LEAN SUPPLY CHAIN: Principles of Lean Supply Chain Management
The case for a Lean Supply Chain
The lean supply chain aims at delivering to the customer what they need in the time that they need while at the same time ensuring that there is as little waste as possible. The same wasteful activities that are found within production areas are also found in the delivery process of goods to the customer.
Elimination of wasteful activities within a supply chain involves strategies that may at first seem counterintuitive to lean principles. It may sometimes be necessary to break some of the rules so as to achieve the greater good within the supply chain.
For example, it may be better to have a standardized inventory of finished goods in a warehouse than to try to achieve just in time delivery which is a key tenet of lean thinking.
This article looks at the main principles of a lean supply chain that drive the delivery of value to the customer while at the same time producing the least amount of waste.
Lean Supply Chain Definition
A supply chain can be defined as all those players that work in a synchronized and mutually beneficial manner to effectively ensure that materials and information flow coherently from suppliers to consumers.
The lean supply chain is a networked interplay of resources and processes that aims at delivering customer defined value with the least amount of waste between the various stages within the flow of materials and information.
Which, according to you is a better supply chain strategy?
Has Just-in-Time thinking fallen on bad times?
A number of incidents in the last few years have made lean thinkers to examine and rethink the viability of some core principles of lean. For example, the disruption of many supply chains by the Fukushima incident left many companies falling short of customer expectations.
Most of these companies have traditionally practised some form of JIT (Just-in-Time) production where by production is based more on actual customer demand than by projections.
When the incident occurred, the little buffer stock that was held in their factories was quickly depleted and it was only a matter of time before customer order started getting late.
Does this mean that companies should abandon lean production and go back to the out-dated batch production methods so as to mitigate against unforeseen disruptions? The answer is definitely no: What should happen is that companies should find ways of mitigating against possible disruptions without introducing the bad practices of batch production.
Principles of the Lean Supply Chain
The following guiding principles of lean supply chain are applicable to any industry and aim at achieving the well-known benefits of lean in the ever-changing circumstances of the global economy.
Emphasis is given to the underlying principle rather than the tools because they give one the ability to adjust according to the prevailing circumstances. Lean tools that are used indiscriminately often result in unintended negative results because the principle behind them was never applied.
Proximity of suppliers to customers where possible is better than long supply chains because regional differences are reduced. When the distance between suppliers and customers increases, there is a proportionate increase in cost for both the providers and customers. Also, chances of unfulfilled customer demand increase as there are more factors to contend with along the way
Reduced inventory along all points in the supply chain helps in smoothing the flow and also reduces the cost of provision. Large inventories have been proven to impede the smooth flow of value to the customer because they take more effort to handle. There is also the cost associated with holding too much inventory such as inventory handling and obsolescence costs.
Dual sourcing from suppliers is better than single or multiple sourcing. This is because single sourcing creates a risk when the supplier is not able to supply for reasons such as disruptions. There is also the possibility that the supplier will exploit the firm because they are at their mercy. Multiple-sourcing creates an atmosphere of unhealthy competition among suppliers to the detriment of the organization. The need to satisfy the economies of scale for the suppliers might also lead to the company holding unnecessary stock.
Suppliers are partners who should work together with the firm they are supplying to for the benefit of the final customer. When suppliers are treated as important stake holders in the value chain, the business relationship becomes mutually beneficial as all players are working for the each other’s success rather than selfish needs. They will go out of their way in difficult circumstances to ensure that the needs of the customer are met even if it means making a temporary loss.
Short lead times from the time a customer places an order to the time they receive it provides a distinct advantage to the players within the supply chain. This includes customer satisfaction which translates to return business and loyalty. Supply chains that concentrate on shortening the lead times have most likely removed a lot of waste and have streamlined most of their processes.
Production closer to the market shortens the length of the supply chain and enhances the communication between the various players. This is beneficial to the final customer because cost reductions are passed on and there is the additional benefit of product freshness.
Engineering closer to the production location results in better manufacturability of the products due to better communication between the plant and the engineers. This reduces the risk of the engineers designing products that are difficult and costly to manufacture because they did not understand the capabilities of the manufacturing plant.
Procuring closer to production keeps inventories low due to reduced lead times and reduces the chances of non-delivery of raw materials. For example, it is better to procure within the region where you are producing rather than importing across the oceans because the long lead time and logistics considerations force you to keep very large inventory buffers.