Executive Briefings

You Need to Create Lean Value Streams

Analyst Insight: 2011 marked a watershed year in the way supply chain managers conceived of global practice. Natural disasters that shook up traditional global sourcing coupled with a growing willingness to rethink the value of lowest piece-part pricing led companies to reassess what it means to operate efficient, effective supply chains. Companies are rethinking and reconfiguring supply chains to be more rational, regional, practical, low in total cost and risk, and high in fostering quality and customer value - moving toward rational, lean value streams. - John Shook, chairman and CEO, Lean Enterprise Institute

For the past two decades, much of the business world was in a rush to de-integrate supply chains by outsourcing and offshoring. Instead of analyzing and improving product value streams in order to reduce total costs and provide better value for customers, managers were searching the globe for suppliers who would quote dramatically lower piece prices.

The objective was clear and simple: rapid and dramatic price reductions from suppliers through a new negotiating tactic, using lowest global piece price - often called "the China price" - as a hammer.  Other trends, such as more sophisticated software and transportation systems, contributed to the creation of massively complex supply streams that were hopelessly impossible to manage.

Today, the situation has transitioned dramatically. Currencies have shifted, labor costs in many low-wage countries have risen steadily, suppliers in high-wage countries have declared bankruptcy, and the potential for squeezing further price reductions from suppliers is largely exhausted.

The challenge now is to turn unwieldy supply chain chaos into lean value streams where value flows from raw material to customers with ever shortening lead times, profiting both OEMs and suppliers.

Managers are starting to use lean management principles to totally rethink supply chains by understanding and improving the underlying value-creation process that suppliers share with their customers.  Such principles include:

• Short lead times are better than long. In general, it makes most sense to produce close to where you sell and to engineer close to where you produce. And it certainly makes most sense to procure as close as possible to where you produce for your customers. For most large firms, that means developing regional supply strategies.

• Less inventory with more frequent delivery is better than large inventories that move infrequently.

• Avoid both single source and "numerous source" supply configurations. Pursue dual sourcing for first and second tier suppliers. (When W. Edwards Deming advocated what he called "single sourcing," he was promoting OEM-supplier relationships based on partnership and on cost of quality, not zero-sum negotiations and price of transaction.)

• Use "lean math" to calculate the total cost of your supply chain. Most companies calculate the cost of a product made in its current location, compare it to the price in a low-wage country, then add in the cost of slow freight to get it to customers. But lean math also counts such factors as:

• The cost of additional inventory in transit over long distances.
• The cost of additional safety stocks to ensure uninterrupted supply.
• The cost of expensive expedited shipments.
• The cost of warranty claims if the new supplier has a long learning curve.
• The cost of visits by senior managers and engineers to fix problems.
• The risk of currency fluctuations.

                                        The Outlook

Global purchasing chiefs, not to mention CEOs and other leading thinkers, will continue to question long-established ways of conducting activities such as sourcing, transportation, and scheduling.  Some companies have started unraveling the unneeded complexity caused by 20 years of piece-price optimization, and more will gradually follow. They will go back to the basics of starting with the customer, defining value, and working backwards from there.


Keywords: Business Strategy Alignment, Global Supply Chain Management; Third-Party Logistics, Global Logistics, Transportation & Distribution, Logistics, Outsourcing, Offshoring, Low-Wage Countries, W. Edwards Deming, Safety Stock

For the past two decades, much of the business world was in a rush to de-integrate supply chains by outsourcing and offshoring. Instead of analyzing and improving product value streams in order to reduce total costs and provide better value for customers, managers were searching the globe for suppliers who would quote dramatically lower piece prices.

The objective was clear and simple: rapid and dramatic price reductions from suppliers through a new negotiating tactic, using lowest global piece price - often called "the China price" - as a hammer.  Other trends, such as more sophisticated software and transportation systems, contributed to the creation of massively complex supply streams that were hopelessly impossible to manage.

Today, the situation has transitioned dramatically. Currencies have shifted, labor costs in many low-wage countries have risen steadily, suppliers in high-wage countries have declared bankruptcy, and the potential for squeezing further price reductions from suppliers is largely exhausted.

The challenge now is to turn unwieldy supply chain chaos into lean value streams where value flows from raw material to customers with ever shortening lead times, profiting both OEMs and suppliers.

Managers are starting to use lean management principles to totally rethink supply chains by understanding and improving the underlying value-creation process that suppliers share with their customers.  Such principles include:

• Short lead times are better than long. In general, it makes most sense to produce close to where you sell and to engineer close to where you produce. And it certainly makes most sense to procure as close as possible to where you produce for your customers. For most large firms, that means developing regional supply strategies.

• Less inventory with more frequent delivery is better than large inventories that move infrequently.

• Avoid both single source and "numerous source" supply configurations. Pursue dual sourcing for first and second tier suppliers. (When W. Edwards Deming advocated what he called "single sourcing," he was promoting OEM-supplier relationships based on partnership and on cost of quality, not zero-sum negotiations and price of transaction.)

• Use "lean math" to calculate the total cost of your supply chain. Most companies calculate the cost of a product made in its current location, compare it to the price in a low-wage country, then add in the cost of slow freight to get it to customers. But lean math also counts such factors as:

• The cost of additional inventory in transit over long distances.
• The cost of additional safety stocks to ensure uninterrupted supply.
• The cost of expensive expedited shipments.
• The cost of warranty claims if the new supplier has a long learning curve.
• The cost of visits by senior managers and engineers to fix problems.
• The risk of currency fluctuations.

                                        The Outlook

Global purchasing chiefs, not to mention CEOs and other leading thinkers, will continue to question long-established ways of conducting activities such as sourcing, transportation, and scheduling.  Some companies have started unraveling the unneeded complexity caused by 20 years of piece-price optimization, and more will gradually follow. They will go back to the basics of starting with the customer, defining value, and working backwards from there.


Keywords: Business Strategy Alignment, Global Supply Chain Management; Third-Party Logistics, Global Logistics, Transportation & Distribution, Logistics, Outsourcing, Offshoring, Low-Wage Countries, W. Edwards Deming, Safety Stock