In today’s uncertain world, more than ever, organisations will have to develop new ways of working to minimise cost and the need for working capital. Manufacturers, Suppliers and logistics companies must work together to minimise the total cost of the supply chain and not just their own sphere of control and management. Companies have often talked about supply chain improvement but what does this really mean in an environment where direct purchase cost is the key? Currently manufacturers are able to pass on price rises throughout the supply chain for the ever increasing cost of energy and raw materials but is this sustainable in the medium to long term, can consumers afford this additional outlay?
For a real difference to the overall cost of supply to be made, organisations need to actively work together to improve the supply chain as a whole. If we think about the true lead time of the products that the end user will use, it is not unimaginable that products being made upstream today will not be at the final market place for many months to come.
Organisations within supply chains need to work together to determine what creates value and how can we make it flow quickly along the supply chain. (James Womack & Dan Jones Lean Thinking 2000 & Lean Solutions 2005). Traditional methods of reviewing supply chain performance need to be replaced to meet the challenges ahead.
If we consider the entire length of supply chains, we need to develop new ways of working between organisations that reduce overall cost, lead time, inventory and the subsequent working capital involved. In the UK, while reviewing the latest Budget from the Chancellor of the Exchequer, the media try to calculate how many equivalent days the average person works before they start to earn money for themselves (after the taxman takes his cut). If we applied this thought to manufacturing and supply organisations that rely on overdrafts to support their operation, how many days production is required to pay for the incurred interest. It is often a question that organisations don’t ask themselves and are shocked at the overall result. Traditional measures of accounting (e.g. Earnings before Tax and Deprecation) do not motivate companies to seek ever decreasing lead times.
Upstream companies will complain of variable demand placed on them by their customers and supply chains as a whole do not have stable demand. The question, however, is how much of it is due to the variability of the customer and how much is caused by the internal operations of the supply chain and independent of the customer. Often the impact of companies relying on inaccurate forecasts, push based MRP systems, economic reorder quantities, large batch sizes (calculated on economic batch size calculations) and internal policies to reduce inventory, cause this additional demand amplification. This amplification in demand will ultimately result in excessive lead time and inventory held throughout the supply system.
Demand Amplification
In the above example, the end customers demand only varies by ± 5%, however this demand amplification propagates through the supply chain ending up with the sub Assembler seeing ± 25% demand variation.
Demand amplification is present in all supply systems and it is up to companies within supply chains to work together to minimise its affect. One of the key fundamentals within the Toyota production system is the elimination of Mura (the Japanese word for unevenness) – the key for our supply chains is to work together to level activity where possible, so that the supply chain as a whole works to the demand of the end customer.
This is a simple statement to make but in practice what does it mean? Organisations have been implementing lean thinking for many years, the breakthrough improvements within the supply chain will come when organisations start to look externally with their partners to eliminate waste throughout the chain. Individuals need to overcome their concerns of sharing too much information with their customers or feelings of self preservation, to challenge the current supply chain thinking.
When supply chains are reviewed in terms of value creating time against total lead time, many supply chains will find that less than 1% of time and 10% of activity is truly value adding. This means the other 90% is incurring cost that is not necessary. As consumers would we be happy to pay for this waste? Whilst the answer is, of course, no, the problem is that ultimately consumers DO pay through inflated prices.
Supply Chain Improvement
When planning a supply chain partnership project, it is important that all sides feel there is benefit for them. Often in a supplier – customer relationship this is hard to achieve. Companies, who offer lean facilitation services such as picme, will be able to assist the supply chain partners in moving beyond usual commercial areas of focus, into mutually beneficial improvement that benefits not only the consumer but the supply chain stakeholders.
There are two areas of improvement that need to be worked on.
Within each company in the supply chain, the organisations must work to eliminate all forms of waste and aim to be able to make to the pull of the customer. This can only be achieved through bottom-up lean implementation such as improving overall equipment effectiveness, eliminating waste and minimising batch size and changeover times through such techniques is Single Piece Flow or SMED (Single Minute Exchange of Die) techniques.
In order for organisations to target the correct improvement activities, all companies should embark on a value stream mapping activity to develop a lean implementation plan which can then form part of an organisation’s Policy Deployment process. This process will then help drive an organisation forward.
In addition to the inward looking activity, it is important for the supply chain partners to then undertake a mapping activity across the supply chain from ultimate raw material through to the final customer, however this is often complex and prioritisation must take place. An organisation must take a lead in the activity and this company should be as close to the end user as possible.
Working back upstream away from the end consumer, the company must decide which value streams it wants to address and which sub – components are critical. This should be done throughout the supply chain and this will determine the complete supply chain to map and therefore the partner organisations.
In complex value or disjointed supply chains, it may be impractical to undertake a complete project. Although not ideal, we should not be defeatist and work on what can be influenced. This may involve only partial supply chains but even this will produce some startling results in terms of lead time reduction, cost reduction and removing the reliance on excessive working capital.
Representatives from each organisation should develop a supply chain map, which will highlight value creating activity, lead time, quality rate throughout (what additional steps are required to guarantee six sigma levels of quality at the end customer) and how demand is amplified.
Once complete the organisations can then work together to develop an overall plan for improvement ensuring win – win – win shares of the benefit.
This process will continue to evolve to new sub-components or completely new value streams. We have to be pragmatic, there is only a finite amount of resource within organisations and improvement activity whether internally focused or supply chain focused needs to be prioritised to gain the biggest benefit. At some point the resource required to fix a particular supply chain will be excessive and not worth the outlay today. At this point, it’s time to move on and tackle the next big win.
Conclusions
Over the last ten to fifteen years, organisations have been rushing to remove cost from their internal business by relocating to low cost emerging economies. In terms of supply chain optimisation this may reduce the cost of manufacture but does it reduce the overall cost of supply? In some cases this may be true but do supply chains really calculate the additional costs associated with the move, the air freighting of products due to stock outs, the excessive lead time and inventories that complex supply chains require. Do they cost the risk of customer disturbance?
As consumers do we really understand the true cost of the items that are purchased, if supply chains have 1% value added activity and less than 10% of the processes adding value what would we demand to be done differently.
It is the author’s belief that, if organisations within supply chains worked across company boundaries, relocation to other parts of the world would not in many cases occur. Would this approach have happened if transport and shipping costs, born of high oil prices, had been evident in the eighties and nineties? Indeed, Japanese television manufacturers only relocated television manufacture to Europe when the logistics cost of shipping a television cost more than the manufacturing cost of a television in Japan.