Building and Managing
the Lean Supply Chain
2004,
M. Srinivasan
The Supply Chain
1st Tier,
2nd Tier, …,
Suppliers
Enterprise
Distribution
Channels
Customers
The Supply Chain
2004,
M. Srinivasan
Develop Systems Thinking
Lean supply chain principle 1:
Improving the performance of every subsystem
does not necessarily improve system
performance. The sum of local optima does not
equate to the global optimum. Improvements in
subsystem performance must be gauged only
through its impact on the whole system.
2004,
M. Srinivasan
Systems Thinking and the
Theory of Constraints
“Find the essence of each situation, like a logger
clearing a log jam. The pro climbs a tall tree,
locates the key log, blows it, and lets the stream
do the rest. An amateur would start at the edge of
the jam and move all the logs, eventually moving
the key log. Both approaches work, but the
essence concept saves time and effort. Almost all
problems have a key log if we learn to find it.”
-- Fred Smith
2004,
M. Srinivasan
The Business Ecosystem
Regulating
Agencies
Competitors
1st Tier,
2nd Tier, …,
Suppliers
Enterprise
Distribution
Channels
Customers
The Supply Chain
Complementors
Stakeholders
2004,
M. Srinivasan
Dell’s Business Ecosystem
Other industries such as airline, automobile, energy, ..........
Competitors: Compaq, IBM,
HP, Gateway, Toshiba, ..........
Regulating agencies: US Government, state governments,
Malaysian government, Chinese government, local governments.......
Telephone service companies, financial institutes, third-party technical supporters, AD companies, ..........
Suppliers:
DELL:
Customers:
o
o
o
o
o
o
o
o
o
o
Phillips, Nokia,
Samsung, Sony,
Acer
SCI, Celestica
Seagate,
Maxtor,
Western
Digital, IBM
Barcelona, HP
Hon Hai/Foxteq
Quanta,
Compal, Acer
...........
Close
proximity to
suppliers
o
o
o
Enterprise
systems
(servers)
Notebook
computers
Desktop
computers
............
Direct sale
o
o
o
o
o
o
Home & Home Office
Small Business (up to 400
employees)
Medium & Large Business
(over 400 employees)
State & Local Government
Federal Government
Education
Healthcare
...........
Dell
Third-party logistics providers such as UPS, Caliber, transportation companies, ..........
Stakeholders: NASDAQ,
Complementors: Microsoft, digital device makers, Internet service
Investors
providers, computer skills trainers, PC game developers ..........
Technology
development
Status of the
Economy
Culture ............
2004,
M. Srinivasan
The Business Ecosystem
Lean supply chain principle 2:
Focus on improving the performance of the lean
supply chain. However, do not ignore the supply
chain’s business ecosystem.
2004,
M. Srinivasan
Steps to Build Lean Supply Chains







Develop a systems perspective
Understand customers and their expectations
Map the supply chain
Benchmark best practices
Design products and processes to manage
demand volatility
Create flow across the supply chain
Develop supply chain metrics
2004,
M. Srinivasan
Develop a Systems Perspective

For any decision you take consider the
following. Does the decision:

Help you sell more products?

Help reduce investments in resources?

Help reduce payments/expenses?
2004,
M. Srinivasan
Understand Customer Value

Critical step: provide what the customer wants


Providing the wrong product or service in an efficient
way is muda. Eg. Air travel
An opportunity for kaikaku (dramatic change):

Rethink the delivery system on a product line basis
with strong dedicated product teams
2004,
M. Srinivasan
Understanding Customer Value

Identify market segments

Document the following:


Customer values in each segment
(order qualifiers and order winners)
Delivery cycle/time expectations of
customers in each segment
2004,
M. Srinivasan
Market Segments: Example
%age
Orders
Market Segmentation Graph
60%
40%
20%
0%
Market Segment
Staple
Stock
Direct Seasonal
Freight
Product Type
2004,
M. Srinivasan
Customer Values in Each Segment

Staple stock (e.g., Stationery)


Direct freight (e.g., Sony DSC-S30)


Availability (qualifier), cost (winner)
Product design (qualifier), quality (winner)
Seasonal

Convenience (qualifier), availability (winner)
2004,
M. Srinivasan
Map the Supply Chain

The set of all actions required to deliver the
finished product or service to the customer

“Seeing the Whole” (Systems Thinking)

Systematic study of the value stream often
reveals a staggering amount of muda

Need to “map” the whole process, and identify
value-added and non-value added activities across
the value stream
2004,
M. Srinivasan
Supply Chain Map: “As-Is”
Physician’s
Office
Intake
Coordinator
Hospital
Discharge Staff
Medical Records
Courier
Admission RN
or Therapist
Transcription
Outside Supplier
Clinical Staff
Materials
Management
Visit Scheduler
Clinical
Supervisor
Patient Telemonitoring System monitored by Office based Nurse
Billing and
Collections
Information flow
Paper flow
Data flow
Supply delivery
Adds Value
2004, M. Srinivasan
Source of Waste
Supply Chain Map: “To-Be”
Physician or
Physician’s Office
Intake
Coordinator/
Scheduler
Patient Telemonitoring System
monitored by Office based Nurse
Clinical
Supervisor
/Case
Manager
Clinical Staff
Outside Supplier
Hospital
Discharge Staff
Materials
Management
Medical
Records
Billing and
Collections
Information flow
Data flow
Supply delivery
Adds Value
Source of
2004,
M.Waste
Srinivasan
Monthly Fax
of Weekly
Schedules
Weekly Calls
with Daily
Schedules
Supplier
Central
Supplies
Production
Planning
Inventory
Management
System
30 Days
Firm
Schedule
Customer
CAPS
System
Bi-Weekly
Schedule
Record
Receipt
PressCuring
DFM
Blend
900
seconds
1.33
0
Days
Days
Compound
PreForm
PreCure
5700
18
4500
seconds
0.26
seconds
Days
Value Added Time: 0.35 days;
0.09
Days
seconds
FIFO
PressCuring slab
18810
0.09
Days
seconds
0.68
Days
Production Lead Time 3.34 days;
Sales
Warehouse
Finishing
Pack
45
0.07
seconds
0.54
Days
seconds
12
Days
Value Added Ratio: 10.5%
Customer Demand: 4,560 units/day
Supply Chain Map: “As-Is”
2004, M. Srinivasan
Monthly Fax
of Weekly
Schedules
Weekly Calls
with Daily
Schedules
Supplier
Central
Supplies
Production
Planning
Inventory
Management
System
30 Days
Firm
Schedule
CAPS
System
Customer
Daily
Orders
Bi-Weekly
Schedule
Record
Receipt
Mixed-Model
Build Schedule
PressCuring
DFM
Blend
900
seconds
0.03
0
Days
Days
Compound
PreForm
PreCure
1800
seconds
18
seconds
4500
seconds
0.11
Days
Value Added Time: 0.30 days;
0
Days
PressFIFO
Curing slab
0.03
Days
18810
seconds
Finishing
45
seconds
0.13
Days
Production Lead Time 0.60 days;
Sales
Warehouse
6
Days
Value Added Ratio: 50%
Customer Demand: 6,200 units/day
Supply Chain Map: “To-Be”
2004, M. Srinivasan
Another kind of
Supply Chain Map
FLOW
Arrivals/Day
From Agent
From Computer
RUNS
RAPS
RAINS
RERUNS
Total
2.9
15
3.8
17.3
39
DISTRIBUTION
Number of Clerks=
4.00
Available Minutes=
1800.00
ServiceTime
Load
68.5
198.65
50
750
43.5
165.3
28
484.4
1598.35
Utilization
0.89
FLOW
Arrivals/Day
1.4
6.3
1.6
5.3
14.6
FLOW
Arrivals/Day
0.8
4.3
1.1
7
13.2
UNDERWRITING 1
Team
1
Available Minutes=
450
ServiceTime=
Load
43.60
61.04
38.00 239.40
22.60
36.16
18.70
99.11
435.71
Utilization
0.97
UNDERWRITING 2
Team
1
Available Minutes=
450
ServiceTime=
Load
43.60
34.88
38.00 163.40
22.60
24.86
18.70 130.90
354.04
Utilization
0.79
Released 1
day prior to
due date
FLOW
Arrivals/Day
0.7
4.4
1.1
5
11.2
UNDERWRITING 3
Team
1
Available Minutes=
450
ServiceTime=
Load
43.60
30.52
38.00 167.20
22.60
24.86
18.70
93.50
316.08
Utilization
0.70
2004,
M. Srinivasan
Benchmark Best Practices
Develop
performance
metrics
Identify world class
organizations; study
their operations
strategies and tactics
2004,
M. Srinivasan
Benchmark Best Practices
Lean supply chain principle 3:
Focus on customer needs and process considerations
when designing the product delivery system.
Enterprises can gain tremendous competitive
advantage through best-in-class practices that cut
across industries.
2004,
M. Srinivasan
Designing Products and Processes:
Coping With Demand Volatility

Can you smooth demand volatility?

Key observation: Much of the demand volatility is selfinduced
 Sales promotions and rebates
 End-of-the-month syndrome (“Channel Stuffing”)
 Batching
 New product introductions
 …
2004,
M. Srinivasan
How Can We Reduce Demand
Volatility?


Have no promotions
Reduce lead times and produce in small lots


Postponement strategies


Exploit product structures
Exploit commonality and delay commitment
Aggregation
2004,
M. Srinivasan
How to Manage Demand Volatility:
The RAP Principle
Before
Raw
Material
Fabrication
Sub-Assembly Final Assembly Finished
Goods
After
2004,
M. Srinivasan
How to Manage Demand Volatility:
The RAP Principle
Lean supply chain principle 4:
Maximize external variety with minimal internal
variety. It is desirable to maintain inventories in
an undifferentiated form for as long as it is
economically feasible to do so
2004,
M. Srinivasan
Managing Demand Variation

As far as possible, avoid using inventory
to buffer variation
 Less chances of misallocation
 Inventory seriously impedes flow
Lean supply chain principle 5:
Buffer the variation in demand with capacity,
not inventory
2004,
M. Srinivasan
Percentage of Orders
Product Delivery Strategies
“At-Once” “At-Lead-Time” “Beyond-Lead-Time”
Customers
Customers
Customers
Wk 1 Wk 2 Wk 3 Wk 4 Wk 5 Wk 6 Wk 7 Wk 8
Replenishment Lead Time
Lead Time
= 3 to 5 weeks
The Customer Time-Based Demand Profile
2004,
M. Srinivasan
Product Delivery Strategies:
Product Structures

Build to stock (BTS)


Finished goods made in anticipation of demand.
Customers’ orders are met from inventory
Assemble to order (ATO)

Subassemblies produced according to forecast.
Required items are drawn from wip and
assembled when orders are received. Very little
finished goods inventory carried
2004,
M. Srinivasan
Product Delivery Strategies:
Product Structures

Build to order (BTO)


Products built in response to actual customer
orders. Usually these are standard products with a
few options
Engineer to order (ETO)

New product designed and produced in response
to specific customer needs. Lead times include
relevant elements of engineering design and
manufacturing
2004,
M. Srinivasan
Product Structures:
Resulting Lead Times
FG
Build to Stock
Customer LT
Assemble-to-Order
Assembly
Customer LT
Build-to-Order RM
Assembly
Customer LT
2004,
M. Srinivasan
Create Flow

Creating flow requires a systems perspective

Lack of flow results in inventory or work
imbalance somewhere in the supply chain

Improved flow  reduced lead times

To create flow, all processes should “row the boat”
at the same pace – the concept of flow balance
Suppliers
Facility
Customers
2004,
M. Srinivasan
Creating Flow

To enhance flow, use pull signals for
execution where possible
Lean supply chain principle 6:
Use forecasts to plan and pull to execute. A
system that reacts to pull signals will have less
variation than a comparable system that adopts a
push mode of operation.
2004,
M. Srinivasan
Develop Metrics Using a Systems
Perspective

“Tell me how you will measure me and I will tell
you how I will behave.”

Does the metric:

Help you sell more products?

Help reduce investments in resources?

Help reduce payments/expenses?
2004,
M. Srinivasan