Strategic, Tactical and
Operational Conflicts in Lean
Supply Chain Management
Scott R. Swenseth, University of Nebraska
David L. Olson, University of Nebraska
European DSI 2014 Swenseth & Olson
Globalization (and global warming)
• SUPPLY CHAINS
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Need lean
Need green
Need agile
Need resilient
• Continuous improvement the goal
• Improvement is never finished
• Lean effective at tactical, operational levels
• OUR FOCUS: STRATEGIC SUPPLY CHAIN IMPLEMENTATION OF LEAN
European DSI 2014 Swenseth & Olson
Views
• Operators don’t have confidence that upper management
understands lean
• Don’t believe upper management supports lean applications
• Upper management continues to demand improvements generated
by lean
• PREMISE: UPPER MANAGEMENT DOES CARE & SUPPORTS LEAN
• But they have many factors to consider
• Some of these factors may trump lean
• STUDY: one major supply chain player
• Interacting upstream
European DSI 2014 Swenseth & Olson
Our Model: Data assumed as inputs
• Average annual (& daily) demand (and standard deviation)
• Unit weight
• Unit purchasing price
• Holding cost as % of unit price
• Order cost
• Backorder cost per unit
• Truckload shipping rate (assume full truckloads)
European DSI 2014 Swenseth & Olson
AGILE
• Lean a good deal
• Agile also good in supply chains [Borgstrom & Hertz, 2011; many others]
• Agile provides information visibility
• Agile has relative advantage in low demand, high variety environments
• Extension of lean to supply chains challenging [Liu, et al., 2013]
• No decision maker can have all needed knowledge
• Internet helps [Hines, et al., 2004]
• Can synchronize decisions, share goals [Manuj & Sahin, 2011]
• But Bullwhip studies indicate difficulties [Disney, Towill, many times]
European DSI 2014 Swenseth & Olson
RESILIENT
• Lean focus on cost minimization
• Zero inventories cause problems [Christopher & Peck, 2004]
• Supply chains may have high levels of uncertainty [Nauhria et al., 2009]
• On-time delivery critical, as is product quality
• Agile refocus on developing capacity
• Provide the ability to cope with unexpected disturbances [Carvalho &
Machado, 2009; Pettit, et al., 2010]
• Highly appropriate if demand rapidly changing
European DSI 2014 Swenseth & Olson
Environmental Sustainability
• Lean can help environment [Sobral, et al., 2013]
• Improve efficiency ecologically at a profit [Rao & Holt, 2005]
• GREEN SYSTEM consideration of Product Life Cycle [Srivastava, 2007]
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Green product design
Material sourcing & selection
Marketing
Consumption
Manufacturing
Delivery
European DSI 2014 Swenseth & Olson
Environmental Sustainability Redux
• Little evidence of green supply chain practice [Genovese, et al., 2013]
• Need holistic approach [Lee, 2010]
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Environmental complexity includes many goals
Inventory studies [Borgstrom & Hertz, 2011; Chung, et al., 2012]
Need to consider overall supply chain system [Mollenkopf, et al., 2010]
Efficiency trade-offs with environmental sustainability [Wolters, et al., 1997]
• Wal-Mart, Caterpillar, Toyota
European DSI 2014 Swenseth & Olson
Lean Implementation
• [Miller 2011] survey
• Mixed findings of Managers knowing what lean really is
• But it is critical they be involved
• Managers should improve process rather than allocate blame
• International Survey of Lean Healthcare Users [2012]
• Primary barriers to lean
• Resources
• Knowledge gaps
• Conflicting priorities
• [Zhang, et al. 2012]
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Need management engagement & commitment
Organizational culture
Reviews & tracking
Communication & assessment
• [Fricke, 2010]
• The larger the organization, the greater the awareness of lean
European DSI 2014 Swenseth & Olson
Problem Scenario
• Supplier shipping TL quantities to customer
• Basic system, lean & agile modifications
• PARAMETERS
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Purchasing
Ordering
Carrying
Shipping
Risk of stock-out
Risk of defects
Demand variability
European DSI 2014 Swenseth & Olson
Input Parameters
Variables
Average Annual Demand (Units)
Unit Weight (Pounds)
Unit Purchase Price ($)
Unit Selling Price ($)
Holding Cost (% of Unit Purchase Price)
Order Cost ($/Order)
Backorder Cost ($/Unit)
Shipping Rate ($/Shipment)
TL Shipping Weight (lbs.)
Shipping Rate ($/Unit)
Product Defect Rate
D
w
P’
P
i
C
b
R
W
r
q
European DSI 2014 Swenseth & Olson
Values
50,000
25
$200
$300
75%
$500
$200
$750
50,000
$ 0.375
5.00%
Intermediate Factors
Demand per Day (annual demand/365)
TL Quantity (50,000 lbs/Unit wgt)
Orders/Year
Cycle time (days)
Lead time (days)
Max Safety Stock (units)
Expected defects/order
European DSI 2014 Swenseth & Olson
Variables
Values
d
Q
137
2,000
25
14.6
14.6
697.9
100
t
l
Output Measures
Values
Cost
$10,000,000.00
$
150,000.00
$
12,500.00
$
49,222.62
$
27,731.08
$
18,750.00
$
750,000.00
$11,008,203.70
Cost Term
Annual Purchase Cost
Annual Holding Cost
Annual Ordering Cost
Annual Safety Stock Cost
Annual Stock-out Cost
Annual Shipping Cost
Annual Product Defect Cost
Annual Total Cost
European DSI 2014 Swenseth & Olson
Assumptions
• Lead Time – same as cycle time (supplier producing to customer demand)
• Standard deviation of Daily Demand = 1/3 daily demand, normally distributed
• Optimal Probability of Stock-out based on backorder unit cost
• Not allowed to be > 0.5, as that would yield negative safety stock
• Optimal Service Level = 1 – Optimal Probability of Stock-out
• Max Safety Stock based on 4 StDev above mean
• Expected Stock-out Quantity near optimal probability of stock-out times likely
number of units stocked out
Q
2
D
Q
• TC = P ′ ∗ D + ∗ i ∗ P ′ + ∗ C + Z ∗ σddlt ∗ i ∗ P ′ + E s ∗ p ∗
• 𝐷 ∗ 𝑃 − 𝑇𝐶
European DSI 2014 Swenseth & Olson
D
Q
+R∗
D
Q
+ D ∗ P′ ∗ q
Implementing Lean Alternatives
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Unit Price reduction – work with supplier, or design changes
Unit Weight reduction – work with supplier to be greener
Unit Demand increase – lower price increases demand
Order Cost reduction – cost of individual order reduced
Shipping Cost reduction – consolidation improves lean & green
Backorder Cost reduction – impact of stock-out reduced
Lead Time reduction – countered by higher number
Holding Cost reduction – decrease in rate and decrease in unit value
Product Defect Rate reduction
Standard Deviation of Demand During Lead Time reduction
European DSI 2014 Swenseth & Olson
IMPACT
• Previous Lead Time: 14.6 days
• Previous Order Quantity: (50,000 lbs/shipment)/(25 lbs/unit) = 2,000 units
• Cycle Time = Lead Time (2000/50000)*365 days/year = 14.6 days
• Current Lead Time: 11.68 days
• Current Order Quantity: (50,000 lbs/shipment)/(18.75 lbs/unit) = 2,667 units
• Without Learning Cycle Time: (2667/62500)*365 = 15.58 days
• With Learning Cycle Time: 15.58*0.75 = 11.68 days
• Because demand increases at same rate that unit weight decreases,
shipment size increases at rate causing average DDLT to be constant
European DSI 2014 Swenseth & Olson
Lean Cycle Comparison
Outputs
Lean 1
Lean 5
Lean 10
Lean 20
$10,000,000
$9,375,000
$7,247,706
$6,026,506
$4,853,907
$12,500
$8,789
$4,307
$2,785
$1,715
Cycle stock
holding cost
$150,000
$112,500
$71,307
$55,447
$42,395
Safety stock
holding cost
$49,223
$32,545
$15,047
$9,533
$5,778
Stock-out cost
$27,731
$16,645
$7,081
$4,365
$2,590
Shipping cost
$18,750
$13,184
$6,460
$4,177
$2,572
$750,000
$703,125
$543,578
$451,988
$364,043
$11,008,204
$8,488.212
$14,973.861
$17,900,548
$20,487,439
$3,991,796
$8,488,212
$14,973,861
$17,900,548
$20,487,.440
Purchase cost
Order cost
Defect cost
Total Cost
Total PROFIT
Original
European DSI 2014 Swenseth & Olson
RESULTS
• Columns represent rounds of lean improvement
• Greater improvement rates during early stages
• Assumes one improvement cycle per year
• Compound profit improvement 8.52 % per year
European DSI 2014 Swenseth & Olson
STRATEGIC ALTERNATIVE TO LEAN & GREEN
• Unit Price further reduced - (30% of current price)
• Unit Weight same
• Unit Demand same
• Order Cost increase – new supplier
• Shipping Cost per truckload increase – overseas
• Backorder Cost per unit increased – multiple suppliers
• Lead Time increased – overseas
• Holding Cost % same
• Product Defect Rate increased – multiple overseas suppliers
European DSI 2014 Swenseth & Olson
Global Outsourcing
Outputs
Original
Purchase cost
$10,000,000
$7,000,000
-$3,000,000
$12,500
$12,500
-
Cycle stock holding cost
$150,000
$315,000
+$165,000
Safety stock holding cost
$49,223
$111,761
+$62,539
Stock-out cost
$27,731
$54,038
+$26,307
Shipping cost
$18,750
$18,750
-
$750,000
$2,250,000
+$1,500,000
$11,008,204
$9,762,050
-$1,246,154
$3,991,796
$5,237,950
+$1,246,154
Order cost
Defect cost
Total Cost
Total PROFIT
Global
European DSI 2014 Swenseth & Olson
Change
SIMULATION
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1,000 randomly generated scenarios
Varied stages of learning
Global outsourcing gains pick up after 5 periods
Considered impact of different change factors on results
• Correlation between input factor and change in profit
• GREATEST IMPACT:
• Defective products
• Greater initial levels of defective product allows lean to improve more
• Can’t transfer this to alternate suppliers
• 2nd GREATEST IMPACT
• Learning Rate
• Greater learning rate, more lean benefits
European DSI 2014 Swenseth & Olson
CONCLUSIONS
• Multiple ways to implement lean, green, agile methods
• We focused on decision processes
• Operational level gains may seem ignored when changes made at
tactical level
• Gains at the operational & tactical levels may seem ignored at the
strategic level
• EACH LEVEL HAS TO UNDERSTAND HIGHER LEVELS HAVE BROADER
CONSIDERATIONS
• What appears detrimental at lower levels may have a compelling higher-level
justification
European DSI 2014 Swenseth & Olson
Learning/experience curve
• Used to emulate progression through lean
• Reflect:
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Improving product design
Affecting unit weight
Affecting defect levels
Affecting holding inventory
Affecting placing orders
Affecting shipping costs
• Improvements from managing demand
• Impact safety stock
• Impact stock-out costs
• WHILE LEAN OFFERED IMPROVEMENT, ALTERNATIVES OFTEN ATTAINED
GREATER GAINS
European DSI 2014 Swenseth & Olson