Executive Briefings

Lean as a Response to Global Outsourcing

Analyst Insight: Mass acceptance of lean principles by manufacturers and logistics companies has the potential to reshape the landscape of global business. The keys to lean success? Setting long-term business goals, focusing efforts on maximization of product value for customers, incorporating lean principles and tools, leveraging personnel as a key asset, and implementing lean accounting.

- Aleksey Osintsev, research analyst at Technology Evaluation Centers

It's all too common for manufacturers to rely on cumbersome global logistical processes in order to achieve a single objective: to save on manufacturing labor. For such manufacturers, increased outsourcing is the only option for increasing their ability to compete. However, more and more manufacturers are coming to realize that an alternative approach is viable - an approach known for many years as lean production.

One of the greatest impacts of the lean business model consists of on-shoring (i.e., the return of manufacturing facilities from remote low-labor-rate countries). The reason for this is that true lean philosophy treats mass item movements and transfers as non-value -added activities that must be eliminated from the process of product value creation.

Any lean manufacturing operation eventually arrives at the idea of shortening complicated and lengthy supply chains, and eliminating needless stock. Thus, a prominent characteristic of global logistical business - bulk inventory movement and storage - may become less prominent under the pressure of mass acceptance of lean manufacturing principles.

Another interesting aspect of lean manufacturing is its idea of extending lean principles into the whole chain of manufacturing and logistical operations that create added value for the end product: the final cost/value of a product is based on a stream that includes all internal and third-party costs, from raw materials to retail and delivery to end user. A manufacturer is not lean if, for example, manufacturing facilities adopt just-in-time and no-inventory principles, while inventory is simply out of balance and outsourced to a third-party logistics partner.

A final note on lean as applied to accounting: the traditional accounting approach overlooks many hidden inventory-related expenses, and is unable to reflect losses caused by supply chain length and the attendant inability to quickly react to product design changes and quality issues. Lean accounting must recognize these costs in order to provide an accurate picture of the truly lean manufacturer.

The Outlook

Lean and on-shoring will be hot topics and trends in the near future as lean principles become mandatory for competitive survival. In order to provide maximum value for customers, manufacturers need to be quicker and more flexible in response to changes in demand. This flexibility will allow them to manage, produce and deliver individualized or custom-made products. Additionally, business-to-business service providers will need to focus on the big picture of integration with customers, including the ability to manage smaller batches (as small as a single item). Manufacturers and supply chain professionals should heed these words: "just-in-time supply management for manufacturing"-they will be standard industry-speak in short order.

Analyst Insight: Mass acceptance of lean principles by manufacturers and logistics companies has the potential to reshape the landscape of global business. The keys to lean success? Setting long-term business goals, focusing efforts on maximization of product value for customers, incorporating lean principles and tools, leveraging personnel as a key asset, and implementing lean accounting.

- Aleksey Osintsev, research analyst at Technology Evaluation Centers

It's all too common for manufacturers to rely on cumbersome global logistical processes in order to achieve a single objective: to save on manufacturing labor. For such manufacturers, increased outsourcing is the only option for increasing their ability to compete. However, more and more manufacturers are coming to realize that an alternative approach is viable - an approach known for many years as lean production.

One of the greatest impacts of the lean business model consists of on-shoring (i.e., the return of manufacturing facilities from remote low-labor-rate countries). The reason for this is that true lean philosophy treats mass item movements and transfers as non-value -added activities that must be eliminated from the process of product value creation.

Any lean manufacturing operation eventually arrives at the idea of shortening complicated and lengthy supply chains, and eliminating needless stock. Thus, a prominent characteristic of global logistical business - bulk inventory movement and storage - may become less prominent under the pressure of mass acceptance of lean manufacturing principles.

Another interesting aspect of lean manufacturing is its idea of extending lean principles into the whole chain of manufacturing and logistical operations that create added value for the end product: the final cost/value of a product is based on a stream that includes all internal and third-party costs, from raw materials to retail and delivery to end user. A manufacturer is not lean if, for example, manufacturing facilities adopt just-in-time and no-inventory principles, while inventory is simply out of balance and outsourced to a third-party logistics partner.

A final note on lean as applied to accounting: the traditional accounting approach overlooks many hidden inventory-related expenses, and is unable to reflect losses caused by supply chain length and the attendant inability to quickly react to product design changes and quality issues. Lean accounting must recognize these costs in order to provide an accurate picture of the truly lean manufacturer.

The Outlook

Lean and on-shoring will be hot topics and trends in the near future as lean principles become mandatory for competitive survival. In order to provide maximum value for customers, manufacturers need to be quicker and more flexible in response to changes in demand. This flexibility will allow them to manage, produce and deliver individualized or custom-made products. Additionally, business-to-business service providers will need to focus on the big picture of integration with customers, including the ability to manage smaller batches (as small as a single item). Manufacturers and supply chain professionals should heed these words: "just-in-time supply management for manufacturing"-they will be standard industry-speak in short order.