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How to Reduce Costs with Lean Supply Chain Management

By Chris Lee

Bookshelves have started to overflow with books on lean. The Lean Startup, Lean Entrepreneur, Lean Enterprise are a few that have popped up in the last decade. The result is innovative new businesses that can compete with industry powerhouses.

The trend started in Lean Manufacturing, the result of best practices in Toyota Production System (TPS) in the late 1980's. The manufacturing practices went on to inspire many of the tools below. Elimination of “muda,” or waste, splintered to its own philosophy of lean.

As manufacturers started noticing massive cost savings and improved operations, lean spread out of the warehouse into other departments. By looking at lean for supply chain, a business can learn how to reduce supply chain costs.

Lean Philosophy

Two main areas of lean supply chain management are reducing waste and reducing unevenness:

Eliminating Waste (Muda)

The strictest form of lean is muda, Japanese for “elimination of waste.” In this case, waste is not the trash swept into the corner, but the eight wastes of lean:

  1. Defects — Anything that uses parts and labor that cannot be used is an obvious waste of time, effort, and materials.
  2. Overproduction — One of the most misleading wastes is producing more than required, often to meet a throughput key performance indicator (KPI).
  3. Waiting — When staff is ready and able to do work but does not have the materials needed to do the work, costs increase.
  4. Non-Utilized Talent — Often the most ignored waste is the “employee genius.” The people closest to the work often know exactly how to improve processes but are not empowered to do so.
  5. Transportation — The traditional supply chain model with product shipping to a large distribution center and possibly back across the same roads harbors a lot of wasted energy in movement of product. (Hence, Warehouse Anywhere developed a decentralized warehousing system to bring product closer to the customer and make every mile productive.)
  6. Inventory — Having too much inventory may be disguised as being agile, but the cash tied in storing the product is waste that could be better used in marketing or technology.
  7. Motion — On a smaller scale than transportation, the motion is the wasted movements and energy of the people performing tasks at their stations repeated hundreds of times a day.
  8. Extra-Processing — Minimum Viable Products all but eliminate processing waste by confirming each advancement is desired by the market.

Eliminating Unevenness (Mura)

Another form of waste is the peaks and valleys of demand. E-commerce and retail will generally have large spikes of orders around holidays like Valentines Day and Christmas, which means hiring and overtime. In a completely lean supply chain, demand would be consistent or predictably increasing.

Lean is one component, but businesses need both agile and lean supply chains to reduce costs and still be able to respond to changes in customers' needs. It is critical to look at the entire supply chain from beginning to end. Many opportunities are only evident when looked at as a whole.

Lean Supply Chain Meaning & Examples

After looking at all the different applications of lean, how does this translate to supply chain? It is easy to see a supply chain as a macro view of a manufacturing process. Instead of raw materials coming from one side of the warehouse, they are coming from the other side of the world.

Lean supply chain is looking at all the raw materials and products through to the end consumer. If you total all of those costs, the supply chain drives at least 50% of them, and each section of the supply chain is based on the decisions of multiple divisions within the company.

One simple example of this is a shipping manager for a national repair service who is held accountable for keeping shipping costs low. The manager, in order to meet his requirements, decides that replenishment of parts will be conducted on a weekly basis using consolidated shipping. This move would save an estimated 10% of his shipping budget.

He implements the policy and shipping costs drop by 15%. Everyone is excited by the improvement in the first couple of months.

In the meantime, the expedite manager notices something. His costs have skyrocketed to four times its normal level. He is getting written up and put under pressure to be more like the shipping manager.

In the above example, no one is looking at the impact of local decisions driving unintended costs in the supply chain. Replenishment schedule is one of thousands of decisions that drive supply chain costs.

Consider Eldorado Stone who bought the coloring for their product in dozens of mixes from the manufacturers. They had to hold more stock of each color to accommodate demand spikes (inventory waste), which took up valuable space as well.

They discovered that by adopting a lean supply chain, they would be able to refactor their coloring to a few base colors. Not only were they able to control scale, but by bringing their Intellectual Property of color mixes in-house, they reduced the risk of competition.

Don't be that high-level executive that falls into the misconception that optimizing the pieces of a supply chain will optimize the whole. In a world-class organization, no action can be taken without first considering the impact on the whole.

Lean Supply Chain Management Tools

Lean Six Sigma

Lean Supply Chain Management  Lean Six Sigma Process

Six Sigma is the control over the variability in the product. When the product and deliverability are consistent, customers gain trust in the brand. Increased trust equates to increases sales. Reliability in manufacturing and the supply chain means more accurate forecasting leading to Just In Time Inventory.

Reduced variability also means less waste and fewer returns. The least profitable portion of the supply chain is the section coming back to the warehouse!

Just In Time

When all aspects of the agile and lean supply chain are mapped and accounted for, the product can be delivered almost as the customer places their order. An order can trigger a replenishment in the warehouse, which can lead to a stocking order to a distributor, that triggers the manufacturer to produce more product.

The cascading response is an incredible customer experience, and a very lean supply chain.

Kanban

Instead of relying on forecasts from trending sales, using Kanban Pull Systems allow the separate entities in Just In Time delivery to create demand at the right time, with the right amounts. This requires integrations and triggers that call for the next process to run.

Kaizen

Kaizen is the art of continuous improvement. In the book 2 Second Lean by Paul Akers, the process of ongoing improvement is in the center of the company's culture. Every employee is empowered to identify opportunity for improvement, then record a video highlighting the improvement.

A Kaizen Event is a week-long strategy meeting involving stakeholders from the floor to executives. The result is a current state and a test that improves the throughput and reduces cost. Through the week the team will follow this process:

  1. All parties contribute to Value Stream Mapping. The entire business process is mapped out using post-it notes until every individual process and movement of product is captured.
  2. Metrics are identified and set up to track the current state against the improved state and determine the return on investment of the project.
  3. The most significant opportunities for improvement are identified, and solutions are brainstormed.
  4. Solutions are implemented, and the results tracked to calculate cost improvements.
  5. If the solution results in large enough gains, the process is closed. If there aren't improvements, then other solutions are tested.

The 5 Why's

The best solution is often not the solution to the first problem. Often the real issue lies beneath multiple layers. By asking “Why” after each answer, the actual cause comes to light. The iPhone is a result of not responding to the demand for a smaller phone but asking “why” until the real desire was uncovered.

The founders of Jiffy Lube took a similar approach. They examined the oil change process to truly understand what was valuable in the eyes of the customer.

There was a time when, if you did not change your oil yourself, you would take it to a local gas station for changing. The process went something like this: drop car off, car sits until the station can get to it, then the oil is drained, oil filter removed, new oil is picked from the oil cage, filter is picked from the filter box, oil filter is replaced, engine plug reinstalled and new oil added. If you were lucky you would get your vehicle back the same day, but if the station got busy or an employee was a no-show, it might be a day or two.

The station could get away with this because customers had no other option. If you couldn't change the oil yourself, you were at the mercy of the gas station.

Was it of value to the customer to have their car sit? Jiffy Lube did the analysis and built a process that added value every step of the way for the customer. They built shops that had built in pits so cars could drive right in. All materials and tools were placed point of use and the mechanic stayed in the pit during working hours. While the oil was being changed below, the other fluids and filter were checked in parallel. They built a process that consistently performed between 12 and 15 minutes. Time was reduced and costs were cut in half, all to the merriment of the customer.

With a little insight into their own “why,” Jiffy Lube created a whole new service industry. They drove gas stations out of the oil changing business and effectively separated the purchase of fuel and maintenance.

While this is a nice story, let's pause on the implications to the supply chain. Let's say that an existing gas station did the same exercise and made many of the same changes, however, did not examine the implications to the supply chain. They were able to get the time close to Jiffy Lube's 12 to 15 minutes, but as the process went forward, they began running out of supplies. Since time was not a factor, oil was shipped to them monthly and oil filters quarterly. The operation would quickly grind to a halt.

You can design the greatest process possible, but without the parts and supplies to support it, the exercise is futile.

Go Lean with Warehouse Anywhere

One of the easiest ways to lean out a supply chain is to reduce the last mile. Amazon has made an art of spreading the product out based on demand. We do it at Warehouse Anywhere by bringing the product closer to the end customer.

E-commerce and retail businesses have the order history to predict trends in demand. Those trends can determine where to place the product to get it into customers' hands quickly. The problem then is maintaining and staffing distribution centers.

Agile and dynamic solutions like Warehouse Anywhere allow a business to spread wider, faster, than traditional models. With high tech and scalable solutions to reduce the last mile, a business can start taking advantage of agile and lean supply chain solutions almost immediately.

When business is booming, it is easy to focus on getting the product through the door. I know two key things that often get missed but can make a huge impact on your bottom line. Schedule a brief lean supply chain consultation with my team and me at no cost to you to see what opportunities you may be missing.

About the Author

Christopher Lee | Warehouse Anywhere

Christopher Lee

Christopher Lee is the Director of Business Development for Warehouse Anywhere. He is a Six Sigma Black Belt, and has developed, managed and integrated many cost saving measures across multiple industries. Christopher is a graduate of Duke University, attended the U.S. Naval Academy and even earned a Congressional Endorsement.

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