LEAN SUPPLY CHAIN

Supply Chain Management

10th November, 2010

Submitted By:

Yatendra Bihani – 102 IT - M

Sharmila Iyer – 109 IT - M
Mohnish Jain – 110 IT - M

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 Table of Contents

Introduction……………………………………………………………. 1

Lean Supply Chain May Be Defined

As…………………………….................................................................. 1
Sharmila Iyer
Driving The Change To Lean Supply
Chains………………………................................................................ 2

Creating Lean Supply Chain…………………………………….. 3

Components Of Lean Supply

Yatendra Bihani
Chain……………………………………………………………………… 4

Benefits Of Lean Supply Chain................................................. 9

Mohnish Jain
Potential Disadvantages Of Lean Supply
Chain……………………………………………………………………… 11

Conclusion……………………………………………………………… 12
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Introduction

Retaining a competitive edge calls for critical self analysis and an innate drive to deliver value. These
core principles are essential to the success of any commercial or industrial enterprise, but they require
a structure and discipline that is incorporated into the very fabric of the business, creating the DNA by
which working processes are continuously improved.

This thinking has been widely absorbed into the culture that surrounds World Class manufacturing,
having originally been developed by Toyota as its ‗Lean Manufacturing Process Management’
Philosophy. The overriding objective behind ‗Lean‘ is to continuously improve operations by offering a
systematic way to identify, analyse and eliminate waste, and its success in delivering productivity gains
is now legendary.

Lean supply chain management is not exclusively for those companies who manufacture products, but
also for businesses who want to streamline their processes by eliminating waste and non-value added
activities.

The implementation of ‘Lean Principles’ has enabled manufacturing firms across the globe to be more
customer-focused, flexible and profitable. Bringing a ‗Lean‘ philosophy into the working culture of a
business has offered tremendous rewards, both in terms of performance improvements and the
engagement of the workforce.

Lean supply chain may be defines as

‘A set of organizations directly linked by upstream and downstream flows of products, services,
finances and information that collaboratively work to reduce cost and waste by efficiently and
effectively pulling what is required to meet the needs of the individual customer.’

A lean supply chain is one that produces just what and how much is needed, when it is needed, and
where it is needed. The underlying theme in lean thinking is to produce more or do more with fewer
resources while giving the end customer exactly what he or she wants. This means focusing on each
product and its value stream. To do this, organizations must be ready to ask and understand which

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activities truly create value and which ones are wasteful. The most important thing to remember is that
lean is not simply about eliminating waste but about eliminating waste and enhancing value.

The Concepts of Value and Waste

Value, in the context of lean, is defined as something that the customer is willing to pay for. Value-
adding activities transform materials and information into something a customer wants. Non-value-
adding activities consume resources and do not directly contribute to the end result desired by the
customer. Waste, therefore, is defined as anything that does not add value from the customer's
perspective.

Understanding the difference between value and waste and value-added and non-value-added
processes is critical to understanding lean. Sometimes it is not easy to discern the difference when
looking at an entire supply chain. The best way is to look at the components of the supply chain and
apply lean thinking to each one and determine how to link the processes to reduce waste.

Driving the Change to Lean Supply Chains

More than at any other time in history, today‘s business environment is in a constant state of change.
Changing customer requirements, product portfolios, marketplace demographics and geographies are
in constant evolution and are impacting the way business is conducted.

Companies need methods, tools and trading partner relationships that allow them to be more flexible
and adapt more quickly to these changes. In part, the need for flexibility has led many traditional
manufacturers to shed their plants and rely on domestic and international contract manufacturers, or to
move production to low-cost countries, causing a longer and more complex supply chain.

Organizations today tend to be ‗horizontally integrated‘ with internal locations performing only the core
function and all other needs outsourced. The remaining company facilities are typically occupied in a
manner that reduces the impact on working capital and provides the flexibility to shift geographically as
the marketplace changes.

 How can a company deal with the scope of a global marketplace and its supply chain, while
retaining speed and flexibility?

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 How can we eliminate wasted time, effort and materials from all points in the supply chain?
 How can a company meet the needs of a global marketplace without creating excessive work
in process or inventory held along the way?
 And how can we use the answers to these questions in a way that addresses the issue of
shrinking profit margins?

To address these issues, today‘s organizations can leverage a variety of tools and business
philosophies to drive improvements across their business. Three of the most widely used philosophies
are TQM, Six Sigma and Lean.

Creating a Lean Supply Chain

To create a leaner supply chain companies must examine each area of the supply chain including
procurement, manufacturing, warehousing and transportation.

 Procurement
Many businesses have complex purchasing operations. Large companies often have corporate
purchasing groups as well as local purchasing. This can lead to vendors being given multiple
contracts leading to variations in prices depending on location. Companies that practice lean
supply chain management reduce their procurement function so that each vendor has one
point of contact, one contract and offers one price for all locations. Businesses are looking to
new technologies to assist them in improving procurement processes. These include internet
based purchasing that allows the purchase of items from the vendor‘s catalogue containing
companywide contract prices. Changes in payment options to vendors can also streamline
processes. Companies that use a two-way match, which is payment on receipt rather than
payment on invoice, will reduce resources in their purchasing department as well as improve
supplier relationships.

 Manufacturing
Lean supply chain management gained popularity in the manufacturing area as this is where
significant improvement can be achieved. Manufacturing processes can be improved to reduce
waste and resources while maintaining operational performance. Companies who have
adopted lean supply chain practices have examined each of their routings, bill of materials and
equipment to identify where improvements can be achieved.

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 Warehousing
Warehouse processes should be examined to find areas of eliminating waste of resources and
non-value added steps. One area the companies should always be working on is the reduction
of unnecessary inventory. The accumulation of inventory requires resources to store and
maintain it. By reducing unnecessary inventory, a company can minimize warehousing space
and handling, in turn reducing overall costs.

 Transportation
Businesses who want to implement lean processes often look to their transportation
procedures to see where they can be streamlined. In many instances companies find that their
efforts to improve customer satisfaction leads to poor shipping decisions. Orders are shipped
without combining additional orders to minimize costs or expensive shipping options are
selected because of a customer request. Businesses often find that they are using a number of
shippers unnecessarily when they could be reducing their shipping options and reduce overall
costs.

Lean supply chain management requires businesses to examine every process in their supply chain
and identify areas that are using unnecessary resources, which can be measured in dollars, time or raw
materials. This will improve the company‘s competitiveness as well as improve the company‘s overall
profitability.

Components of the Lean Supply Chain

Lean Suppliers

Lean suppliers are able to respond to changes. Their prices are generally lower due to the efficiencies
of lean processes, and their quality has improved to the point that incoming inspection at the next link is
not needed. Lean suppliers deliver on time and their culture is one of continuous improvement.

To develop lean suppliers, organizations should include suppliers in their value stream. They should
encourage suppliers to make the lean transformation and involve them in lean activities. This will help
them fix problems and share savings. In turn, they can help their suppliers and set continually declining
price targets and increasing quality goals.

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The decision to create lean suppliers is driven by multiple concerns. There can be substantial
diseconomies of vertical integration outside of the core business. Switching to lean suppliers may entail
considerable costs (economic, political, and reputational). Helping suppliers become lean potentially
enlarges the pool available for sourcing choices. Finally, customers may be more effective than outside
parties in teaching suppliers to be lean.

Lean Procurement

Some lean procurement processes are e-procurement and automated procurement. E-procurement
conducts transactions, strategic sourcing, bidding, and reverse auctions using Web-based applications.
Automated procurement uses software that removes the human element from multiple procurement
functions and integrates with financials.

The key to lean procurement is visibility. Suppliers must be able to "see" into their customers'
operations and customers must be able to "see" into their suppliers' operations. Organizations should
map the current value stream, and together create a future value stream in the procurement process.
They should create a flow of information while establishing a pull of information and products.

1) Migrate from ―push‖ to ―pull‖

Strengthen and improve the ―pull‖ supply chain processes by deploying supply chain event
management solutions that enhance collaboration with the suppliers. Operating in real-time mode,
collaboration portals can connect people – buyers, suppliers and partners – directly to their ―pull‖
business processes anytime, anywhere. These collaboration portals allow buyers and their suppliers to
communicate the following supply chain ―exception based‖ signals in real-time.

 Proactive Alerts: These alerts notify the trading partners of a potential stock-out. As an
example, a proactive alert can notify a trading partner of a potential stock out, e.g., the Kanban
Replenishment Capacity program allows you to track the production capacity of a Kanban and
compare it to the demand pattern of the item. The system displays an alert for all items that
cannot meet the new demand.
 Reactive Alerts: Alerts that identify critical supply chain exceptions. For example, a reactive
alert can identify critical supply chain exceptions, such as late shipments, past due Kanban
acknowledgements and supplier ―under-commits‖ to the MRP forecast.

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 Execution Alerts: These alerts provide updates on business process transactions. Consider the
example where an execution alert is used to provide updates on business process transactions
such as Advance Ship Notices (ASN)

2) Develop a flexible and responsive supply chain

Help your procurement professionals eliminate long material lead-times by adopting postponement
strategies. With the fully automated Supply Management Suite, buyers can:

 Deploy a more responsive supply chain. When customer demand unexpectedly goes up, your
supply chain can meet that increase. When forecasts go down you are not left with excessive
levels of inventory;
 Reduce the long lead-times normally associated with offshore procurement;
 Proactively manage potential shortages through automated real-time forecast collaboration
solutions;
 Receive proactive alerts when suppliers cannot support requirements;

3) Eliminate all waste in the procurement cycle

Without lean procurement, buyers spend the majority of their time on nonstrategic processes like
tracking down order status, purchase order entry, and maintaining ―private‖ spreadsheets for analysis.
As a result, they miss opportunities for mutually beneficial supplier negotiations and process
efficiencies.

 Eliminate discrete purchase orders;

 Grant suppliers 24 x 7 x 365 access via the web so they can respond electronically with critical
business process information. This ends over-reliance on phone, fax and e-mail;
 Use enhanced workflow in acknowledgement approval processes;
 Develop ―no touch‖ processes that automate and eliminate 50 percent of purchase orders and
70 percent of all invoices;

Lean Manufacturing

Lean manufacturing systems produce what the customer wants, in the quantity the customer wants,
when the customer wants it, and with minimum resources. Lean efforts typically start in manufacturing
because they free up resources for continuous improvement in other areas, and create a pull on the

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rest of the organization. Applying lean concepts to manufacturing typically presents the greatest
opportunity for cost reduction and quality improvement; however, many organizations have received
huge benefits from lean concepts in other functions.

Lean manufacturing requires that not only should technical questions be fully understood, but existing
relationships between manufacturing and the other areas of the firm should also be examined in depth,
as should other factors external to the fir. As an integrative concept, the adoption of lean manufacturing
can be characterized by a collective set of key areas or factors. These key areas encompass a broad
array of practices which are believed to be critical for its implementation. They are, scheduling,
inventory, material handling, equipment, work processes, quality, employees, layout, suppliers,
customers, safety and ergonomics, product design, management and culture, and tools and
techniques.

Lean Warehousing

Lean warehousing means eliminating non-value added steps and waste in product storage processes.
Typical warehousing functions are:

 Receiving
 Put-away/storing
 Replenishment
 Picking
 Packing
 Shipping

Warehousing waste can be found throughout the storage process including:

 Defective products which create returns

 Overproduction or over shipment of products
 Excess inventories which require additional space and reduce warehousing efficiency
 Excess motion and handling
 Inefficiencies and unnecessary processing steps
 Transportation steps and distances
 Waiting for parts, materials and information
 Information processes

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Each step in the warehousing process should be examined critically to see where unnecessary,
repetitive, and non-value-added activities might be so that they may be eliminated.

In warehousing, the monitoring and reduction of order cycle time also is involved. In your warehouse,
what is the time lapse between receipt of an order and delivery to the customer? If it is less than it was
a year ago, you are reducing the order cycle time. Improvement of the flow of materials and information
is one way to accomplish this. In materials handling, flow is facilitated by reducing the number of times
that product is moved during the process of receiving, storing, picking and shipping. Flow of information
is controlled in similar ways, by eliminating opportunities for error in the transmission of data.

The 5 S‘s of a lean warehouse are:

 Sortation is the process of separating needed tools or merchandise from those that are not
needed, and removing the unneeded materials.
 Straightening means that items are arranged in an order making them easiest to use.
 Shining is the cleanup campaign. Lean warehouses have excellent housekeeping.
 Standardization is the development of systems and procedures used to monitor the first three
S‘s.
 Sustaining is the maintenance of a stabilized workplace, through continuous improvement.

Lean Transportation

Lean concepts in transportation include:

 Core carrier programs

 Improved transportation administrative processes and automated functions
 Optimized mode selection and pooling orders
 Combined multi-stop truckloads
 Cross-docking
 Right sizing equipment
 Import/export transportation processes
 Inbound transportation and backhauls

The keys to accomplishing the concepts above include mapping the value stream, creating flow,
reducing waste in processes, eliminating non-value-added activities and using pull processes.

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A Lean transportation network must be designed to support Lean delivery requirements. Material
arrives in smaller quantities on a more frequent, predictable schedule. Once shipment sizes are
reduced and delivery frequency is increased, the shipments need to be leveled over available working
time. Lean transportation networks need to successfully support the triple goal of increased delivery
frequency, reduction of lot sizes and levelled flow of material.

The use of small package delivery, multiple stop milk runs, LTL consolidation and mixed product
container building at the point of origin all play a vital role to achieve Lean transportation. The milk run
is a specific Lean transportation technique that helps to facilitate small lot sizes, increased delivery
frequency and levelled flow. Milk runs are pick-up and delivery routes that deliver goods to
manufacturers at fixed times during the production cycle. They typically involve picking up or delivering
at multiple suppliers with the same truck. The goal is to deliver small lots in frequent delivery cycles.

The challenge of implementing smaller more frequent shipments is controlling transportation costs.
There are tools and techniques to achieve the three Lean goals (frequency, lot size, levelled flow) and
even reduce transportation costs in the process. Two of these techniques are daily transportation
variability optimization and transportation event management (Transportation cost reduction cannot be
realized through infrequent transportation network designs. Real savings will only result from daily
management and optimization of transportation requirement variability.).

Lean Customers

Lean customers understand their business needs and therefore can specify meaningful requirements.
They value speed and flexibility and expect high levels of delivery performance and quality. Lean
customers are interested in establishing effective partnerships—they are always seeking methods of
continuous improvement in the total supply chain to reduce costs. Lean customers expect value from
the products they purchase and provide value to the consumers who they interact with.

Benefits of Lean Systems

Speed and Responsiveness to Customers

Lean systems allow a supply chain to not only to be more efficient, but also faster. As the culture of
lean takes over the entire supply chain, all links increase their velocity. A culture of rapid response and
faster decisions becomes the expectation and the norm. This does not mean that decisions are made

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without careful thought. It simply means that a "bias for action" becomes the new corporate culture and
anything less will not be tolerated. Slow response or no response becomes the exception, rather than
the rule.

Reduced Inventories

In the lean paradigm, inventory is considered waste. Many would argue this point, but manufacturing
can take place efficiently with little or no raw material, work in process (WIP), or finished goods
inventory.

Many companies today produce directly into trailers and maintain no other finished goods inventory. All
quality inspections and checks are performed within the process, rather than after production is
complete. In this true make-to-order scenario, all goods are shipped directly to the next link in the
supply chain when the trailer is full, and overproduction is not possible and cannot be tolerated. No
space is designated to store finished goods. The system is not designed to carry them.

Applying one-piece flow and pull systems can reduce WIP dramatically. A Kanban or visual signal for
more goods to be moved forward to the next process can accomplish this procedure. Although the
ultimate goal is to eliminate WIP, minimal WIP is normally the result. The elimination of bottlenecks is
one goal of a lean supply chain, but a bottleneck will always exist to some degree. As a result, WIP
must always exist in front of a bottleneck or the bottleneck operation will be starved and will stop.

Raw material inventory is a different matter. Although the leanest organizations have arranged just in
time deliveries to support manufacturing, this approach requires the absolute highest degree of
competency and coordination within the supply chain.

Reduced Costs

Traditional mass production tries to minimize unit costs by increasing total production over the life cycle
of the product. High development costs are the result of this model. To recover the enormous
development and initial capital costs sunk into the product before it was produced, mass producers
forecast and run long production cycles for each SKU. Consumer preferences and variety suffer in this
scenario. Costs still need to be minimized, but not at the expense of what more sophisticated
consumers now demand.

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Improved Customer Satisfaction

Lean promotes minimizing new product development time and expense. This delivers the product to
market faster, making it easier to incorporate current requirements into the product. Lean also promotes
the use of less capital-intensive machines, tools, and fixtures, which results in more flexibility and less
initial cost to recover. As a result, product life cycles may be shorter and product developments
incorporated in newer versions of the product more frequently. Profitability does not suffer and brand
loyalty is increased, as customers prefer to buy products and services from a perceived innovator.

Supply Chain as a Competitive Weapon

A strong supply chain enables the member companies to align themselves with each other and to
coordinate their continuous improvement efforts. This synthesis enables even small firms to participate
in the results of lean efforts. Competitive advantage and leadership in the global marketplace can only
be gained by applying lean principles to the supply chain. Thought, commitment, planning,
collaboration, and a path forward are required.

Potential Disadvantages of lean systems

Supply Problems

Because only a small amount of inventory is kept on hand, lean system depends heavily on suppliers
that can provide products for the manufacturing process dependably and without interruption. Problems
like employee strikes, transportation delays and quality errors on the part of suppliers can create
manufacturing holdups that can be fatal. Vendors may be unable or unwilling to supply parts or
products on a tighter schedule or in smaller amounts. These needs can burden suppliers with
unprofitable costs and create tensions that ultimately affect the manufacturing process and can cause
frequent changes of suppliers, or even difficulties finding suppliers who can provide on the necessary
schedule at all.

High Cost of Implementation

Implementing lean system often means completely dismantling previous physical plant setups and
systems. Training employees can be lengthy and acquiring managers experienced in lean
manufacturing process can add considerably to company‘s payroll expenses. The purchase of
machinery that increases efficiency, and the setup of smaller work cells can add to long-term debt.
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Small and medium-sized businesses, in particular, may find the cost of changeover to lean
manufacturing processes prohibitive.

Lack of Acceptance by Employees

Lean system processes require a complete overhaul of manufacturing systems that may cause stress
and rejection by employees who prefer old ways of doing things. Moreover, lean manufacturing
requires constant employee input on quality control, which some employees may feel disinclined or
unqualified to do. Older employees may prefer previous methods and can cause resistance among
others in the work group. This is where good managers become crucial to the changeover to lean
manufacturing. There may also be some difficulty finding managers with sufficient leadership and
persuasion skills to overcome this resistance.

Customer Dissatisfaction Problems

Because lean processes are so dependent on supplier efficiency, any disruption in the supply chain
(and therefore, in production) can be a problem that adversely affects customers. Delivery delays can
cause long-lasting marketing problems that can be difficult to overcome.

Conclusion

Lean is a cooperative process for survival and for success. Supply chains that want to grow and
continue to improve must adopt lean. Lean concepts require an attitude of continuous improvement
with a bias for action. The concepts of lean apply to all elements of the supply chain, including support
departments such as product development, quality, human resources, marketing, finance, purchasing,
and distribution. The challenge is to bring all of these areas out of their traditional silos and make them
work together to reduce waste and create flow. Duplication and a lack of appropriate and timely
communication run rampant in these traditional organizations. A lean supply chain is proactive and
plans for the unexpected by positioning all resources for effectiveness. Downturns in demand can be
addressed without layoffs or significant productivity losses.

Leaning "other" areas presents a larger challenge than it does in manufacturing. Supervisors and
factory workers embrace change that results in making their lives less complicated and more
successful. In the hierarchy of support areas, it is more challenging for the people to understand how

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lean can benefit them. The answer is simple: What benefits the organization as a whole benefits the
supply chain.

Because the Internet provides us with unprecedented opportunities for sharing information and
conducting transactions across the supply chain, companies should have a sense of urgency about
adopting lean concepts. But all chain partners have to be on the same playing field, and the lean
concept is intended to let everyone reach new levels of efficiency and effectiveness. Supply chain
leaders should not delay—it's urgent to act now to implement lean concepts in the supply chain.

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