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12 Target Second Issue 2011 www.ame.org/target
Supply Chain
I
n a recent survey, supply chain executives said
cost containment and reduction (39 percent),
supply chain visibility (35 percent), inventory
management and optimization (33 percent), and
escalating customer expectations (33 percent) are
becoming their greatest challenges.1 Let’s take a look
at how a lean approach to logistics can help.
Consider the Total Cost of Fulfillment
The supply chain is often viewed in terms of the
costs shown in customary accounting statements.
However, many of the costs of delivering an item to
the point of use are hidden. Lean logistics practices
reveal new metrics and improvement targets that tra-
ditional practices miss.
When a company digs into its true costs of deliv-
ering a product through its end-to-end total supply
chain, it finds that many things are not measured. To
get a handle on hidden costs, Robert Martichenko
and Kevin von Grabe, Toyota veterans and leaders of
the third party logistics (3PL) company LeanCor, rec-
ommend that a cross-functional team prepare a
detailed financial baseline that includes the cost of:
• People/overhead in customer service and
demand planning
• Outbound/inbound transportation, both customer -
and intra-company-related, for materials and goods
• Outbound/inbound expedited freight cost
• Distribution operating expense and cost of space
• People/overhead for outbound/inbound logistics
management
• People/overhead for material handling in both
shipping and receiving
• Material handling equipment costs
• People and equipment in yard operations
• Storage trailers
• People/overhead in material ordering and planning
• People/overhead for supplier collaboration
• Total working capital tied up in inventory, plus
carrying costs, including cost of capital, inventory
damages, insurance, obsolescence, write-downs,
and shrinkage.
These metrics will allow the company to track
gains that go beyond freight or unit cost purchase
reductions.
Looking at cost cutting alone will not yield last-
ing results. Attention to factors such as supply chain
visibility and inventory will not only result in better-
managed costs, but can also make the entire supply
chain more competitive.
www.ame.org/target Target Second Issue 2011 13
Supply Chain
Visibility: Managing Material with ties to optimize shipments. As an prise could really hurt us.” With early
Discipline and Data example, Molleur says, “LeanCor con- collaboration, LeanCor might find that
firms when the supplier intends to the supplier could divert material from
Supply chain visibility means ship one product two days early, and another customer or Saint-Gobain
having real-time data showing what another product the next day on time. might determine that it could wait for
goods are ordered, what the supplier They can ask the supplier to hold the a later shipment to complete the order.
is doing with the order, where the one and ship it a day later combined Everyone involved in the supply
order is at any given time — on a ship, with the other.” chain at Saint-Gobain Abrasives now
in the port, on a train, on a truck, or Freight costs have decreased, and sees and shares the same data, pro-
in a warehouse — where it should be, Saint-Gobain also learned that other viding visibility they had never had
where there are problems, and any operational problems can be relieved before. Material availability and inven-
number of other pieces of information. by a methodical lean approach to tory turns are improving significantly
Saint-Gobain Abrasives produces inbound supply management. “A and freight costs are coming down at
grinding wheels, sandpaper, and other much more significant problem was the same time.
abrasive products for retailers like The that our manufacturing was struggling Customer focus and lean logis-
Home Depot and tics are also impor-
industrial manufac- tant to competitive-
turers like Ford and
Boeing. Tom Molleur,
“It’s a supply chain leader’s ness. Other suppliers
compete on service
vice president supply and leadtime, saying
chain, North America, responsibility to focus on the they are small and
says his supply chain nimble, and that
team targeted inbound
material flow for on- balance of working capital and Saint-Gobain is too
big to be as respon-
time improvement and sive. Molleur says,
cost reductions. He
says, “We saw a lot of
excellent customer service.” “Our stock service
actually outperforms
our raw materials almost all of our com-
— Sue Armstrong, Carl Zeiss Vision
arriving on non-pre- petitors. It’s really
ferred carriers, and important to us that
not on time, or you’d have a supplier to meet schedules because of problems we leverage this competitive advantage
ship 50 lb. of product in three different with raw material availability during in the marketplace.”
boxes instead of consolidating them the strong 2010 recovery. This could
into fewer shipments. They used to jeopardize service for our end cus- Inventory: Reduce Working Capital
ship to us a la carte, and incomplete tomer,” Molleur says. “Raw material Requirements through Standards
shipments would trickle in randomly.” must be available to manufacturing
for Suppliers
To gain more control, Saint- so we can make and ship our prod-
Gobain Abrasives outsourced inbound ucts on time and customers can keep Inventory is a waste familiar to all
flow of materials from purchase order their manufacturing running. They’re lean practitioners. When supply chain
creation through delivery to LeanCor, making cars, engines, and airplanes. inventory is spread throughout the
which stays in contact with suppliers, You can imagine what it could be like world, controlled by many organiza-
confirming that they are going to ship if they had to shut a line down tions, and affected by many uncer-
each order line on time, in the correct because we were out of stock of a crit- tainties, it is daunting to contemplate.
quantity, and meet mode require- ical abrasive item.” The process of asking why inventory is
ments. LeanCor controls the process Molleur cites a typical situation found in each place is complicated,
by creating the bill of lading for the from the past: “If we ordered a thou- but necessary.
supplier, which determines that a pre- sand pieces of a raw material, we’d Carl Zeiss Vision distributes eye-
ferred carrier and the correct mode of hope a thousand pieces would arrive glass lenses to retail and wholesale
shipment are used. By creating visibil- on time. If the supplier was going to chains, to eye doctors, and to its own
ity through flexible IT systems, person- short ship us, we didn’t know until it facilities, domestically and interna-
al communication with suppliers, and was too late. Many of our suppliers are tionally. Products are sourced from all
daily discipline, one thing LeanCor can overseas so some materials have two- over the world. Five years ago, the
do is to take advantage of opportuni- or three-month leadtimes. A big sur- company consolidated its two North
14 Target Second Issue 2011 www.ame.org/target
American distribution centers to a sin- are, the earlier and more efficiently we the time of quoting and shipping. They
gle one in Hebron, KY. They expected can get products to customers, and needed a process that would give deal-
to find many duplicated activities and the lower we can make our working ers a consistent and reliable charge to
other waste that they could improve. capital commitments.” use in its quote that would not change
They began by mapping activity flow in Another approach to inventory when the forklift shipped, yet would
the distribution center. reduction was taken at Saint-Gobain not cause MCFA to lose money. As its
It became obvious that the facili- Abrasives by giving attention to level- 3PL, LeanCor gathered data on the
ty’s receiving area had big problems. It ing purchasing amounts. If the stan- products, the dealers, rates from the
could take an item 10 to 25 days from dard practice is to order a full truck- past, and future trends.
landing on the dock to being put away load of an item four times a year, they Once the rate plan was designed,
on a shelf. Sue Armstrong, vice presi- will examine actual consumption, cal- MCFA and LeanCor spent six months
dent of global supply chain at Carl culating how much they use weekly or checking the plan rates against actual
Zeiss Vision, says, “All that inventory monthly, and consider ordering small- freight rates, shifting and adjusting
sitting on the receiving dock wasn’t on er amounts more frequently. Since them where necessary, and actually
the shelf available to be sold, so it was average inventory on-hand value is using the plan without telling dealers.
waste of working capital and invento- approximately half the order value Dealers’ quotes and actual charges
ry, and waste from a service point of amount plus safety stock, Molleur now matched and complaints all but
view because we were not able to explains, working on the order went away. When MCFA announced it
release those lenses from the shelves amount for thousands of incoming to its dealer base, they had already
for customer orders.” items has a great potential for savings. demonstrated that they would come
A closer look showed that prod- through. Because the dealer knows
ucts were arriving in different configu- Customers: Healing the Pain where the forklift is being delivered,
rations, with non-standard labeling, how large it is, and what it weighs, it’s
and in different boxes or packaging, Mitsubishi Caterpillar Forklift easy to figure what freight will cost.
requiring people in the distribution America Inc. (MCFA), which builds Being assured that their quotes would
center to double handle, unpack and material handling equipment, uses match freight invoices made the deal-
repack items into other boxes, or re- its dealer network to reach direct ers’ world easier and MCFA now has
label them — wasted activity. customers. Dealers had a problem an edge over the competition.
That time is now down to 24 with freight rates. After the eight to
hours. Not only is velocity greater, but 16 weeks it takes for the equipment A Common Thread: Disciplined
two to three weeks’ worth of inventory to be delivered, the freight bill to the
Performance
is no longer needed. Armstrong says dealer could be markedly different
the improvement was accomplished from the firm price the dealer had The lean logistics approach in all
through collaboration with suppliers. quoted to its customer. Market condi- three companies is organized around
“We developed a detailed document tions, load factors at the time of ship- PDCA (the Plan, Do, Check, Adjust
which outlined how we wanted the ping, and other issues cause rates to cycle); Toyota-style A3 problem-solving
shipment to come in,” she explains. fluctuate widely. For example, the and policy deployment tools; and stan-
“We went through several intensive dealer might get a 5000-lb. truck one dardized daily, weekly, and monthly
months of conference calls with sup- week with a freight charge of $400, meetings. A PDCA board from Carl
pliers in China and other locations to and another one the next week for Zeiss Vision with A3 problem-solving
reach an agreement on the most effec- $500. There could be many explana- documents is shown on p. 17.
tive way of dispatching and receiving tions depending on where the dealer Bob Martinolli, director, opera-
goods for the benefit of both the fit on the carrier’s route that day or tions planning and logistics at MCFA,
source and receiving location. Clear how many other forklifts were on the describes what happens in a daily
documentation was key to making load. MCFA’s salespeople and cus- meeting focused on catching prob-
sure there was collaboration and tomer service representatives took lems in real time. “We look at what
tracking.” daily calls from dealers upset about was planned to do, asking, ‘Did we
Armstrong continues, “It’s a sup- the freight charges. Dealers operate get the work done?’ We look at the
ply chain leader’s responsibility to on a small profit margin, which can key metrics we’re following. We see
focus on the balance of working capi- be completely wiped out by unpre- what’s gone well, what’s gone badly,
tal and excellent customer service. The dictably higher freight cost. what did we learn? Then we make
more visibility we can get on available MCFA decided to offer dealers a adjustments, re-plan, and move on.
inventory, the leaner our processes flat rate that wouldn’t change between It’s very structured, using lean tools
www.ame.org/target Target Second Issue 2011 15
Supply Chain
The Big Picture
Although many companies choose to improve a specific part of their total value stream, working on a point solution will soon
reveal the system’s interconnectedness. LeanCor advises clients to start with the big picture, an end-to-end value stream map
with a total cost performance emphasis. The start of the mapping process is an assessment of the total cost of fulfillment, gath-
ered by a cross-functional team from every department that touches the flow of materials and goods, including the supplier
and customer if possible.
To map every part and every product would approach
insanity. LeanCor recommends selecting one high-volume product,
and one part that goes into it. What you learn will be applicable
across much of the rest of your operation. As you map physical
movement, you will also map the information signals that push or
pull (preferably) the flow.
Good maps start with customer demand and work back
through each transportation link, distribution center, and produc-
tion facility on the way. The team should record leadtime, wait time,
and inventory (measured in dollars and as average days’ usage on
hand, plus carrying costs). The team should score the “Eight
Rights of the Perfect Order” (see the box on p. 17) at each point in
the chain where someone receives the part or product, multiplying
the percentage scores to get a total score across the entire map.
Many pain points — opportunities for quick improvements or
kaizens — will reveal themselves. Simple scheduling board levels the day’s work at Carl Zeiss
Once the current order cadence, as variable as it may be, Vision. Everyone sees what to do to ensure that the right
is recorded, members of the team should visit the customer and quantity of the right product gets to the right place at the right
determine actual consumption. Collaboration with the customer time.
can begin to level order amounts and frequency to
pace all the upstream events. The team should sum- Quantity Supplier ABE ABE ABE ABE Customer
marize data for the current state and set a goal for Production: Orders: Production: Shipping: Shipping: Orders:
3,000 1,000 500 500 250 50
what the future state should look like (see the current- Distribution
state and future-state hypothetical total value stream Current
Center:
1,000
analysis at right). Gradually, inventory and leadtime State
Being
are reduced, outbound transportation routes and Stored
schedules are systematized (see the scheduling
board at right), and improvements that prevent dam-
Frequency 1/Quarter 1/Month 2/Month 2/Month 4/Month 1/Day
age and defects from ever reaching the customer are
continuously found. Color-coded labels that help pre-
vent shipping errors are shown below. These changes
will also improve the flow of many other materials and
products. Quantity Supplier ABE ABE ABE ABE Customer
Production: Orders: Production: Shipping: Shipping: Orders:
250 50 50 50 50 50
Distribution
Future Center:
State 100 Being
Stored
Carl Zeiss Vision’s Frequency 1/Week 1/Day 1/Day 1/Day 1/Day 1/Day
shipping labels are
color coded to pre-
vent mistakes. The most powerful strategy to increase velocity is to move smaller shipments more often. Reducing order lot
sizes and increasing delivery frequency not only reduces inventory throughout a fulfillment stream, it also
allows the stream to respond faster to market changes and customer demand
A hypothetical company’s current- and future-state total value stream
A hypothetical company’s current and future-state total value stream analysis. analysis.
-
16 Target Second Issue 2011 www.ame.org/target
Resources
Council of Supply Chain Management
Professionals (CSCMP), Lombard, IL;
630-574-0985; www.cscmp.org
Martichenko, Robert and Kevin von
Grabe, Building a Lean Fulfillment
Stream, Lean Enterprise Institute,
2010.
Footnote
1. Eyefortransport, “Global Chief Supply
Chain Officer Strategy Survey,”
www.eft.com, April, 2010.
PDCA Continuous Improvement board at Carl Zeiss Vision. A3 problem-solving documents help Eight Rights of the
organize projects.
Perfect Order
Eight things ought to be right with
every order shipped from each point
in a very disciplined way.” working meetings means people hold to the next, from raw material supplier
He continues, “Our people have each other accountable, support each to end customer:
become more disciplined. There’s a other, and gains are sustained.
great emphasis on problem solving in Right quantity
the meetings. When people get into that Wide Open for Improvement Right product
mindset, deviating from the process Right place
feels odd. One of our big initiatives this These three companies found Right time
year is becoming a more process-driv- that attention to supply chain and Right quality
en, problem-solving culture.” logistics was a gold mine of improve- Right source
The standardized meeting sched- ment opportunities. Lean leaders in Right price
ule is also vital at Saint-Gobain. Tom operations functions must join forces Right service
Molleur says his team is on daily con- with their counterparts in supply
ference calls and meetings on improve- chain management in order to level Performance is measured as a
ment. He has monthly meetings with multi-enterprise flow. Turning raw percentage of the time each order
procurement, purchasing, and trans- materials into products purchased by meets each requirement when it
portation managers for a higher-level the customer is a complex system, but moves from each stage to the next,
PDCA discussion — half strategic, half one that is ready for lean thinking. then all the scores are multiplied to
tactical. Managers host a call twice a get an overall score for the value
week with the procurement teams, Karen Wilhelm is a Target contributing stream.
which include the LeanCor lead who editor and publishes the blog Lean
works with Saint-Gobain’s data on a Reflections.
daily basis. The disciplined schedule of
www.ame.org/target Target Second Issue 2011 17
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