Executive Briefings

How Lean is Too Lean in the High-Tech Supply Chain?

Lean manufacturing and the lean supply chain have been hot topics for the last decade. It's really heating up now that Toyota is suffering safety and quality woes, and naturally, all fingers point at Toyota's supply chain. While the lean manufacturing pioneer grapples with the fallout and recovery from "unintended acceleration" and other issues, high-tech manufacturers would do well to view the troubles at Toyota as a cautionary tale and take a look inward at their own lean supply chain practices. Regardless of the final verdict on Toyota, the supply chain can, indeed, get too lean. As a veteran of several lean implementations in the high-tech industry, and JIT and TQM before that, I've got a few suggestions for staying on the right side of the lean line.

Don't blame lean for Toyota's woes. People who say that Toyota has messed up because of lean are not clear about Toyota's history or the real root cause of their problems. Toyota has a great supply chain as well as the original and best, long-term implementation of lean manufacturing. In fact, the Toyota Production System that the company started to develop in the 1950s is the original blueprint for lean manufacturing. The real root cause of their problems: the change of strategy in the 1990s to become the largest automotive manufacturer in the world and overtake GM. Bottom line, they tried to grow too fast!

More humbling for U.S. automakers, Toyota drew heavily on the works of W. Edwards Deming, an American. After Toyota successfully implemented lean, the U.S. automakers adopted lean manufacturing. Bottom line, whatever lessons Toyota may learn from any supply chain errors will certainly be worth studying.

The Devil's in the Details. Many lean implementations are done suboptimally. They may look good because of the emphasis on the visible. People pay attention to establishing visual controls, fool-proofing assembly lines, laying out factory floors and "walking the Gemba" - all of which are great. You have to do those things. But that's just the first part of the job and, unfortunately, where most lean implementations stop.

The rest of the job involves the unseen. Utilizing an analytical approach and statistics to understand, control and then improve processes. Whether it's measuring variability of output from a CNC machine or truly understanding supply and demand patterns, you have to be reasonably sophisticated in the way that you apply these techniques in a lean environment. You have to be able to collect and interpret data correctly to do things right, e.g., know what your inventory level needs to be to provide a desired service level or know when a result is outside of tolerance. When you don't pay attention to the details - or you don't know what you're doing with the details - things can (and will) go wrong.

Look at the big picture. Many of the lean implementations I've witnessed do a great job of "leaning" the factory floor, but that's where they stop. The principles of lean apply equally well to the finance department or to purchasing as they do to lean manufacturing. That's why I prefer the phrase lean supply chain as it encompasses all parts of the business. Take this one step further; apply the principles of lean up and down the supply chain by looking from end to end. With the increase in outsourcing, supply chains have become longer and more fragmented so companies must apply the principles of lean across factories and with suppliers and customers if they're going to achieve a truly lean supply chain.

Reinterpret inventory. Lean tells us to view inventory as a necessary evil. Why? Because as a manufacturing discipline, lean encourages the elimination of waste, which includes inventory. Meanwhile, Wall Street takes a really close look at inventory when it comes to corporate valuation. To Wall Street, inventory is a non-performing or under-performing asset.

But manufacturers can't just take inventory out of the supply chain altogether without exposing themselves to many risks. Look at Texas Instruments, for example. It cut back so much in the downturn that a lot of their parts are factory allocated, and Texas Instruments can't make enough, fast enough to meet overall demand. The company cut everything back, from manufacturing facilities to staff, and it drained a lot of its inventory out of the supply chain.

Another way manufacturers reduce inventory levels is to implement vendor-managed inventory (VMI) programs. Dell is a good historic example, having earned raves about its supply chain as best in class with a negative cash-to-cash cycle and a configure-to-order model that had a two-hour lead time from order to build complete. Basically, Dell pushed its entire inventory into warehouses that sat next to its factories. Until it was actually delivered to the Dell factory, the inventory was owned by the vendors. Dell had access to inventory whenever they needed it, but the vendors shouldered the cost of carrying the inventory when Dell was probably best suited from a cost of capital perspective to actually own the inventory.

Unless you have a perfect supply chain, you're going to need inventory to help align supply and demand. And for most high-tech manufacturers, that means thinking about inventory in a different way to get a lean supply chain.

Source: Verical

Lean manufacturing and the lean supply chain have been hot topics for the last decade. It's really heating up now that Toyota is suffering safety and quality woes, and naturally, all fingers point at Toyota's supply chain. While the lean manufacturing pioneer grapples with the fallout and recovery from "unintended acceleration" and other issues, high-tech manufacturers would do well to view the troubles at Toyota as a cautionary tale and take a look inward at their own lean supply chain practices. Regardless of the final verdict on Toyota, the supply chain can, indeed, get too lean. As a veteran of several lean implementations in the high-tech industry, and JIT and TQM before that, I've got a few suggestions for staying on the right side of the lean line.

Don't blame lean for Toyota's woes. People who say that Toyota has messed up because of lean are not clear about Toyota's history or the real root cause of their problems. Toyota has a great supply chain as well as the original and best, long-term implementation of lean manufacturing. In fact, the Toyota Production System that the company started to develop in the 1950s is the original blueprint for lean manufacturing. The real root cause of their problems: the change of strategy in the 1990s to become the largest automotive manufacturer in the world and overtake GM. Bottom line, they tried to grow too fast!

More humbling for U.S. automakers, Toyota drew heavily on the works of W. Edwards Deming, an American. After Toyota successfully implemented lean, the U.S. automakers adopted lean manufacturing. Bottom line, whatever lessons Toyota may learn from any supply chain errors will certainly be worth studying.

The Devil's in the Details. Many lean implementations are done suboptimally. They may look good because of the emphasis on the visible. People pay attention to establishing visual controls, fool-proofing assembly lines, laying out factory floors and "walking the Gemba" - all of which are great. You have to do those things. But that's just the first part of the job and, unfortunately, where most lean implementations stop.

The rest of the job involves the unseen. Utilizing an analytical approach and statistics to understand, control and then improve processes. Whether it's measuring variability of output from a CNC machine or truly understanding supply and demand patterns, you have to be reasonably sophisticated in the way that you apply these techniques in a lean environment. You have to be able to collect and interpret data correctly to do things right, e.g., know what your inventory level needs to be to provide a desired service level or know when a result is outside of tolerance. When you don't pay attention to the details - or you don't know what you're doing with the details - things can (and will) go wrong.

Look at the big picture. Many of the lean implementations I've witnessed do a great job of "leaning" the factory floor, but that's where they stop. The principles of lean apply equally well to the finance department or to purchasing as they do to lean manufacturing. That's why I prefer the phrase lean supply chain as it encompasses all parts of the business. Take this one step further; apply the principles of lean up and down the supply chain by looking from end to end. With the increase in outsourcing, supply chains have become longer and more fragmented so companies must apply the principles of lean across factories and with suppliers and customers if they're going to achieve a truly lean supply chain.

Reinterpret inventory. Lean tells us to view inventory as a necessary evil. Why? Because as a manufacturing discipline, lean encourages the elimination of waste, which includes inventory. Meanwhile, Wall Street takes a really close look at inventory when it comes to corporate valuation. To Wall Street, inventory is a non-performing or under-performing asset.

But manufacturers can't just take inventory out of the supply chain altogether without exposing themselves to many risks. Look at Texas Instruments, for example. It cut back so much in the downturn that a lot of their parts are factory allocated, and Texas Instruments can't make enough, fast enough to meet overall demand. The company cut everything back, from manufacturing facilities to staff, and it drained a lot of its inventory out of the supply chain.

Another way manufacturers reduce inventory levels is to implement vendor-managed inventory (VMI) programs. Dell is a good historic example, having earned raves about its supply chain as best in class with a negative cash-to-cash cycle and a configure-to-order model that had a two-hour lead time from order to build complete. Basically, Dell pushed its entire inventory into warehouses that sat next to its factories. Until it was actually delivered to the Dell factory, the inventory was owned by the vendors. Dell had access to inventory whenever they needed it, but the vendors shouldered the cost of carrying the inventory when Dell was probably best suited from a cost of capital perspective to actually own the inventory.

Unless you have a perfect supply chain, you're going to need inventory to help align supply and demand. And for most high-tech manufacturers, that means thinking about inventory in a different way to get a lean supply chain.

Source: Verical