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 Stockout 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 Stockout 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 Stockout
• Max Safety Stock based on 4 StDev above mean
• Expected Stockout Quantity near optimal probability of stockout 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 stockout 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 Deman 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 stockout costs
• WHILE LEAN OFFERED IMPROVEMENT, ALTERNATIVES OFTEN ATTAINED
GREATER GAINS
European DSI 2014 Swenseth & Olson