Executive Briefings

Devastating Inventory Shortages Require Companies to Extend Their Lean Thinking

Alexander the Great was a leader who truly understood the value of a supply chain. One might question his motivational tactics, however, since he was the one to famously state, "My logisticians ... know if my campaign fails, they are the first ones I will slay." There's no doubt he understood the consequences of supply shortages and its impact on mission outcomes. Still, centuries later, inventory shortages continue to be a thorn that cut into business financials and market share across industries. Customers feel the pain as well - in some cases, with life-threatening results. Low inventories improve cash flow, but the strategy backfires when shipments grind to a halt due to a supply disruption. This is leading manufacturers to take a hard look at their lean strategies and progress their lean thinking toward demand-driven value networks (DDVNs).

The mention of inventory shortages sends a shiver up the spine of the most seasoned operations executive, setting in motion a flurry of expediting and reallocation activities. We've come a long way from the days of scrounging for parts by ripping apart work-order kits or breaking down unneeded assemblies generated by wasteful material requirements planning models. Still, shortages continue, and the pain remains real.

Consider the impact of inventory shortages in these examples:

The Boeing 787 suffered significant delays early in the aircraft program, partially due to a shortage of titanium alloy impacting its supply of fasteners. This set off a series of expediting activities that, in some cases, led to further assembly issues and delays.

According to the Wall Street Journal, insufficient dealer inventory due to supply shortages were blamed for Honda's U.S. sales decline of 28 percent in July and its market share dropping to 9.3 percent from 10.6 percent the previous year. This was the result of part shortages caused by the Japan earthquake earlier this year.

The Boston Globe recently reported that lifesaving medications are increasingly in short supply, with an insufficient amount of cancer medications leaving many patients in life-threatening situations.

There are many reasons for inventory shortages, and eliminating the root causes should be a never-ending effort. Using Six Sigma techniques to reduce variability and lean methods to drive out waste is a proven best practice that is at the foundation of being demand-driven. Yet, disruptions remain a reality, and this requires a resilient supply chain that can adapt.

Companies must expand upon core, lean techniques to assess cost versus risk across an end-to-end value network. Start by value stream mapping from the customer back to supply sources, extending beyond an exercise performed only within supply chain silos. This is a complex exercise when assessing product supply and distribution networks. It also requires a governance process and metrics that support this end-to-end view.

Incorporate Resiliency Into a Lean Value Network
Two core principles of lean are the elimination of waste and responding to demand in near real time. These are solid principles that can be expanded to the value network. We see demand-driven companies applying them to complex global networks, while also applying risk-reward trade-off assessments. Dow Chemical provides a great example: The company uses supply chain modeling to assess the impact of lean improvements on downstream operational metrics, as well as on revenue and other financials. This helps prioritize continuous improvements at various nodes in the value network.

Although not exhaustive, this list provides a sample of techniques for scaling lean to a DDVN: Network modeling for advanced planning and optimization allows scenario analysis to test changes to the network under various demand and supply conditions. One life science company saw a 10-percent inventory reduction and a two-point, service-level improvement using this approach.

Multienterprise collaboration and visibility allow rapid assessment and inventory repositioning in response to demand or supply changes across the network. Del Monte Foods has used this to maintain fill rates that exceed 99 percent, while reducing inventory and floor space in distribution centers.

Rapid replanning and collaboration can quickly assess the appropriate response and service-level impact of schedule, engineering or other sudden changes. A high-tech manufacturer uses this to look across its contract manufacturing network and run models to update available-to-promise dates.

Total cost-to-serve (CTS) analysis helps with understanding all the waste across the value network, including transportation cost or the tax consequences of routing supplies through various countries. Intel's initial phase of using CTS is allowing its team to begin answering questions about cost trade-offs for certain services.

Lean is fundamental to eliminating waste. However, when performed in a silo, it can lead to sub-optimization of a node or inventory decisions that have the potential for dire consequences on the business. This is truly a journey, and each company needs to assess its own stage of maturity. Don't overlook the low-hanging fruit that can be gained by applying lean principles to any operation. The opportunity then is to scale these principles to the value network, continuing to eliminate non-value-adding activities, while also assessing risk and business impact. This journey includes implementing not only new processes, but an organizational structure and performance measures that support an end-to-end view focused on delighting customers and growing profitably.

The author can be contacted at michael.burkett@gartner.com.

Source: Gartner

Alexander the Great was a leader who truly understood the value of a supply chain. One might question his motivational tactics, however, since he was the one to famously state, "My logisticians ... know if my campaign fails, they are the first ones I will slay." There's no doubt he understood the consequences of supply shortages and its impact on mission outcomes. Still, centuries later, inventory shortages continue to be a thorn that cut into business financials and market share across industries. Customers feel the pain as well - in some cases, with life-threatening results. Low inventories improve cash flow, but the strategy backfires when shipments grind to a halt due to a supply disruption. This is leading manufacturers to take a hard look at their lean strategies and progress their lean thinking toward demand-driven value networks (DDVNs).

The mention of inventory shortages sends a shiver up the spine of the most seasoned operations executive, setting in motion a flurry of expediting and reallocation activities. We've come a long way from the days of scrounging for parts by ripping apart work-order kits or breaking down unneeded assemblies generated by wasteful material requirements planning models. Still, shortages continue, and the pain remains real.

Consider the impact of inventory shortages in these examples:

The Boeing 787 suffered significant delays early in the aircraft program, partially due to a shortage of titanium alloy impacting its supply of fasteners. This set off a series of expediting activities that, in some cases, led to further assembly issues and delays.

According to the Wall Street Journal, insufficient dealer inventory due to supply shortages were blamed for Honda's U.S. sales decline of 28 percent in July and its market share dropping to 9.3 percent from 10.6 percent the previous year. This was the result of part shortages caused by the Japan earthquake earlier this year.

The Boston Globe recently reported that lifesaving medications are increasingly in short supply, with an insufficient amount of cancer medications leaving many patients in life-threatening situations.

There are many reasons for inventory shortages, and eliminating the root causes should be a never-ending effort. Using Six Sigma techniques to reduce variability and lean methods to drive out waste is a proven best practice that is at the foundation of being demand-driven. Yet, disruptions remain a reality, and this requires a resilient supply chain that can adapt.

Companies must expand upon core, lean techniques to assess cost versus risk across an end-to-end value network. Start by value stream mapping from the customer back to supply sources, extending beyond an exercise performed only within supply chain silos. This is a complex exercise when assessing product supply and distribution networks. It also requires a governance process and metrics that support this end-to-end view.

Incorporate Resiliency Into a Lean Value Network
Two core principles of lean are the elimination of waste and responding to demand in near real time. These are solid principles that can be expanded to the value network. We see demand-driven companies applying them to complex global networks, while also applying risk-reward trade-off assessments. Dow Chemical provides a great example: The company uses supply chain modeling to assess the impact of lean improvements on downstream operational metrics, as well as on revenue and other financials. This helps prioritize continuous improvements at various nodes in the value network.

Although not exhaustive, this list provides a sample of techniques for scaling lean to a DDVN: Network modeling for advanced planning and optimization allows scenario analysis to test changes to the network under various demand and supply conditions. One life science company saw a 10-percent inventory reduction and a two-point, service-level improvement using this approach.

Multienterprise collaboration and visibility allow rapid assessment and inventory repositioning in response to demand or supply changes across the network. Del Monte Foods has used this to maintain fill rates that exceed 99 percent, while reducing inventory and floor space in distribution centers.

Rapid replanning and collaboration can quickly assess the appropriate response and service-level impact of schedule, engineering or other sudden changes. A high-tech manufacturer uses this to look across its contract manufacturing network and run models to update available-to-promise dates.

Total cost-to-serve (CTS) analysis helps with understanding all the waste across the value network, including transportation cost or the tax consequences of routing supplies through various countries. Intel's initial phase of using CTS is allowing its team to begin answering questions about cost trade-offs for certain services.

Lean is fundamental to eliminating waste. However, when performed in a silo, it can lead to sub-optimization of a node or inventory decisions that have the potential for dire consequences on the business. This is truly a journey, and each company needs to assess its own stage of maturity. Don't overlook the low-hanging fruit that can be gained by applying lean principles to any operation. The opportunity then is to scale these principles to the value network, continuing to eliminate non-value-adding activities, while also assessing risk and business impact. This journey includes implementing not only new processes, but an organizational structure and performance measures that support an end-to-end view focused on delighting customers and growing profitably.

The author can be contacted at michael.burkett@gartner.com.

Source: Gartner