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Over the years I have been invited to speakat many supplier days. The best onesshare the stories of the lean progressmade by the hosts to encourage theirsuppliers to follow suit, to mutualadvantage. However, there is always

some tension lurking in the background as both sides sizeup whether this is a genuine step towards win-wincooperation or merely the same old margin squeezingdressed up in a new guise. The truth usually turns out to bea bit of both.

However, it is becoming apparent that simply squeezingsupplier margins is reaching the end of the road. Withoutany fundamental changes to the way the shared processbetween the customer and supplier is managed, there is alimit to how much margin there is left to squeeze. Moreseriously, there is now growing evidence that successiveraids on margins are beginning to have a seriouslydamaging and even perverse effect on supplier performance.Ignore this at your peril.

This was brought home when visiting a supplier makinga basket of different components, which they deliver to acustomer for assembly into a complete piece of equipment,made in a variety of different configurations. At the momentthe market for this product is buoyant and suppliers arehaving a hard time keeping up with demand. This is a well-intentioned supplier, taking action to respond to pressurefrom its customers to improve its performance and to reduceits prices. However, these actions have not always had theintended consequences, for them and for their customers.

First, they decided to upgrade their machining plant bybuying a completely new set of machines. After a struggleto get all the machines installed and running they are stillstruggling to get this equipment to work more than 30% ofthe time! Instead of solving their capacity problems, it madethem worse than ever. It turns out the machinery was justnot capable of running with these products, to the requiredtolerances and at the planned volumes. Sure, the supplier is

E Manufacturing Engineer | June/July 2005

making some progress in reducing changeover times andbreakdowns, but not nearly enough. This is not just amaintenance problem.

More worryingly, they were not able to specify the designconditions for what Toyota calls basic stability whenchoosing the equipment in the first place. It turns out thattheir customer is suffering from the same problem with itsnew equipment, even though they have been going lean andusing Total Productive Maintenance for some years. This isa very expensive lesson for all concerned. Not surprisingly,it is a common problem that people do not want to talk muchabout!

Second, this supplier centralised each of its processes indifferent ‘focused factories’ across Europe. This wassupposed to reduce production costs. But, instead, most oftheir products now travel through three or more of theirplants before being marshalled for delivery to the customerin their central warehouse. Total lead time through thissupplier has gone up and not down, and the probability ofhaving the exact basket of parts ready when the customerwants them has fallen. As a result they are constantlychasing ‘missing parts’, and their overtime and excessfreight bill is enormous.

Third, in order to manage this complex routing throughtheir plants they bought an ERP scheduling system. Thisturned out to be a disaster. They are still struggling to winthe un-winnable war between data that is constantly beingundermined by the expediters, trying to end-run schedulesbased on forecasts that always differ from what the customer

The customer should, like Toyota,begin to assume responsibility fororganising inbound logistics

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actually wants. They now employ more planners andschedulers then ever before. Schedules passed in turn totheir suppliers jump up and down all the time and, notsurprisingly, on-time deliveries from them have also fallen.

Fourth, like many, they have sourced several keycomponents from low cost sub-contractors in China. Quiteapart from all the start up and logistics nightmares, pricesin China are beginning to rise. Their sub-contractor is moreinterested in fulfilling booming domestic demand than theirorders, which gyrate far more than planned. They will soonhave to find another sub-contractor further inland in Chinaor look for a supplier closer to home, in, say, Romania orTurkey.

This is not an isolated case. Indeed, by conventionalwisdom, they did all the right things. However they wereundermined by a lack of real knowledge of the equipmentneeded to produce their products and by focusing on pointeconomies rather than the cost of the product travellingthrough the entire supply chain. Every supply chaincontains many such stories. Rather than walking away, thereare several positive steps that should be on the agenda forthe next supplier day.

First, establish an expert working group to pool andupgrade the collective knowledge about specifying right-sized equipment that is fully capable and available. This isa strategic foundation underpinning the shared enterprise.

Second, the customer should, like Toyota, begin toassume responsibility for organising inbound logistics,picking up products from suppliers much more frequentlyusing milk-rounds, visiting several suppliers in turn. Thisbrings the heartbeat of the supply chain to the supplier’sdoor.

Third, by creating level schedules for high volumeproducts that are pulled by the customer from stocks offinished goods and separately scheduling capacity for lowvolume make-to-order products, the customer can create theconditions where suppliers can follow suit. This inevitablyleads to freeing up previously hidden capacity and

FOCUSING ON POINT ECONOMIES RATHERTHAN THE COST OF THE PRODUCTTRAVELLING THROUGH THE ENTIRE SUPPLYCHAIN CAN LEAD COMPANIES TO DEVELOPINEFFICIENT SUPPLY CHAINS By Prof Daniel T Jones

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achieving and sustaining record levels of output, while alsofreeing up the time of many of the planners and expeditersto focus on improving the process.

Fourth, suppliers and customers should jointly map theirvalue streams right back to raw materials. Over time thesevalue streams can be compressed in time and distance byregrouping as many value creating steps as possible in onelocation, either close to the customer or at least withintrucking distance.

The path beyond margin squeezing is no less relentingthan value stream redesign. But it actually needs leadershipfrom the customer to take responsibility for reshaping itsentire supplier base and for building deeper relationshipswith fewer suppliers, each with a deeper knowledge toenable them to solve bigger problems on a continuing basis.

Ultimately the success of every business is determinedby the success of the supply chains of which they are a part,just as a supply chain is only as strong as the links in thechain. Whether we like it or not, a supply chain, or, moreaccurately, the collection of extended value streams for eachproduct family, is a shared process between all the parties,and needs to be managed as such.

But where does your value stream begin and end?Probably back to the raw material processing for yourlongest lead item. At the other end it does not just end withthe consumer purchase of your product – but includes allthe product support activities through the life of the productto its replacement or disposal. Even if we just count backfrom the point of purchase, how long is your supply chain?Longer than the 319 days to make a cola can or double thatto make a pharmaceutical pill? This is something everybusiness should know.

IEE Manufacturing Engineer | June/July 2005

The second fact everyone should know, but few really do,is how well this value stream really serves the needs of itsend customers. The results will probably shock you. Groceryretailers setting up to supply orders placed on the Internetdiscovered they could only fulfil about two thirds of theitems customers actually ordered, even though theavailability of individual items was close to 98%. As aconsequence, many customers are dissatisfied with thesubstitutions made on their behalf.

Think about how often you found the shoe size youwanted in the style you chose – and then remember that atleast one third of the shoes in stock that you did not wantwill be remaindered at the end of the selling season. Reflecton the fact that only just over half the customers for a newcar actually get the exact car they wanted, on time and withno defects and that only two thirds of car service jobs arecompleted on time in full. In other words, how do youdisappoint your customers? And how much effort and hassleis required on their part to get what they want from you, ifit does not go right first time?

The true performance of your value streams can only beunderstood by taking a walk. I was recently reminded of thefirst value stream walks we did with a combinedmanagement team from Tesco and its key suppliers back in1996. We walked the path of several products back from thestore through two warehouses to the production andpackaging plants. No one had done this before and it openedtheir eyes and triggered Tesco’s lean journey.

After a bit more digging, particularly to follow the orderthrough the information processing maze, it became clearthat the way to both improve the fulfilment of the shopper’sbasket and to cut swathes of inventories and cost from the

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system was to dramatically compress the value streamthrough a series of tight, continuous replenishment loops.Store sales should trigger replenishment of exactly thesame quantities from distribution centres. Shipments fromdistribution centres should trigger daily pickups of exactlythe same quantities from suppliers. These, in turn, shouldtrigger daily production of the exactly the same quantities,and so on back through packaging and the production ofingredients.

The ultimate example of a one-touch, flow-throughproduct is a soft drinks bottle or can placed on rolling dolliesat the end of the production line, which are wheeled throughdistribution to become the shelf fixture from which thecustomer selects the product. The same logic applies toslower selling products (the majority in most supermarkets)but with either an appropriately longer replenishment cycle– every three days or every week – or better still by morefrequent deliveries of mixed-product shipments of therequired quantities.

The model for us, and still the most impressive supplychain in the world, is the Toyota aftermarket partsdistribution system we described in Lean Thinking. This

still sets the global standard for how torun a lean replenishment system, withlean distribution centres, frequent milk-run mixed-load deliveries picking upproducts and cross docks.

In the early 1990s Toyota built twohighly automated warehouses in theUSA and Japan and discovered thesecould never match the efficiency andflexibility of their manual leanwarehouses. They also knew fromexperience that big centralised ERPscheduling systems can never beat aseries of simple reflexive pull loops.Toyota distinguishes between cognitivedecisions and reflexive decisions, thelatter based on unambiguous signals ofexactly what to do next – like takingyour hand off a hot stove! This equatesto separating decisions about changes incapacity and materials requirements

While manufacturers can learn alot about rapid replenishmentfrom retailing this is not the onlyplace to look for inspiration

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from hour by hour production and shipping instructions toeach activity in the value stream.

Economic order quantity (EOQ) logic creates lots of noisein the order signal, which in turn leads to constant re-planning of every activity at every level and an army ofexpediters chasing orders through the system. The endresult is a much poorer utilisation of assets than can beobtained through optimising the flow. WebVan, the homeshopping firm in California, went bankrupt trying theautomated route. Sainsbury in the UK is now strugglingbecause they followed the same path. When will we learn?

While manufacturers can learn a lot about rapidreplenishment from retailing this is not the only place tolook for inspiration. Earlier this year I visited a plantmaking contact lenses. It was busy planning an even bigger,faster machine. This sounded like ‘hurry up to wait’ to me.True enough these lenses went through three differentwarehouses, each containing mountains of stock and nodoubt highly automated, before they reached the customer.Demand for contact lenses is by definition very flat! Isuggested they make and ship just the right number oflenses directly to each customer’s home or, alternatively,design simple, less ‘efficient’ machines that could make theselenses in a local dispensary while customers waited. Theroom went quiet at this point, until someone said “We neverthought of that!”

What would happen if you applied the same logic to yoursupply chain? How short could it be? What difference wouldthis make to your customers? What would this do to yourinvestment, design and production costs, and the location ofyour activities? And how would this change your impact onthe environment? �

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