/ CAS* ST-+3 BF4

Chapter E2 Phase &)-)alue Analysis4)alue !ngineering


CAS* ST-+3 CF/ CAS* ST-+3 CF4

Chapter F2 Phase )-Lean Manufacturing


CAS* ST-+3 DF/ CAS* ST-+3 DF4

Chapter 3:2 #efining the Standard !nvironment


CAS* ST-+3 /EF/ CAS* ST-+3 /EF4

Chapter 332 Supply ,ase Management


CAS* ST-+3 //F/ CAS* ST-+3 //F4

Chapter 382 Supplier >uality and #evelopment


CAS* ST-+3 /4F/ CAS* ST-+3 /4F4

Chapter 3;2 Cost Management and Control


CAS* ST-+3 /7F/ CAS* ST-+3 /7F4

Chapter 3A2 Materials Management


CAS* ST-+3 /<F/ CAS* ST-+3 /<F4

Chapter 362 *he Supply Chain (rganiLation


CAS* ST-+3 />F/ CAS* ST-+3 />F4

Chapter 3C2 #eveloping N &mplementing Lean Fundamentals


CAS* ST-+3 /AF/ CAS* ST-+3 /AF4

Chapter 3E2 (ngoing &mprovements


S-MMA,#=#&2 L*A& #M L*M*&TAT#'& AT +S$

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