2004, M. Srinivasan

Building and Managing the Lean Supply Chain

2004, M. Srinivasan

The Supply Chain

1st Tier, 2nd Tier, …, Suppliers

Enterprise Distribution Channels Customers

The Supply Chain

2004, M. Srinivasan

Develop Systems Thinking

Lean supply chain principle 1:Improving the performance of every subsystem does not necessarily improve system performance. The sum of local optima does not equate to the global optimum. Improvements in subsystem performance must be gauged only through its impact on the whole system.

2004, M. Srinivasan

Systems Thinking and the Theory of Constraints

“Find the essence of each situation, like a logger clearing a log jam. The pro climbs a tall tree, locates the key log, blows it, and lets the stream do the rest. An amateur would start at the edge of the jam and move all the logs, eventually moving the key log. Both approaches work, but the essence concept saves time and effort. Almost all problems have a key log if we learn to find it.”

-- Fred Smith

2004, M. Srinivasan

The Business Ecosystem

Regulating Agencies

1st Tier, 2nd Tier, …, Suppliers

Competitors

Complementors Stakeholders

Enterprise Distribution Channels Customers

The Supply Chain

2004, M. Srinivasan

Dell’s Business Ecosystem

Customers: o Home & Home Office o Small Business (up to 400

employees) o Medium & Large Business

(over 400 employees) o State & Local Government o Federal Government o Education o Healthcare o ...........

Suppliers: o Phillips, Nokia,

Samsung, Sony, Acer

o SCI, Celestica o Seagate,

Maxtor, Western Digital, IBM

o Barcelona, HP o Hon Hai/Foxteq o Quanta,

Compal, Acer o ...........

Competitors: Compaq, IBM, HP, Gateway, Toshiba, ..........

Regulating agencies: US Government, state governments, Malaysian government, Chinese government, local governments.......

Complementors: Microsoft, digital device makers, Internet service providers, computer skills trainers, PC game developers ..........

Stakeholders: NASDAQ, Investors

Telephone service companies, financial institutes, third-party technical supporters, AD companies, ..........

Third-party logistics providers such as UPS, Caliber, transportation companies, ..........

Technology development

Status of the Economy

Culture ............

Other industries such as airline, automobile, energy, ..........

Dell

DELL: o Enterprise

systems (servers)

o Notebook computers

o Desktop computers

o ............

Direct sale

Close proximity to suppliers

2004, M. Srinivasan

The Business Ecosystem

Lean supply chain principle 2:Focus on improving the performance of the lean supply chain. However, do not ignore the supply chain’s business ecosystem.

2004, M. Srinivasan

Steps to Build Lean Supply Chains

Develop a systems perspective Understand customers and their expectations Map the supply chain Benchmark best practices Design products and processes to manage

demand volatility Create flow across the supply chain Develop supply chain metrics

2004, M. Srinivasan

Develop a Systems Perspective

For any decision you take consider the following. Does the decision: Help you sell more products? Help reduce investments in resources? Help reduce payments/expenses?

2004, M. Srinivasan

Understand Customer Value Critical step: provide what the customer wants

Providing the wrong product or service in an efficient way is muda. Eg. Air travel

An opportunity for kaikaku (dramatic change): Rethink the delivery system on a product line basis

with strong dedicated product teams

2004, M. Srinivasan

Understanding Customer Value

Document the following: Customer values in each segment

(order qualifiers and order winners) Delivery cycle/time expectations of

customers in each segment

Identify market segments

2004, M. Srinivasan

Market Segments: Example

0%20%40%60%

%ag

e O

rder

s

StapleStock

DirectFreight

Seasonal

Product Type

Market Segmentation Graph

Market Segment

2004, M. Srinivasan

Customer Values in Each Segment

Staple stock (e.g., Stationery) Availability (qualifier), cost (winner)

Direct freight (e.g., Sony DSC-S30) Product design (qualifier), quality (winner)

Seasonal Convenience (qualifier), availability (winner)

2004, M. Srinivasan

Map the Supply Chain The set of all actions required to deliver the finished

product or service to the customer “Seeing the Whole” (Systems Thinking) Systematic study of the value stream often reveals a

staggering amount of muda Need to “map” the whole process, and identify value-added

and non-value added activities across the value stream

2004, M. Srinivasan

Supply Chain Map: “As-Is”

Patient Telemonitoring System monitored by Office based Nurse

Physician’s Office

Admission RN or Therapist Transcription

Medical Records

Outside Supplier

Clinical Staff Materials Management

Intake Coordinator

Hospital Discharge Staff Billing and

Collections

Clinical Supervisor

Visit Scheduler

Courier

Information flowPaper flowData flow

Supply deliveryAdds Value

Source of Waste

2004, M. Srinivasan

Supply Chain Map: “To-Be”Patient Telemonitoring System

monitored by Office based Nurse

Outside Supplier

Clinical Staff

Materials Management

Hospital Discharge Staff

Billing and Collections

Clinical Supervisor/Case Manager

Intake Coordinator/ Scheduler

Physician or Physician’s Office

Information flow

Data flow

Supply delivery

Adds Value

Source of Waste

Medical Records

2004, M. Srinivasan

CustomerSupplier

30 Days Firm

Schedule

ProductionPlanning

CentralSupplies

Monthly Faxof WeeklySchedules

Weekly Calls with Daily Schedules

InventoryManagement

SystemCAPSSystem

Blend Compound Pre-Form

Pre-Cure

Press-Curing slab

Finish-ing Pack

1.33Days

900seconds

0Days

0.26Days

0.09Days

0.09Days

0.68Days

0.54Days

12Days

18seconds

5700seconds

18810seconds

4500seconds

45seconds

0.07seconds

Bi-WeeklySchedule

Press-Curing DFM

FIFO

SalesWarehouse

Customer Demand: 4,560 units/day

RecordReceipt

To R

aw M

ater

ial

Supe

rmar

ket

Value Added Time: 0.35 days; Production Lead Time 3.34 days; Value Added Ratio: 10.5%

Supply Chain Map: “As-Is”

2004, M. Srinivasan

CustomerSupplier

30 Days Firm

Schedule

ProductionPlanning

CentralSupplies

Monthly Faxof WeeklySchedules

Weekly Calls with Daily Schedules

InventoryManagement

SystemCAPSSystem

Blend Compound Pre-Form

Pre-Cure

Press-Curing slab

Finish-ing

0.03Days

900seconds

0Days

0.11Days

0Days

0.03Days

0.13Days

6Days

18seconds

1800seconds

18810seconds

4500seconds

45seconds

Bi-WeeklySchedule

Press-Curing DFM

FIFO

SalesWarehouse

Value Added Time: 0.30 days; Production Lead Time 0.60 days; Value Added Ratio: 50%

DailyOrders

RecordReceipt

Mixed-ModelBuild Schedule

To R

aw M

ater

ial

Supe

rmar

ket

Customer Demand: 6,200 units/day

Supply Chain Map: “To-Be”

2004, M. Srinivasan

UNDERWRITING 1Team 1

FLOW Available Minutes=450Arrivals/Day ServiceTime=Load

1.4 43.60 61.046.3 38.00 239.401.6 22.60 36.165.3 18.70 99.11

14.6 435.71Utilization 0.97

DISTRIBUTION UNDERWRITING 2Number of Clerks= 4.00 Team 1

FLOW Available Minutes= 1800.00 FLOW Available Minutes=450Arrivals/Day ServiceTime Load Arrivals/Day ServiceTime=Load

From Agent RUNS 2.9 68.5 198.65 0.8 43.60 34.88RAPS 15 50 750 4.3 38.00 163.40RAINS 3.8 43.5 165.3 1.1 22.60 24.86

From Computer RERUNS 17.3 28 484.4 7 18.70 130.90Total 39 1598.35 13.2 354.04

Utilization 0.89 Utilization 0.79

UNDERWRITING 3Team 1

FLOW Available Minutes=450Arrivals/Day ServiceTime=Load

0.7 43.60 30.524.4 38.00 167.201.1 22.60 24.86

5 18.70 93.5011.2 316.08

Utilization 0.70

Released 1day prior to due date

Another kind of Supply Chain Map

2004, M. Srinivasan

Benchmark Best Practices

Develop performance

metrics

Identify world class organizations; study

their operations strategies and tactics

2004, M. Srinivasan

Benchmark Best Practices

Lean supply chain principle 3:Focus on customer needs and process considerations when designing the product delivery system. Enterprises can gain tremendous competitive advantage through best-in-class practices that cut across industries.

2004, M. Srinivasan

Designing Products and Processes: Coping With Demand Volatility

Can you smooth demand volatility? Key observation: Much of the demand volatility is self-

induced Sales promotions and rebates End-of-the-month syndrome (“Channel Stuffing”) Batching New product introductions …

2004, M. Srinivasan

How Can We Reduce Demand Volatility?

Have no promotions Reduce lead times and produce in small lots

Exploit product structures Postponement strategies

Exploit commonality and delay commitment Aggregation

2004, M. Srinivasan

How to Manage Demand Volatility: The RAP Principle

Raw Material

Before

After

Sub-Assembly Final Assembly FinishedGoods

Fabrication

2004, M. Srinivasan

How to Manage Demand Volatility: The RAP Principle

Lean supply chain principle 4:Maximize external variety with minimal internal variety. It is desirable to maintain inventories in an undifferentiated form for as long as it is economically feasible to do so

2004, M. Srinivasan

Managing Demand Variation

Lean supply chain principle 5:Buffer the variation in demand with capacity, not inventory

As far as possible, avoid using inventory to buffer variation Less chances of misallocation Inventory seriously impedes flow

2004, M. Srinivasan

“At-Once”Customers

“At-Lead-Time” Customers

“Beyond-Lead-Time”Customers

Perc

enta

ge o

f Ord

ers

Lead Time= 3 to 5 weeks

Replenishment Lead TimeWk 1 Wk 2 Wk 3 Wk 4 Wk 5 Wk 6 Wk 7 Wk 8

The Customer Time-Based Demand Profile

Product Delivery Strategies

2004, M. Srinivasan

Build to stock (BTS) Finished goods made in anticipation of demand.

Customers’ orders are met from inventory

Assemble to order (ATO) Subassemblies produced according to forecast.

Required items are drawn from wip and assembled when orders are received. Very little finished goods inventory carried

Product Delivery Strategies: Product Structures

2004, M. Srinivasan

Build to order (BTO) Products built in response to actual customer

orders. Usually these are standard products with a few options

Engineer to order (ETO) New product designed and produced in response

to specific customer needs. Lead times include relevant elements of engineering design and manufacturing

Product Delivery Strategies: Product Structures

2004, M. Srinivasan

FGBuild to Stock

Customer LT

AssemblyAssemble-to-Order

Customer LT

Build-to-Order AssemblyRM

Customer LT

Product Structures: Resulting Lead Times

2004, M. Srinivasan

Create Flow

CustomersFacilitySuppliers

Creating flow requires a systems perspective Lack of flow results in inventory or work imbalance somewhere

in the supply chain Improved flow reduced lead times To create flow, all processes should “row the boat” at the same

pace – the concept of flow balance

2004, M. Srinivasan

Creating Flow

Lean supply chain principle 6:Use forecasts to plan and pull to execute. A system that reacts to pull signals will have less variation than a comparable system that adopts a push mode of operation.

To enhance flow, use pull signals for execution where possible

2004, M. Srinivasan

“Tell me how you will measure me and I will tell you how I will behave.”

Does the metric: Help you sell more products? Help reduce investments in resources? Help reduce payments/expenses?

Develop Metrics Using a Systems Perspective