A New View on Lean

June 1, 2009
Five supply chain strategies that improve business performance.

With spending down and credit and operating budgets tightening, manufacturers are faced with the challenge of reducing costs, re-aligning offerings to meet changing consumer preferences and looking for new areas of growth.

Compounding factors, such as fluctuating materials, and logistics costs, increased supply chain security and quality control requirements and dramatic changes in demand patterns only add to the complexity of managing a global supply chain. To overcome these challenges, progressive companies are seeking supply chain solutions that offer a new view on the traditional concept of lean manufacturing. Pioneered decades ago by Toyota, lean manufacturing was designed to help the carmaker compete in domestic and foreign markets with limited resources and capacity by driving out production inefficiencies and waste and focusing on quality initiatives with value-focused workflows. Toyota's success story became a model for manufacturers all over the world, and the company has grown to become a worldwide automotive leader.

Times have changed, however, and today's concept of lean has expanded far beyond the original focus and methods of discrete industrial manufacturing.

Next-generation lean manufacturing represents a leap beyond Toyota's model. Applied intelligently and systematically across the enterprise, lean thinking today can have a transformative effect on the ability to compete in both good and challenging economic times. Here are five strategies to help guide manufacturers in applying next-generation lean thinking to improve operations and overall business performance and ultimately drive profits.

  1. Commit to lean on an enterprise-wide basis.

    The primary goals of traditional lean manufacturing — to drive out inefficiencies, reduce costs and waste, increase value and decrease variability — remain the same today. Only now, these goals need to be embraced across the extended enterprise — both internally and externally with supply chain partners. In today's dynamic business environment, virtually all operational processes are interrelated, and disruptions along the extended supply chain need to be responded to quickly and in real time.

    Confining lean to a single facility or production area is not sufficient. Lean initiatives cannot work if done in isolation because changes made in siloed functional areas, such as manufacturing, distribution or transportation — or even at the local, regional or country level — can have unintended consequences that can lead to problems or increased costs in other areas.

    The most effective lean initiatives focus on the extended supply chain. For this reason, companies are deploying advanced modeling tools that consider all costs and provide optimized strategies across a comprehensive supply chain network of distribution centers, plants, contract manufacturing partners, sourcing options and logistical lanes.

  2. Understand what drives your supply chain.

    Understanding demand and, just as importantly, understanding the variability of demand, is essential for the removal of waste, or Muda — a Japanese term for wasteful and unproductive activity and a key concept in the Toyota production system. Today's variability is different. It is often powered by economic and market forces outside one's own control. These include consumers opting for more value-priced products, a need for more product innovation, competition on a global scale, seasonal variations and increased promotional activity.

    In difficult times, it is critically important to reexamine your enterprise's forecasting and demand planning processes and challenge historical assumptions to better understand what is driving demand.

    Lean manufacturing initiatives have a much better chance of delivering the expected benefits in enterprises that quickly and profitably respond to changing demand patterns. This requires a demand management and shaping process that is statistically sound and collaborative across the planning, sales, marketing, product management and financial area.

  1. Tie demand signals tightly to supply.

    Once demand drivers are clearly understood, the next step is to use demand to drive development of a connected supply chain plan, from distribution to production, to raw materials through to optimized sourcing. An optimized and connected plan can eliminate the significant levels of waste — Muda — that exist in most supply chains.

    Waste comes in many forms, including: high production changeover costs and excessive downtime due to inefficient scheduling, excessive materials and finished goods inventories that build over time in an attempt to keep service levels high and supply chain risk mitigated, as well as high logistics costs associated with unnecessary expediting and inefficient loads.

    With one synchronized view of demand, companies can transition from push manufacturing to pull manufacturing, driven by consumer demand, customer orders and accurate forecasting.

    Two critical keys to success are the ability to determine optimum inventory policies and continuously optimize sourcing plans based on the most current demand.

  2. Leverage the power of IT for global visibility and flexibility.

    The time when companies could effectively manage their demand and supply chains using traditional manufacturing resource planning (MRP) principles to drive a site-by-site production plan based on a simplified view of constraints are over. Manual lean methods of the past have also proven inconsistent and inadequate.

    With complex global supply chains, enterprises need solutions simple to use, easy to deploy and capable of responding to real-time information. They must also provide the collaboration required to drill down into demand drivers at a granular level, as well as integrate and align internal and external supply chain partners.

    Today's robust supply chain software solutions integrate industry best practices, designed to help users manage even the most complex enterprises at today's rapid speed of business. Global visibility and the flexibility to respond to economic and market changes in real time are among the most strategic initiatives any company can deploy to remain competitive.

  3. Align the lean initiative closely to operational plans and corporate financial goals.

    One of the most critical elements of an effective lean strategy is tight alignment between demand and supply chain operations and the enterprise's strategic business plan. The role of financial performance management is to plan, direct and oversee capital expenditures, monitor and control cash flows and invest as appropriate to ensure profitability and revenue goals are met. Therefore, it is essential that financial management be integral to lean initiatives and a key part of information flow, transparency, visibility and critical decision-making processes.

To maximize operational efficiencies, enterprises should incorporate sales and operations planning processes into lean manufacturing initiatives on an enterprise-wide global scale to enhance supply chain visibility, eliminate performance surprises and achieve more integrated business planning and management.

Lean is not just about production anymore. It can generate positive results across the value chain and have a profound effect on the long-term sustainability of any enterprise.

In a successful next-generation lean initiative, operational efficiency drives increased productivity and better operating margins, leading to increased revenues. All of these benefits can significantly increase cash flow and working capital, providing a cushion in a tough economy. Moreover, the positive effects of lean can pave the way for competitive growth during both challenging and prosperous times.

David Johnston is senior vice president of supply chain for JDA Software. For more information visit the company's Web site at www.jda.com.

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