the challenge of supply chain compression

1 Lean Enterprise Academy www.leanuk.org

First Lean Supply Chain Forum5 June 2007

The Challenge of Supply Chain Compression

Daniel T Jones

ChairmanLean Enterprise Academy


Agenda

• 8.30-10.00 Plenary• The Challenge of Supply Chain Compression –

DTJ• Changing the Logic from Batch to Flow – IG

• 10.30-12.00 & 13.00-14.30 Parallel Workshops• Every Product Every Cycle in Production – IG• Every Product Every Day across the Supply

Chain – DB• 15.00-16.30 Plenary

• Creating a Value Stream Plan – DB• Leading Value Stream Compression - DTJ


The Power of Lean

• Toyota as a reference example

• The key is brilliant processes - “We get brilliant results from average people managing brilliant processes - while our competitors get average or worse results from brilliant people managing broken processes”

• There is more to lean than you think


Layers of Lean at Toyota

• Began with experiments to create value streams – TPS etc - principles of designing lean processes

• As part of a lean business system – Toyota Way – the process focused enterprise and the management system to sustain it

• Then used to change the business model –third generation hybrids – and more


Layers of Lean at Tesco

• Experiments to create flow to stores – and to understand what customers want

• Now building a business model to spread lean, adapt it and manage rapid change

• Using these capabilities to transform the retail business model – opening a new era of convenient retailing


Leaning Healthcare

• Many experiments now underway – to redesign patient flows and support flows

• Just beginning to see how this changes everything in the hospital and beyond –and needs a different kind of management

• Also opens up many new business models to deliver care safely, efficiently and conveniently


The Problem

• Logistics like to fill trucks by keeping stocks in warehouses at either end

• Planners like to dream that they get best utilisation by planning, controlling and scheduling every batch and every shipment

• Operations like to create focused factories for each activity and to plan every product or batch through every step

• Finance likes to source these activities in the lowest cost location


The Results• Long supply chains with many steps –

inventories everywhere - 300 plus days throughput for 3 hours of value creation

• Many decision points send chaotic orders upstream – constantly changing plans, extra inventories and capacity and endemic fire-fighting

• Optimising the pieces rather than the flow – poor utilisation of assets and trucks

• Poor availability and responsiveness and higher than necessary costs


Supply Chain Performance

• Levels of Fulfilment are poor in most systems: -• 98.5% service level means 55% fulfilment

for a basket of 40 items in the store• 80% availability for the shoe with 150 day

order window leads to 40% being remaindered

• 52% of consumers get the cars they wanted on time and 64% of service jobs are completed RFTOT


The Remedies

• The instinctive reaction is buy a better planning system – squeeze suppliers – and move to a lower cost location

• The right answer is to learn to see the whole value stream, to rethink the way it is planned and directed, to improve the performance of each activity and to synchronise them in line with demand

• And then to redesign the value stream to compress it in time and distance in the right location


The Challenge

• Traditional logic and practice is not only fundamentally flawed

• It is also being challenged by: -• Significant changes in consumer

behaviour and retailing • Intensified competition from low cost

locations• What are the keys to break through to new

ways of working?• How to assemble the building blocks to

create end-to-end value streams?


Lessons from Toyota

• Toyota spent 30 years developing lean in house and spreading it up and down its supply chain

• The most impressive example is aftermarket parts distribution – supplying 500,000 SKUs to dealers

• It operates as a series of tight replenishment loops • Dealers call off parts from Distribution Centres every day• These shipments trigger daily orders to be picked up from

suppliers the next day• Most of whom can also make every part that is required in

a day every day• The result is the highest availability, lowest stock

levels and the smoothest order signals


Traditional Auto Parts System

Monthly Forecast

SupplierSupplier PRCPRC RDCRDC

50,000

6 weeks 1 day 6 months 3 months 11 months11 months

60% RFT60% RFT

DealerDealer

4,000

3,000 suppliers3,000 suppliers20 parts each20 parts each

Weekly Order

Weekly Order Overnight


Toyota Auto Parts System

SupplierSupplier PRCPRC RDCRDC DealerDealerLDCLDC

60,000

Daily Order

15,000 40

Overnight Order

Multiple Daily Order

Diagnose

Monthly Forecast

9 days2 days 1 day 18 days 3 days 33 days33 days

95% RFT95% RFT

300 suppliers300 suppliers250 parts each250 parts each

Every Product Every Product Every DayEvery Day

Cross Docks &Cross Docks &One stocking One stocking point per partpoint per part

Daily order Daily order rhythmrhythm

Manual Manual warehouseswarehouses


Lessons from Car Parts

• A common rhythm is key to flow through warehouses and beyond

• Better to pull products from suppliers using milk rounds rather than wait for full load deliveries

• Distinguish between replenishment pull and build to order pull

• Move buffer stocks back to local distribution centres – with frequent replenishment

• Distinguish between actual and created demand –pre-diagnosing parts, kitting etc

• Part of doubling workshop productivity and completing every job RFTOT


Lessons from Tesco

SupplierSupplier RDCRDC StoreStoreNDCNDC

Continuous Continuous ReplenishmentReplenishment

FlowFlowThroughThrough

StoreStore


ProductionProduction

LeanLeanSchedulingScheduling

CustomCustomStoreStore

RangingRanging

LoyaltyLoyaltyCardCardDataData

HomeHomeShoppingShopping

MultiMulti--FormatFormat

ConvenienceConvenience


WarehouseWarehouse

PrimaryPrimaryDistributionDistribution

Continuous Continuous ReorderingReordering

ConsolidationConsolidationWarehousesWarehouses


Changing Consumption

• Consumption is also an ongoing process for solving consumer needs

• Managing household consumption is increasingly complex – with more choices, more decisions and more things

• Consumers are better informed and short of time – so they are demanding better availability and greater convenience

• Products have got better and cheaper –the next revolution is retailing and service


Changing Retailing

• Every product is now being sold through supermarkets – clothing, pharma etc.

• Some lean retailers have begun a revolution in convenience retailing and home shopping

• Seven-Eleven in Japan• German Discounters• Tesco multiple formats in the UK

• Others are pioneering quick response• Zara, H&M, Benetton

• Availability and responsiveness are key


MAK

E

FORECASTS

SHIP

SALES

What does the Grocery Value Stream look like?INFORMATION FLOWS

PHYSICAL FLOWS

CU

STOM

ER

PICK

ORDERS

HO

ME

SH

OP

PE

RSHIPSHIP

STO

CK

MAK

E

SHIP

MAK

E

MAK

E

SHIP

SHIP

WHOLEWHOLE--SALESALE

CASH &CASH &CARRYCARRY

CATECATE--RINGRING

FOOD SERVICE PATHWAY

HARVEST

WAREWARE--HOUSEHOUSE

INGRE-DIENTS

FARMFARM

INGREDIENTS PATHWAY

PACK-AGING

MATE-RIALS

MINEMINE

PACKAGING P

ATHW

AYMANUF-ACTURE

MANUFMANUFNDCNDC

SUPERSUPERSTORESTORE

HIGHHIGHSTREETSTREET

RETAILRETAILRDCRDC

CONV.CONV.STORESTORE


What does the Flow Value Stream look like?

ORDERS

SALESMAK

E

CU

STOM

ER

PICK

ORDERS

HO

ME

SH

OP

PE

R

STO

CK

MAK

EM

AKE

MAK

E

HARVEST

WAREWARE--HOUSEHOUSE

INGRE-DIENTS

FARMFARM

INGREDIENTS PATHWAY

PACK-AGING

MATE-RIALS

MINEMINE

PACKAGING P

ATHW

AYMANUF-ACTURE

SUPERSUPERSTORESTORE

HIGHHIGHSTREETSTREET

RETAILRETAILRDCRDC

CONV.CONV.STORESTORE

INFORMATION FLOWS CROSS DOCK

PHYSICAL FLOWS MILK ROUNDS


RETAILRDC

LOCALSTORE

MAK

E

ORDERS

SALES

Where might this Lead?

PACK-AGING

MATE-RIALS

MINE

PACKAGING P

ATHW

AY

WARE-HOUSE

INGRE-DIENTS

FARMHARVEST

INGREDIENTS PATHWAY

CU

STOM

ER

PICK

ORDERS

MAK

EM

AKE

MANUF-ACTURE

INFORMATION FLOWS CROSS DOCK

PHYSICAL FLOWS MILK ROUNDS

Distributed, Contract Distributed, Contract Manufacturing with Manufacturing with Right Sized Tools, Right Sized Tools,

CoCo--located Packaging, located Packaging, Printing after FillingPrinting after Filling

Customised Local Store and Customised Local Store and PickPick--Up Point offering Up Point offering

proactive Advice, Meals and proactive Advice, Meals and Fresh Produce with access Fresh Produce with access to Full Range of Products to to Full Range of Products to

Order from the RDCOrder from the RDC


Current State

44d55m

738

Steps

Time

Steel

DELTA STEEL

Stamping

GAMMA STAMPING

Warehouse Cross Dock

Wipers

BETA WIPERS

Assembly

Dist. Centre

Cross Dock

ALPHA MOTORS

Amplification

F E D C B A

%

40

30

20

10

0

F E D C B A

Quality & Deliveryppm

2000

1500

1000

500

0

F E C A

%

10

5

0

AssemblyWipersStamping

SteelDist. Centre

16d55m

398

Steps

Time

Amplification

F E D C B A

%

40

30

20

10

0


2000

1500

1000

500

0

F E C A

%

10

5

0

F E D C B A

DELTA STEEL

GAMMA STAMPING BETA WIPERS ALPHA MOTORS

Future State 2Flow and Pull between Plants

Time Time reduced reduced

from 44 to from 44 to 16 days16 days

Ideal StateValue Stream Compression

Dist. Centre

3d55m

308

Steps

Time

Amplification

F E D C B A

%

40

30

20

10

0


2000

1500

1000

500

0

F E C A

%

10

5

0

F E D C B A

Steel

EPSILON STEEL

Assembly

ALPHA MOTORSSUPPLIER PARK

WiperCell

StampingCell

Time reduced Time reduced from 16 to 3 from 16 to 3

daysdays

Across the Value Stream


The Logic of Location

• Value stream compression eliminates storage at the plant, at the container port, customs delays, storage in DC, entire cost of the store, overstocks, lost sales, remaindering – touch labour a tiny fraction of costs

• Make customised products close to customers and make standard products within the region of sale – using trucks – not boats that always lead to planes

• No one has an adequate cost of location model across functions to make these decisions


Where to Produce What

• Calculate “factory gate” costs at different locations • Germany, Romania and China?

• Calculate freight costs to supply the factory and to reach all your customers • Including all the expedited shipments!

• Add in all the overhead costs of:• Management and engineering time and travel• Quality (warranty costs etc.)• Extra inventories, lost sales, out-of-stocks, write-offs, etc.• Currency and country risks

Then decide what to make where – which might also change over the product life cycle


Six Questions

• Why does a few minutes to make and few days to transport products take several months?

• How can you close the gap between use and ordering?

• How can you increase the frequency of production and delivery?

• How can you synchronise production with the pattern of demand?

• What are the win-win gains around which you can build cooperation?

• Who will be the architect of value stream redesign?


First Lean Supply Chain Forum5 June 2007

The Challenge of Supply Chain Compression

Daniel T Jones

ChairmanLean Enterprise Academy

the challenge of supply chain compression

Education

lean processes

layers of lean

power of lean toyota

lean supply chain forum

process focused enterprise

toyota toyota

supply chain db

parts each20 parts