Supply Chain Management - Part 2

Supply chain management was designed to take waste out of supply chains—waste as to excess inventory, time and cost. Supply chains are meant to pull, not push, inventory through the supply chain. This is exactly what lean logistics is also about—removing waste and variation from supply chains.

Retailers, wholesalers, manufacturers, distributors, suppliers and every party involved in the supply chain feel the pressure to reduce and balance cost, time and inventory—to be lean. This is true with domestic supply chains; but it is especially true with global supply chains.

The future of the industry may not belong to any one size company, marketing channel or country of origin. It will belong to those manufacturers who and retailers that embrace Global Lean Logistics.

Lean Logistics has many challenges. Global Lean Logistics especially has the challenge of the additional time required for shipments to move door-to-door over the long distance. In addition, there are many parties involved with each shipment. Some reports say that up to seventeen parties can be involved with one shipment—suppliers, truckers, freight forwarders, terminals, customs brokers, railroads, ocean/air carriers and more. Bringing lean across such an extended, multi-transactional supply chain is daunting. Often the parties are working together and at odds with each purchase order/shipping transaction.

As the competitive environment changes the way companies do business, companies are embracing Lean and Six Sigma initiatives to support cost reductions and quality improvements. Although Lean and Six Sigma programs were initially separate initiatives in most organizations, today’s firms see that Lean and Six Sigma do not compete, but rather the two complement each other and provide for dovetailing of continuous improvement activities.

But what does this have to do with Logistics? The quick answer is “everything “. Once we are grounded in Lean and Six Sigma principles, the logistician will realize that Logistics, Lean and Six Sigma form a natural union. This union leverages the strengths and weaknesses of each discipline to create a cultural and operational model that will aid the logistician to solve age-old issues, while improving operations at all levels.

To truly understand Lean Six Sigma Logistics, the best place to start is to know about the Logistics, Lean and Six Sigma.

What is Logistics?
There are as many definitions of “Logistics” as there are logisticians. This is not a bad thing! Logistics is so far reaching, so integrated into businesses that it is hard for one definition to ever meet the challenge of summing up what we do in a few short sentences.

Although logistics does span the entire scope of any business, it is fair to say that any definition of logistics will need to involve the management of inventory. Whether inventory is in the form of hard goods (materials-people) or soft goods (information), logisticians manage it.

What is Lean?
Lean Logistics concepts are deeply rooted inside the lean manufacturing of Toyota Production System. Jim Womack summarizes the key principles of the Toyota Production System as Lean Manufacturing in his book “Lean Thinking“. Lean Manufacturing has now been abbreviated to simply being called ‘Lean”. Lean and Six Sigma joined forces in Michael George’s book “Lean Six Sigma".

In its purest form, Lean is about the elimination of waste and the increase of speed and flow. Although this may be over-simplification, the ultimate objective of Lean is to eliminate waste from all processes. At the top of the list of known wastes, according to Lean theory is the elimination of inventory. More simply, any inventory should be eliminated that is not required to support operations and the immediate need of the customer.

Lean and the Logistician
The impact of Lean on the logistician is significant, as the goal of Lean is to eliminate waste (inventory) which will decrease work in process inventories which in turn will decrease process and cycle times and ultimately increase supply chain velocity and flow.
Lean also has a vital cultural element to it that is crucial to the logistician. This is the concept of “Total Cost “. The Lean practitioner does not focus on individual cost factors such as transportation or warehousing, but rather focuses on “total cost of ownership”. With inventory carrying costs representing 15-40% of total logistics costs for many industries, making decisions based on total cost has dramatic implications for the logistician. Unfortunately though, many organizations never fully embrace total cost concepts, as poor decisions are continually made based on traditionally visible cost drivers like transportation, warehousing and ill-fated sourcing practices.

What is Six Sigma?
Six Sigma is a management methodology that attempts to understand and eliminate the negative effects of variation in our processes. Based on an infrastructure of trained professionals (Black Belts), Six Sigma delivers a problem-solving model armed with voice of the customer utilities and statistical process control tools. The DMAIC (Define-Measure-Analyze-Improve-Control) process is a map, or step-by-step approach, to understand and improve upon organizational challenges to reduce variation in processes and attempt to achieve “Six Sigma Quality.

At the heart of Six Sigma is the principle of variation reduction. Essentially, the theory is if we can understand and reduce variation in our processes, then we can implement improvement initiatives that will centre the process and ensure accuracy and reliability of the process around customer expectations. For example, if the purchase order-delivery cycle required for your supplier in China is sixty days, and you are averaging sixty days, then you may think all is fine. However, your average of sixty days may reflect the fact that some orders arrive in forty-five days and others are delivered in seventy-five days. It is this variation that results in expedited transportation, out of stocks and all the evils of non-confidence result, the worst of which is inventory build up.

Six Sigma and the Logistician
The concept of variation reduction is paramount to the logistician. As stated above, logistics is about managing inventory. And managing inventory is about managing variation, a driver in both the amount of inventory carried and in stock-out potential. Given the basic types of inventory, variation plays such a vital role in how inventories are managed at all levels.

For example, safety and buffer stock are inventories needed to hedge against unknowns. These unknowns really represent variation. Safety stocks are maintained because of variation with supplier quality, transportation reliability, internal operations process capability and customer demand patterns. If variation from supplier to customer can be understood and controlled, then firms will be able to dramatically reduce reliance on safety and buffer stocks. Implicit in this is the seeming addiction that business seems to have to inventory.

What is Lean Six Sigma Logistics?
Now that the three elements of Lean Six Sigma Logistics have been presented, they need to put them together to fully appreciate how they dovetail and complement each other. Remember:

Logistics & managing inventory
Lean is about speed, flow and the elimination of waste (inventory)
Six Sigma is about understanding and reducing variation.
Therefore, Lean Six Sigma Logistics can be defined as: The elimination of unnecessary inventories through disciplined efforts to understand and reduce variation, while increasing speed and flow in the supply chain.

Put this into the global supply chain, and the effect on furniture retailers, wholesalers, distributors, manufacturers and suppliers can be significant. Logistics service providers need to understand this as well because of its impact on reducing waste and controlling variance.

Getting Started
Both Lean and Six Sigma bring disciplines and tools to Logistics. Using these disciplines and tools will allow an organization to uncover and deal with waste (inventory) and gross inefficiencies. Although the tools are very powerful from both Lean and Six Sigma, companies should remember that for Lean and Six Sigma to work in logistics, a fundamental mind shift must occur. This mind shift requires that firms begin making decisions based on the concept of “Total Logistics Costs” and second, they must have the courage to eliminate inventories that are unnecessary. This may sound simple, but reality will prove otherwise. Organizational norms and financial accounting traditions will fight against “Total Cost” and the addiction to inventory will make it difficult to reduce inventory levels.

All in the international supply chain must practice Lean Logistics in order to obtain dramatic, significant improvements. Waste must be identified and removed. Variation must be identified and removed.
Future articles will discuss Kanban, Value-Stream Mapping and other topics for making the global supply chain lean.