Lean and Agile Supply Chain Design

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					Lean and Agile Supply
Chain Design
Tim Waddington, MIOM, V2C Limited

INTRODUCTION                              have led to a shortening of Product                          In practice, although the lean ‘toolkit’
                                          Life Cycles (PLCs) and an increase in                        has been well explained in recent years,
There is no disputing the impact that     the number of product variants                               it is less clear what the alternative agile
has been achieved through Lean            required.                                                    tools would be. Indeed, many lean
Thinking in western manufacturing             It has been proposed that the lean                       practitioners dispute the assertion that
companies, in the last decade in          model works well where demand is                             the agile model is required and believe
particular. In more recent years the      relatively stable and variants few,                          that the lean one can be adapted to,
concept of Agility has been proposed as   but at the other extreme a different,                        and is sufficient for, varying market
an approach to cope with more volatile    ‘agile’ model is required. One of the                        situations.
markets. There has been much              classic diagrams on this subject is                               The model is useful in illustrating,
debate, often contradictory, on the        the following:                                              however, that production and supply
compatibility or otherwise of these two                                                                chain systems do need to adapt to
approaches.                                                                                            changing markets, no matter which
    In the ‘real world’ away from                                         Figure 1                     labels are used! It is also not surprising
the debating chamber, we have seen                                                                     that a simple 2x2 box alone is not a
a relentless increase in pressures                                                                     practical tool for all the complexities of
on British manufacturing and a                                                                         real markets. A recent study illustrates
continuing flow eastwards of product          H                                                        how demand variability varies across
manufacture. Several companies have                                                                    different industries, see Figure 2.
been seduced by the low product costs      Variety                                                          In addition, not only does
in making such decisions, and without                                                                  marketplace uncertainty vary between
considering the wider implications             L
                                                                                                       industries and companies (as
some have had their fingers burned in                                                                  illustrated here), but also between
the process.                                                          L                       H
                                                                            Variability                products in the same company. If
    In recent months a Lean/Agile                                                                      production systems and supply chains
Special Interest Group has been set up                                                                 need to be adapted to market
                                           (Source : Christopher, M.G., 1999 [2])
by the IOM, which is seeking to find                                                                   requirements, even for different
practical solutions from the Lean/Agile
debate that will help companies make
clear and informed decisions about
                                                                                                  Figure 2
their products and supply chains.
                                                                                  The New On-demand Environment
The lean model has been seen as one
                                              Survey Frequency

major factor contributing to business                            15                                                   Ve n t i l a t i o n
success in the second half of the                                                                                     Utilities
twentieth century. By identifying                                10
                                                                                                                      Chemical and Plastic
and eliminating waste in their
organisations, companies have seen                                5                                                   Electrical
dramatic improvements in cost                                                                                         Engineering
reduction and hence their productivity                            0
and competitiveness. However, in the                                        1             2       3       4
last decade in particular, markets have                               Low       Demand Uncertainty       High

become increasingly volatile and
unpredictable in demand and                  (Source: Waddington, 2001 and Childerhouse, 2001 [1])

technological and fashion changes

18          CONTROL Number 8 2003 iomnet.org.uk
products within one company, how can       q Production lead time                            The aim is to develop a practical
the factors that should drive such         q Product life cycle                           toolkit that will aid the decision
decisions be clarified?                    q Margin (profitability)                       making for supply chain design. One
    The SIG is developing a tool to help   q % cost breakdown (labour and                 key application of the clustering
companies identify where they stand        material content).                             method is to help determine the most
on various factors and to make                  In order to cluster effectively this      appropriate sourcing policy for a
informed decisions based on this           list needs to be trimmed down to just          product or component.
information. The key questions it is       the factors which are relevant to a
seeking to answer are:                     particular company. The ‘Runner                GLOBAL SOURCING
q Should we treat all our products the     Repeater and Stranger’ model gives us
same (in supply chain design)? If not,     3 simple clusters. However, if we              Offshore sourcing and manufacturing
how should we decide how to group          applied all the factors mentioned              has been an increasing trend across
them?                                      above, even on a binary high/low               much of Western industry for several
q Which product and market factors         choice, then the number of clusters            decades. The motivation to offshore
are the key to this decision making for    produced would be 128. Hardly                  source has been primarily cost.
our company and products?                  simplified! The challenge is to achieve        However, several companies have got
q Finally, once products have been         what Einstein said,“everything should          themselves into difficulties in recent
clustered, which supply chain              be made as simple as possible, but not         years when other areas of Total Supply
designs and operations and design          simplistic”. The ‘Runner, Repeater and         Chain (TSC) costs have subsequently
methodologies are most appropriate?        Stranger’ model may be too simple for          increased. It is important to combine
                                           many companies with widely varying             both marketability and physical costs:
Clustering Techniques                      market situations, but equally we must         Physical Costs =
                                           not drown in excessive detail.                 Production      +     Distribution   +   Storage
One of the most common techniques
                                                For example, for company A,                 Costs                  Costs            Costs
used in recent years is the ‘Runners,
                                           product life cycle might be a key factor,      Marketability Costs =
Repeaters and Strangers’ approach,
                                           as its products range from PLCs of 6
which groups products into three                                                          Obsolescence    +     Lost sales + Sub-optimum
                                           months to 6 years (as in the case of a            Costs            - stock out      pricing
clusters based on product sales                                                                               - competition
                                           company making men’s shirts, with
                                           both coloured seasonal ‘fashion’ shirts        Most companies would like to make
                                           through to less fashionable white              decisions based on TSC costs, but
                                           ‘work’ shirts). In company B, making           measuring them is not as easy as to
               Figure 3                    electrical components, the PLCs might          simply     compare      product       and
                                           be all longer than 5 or even 10 years so       transportation costs alone, so it is often
                                           it should not be used in the clustering        not done. For example, rarely is a
                                           process.                                       realistic charge placed upon the
                                                The SIG is currently piloting a           additional inventory that inevitably
                                           clustering technique in a number of            will be created as pipelines lengthen.

                                           British manufacturing companies,               Storage costs may well increase
                                           analysing the data from their products         through inventory carrying costs
                                           and charting the results. For example,         and warehousing, and additions to
                                           for a pharmaceutical company, using            the production costs will include
                                           two of the factors, ‘Volume and demand         transaction costs (including letters
                Products                   variability’, their products have been         of credit, customs clearance),
                                           grouped into three clusters, see               transportation (including emergency
                                           Figure 4.                                      airfreight) and duties. Lead-times will
Developed by the Lucas group in the
late ‘80’s, the terms have become part
of manufacturing language and helped                                              Figure 4
countless companies to decide on
cellular design and scheduling and
stocking policies.
    The SIG is investigating which
other factors would also be appropriate       Variability
to add to this decision making cooking
pot, for example:
q Product sales volume
q Demand variability                                Low

q Product variety                                            Low                       Volume                        High
q Demand lead time

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often be between 24 and 60 weeks
                                                                                  Stable demand                 Volatile demand
when ordering from Asian sources.
                                                 High Product Volume              Honduras                      USA
This clearly inhibits agility and                                                 High volume, cost efficient   Flexible, top-up production
increases risk of obsolescence and
                                                 Low Product Volume               Not applicable                USA
stockout costs if demand for those                                                                              Innovative, flexible
products does not come up to                                                                                    production
expectations. This is particularly the           (Source: Author based on Stratton & Warburton)

case where ‘bullwhip’ or demand
amplification effects come into play in      responsive pipeline in the USA.                        REFERENCES
an extended supply chain. Equally the            The US plant makes small runs of
impact on the firm’s flexibility and         complex styles, and produces them                      [1] Childerhouse      P.,    “Enabling
responsiveness is not factored into the      quickly. It also ‘tops-up’ high volume                     Seamless Market Orientated Supply
equation.                                    products as required to meet extreme                       Chains”, Cardiff University, PhD
    There will be many occasions             demands. These two agile pipelines                         Thesis, 2001.
where, even taking all the above costs       account for some 20% of the total                      [2] Christopher M., “Responding to the
into account, it will still make sense to    volume. The clustering techniques has                     Global Supply Chain Challenge”,
source in low-cost, offshore locations.      thus identified the agile ‘home-based’                    Supply     Chain     Management
For example, high volume products            niches to complement low-cost                             Review, Winter 1999.
with limited variants, limited variation     Honduras manufacture.
in demand, high labour costs and long                                                               [3] Christopher M. and Towill D.,
product life cycles. However, for other                                                                “Developing Market Specific Supply
                                             CONCLUSION AND AIM OF A                                   Chain       Strategies”,      The
products where demand is much more
                                             LEAN AND AGILE SIG                                        International Journal of Logistics
volatile and harder to predict, local
sourcing may be preferable.                                                                            Management. Vol. 13, No. 1, 2002.
                                             Companies do need to adapt their
    The clustering technique being                                                                  [4] Waddington T., “The Integrated
                                             manufacturing systems and supply
developed by the SIG aims to help                                                                      Supply Chain: Fact or Fiction”,
                                             chains to varying product and market
companies with this decision making,                                                                   Durham University, MBA Thesis,
                                             situations. A wide range of factors can
as illustrated by two examples below.                                                                  2001.
                                             have an influence on these decisions,
                                             and these factors are likely to be                     [5]Warburton R. and Stratton R.,
CASE STUDIES                                 different for different companies.                        “Questioning the Relentless Shift to
                                             Clustering frameworks can simplify                        Offshore Manufacturing”, Supply
Two companies that have used the
                                             such decision making, and the ongoing                     Chain Management, Vol. 7, No. 2,
clustering technique to clarify their
                                             research through the SIG aims to                          2002, pp 101-108.
global sourcing decisions have been a
                                             further test and refine these frame-
British lighting products company
                                             works in industrial companies and
and a North American clothing
                                             share the results, for example in                         About the author
     For the lighting company a number                                                                 Tim Waddington, MIOM is
of its products had become commodity                                                                   the Director of the business
                                                 q We are looking to set up a Lean and
in nature, and as such a UK based                                                                      consultancy V2C Ltd., a member
                                                 Agile Special Interest Group. If there
company would struggle on the basis of           are manufacturing companies out                       of the Delos Partnership,
price when competing with imports                there who would like to be involved,                  and heads the Lean/Agile
from low labour cost countries such              contact Tim Waddington on:
                                                                                                       Special Interest Group. Prior to
as China. However there was also                 timwaddington@V2Climited.co.uk
                                                                                                       V2C Ltd. he was a Director and
increased demand for low volume,
                                                                                                       shareholder of Forward Vision
customised products.
                                                                                                       (International) Ltd., a lean
     By identifying three supply chain       ACKNOWLEDGMENTS                                           manufacturing        consultancy
routes, China, Morocco and the UK,
                                                                                                       company, and before that
they are seeking to keep TSC costs to a      Martin Christopher,                                       worked for Philips Electronics.
minimum.                                     Cranfield School of Management                            He teaches the Operations
     The strategy of the North American      Dan Jones, Lean Academy                                   Strategy and Lean Improvement
clothing company combines a low cost         Denis Towill, Cardiff Business School                     modules for the Durham
pipeline offshore (in Honduras) and a        Peter Willats, McKinsey Consulting                        University MSc in Manufacturing
                                                                                                       and during the last decade he has
                           Stable demand                    Volatile demand                            guided many companies, across a
  High Product Volume      China                            Morocco                                    range of sectors, in the
                           High volume, cost efficient      Flexible, top-up production                implementation        of    Lean
  Low Product Volume       UK                               UK                                         Techniques.
                           Flexible production              Flexible production

20           CONTROL Number 8 2003 iomnet.org.uk

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