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Chapter 18. Lean and Agile Supply Chain & Logistics

It is the goal of every business to be both profitable and efficient. Over the past 25 years or so, one method has emerged as a way to focus on customer needs to improve processes and profitability; it is known as “Lean” which will be discussed in this chapter, and can be applied throughout the supply chain & logistics function.

Lean and Waste

By definition, Lean is a team-based form of continuous improvement to identify and eliminate waste through a focus on exactly what the customer wants. Lean supplies the customer with exactly what they want when they want it, through continuous improvement. Lean is driven by the “pull” of the customer’s order.

This is in contrast to Just-In-Time (JIT) which is a philosophy of continuous and forced problem solving that supports lean production. JIT is one of the many tools of Lean. When implementing as a comprehensive strategy, JIT and Lean sustain competitive advantage and result in greater returns for an organization.

In order to successfully execute a Lean strategy, the supply chain needs to also be very agile; meaning that it must be designed to be flexible and fast when dealing with “unique” products with unpredictable demand.

So, not surprisingly, that’s where the idea of having a “hybrid” strategy comes into play. A hybrid supply chain strategy is a combination of lean and agile concepts, where a manufacturer operates with flexible capacity that can meet surges in demand along with a postponement strategy, where products are partially assembled to a forecast and then completed to the actual order when and even where it arrives.

In the end, your supply chain strategy (and capabilities) must support your organization's overall strategy and typically, in today’s world, that means being lean and agile.

This chapter will describe the methodology and some of the tools used to enable a Lean and agile supply chain & logistics function.

History of Lean ( Figure 18.1 )

Figure 18.1. History of Lean

Early concepts like  labor specialization (Smith) where an individual was responsible for a single repeatable activity, and  standardized parts (Whitney) helped to improve efficiency and quality.

At the turn of the 20 th century, the era of scientific management arrived where concepts such as  time and motion studies (Taylor) and  Gantt charts (Gantt) allowed management to measure, analyze and manage activities much more precisely.

During the early 1900’s the era of mass production had arrived. Concepts like the assembly line, economies of scale (producing large quantities of the same item to spread fixed costs) and statistical sampling were utilized. Today this is referred to as a “push” process, which is the opposite of “demand pull” (by the customer) used in a Lean philosophy.

Lean, originally applied to the manufacturing industry, was developed by the Japanese automotive industry, largely Toyota, while re-building the Japanese economy after World War II. Material was scarce and they realized that in order to compete with the US auto companies they would have to work smarter.

The concept of Lean was little known outside Japan until the 1970's (generally known as “JIT” as the actual term “Lean” didn’t come about until the 1990’s). England had early experience with Lean manufacturing from the Japanese automotive plants in the UK.

Up until the 1990's only the automotive industry that had adopted Lean manufacturing and that was primarily on the shop floor. Since then it has spread into aerospace and general manufacturing, consumer electronics, healthcare, construction and, more recently, to food manufacturing and meat processing as well as to other processes such as the administrative and support functions as well as the supply chain.

In today’s global economy, companies source product and material world-wide, looking for the best quality at the lowest cost. E-commerce and ERP systems have made for easy entry to the global economy for smaller companies as well, allowing them to compete against much larger competitors.

This has led to the concept of “mass customization”, which is the ability to combine low per unit costs of mass production with the flexibility associated with individual customization (ex: Dell computers which can configure, assemble, test and ship your customized order within 24 hours).

Value Added versus Non-Value Added activities

In order to understand the Lean concept of “waste”, it is first important to understand the meaning of value added versus non-value added activities.

Any process entails a set of activities. The activities in total are known as “cycle” or “lead time”. Lead time required for a product to move through a process from start to finish includes queues/waiting time and processing time.

The individual activities or work elements that actually transform inputs (ex: raw materials) to outputs (ex: finished goods) are known as “processing” time. In general, processing adds value from the customer’s standpoint. Processing time is the time that it takes an employee to go through all of their work elements before repeating them. It is measured from the beginning of a process step to the end of that process step.

If we think of a simple example such as taking raw lumber and making it into a pallet of 2×4’s, the value added to the customer is the actual processing that transforms the raw lumber into the final pallet of 2×4’s. This would include activities such as washing, trimming, cutting etc. and are a relatively small part of the cycle time (i.e. it may only take one hour to process the raw material into a finished pallet, but the entire cycle time may be one week).

In Lean terms, the non-value added time is actually much greater than just the lead time. We include current inventory “on the floor” (i.e. raw, WIP and finished goods) and using a calculated Takt time for a specific “value stream” (a single or family of products or service which will be discussed later in this chapter), convert those quantities to days of supply. Doing so can expand the non-value added time from days to weeks (or even months).

It is very common for many processes (or value streams) to only have 5-10% value added activities. However, there are some non-value added necessary activities such as regulatory, customer required and legal requirements that while they don’t add value, are waste. As they are necessary, we can’t eliminate them, but should try to apply them as efficiently as is possible.

It is fairly normal for management to focus primarily on speeding up processes; often value added ones such as the stamping speed on a press. From a Lean perspective, the focus moves to non-value added activities which in some cases may even result in slowing down the entire process in order to balance it, remove bottlenecks and increase flow.

Waste

In Lean terms, non-value added activities are referred to as “waste”. Typically, when a product or information is being stored, inspected or delayed, waiting in line or is defective, it is not adding value and is 100% waste.

These wastes can be found in any process, whether it’s manufacturing, administrative, supply chain & logistics or elsewhere in your organization.

Below are listed the eight wastes. One easy way to remember them, is that they spell “TIM WOODS”:

Transportation – Excessive movement of people, products and information.

Inventory – Storing material or documentation ahead of requirements. Excess inventory often covers for variations in processes as a result of high scrap or rework levels, long setup times, late deliveries, process downtime and quality problems.

Motion – Unnecessary bending, turning, reaching and lifting.

Waiting – For parts, information, instructions, equipment.

Over production – Making more than is immediately required.

Over processing – Tighter tolerances or higher grade materials than are necessary.

Defects – Rework, scrap and incorrect documentation (i.e. errors).

Skills – Underutilizing capabilities of employees, delegating tasks with inadequate training.

There are a variety of places to look for waste in your supply chain & logistics function.

One way to consider where waste might exist in the supply chain is in terms of the SCOR model:

Plan – It all starts (and ends) with a solid Sales and Operations Planning (S&OP) process (or lack thereof). If there isn’t one then in an organization, then there is probably plenty of waste in the supply chain.

Source – As purchasing accounts for approximately fifty percent (or more) of the total expenditures, using sound procurement approaches discussed earlier in this book such as EOQ and the use of JIT principles (including Vendor Managed Inventory or VMI) can go a long way towards reducing waste, especially excess inventory. Partnerships, collaborations and joint reviews with suppliers can also help to identify and reduce waste.

Make (and store) – Activities such as (light) manufacturing, assembly and kitting, much of which is done in the warehouse or by a 3PL these days, can have a huge impact on material and information flow impacting productivity and profitability.

Within the warehouse, waste can be found throughout the receiving, put away, storage, picking, staging and shipping processes 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.

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.

Deliver – Transportation optimization (especially important with high fuel prices). This would include routing, scheduling and maintenance among other things.

Return – Shipping mistakes, returns, product quality and warranty issues often ignored or an afterthought.

There are a variety of Lean tools available which we will discuss briefly in this chapter. However, it is most important to first have a Lean culture and support that is conducive to success, as Lean is more of a journey than any individual project.

Lean Culture and Teamwork

In order to be successful for the long term, any type of program has some key success factors (KSF). In the case of Lean, they include:

 Train the entire organization and make sure everyone understands the Lean philosophy and understand that it may be a cultural change for the organization.

 Ensure that top management actively drive and support the change with strong leadership.

 Everyone in the organization should commit to make it work.

 Find a good, experienced change agent as the “champion”.

 Set a kaizen (i.e. continuous improvement project) agenda and communicate it and involve operators through empowered teams.

 Map value streams apply Lean tools and begin as soon as possible with an important and visible activity.

 Integrate the supporting functions and build internal customer and supplier relationships.

Lean Teams

Teamwork is essential for competing in today's global arena, where individual perfection is not as desirable as a high level of collective performance.

In knowledge based enterprises, teams are the norm rather than the exception. A critical feature of these teams is that they have a significant degree of empowerment, or decision-making authority.

There are many different kinds of teams: top management teams, focused task forces, self-directed teams, concurrent engineering teams, product/service development and/or launch teams, quality improvement teams, and so on.

It is no different in Lean. As a result, it is important to establish Lean teams that can develop a systematic process that consistently defines and solves problems utilizing Lean tools.

Lean teams are a great way to share ideas and create a support system helping to ensure better “buy in” for implementation of improvements.

Successful teams realize the “power of teamwork” and teamwork culture and that the goal is more important than anyone’s individual role. However, teams must be in a “risk-free” environment but have leadership, discipline, trust and the tools and training to make things happen.

To make teamwork happen, it is important that executive leaders communicate the clear expectation that teamwork and collaboration are expected and that the organization members talk about and identify the value of a teamwork culture. Teamwork should be rewarded and recognized and important stories and folklore that people discuss within the company emphasize teamwork.

Kaizen and Teams

The work “kaizen”, which literally means “improvement” in Japanese, refers to activities that continually improve all functions and involve all employees.

Kaizen events are a big part of a successful Lean program. A typical kaizen event involves a team of people for a period of 3-10 days. They typically focus on a working (or proposed) process with the goal of a rapid, dramatic performance improvement. Typically, the event starts with training on topic of the event to ensure common understanding.

Team and Kaizen Objectives

Once teams have been established and basic training has begun to start a Lean philosophy, it is important for any projects undertaken by teams have proper objectives to ensure success. So you will need to ask questions such as:

• What is the customer telling you in terms of the cost, service, and quality of your products/services?

• What objectives and goals have been established by your company to address market needs?

• What processes immediately impact the performance of these products and services?

• Who needs to support this effort?

• How can the business objectives be used to garner support?

By asking these types of questions, it’s not hard to link Lean projects to overall and functional objectives and metrics for improvement.

Value Stream Mapping (VSM)

Before discussion specific Lean tools, it is first important to understand the current processes to be examined. Lean has a visual, relatively high and broad level method for analyzing a current state and designing a future state for the series of activities (both value added and non-value added) required to produce a single or family of products or services for a customer known as a “Value Stream Map” (VSM).

A VSM is typically labeled a “paper and pencil” tool, although it may be constructed digitally and is a value management tool designed to create two separate visual representations (i.e., “maps”).

The  first map illustrates how data and resources move through the “value stream” during the production process, and is used to identify wastes, defects, and failures ( Figure 18.2 ); the  second map, using data contained in the first, illustrates a “future state map” of the same value stream with any waste, defects, and failures eliminated ( Figure 18.3 ).

Figure 18.2. Current State Value Stream Map

Figure 18.3. Future State Value Stream Map

The two maps are used to create detailed strategic and implementation plans to enhance the value stream's performance.

A VSM is usually one of the first steps your company should take in creating an overall lean initiative plan.

Developing a visual map of the value stream allows everyone to fully understand and agree on how value is produced and where waste occurs.

VSM Benefits

Benefits of Value Stream Mapping include:

• Highlights connections among activities and information and material flow that impact the lead time of your value stream.

• Helps employees understand your company’s entire value stream rather than just a single function of it.

• Improves decision making process of all work teams by helping team members to understand and accept your company’s current practices and future plans.

• Allows you to separate value-added activities from non-value added activities and then measure their lead time. Provides a way for employees to easily identify and eliminate areas of waste.

Lean Tools

As was previously discussed and is displayed in  Figure 18.4 ’s “House of Lean”, the foundation for a Lean enterprise (including the supply chain & logistics areas) is to have a Lean culture and infrastructure as well as a way to set and measure objectives and performance.

Figure 18.4. House of Lean

After performing basic Lean training and establishing teams, one or more value stream map studies are typically performed to identify areas for improvement. However, it is not uncommon for teams to “brainstorm” to come up with ideas for future kaizen events in addition to or instead of value stream mapping events (see  Figure 18.5  for an example of a kaizen form for brainstorming ideas).

Figure 18.5. Cost Reduction Kaizen Implementation Form

Next, we will look at some of the tools that can be used by Lean teams in pursuit of continuous improvement.

Lean Tools

Standardized Work

Standardization refers to best work practices, that is, as the work is actually routinely (and best) performed in real life. The purpose of standardization is to make operations repeatable and reliable, ensuring consistently high productivity, and reduced variability of output.

It ensures that all activities are safely carried out, with all tasks organized in the best known sequence using the most effective combination of people, material, machines, and methods.

It is important, where possible, to make standard work more of a “visual job aid” that is easy to understand and follow (ex: a laminated simplified list of standard instructions supplemented with digital photographs).

In the supply chain & logistics function standardized work (preferably visual) can applied nearly everywhere. The office and warehouse are the most common places they are found and can include order processing, invoicing, and drawings. Out in the warehouse floor itself most of the basic activities of receiving, put away, picking, packing, loading and shipping can benefit from standardized work in the form of visual job aids.

5S-Workplace Organization System

5S is a philosophy that focuses on effective work place organization and standardized work procedures. It is a great, general activity to start a Lean program with, as it’s easy to understand and implement throughout a business.

5S simplifies your work environment, reduces waste and non-value activity while improving quality efficiency and safety. It ensures that the workplace that is clean, organized, orderly, safe, efficient, and pleasant results in:

 Fewer accidents

 Improved efficiency

 Reduced searching time

 Reduced contamination

 Visual workplace control

 A foundation for all other improvement activities

A 5S project begins with the selection of a specific area (usually one that is fairly disorganized) and a multi-functional team that includes at least one member from the selected area.

Next, the team goes to the selected area to perform a “workplace scan” which involves activities such as taking “before” pictures, drawing a “spaghetti diagram” showing locations of materials and equipment as well as product flow, and the performance of some kind of 5S audit (various forms are readily available on the internet).

The steps in 5S (and what the actual “S”’s stand for) are:

Sort – Unneeded items are identified and removed. Only needed parts, tools and instructions remain.

Set in order – Everything has a place; everything is in its place. Create visual controls to know where items belong and when they are missing as well as how much to keep on-hand in the area.

Shine – Do an initial spring cleaning. This can include scouring as well as some painting.

Standardize – Routine cleaning becomes a way of life. Preventative maintenance is routinely performed. Standards are created to maintain the first three S’s.

Sustain – This is perhaps the hardest part of 5S where it has to become a routine way of life. Root causes are routinely identified and dealt with.

Visual Controls

Simple visual signals give the operator the information to make the right decision. They are efficient, self-regulating, and worker-managed.

Examples include visual job aids mentioned previously, kanbans, “andon” lights (i.e. green=process working; red=process stopped), color-coded dies, tools, pallets and lines on the floor to delineate storage areas, walkways, work areas, etc.

Facility Layout

Considering optimal facility layout, like standardized work is nothing new. However, as a tool of Lean it is focused primarily on maximizing flow and eliminating wastes such as transportation and motion. If used properly it can result in:

 Higher utilization of space, equipment and people.

 Improved flow of information, materials or people.

 Improved employee morale.

 Improved customer/client interface.

 Increased flexibility.

Batch Size Reduction and Quick Changeover

The concepts of batch size reduction and quick changeover (sometimes also referred to as “setup reduction”) are highly intertwined.

When material is “pushed” through a supply chain and operations process, you produce, store and ship in large quantities to spread your fixed costs among a large number of items, thus minimizing your costs per unit. In “pull”, you schedule what the downstream customer actually wants, using a Just-in-Time (JIT) approach. The goal is one piece flow (or at least a reduction in batch or lot size).

Long changeovers tend to create larger batch sizes, resulting in higher inventory costs, longer lead times and potentially larger quality issues and that is why we focus on reducing changeover times though “setup reduction” kaizen events.

In supply chain & logistics processes, we often see the results of batching in production to cover manufacturing wastes that result in excess inventory, and in purchasing to obtain economies of scale. Additionally, there is a large amount of batching of paperwork in the office, which if reduced, can encourage improved flow and getting orders out faster, resulting in a shorter order-to-cash cycle.

In warehouse operations, there are setups everywhere including receiving, picking, staging, loading and shipping (especially during shift start-ups).

Quality at the Source

Also known as “source control”, the idea with this concept is that the next step in the process is your customer and as a result, you need to ensure perfect product to your customer.

One major technique used in source control is known as “poka-yoke” which is the concept of using foolproof devices or techniques designed to pass only acceptable product. Poka yokes can range from simple tools such as a “cut out” to ensure proper dimensions to a scale at a packing station that checks the weight of an item and if it is outside of the proper range, software would prevent a label from printing.

Quality at the source can eliminate or reduce final inspections, reduce passed-on defects, eliminate non–value-added processing, increase throughput and increase employee satisfaction.

Quality at the source helps to reduce the total cost of quality, which looks at the true impact of defective work as it moves towards the customer. This includes:

 Prevention costs – Reducing the potential for defects (ex: poke yokes).

 Appraisal costs – Evaluating products, parts, and services (ex: quality control sampling).

 Internal failure – Producing defective parts or service before delivery (ex: final inspection).

 External costs – Defects discovered after delivery (ex: returns).

Obviously, the further along a quality issue gets, the greater impact (cost and otherwise) it has on an organization.

Other techniques such as standardized work, visual workplace and 5S are all tools of implementing quality at the source.

Point of Use Storage

Point of use storage is the storing of raw materials and supplies needed by a work area that will use them nearby. It works best if the supplier can deliver frequent, on-time, small deliveries. It can simplify the physical inventory tracking, storage and handling processes.

Total Productive Maintenance (TPM)

Total productive maintenance or “TPM” is often used interchangeably with the concept of preventative maintenance. While preventative maintenance may be involved, TPM is actually a team-based systematic approach to the elimination of equipment-related waste. It involves the charting and analysis of equipment performance to identify the root cause of problems, then implementing permanent corrective actions.

TPM is a shared responsibility, which involves not only mechanics but operators, engineers and employees from other functional area.

Ultimately, in addition to creating “counter measures” using techniques such as poke yokes, TPM develops preventive maintenance plans that utilize the best practices of operators, maintenance departments, and depot service. It also involves the training of workers to operate and maintain their own machines, often referred to as “autonomous maintenance”.

While the supply chain & logistics function may not have as many or as complicated equipment as in manufacturing, there is plenty of equipment that must run at peak performance including forklifts and carousels in a warehouse, trucks on the road and office equipment including computer hardware and software.

Pull/Kanban and Work Cells

As mentioned before, a “push” system produces product, using forecasts or schedules, without regard for what is needed by the next operation, whereas a “pull” system is a method of controlling the flow of resources by indirectly linking dissimilar functions, through the use of visual controls (ex: kanbans), replacing only what has been consumed at the demand rate of the customer.

A pull system is a flexible and simple method of controlling and balancing the flow of resources and eliminates the waste of handling, storage, expediting, obsolescence, rework, facilities, equipment and excess paperwork. It consists of processing based on actual consumption, low and well planned work in process (paperwork) and management by sight, with improved communication.

One of the main tools in a pull system is a kanban, in which a user removes a standard sized container and a signal is seen by the producing/supplying department as authorization to replenish. The signal can be a card or even something as simple as a line on a wall.

Another Lean tool is known as a “work cell”, covered in