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Lean Supply Chain Management

Course Design

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Advisory Council

Chairman
Dr Parag Diwan

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Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO

Dr S R Das Dr Sanjay Mittal Prof V K Nangia


VP – Academic Affairs Professor – IIT Kanpur IIT Roorkee

SLM Development Team


Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
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Print Production

Mr Kapil Mehra Mr A N Sinha


Manager – Material Sr Manager – Printing

Author

R P Mohanty

All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
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Course Code: MDSL-804D

Course Name: Lean Supply Chain Management

Version: July 2013

© MPower Applied Learning Enterprise


UNIT 20: Case Study

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Contents
Block-I

Unit 1 Lean Basics ..................................................................................................................... 3

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Unit 2 Characteristics of a Lean Supply Chain...................................................................... 13
Unit 3 Lean Implementation in the Supply Chain................................................................. 27
Unit 4 Lean Thinking for the Supply Chain........................................................................... 37
Unit 5 Case Study .................................................................................................................... 49

Block-II

Unit 6 Lean Approaches and Methodology ............................................................................. 55


Unit 7 Supply Chains............................................................................................................... 77
Unit 8 Supply Chain: Flows and Problems............................................................................. 93
Unit 9 Attributes of Lean Supply Chain............................................................................... 107
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Unit 10 Case Study .................................................................................................................. 115

Block-III

Unit 11 Lean Supply Chain Leadership ................................................................................. 121


Unit 12 Customer Value .......................................................................................................... 145
Unit 13 Customer Value Focus................................................................................................ 155
Unit 14 Ethics, Trust and Environment ................................................................................. 169
Unit 15 Case Study .................................................................................................................. 181

Block-IV
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Unit 16 Outsourcing in SCM ................................................................................................... 187


Unit 17 Lean Outsourcing Strategy ........................................................................................ 199
Unit 18 Lean Supply Chain New Product Development........................................................ 213
Unit 19 Strategies and Tactics in Lean Supply Chain........................................................... 225
Unit 20 Case Study .................................................................................................................. 241
Lean Supply Chain Management
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Block-V

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Unit 21 Globalisation and Cultural Impact on Lean Supply Chain Management............... 247

Unit 22 ERP in Lean Supply Chains ...................................................................................... 257

Unit 23 Lean Supply Chain and E-commerce ........................................................................ 269

Unit 24 Integrating E-commerce and Supply Chains ............................................................ 279

Unit 25 Case Study .................................................................................................................. 291

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Glossary ............................................................................................................................................ 293
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UNIT 1: Lean Basics

1
Notes

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BLOCK-I
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Lean Supply Chain Management
Detailed Contents
2
Notes

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UNIT 1: LEAN BASICS
___________________ UNIT 3: LEAN IMPLEMENTATION IN THE
SUPPLY CHAIN
z Introduction
___________________ z Introduction
z Concept of Lean
___________________ z Lean Principles
z Origin of Lean
___________________ z Common Mistakes when Implementing Lean
z Lean: A Toyota Approach
Principles
___________________

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z Lean as a Supply Chain Strategy
z Streamlining Processes
___________________
UNIT 2: CHARACTERISTICS OF A LEAN SUPPLY
___________________ UNIT 4: LEAN THINKING FOR THE SUPPLY
CHAIN
CHAIN
z Introduction
___________________
z Introduction
z Elimination of Waste
___________________
z Concepts of Value and Waste
z Smooth Operational Flow
___________________ z Components of the Lean Supply Chain
z High Level of Efficiency
z Benefits of Lean Systems
z Quality Assurance
z Path Forward to a Lean Supply Chain

UNIT 5: CASE STUDY


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UNIT 1: Lean Basics

Unit 1
3
Notes

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Activity

Lean Basics
___________________
Identify the organizations who
recently applied lean concept
in ___________________
their processes with the
help of newspapers and
___________________
internet.
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Concept of Lean ___________________
\ Origin of Lean
___________________
\ Toyota Approach to Lean
___________________
\ Lean as a Supply Chain Strategy
___________________

Introduction ___________________

The initiation of lean concept or lean thinking cannot be easily


credited to any single individual, company or a nation. Lean is the
sum total of millions of business organizations and their people
who have made contributions to the concept over many years. Most
of the experts would support the claim that Toyota Corporation of
Japan has been in the past and continues to be the standard holder
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of lean. Due to Toyota's heightened lean status, much of our
discussion here will be focused either directly or indirectly on what
Toyota does to foster lean in their operational activities.

Concept of Lean
In the literature, lean has been referred to as a process, project,
program, principle, approach, methodology and philosophy.
Depending on the lean application, it is all of these. Lean can be
applied to individual processes, individual departments or entire
organizations as a project for short-term efficiency improvements.
Lean can be strengthened to long-term programs where projects
are undertaken to permanently install lean for continuous process
improvement. Lean is also a set of principles, approaches, and
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methodologies that can be applied individually or collectively.


When lean principles are used as an approach to management they
are continuously applied and can become a long-term philosophy
leading an organizations toward world-class performance.
Lean Supply Chain Management

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The core idea is to maximize customer value while minimizing
Notes
waste. Simply, lean means creating more value for customers with

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___________________ fewer resources.
___________________ A lean organization understands customer value and focuses its
___________________ key processes to continuously increase it. The ultimate goal is to
provide perfect value to the customer through a perfect value
___________________
creation process that has zero waste.
___________________

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To accomplish this, lean thinking changes the focus of
___________________
management from optimizing separate technologies, assets, and
___________________ vertical departments to optimizing the flow of products and
___________________ services through entire value streams that flow horizontally across
technologies, assets, and departments to customers.
___________________
Eliminating waste along entire value streams, instead of at
___________________
isolated points, creates processes that need less human effort, less
space, less capital, and less time to make products and services at
far less costs and with much fewer defects, compared with
traditional business systems. Companies are able to respond to
changing customer desires with high variety, high quality, low
cost, and with very fast throughput times. In addition, information
management becomes much simpler and more accurate.
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Lean for Production and Services
A popular misconception is that lean is suited only for
manufacturing. Not true. Lean applies in every business and every
process. It is not a tactic or a cost reduction program, but a way of
thinking and acting for an entire organization.
Businesses in all industries and services, including healthcare and
governments, are using lean principles as the way they think and
do. Many organizations choose not to use the word lean, but to
label what they do as their own system, such as the Toyota
Production System or the Danaher Business System. Why? To
drive home the point that lean is not a program or short term cost
reduction program, but the way the company operates. The word
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transformation or lean transformation is often used to characterize


a company moving from an old way of thinking to lean thinking. It
requires a complete transformation on how a company conducts
business. This takes a long-term perspective and perseverance.
UNIT 1: Lean Basics

Purpose, Process and People 5


Notes
Womack and Jones recommend that managers and executives

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Activity
embarked on lean transformations think about three fundamental ___________________
Create a digital essay on
business issues that should guide the transformation of the entire origin of lean concept.
___________________
organization:
___________________
z Purpose: What customer problems will the enterprise solve to
___________________
achieve its own purpose of prospering?
___________________

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z Process: How will the organization assess each major value
___________________
stream to make sure each step is valuable, capable, available,
adequate, flexible, and that all the steps are linked by flow, ___________________
pull, and levelling? ___________________

z People: How can the organization insure that every important ___________________
process has someone responsible for continually evaluating
___________________
that value stream in terms of business purpose and lean
process? How can everyone touching the value stream be
actively engaged in operating it correctly and continually
improving it?
For example, "Just as a carpenter needs a vision of what to build in
order to get the full benefit of a hammer, Lean Thinkers need a
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vision before picking up our lean tools," said Womack. “Thinking
deeply about purpose, process, people is the key to doing this.”

Check Your Progress


True or False:
1. Lean is a set of principles, approaches, and
methodologies that can be applied individually or
collectively.
2. Lean does not apply in every business and every
process.

Origin of Lean
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The main principles that are the foundation of lean started in


Japan during the 1950s with manufacturing firms that desires to
make maximum use of limited resources available at that time. A
set of waste removal guidelines emerged, which were collectively
referred to as Just-in-Time principles. The name Just-in-Time
(JIT) refers to resource utilization, that is, units of material,
Lean Supply Chain Management

6 subassemblies, and components reach in a manufacturing setting


Notes "just-in-time" for their use. Suppliers deliver their supplies just in

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Activity
___________________
time for their use in production, and customers receive finished
Prepare a presentation on the
Toyota approach to lean with products just in time for their suitable use. Hence, there is no
___________________
images and text using insignificant movement of materials, use of labour or equipment,
secondary sources of
___________________
information. or idle inventory in a JIT system. All resources reach just in time
___________________ for their consumption.

___________________ The body of JIT principles basically evolved from manufacturers'

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shop floors dealing with common shop floor production issues.
___________________
These typical manufacturing issues dealt with inventory,
___________________
production, human resources, and quality. Ultimately, as those JIT
___________________ principles took hold in manufacturing plants, JIT principles
___________________ expanded to include longer-term considerations like facility design.
For example, it is difficult to adopt JIT quality principles without
___________________
considering the use of facility principles like the use of automation
in facilities to improve quality. Continuing to expand outside the
organization, JIT principles were added to include suppliers.
Further, it is difficult to adopt unitary production and scheduling
JIT principles without considering the external suppliers that
must deliver materials in a way to support unitary production.
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Check Your Progress
Fill in the blanks:
1. The body of JIT principles basically evolved from
manufacturers' shop floors dealing with common shop
floor ………………….. issues.
2. ……………….. deliver their supplies just-in-time for
their use in production.

Lean: A Toyota Approach


The Lean Manufacturing, sometimes referred to as Toyotaism or
Toyota Production System; means that materials flow ‘like water’
from the supplier through the production process onto the
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customer with little, if any, stock of raw materials or components


in warehouses, no buffer stocks of materials and part-finished
goods between stages of the manufacturing process, and no output
stock of finished goods. This ‘just-in-time’ (JIT) approach requires
that materials arrive from dedicated suppliers on the factory floor
at the right stage of production just when required, and when the
UNIT 1: Lean Basics

production process is completed, they are shipped directly to the 7


customers. Notes

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With no spare or safety stock in the system, there is no room for ___________________
error. Scheduling of activities and resource has to be exact, ___________________
communication with suppliers must be precise, suppliers have to
___________________
be reliable and able to perform to exacting timetables, materials
have to arrive on time and meet the specification, machines have ___________________

to be maintained so that there is no down time, operators cannot ___________________

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make mistakes, there is no allowance for scrap or rework and ___________________
finally the finished product has to be delivered on time to
___________________
customers. This is often implemented by circulating cards or
Kanban between a workstation and the downstream buffer. The ___________________
workstation must have a card before it can start an operation. It ___________________
can pick raw materials out of its upstream (or input) buffer,
___________________
perform the operation, attach the card to the finished part, and put
it into the downstream (or output) buffer. The card is circulated
back to the upstream to signal the next upstream workstation to
do next cycle. The number of cards circulating determines the total
buffer size. Kanban control ensures that parts are made only in
response to a demand.
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This ‘just-in-time’ approach generally precludes large batch
production; instead items are made in ‘batches’ of one. This means
that operators have to be flexible, the system has to be flexible and
‘Single Minute Exchange of Dies’ (SMED) becomes the norm. A
lean approach reduces the number of supervisors and quality
inspectors. The operators are trained to know the production
standards required and are authorized to take corrective action, in
short they become their own inspectors/supervisors. The principles
of TPM (Total Productive Maintenance) and Five Ss (Sort, Set in
place, Shine, Standardize and Sustain) are followed and as a result
the equipment becomes more reliable and the operator develops
‘ownership’ towards the equipment.
Another important aspect of the Toyota approach was to expand
the work done at each stage of production. For example, a team of
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workers will be responsible for a stage of production or ‘Work Cell’


on the moving assembly line, such as installing the transmission,
or installing the seats, etc. Each team is responsible for it is part of
the assembly and might be able to make minor changes to
procedures within the confines of a time limit (the time allowed on
the moving line for production to move from one stage to the next)
Lean Supply Chain Management

8 and within the limits of the specified standards (for example, the
Notes team can change the order of assembly at their workstation but

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___________________
would not have the authority to add extra nuts, etc.). Quality
standards are assured the application of Zero Quality Control or
___________________
Quality at Source before the actual production and Poka Yoke
___________________ (mistake proofing) during a production process.
___________________ A visitor to a lean manufacturer will be struck by the lack of
___________________ materials; there is no warehouse, no stocks of materials between

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workstations, and no stocks of finished goods. At first glance this
___________________
suggests that lean is an inventory system. However, lean is not
___________________
just an inventory system, lean also means the elimination of
___________________ ‘muda’. Muda, is a Japanese word, which means waste, with waste
___________________ being defined as any human activity that absorbs resource but
creates no value. Thus, the philosophy of lean is the elimination of
___________________
non-value adding activities. The rough rule is the elimination of
any activity that does not add value to the final product, and the
taking of action so that the non-value activity never again occurs.
Before anything can be eliminated, it first has to be identified. The
Toyota approach to identifying areas of waste is to classify waste
into seven ‘mudas’.
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The seven ‘mudas’ are:
z Excess production,
z Waiting,
z Movement or transportation,
z Unnecessary motion,
z Non-essential process,
z Inventory,
z Defects.
The approach is to identify waste, find the cause, eliminate the
cause, make improvements and standardize (until further
improvements are found).
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Check Your Progress


Fill in the blanks:
1. With no spare or safety stock in the system there is no
room for …………….
2. The philosophy of lean is the ……………… of non-value
adding activities.
UNIT 1: Lean Basics

Lean as a Supply Chain Strategy 9


Notes

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A lean supply chain design requires that supply chains minimize Activity
___________________
the cost of operations at all levels. Lean requires that the supply Interview a supply chain
officer and ask him what is his
chain uses the least amount of resources to efficiently complete its ___________________
understanding about the
concept of lean as a supply
job. The primary resources in a supply chain are inventory, ___________________
chain strategy.
warehouses, trucks, people, and working capital. A lean supply
___________________
chain will be designed to have minimal inventories in the system,
minimal amount of warehousing space required to store these ___________________

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inventories, and optimized shipments to reduce the cost of moving ___________________
inventory. A lean supply chain will also be designed to establish ___________________
long-term, stable supply contracts with the lowest negotiated cost,
___________________
but typically without any substantial ability to change ordered
quantities, delivery destinations, and required need dates after the ___________________
order has been placed. Lean design will most likely not engage ___________________
secondary suppliers, because a second tier of suppliers is expensive
to maintain. All of these factors will reduce the costs of the supply
chain operations, making it extremely cost-efficient, but will also
constrain the supply chain’s ability to adapt to any changes in
demand, supply, or other resources, due to the built-in rigidity of
the design.
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Therein, lies the rub: Low inventories make the supply chain
vulnerable to not being able to fulfil orders if the demand suddenly
spikes or if there are changes in demand that were not foreseen.
Inability to change orders with the suppliers also constrains the
supply chain’s ability to react to any changes in demand and may
saddle the supply chain with unwanted inventory. Having no
secondary suppliers also limits the ability of the supply chain to
reacting to spikes in demand and/or exposes it to supply failures
from the primary suppliers. The focus on being lean prevents this
supply chain from building redundancy by design, which reduces
supply chain’s ability to manage variability.
On the other hand, the only reason for supply chains to exist is to
manage variability. Therefore, a lean focus on supply chain design
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actually goes against the very basic nature of the supply chains.
However, if the lean focus is seen simply as the most efficient way
to execute business operations (which include a fair amount of
agility to respond to natural volatility in demand), then it can be
used to design effective supply chains.
In addition, most firms have a large assortment of material to be
managed: Raw materials, WIP, finished goods, and retail
Lean Supply Chain Management

10 assortments almost always consist of a mixed bag of products when


Notes it comes to their demand profile. While some products may have a

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stable demand profile, others will be more volatile to manage. This
___________________
means that the enterprise supply chain that must be designed to
___________________ cater to all these types of products must be lean (to best manage
___________________ the products with a stable demand) and agile (to manage others
with volatile demand) simultaneously. After all, you could not run
___________________
a business with a lean supply chain with the lowest cost, but that
___________________ cannot respond to any changes in demand or supply. Since all

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___________________ demand and supply has inherent variability, such a rigidly
designed supply chain will quickly build up unwanted and obsolete
___________________
inventories as it is incapable of reacting to changes in demand and
___________________
supply. Of course, too much emphasis on creating agility may be
___________________ expensive and may also not provide the best design.
___________________ Finally, the cost focus serves as a much better generic business
strategy as suggested by Michael Porter because it can be used
effectively to drive any corporate function, such as accounting,
human resources, merchandising, production planning,
engineering and so on. There is nothing specific about the cost
focus that would make it work any extra magic for supply chain
than what it can do for any other corporate function, and hence its
inability to drive supply chain strategy.
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Summarizing, supply chains must manage variability and an
exclusive focus on lean prevents supply chains to be designed
effectively for managing natural variability and hence from doing
their most important job.
As most firms have several products to manage and these products
have widely varying demand and lead-time patterns, the
enterprise supply chain must be designed to work for all these
products without undue focus on a single characteristic.
There is nothing special about the cost focus that helps driving
supply chain strategy any more than it can do for any other
corporate function. To that extent it remains an effective business
strategy, but not a supply chain strategy.
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Check Your Progress


Fill in the blanks:
1. Lean requires that the supply chain uses the least
amount of resources to …………………. complete its job.
2. Low inventories make the supply chain …………to not
being able to fulfil orders if the demand suddenly spikes.
UNIT 1: Lean Basics

Summary 11
Notes

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Lean can be strengthen to long-term programs where projects are
___________________
undertaken to permanently install lean for continuous process
improvement. The ultimate goal is to provide perfect value to the ___________________
customer through a perfect value creation process that has zero ___________________
waste. Companies are able to respond to changing customer
___________________
desires with high variety, high quality, low cost, and with very fast
throughput times. ___________________

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___________________
Lean applies in every business and every process. It is not a tactic
or a cost reduction program, but a way of thinking and acting for ___________________
an entire organization. All resources reach just in time for their ___________________
consumption. Lean design will most likely not engage secondary
___________________
suppliers, because a second tier of suppliers is expensive to
maintain. All of these factors will reduce the costs of the supply ___________________

chain operations, making it extremely cost-efficient, but will also


constrain the supply chain’s ability to adapt to any changes in
demand, supply, or other resources, due to the built-in rigidity of
the design.

Lesson End Activity


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Compare and contrast supply chain and lean supply chain.

Keywords
Lean: Lean is a production practice that considers the expenditure
of resources for any goal other than the creation of value for the
end customer to be wasteful, and thus a target for elimination.
Supply Chain: A supply chain is a system of organizations,
people, technology, activities, information and resources involved
in moving a product or service from supplier to customer.
Lean Supply: Lean has evolved from just-in-time manufacturing
to lean manufacturing and to a lean enterprise.
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Variability: The term variability, "the state or characteristic of


being variable", describes how spread out or closely clustered a set
of data is.
Strategy: Strategy is a high-level plan to achieve one or more
goals under conditions of uncertainty.
Lean Supply Chain Management

12 Questions for Discussion


Notes

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1. What are the issues that should guide the transformation of
___________________
the entire organization?
___________________
2. What is the origin of the concept of lean?
___________________
3. Explain the lean concept in detail.
___________________
4. Discuss the Toyota approach to lean concept.
___________________

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5. Why does a lean supply chain is designed?
___________________

___________________
Further Readings
___________________

___________________ Books
___________________ Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
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Web Readings
http://www.lean.org/whatslean/
http://www.supplychainmusings.com/2010/10/lean-as-supply-chain-
strategy.html
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UNIT 2: Characteristics of a Lean Supply Chain

Unit 2
13
Notes

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Characteristics of a Lean Supply
___________________

___________________

Chain ___________________

___________________

Objectives ___________________

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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Elimination of Waste
\ Smooth Operational Flow ___________________
\ High Level of Efficiency ___________________
\ Quality Assurance
___________________

Introduction
The characteristics and tenets of a lean supply chain are derived
from the principles of Toyota Production Systems (TPS) and the
methodology of Lean Sigma. Womack, Jones and Roos (1990)
proposed five Lean principles based on TPS, viz. value, value
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stream, flow, pull and perfection. However, the application of Lean
principles has moved with time and experience of organizations in
both manufacturing and service sectors.
Until recently, supply chains were understood primarily in terms
of planning the demand forecasts, upstream collaboration with
suppliers and planning and scheduling the resources. Emphasis
perhaps, is shifted to provide what the customers want at a
best-in-class cost. Cost reduction is often the key driver for lean,
but it is also about speed of delivery and quality of products and
services. The competition for gaining and retaining customers and
market share is between supply chains rather than other functions
of companies. A supply chain, therefore, has to be lean with four
inter-related key characteristics or objectives:
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1. Elimination of waste,
2. Smooth operation flow,
3. High level of efficiency, and
4. Quality assurance.
Lean Supply Chain Management

14 Elimination of Waste
Notes

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Activity The lean methodology as laid out by Womack, Jones and Roos
Visit___________________
any retail showroom of (1990) is sharply focused on the identification and elimination of
your choice and study their
___________________
inventory policy and prepare a ‘mudas’ or waste and their first two principles (i.e. value and value
report on the same.
___________________ stream) are centred around the elimination of waste. Their motto
has been, ‘banish waste and create wealth in your organization’. It
___________________
starts with value stream mapping to identify value and then
___________________ identify waste with process mapping of valued processes and then

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___________________ systematically eliminate them. This emphasis on waste
elimination has probably made lean synonymous to absence of
___________________
waste. Waste reduction is often a good place to start in the overall
___________________
effort to create a lean supply chain because it can often be done
___________________ with little or no capital investment.
___________________ One popular area of waste in processes is excess inventory. Many
organizations started to measure their ‘leanness’ only in terms of
inventory performance. Inventory reduction attempts to reduce
inventory through such practices as Enterprise Resource Planning
(ERP), JIT and modern approaches to supply chain management
have led to lower inventory levels, but there is still plenty of room
for improvement. In fact, most all manufacturers carry at least 25
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per cent more inventory than they have to.
This approach although is a good indicator of inventory policy of a
company, but it does not necessarily reflect the business
performance of the company. For example, the inventory policy of a
Fast-moving Consumer Goods (FMCGs) company is different from
that of a pharmaceutical company. Inventory is only one of the
seven ‘mudas’.
Cycle time or lead-time reduction is another target area of waste
reduction. Cycle time is the time required to complete a given
process. The cycle time required to process a customer order might
start with the customer phone call and end with the order being
shipped. The overall process is made up of many sub-processes
such as order entry, assembly, inspection, packaging and shipping.
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Cycle time reduction is identifying and implementing more


efficient ways of completing the operation. Reducing cycle time
requires eliminating or reducing non-value-added activity.
Examples of non-value-added activity in which cycle time can be
reduced or eliminated include repair due to defects, machine
set-up, inspection, waiting for approval, test and schedule delays.
UNIT 2: Characteristics of a Lean Supply Chain

15
There are a few formal and publicized methodologies for cycle time
Notes

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reduction including QRM (Quick Response Manufacturing; Suri,
1998) and SMED (Single Minute Exchange of Dies; Shingo, 1985). ___________________
QRM is underpinned by two key principles. Firstly, plan to operate ___________________
at 80 per cent or even 70 per cent capacity of critical resources.
___________________
Secondly, measure the reduction of lead times and make this the
main performance measure. These principles are supported by ___________________

Material Requirements Planning (MRP) plans for production- ___________________

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oriented cells and continuous training. The SMED method involves ___________________
the reduction of production changeover by extensive work study of
___________________
the changeover process and identifying the ‘in process’ and ‘out of
process’ activities and then systematically improving the planning, ___________________
tooling and operations of the changeover process. ___________________

Shingo believes in looking for simple solutions rather than relying ___________________
on technology. With due respect to the success of the SMED
method, it is fair to point out that the basic principles are
fundamentally the application of classical industrial engineering or
work-study.
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Source:http://fachmannhunter.com/doc/supply-chain/Lean_and_agile_supply.pdf

Figure 2.1: Set-up Time Reduction


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The reduction of cycle time has become an important feature of


lean thinking beyond manufacturing industries where approaches
other than QRM and SMED are applied. In service industries such
as call centres there has extensive application of value analysis
around process mapping charts. Even flow production technique
(Ballard, 2001) is applied in reducing cycle time in the construction
of repetitive residential homes. The technique comprises:
Lean Supply Chain Management

16 (1) overlap activities within their phase of the work, (2) reduce
Notes activity durations through cycle time studies, and (3) reduce work

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Activity
in process through the development of multi-skilled workers. Cycle
Visit___________________
any electronics
manufacturing concern and time reduction is also an important area of Lean Sigma projects.
___________________
enquire if Kanban system is
being implemented or not and
what___________________
other techniques they Check Your Progress
use to keep their inventory
flow___________________
smooth.
Fill in the blanks:

___________________ 1. ………….. time or …………….. reduction is another

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___________________
target area of waste reduction.

___________________ 2. ………………. reduction is often a good place to start in


the overall effort to create a lean supply chain.
___________________

___________________
Smooth Operational Flow
___________________
The well-publicised JIT approach is a key driver of Lean Supply
Chain and, as we have indicated earlier, it requires materials and
products flow ‘like water’ from the supplier through the production
process onto the customer. The capacity bottlenecks are
eliminated, the process times of workstations are balanced, and
there is little buffer inventories between operations. Smooth
operation flow requires the applications of appropriate approaches.
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Three of the most frequently applied approaches are:

Cellular Manufacturing
In cellular manufacturing concept, traditional batch production
area is transformed into flow line layouts so that ideally a single
piece flows through the line at any time. In practice an optimum
batch size is calculated starting with the most critical work centres
and the largest inventory carrying costs. Action is taken for
improvement at the work centres and methods that have greatest
impact on the throughput, customer satisfaction, operating cost
and inventory carrying charges. Good management consists of
avoiding a wide variety of products. Cellular manufacturing
concept is most appropriate when demand is predictable and
(c

products have low variety and high volume.


The Toyota Motor Company of Japan pioneered the Kanban
technique in the 1980s. As part of Lean Manufacturing concepts
Kanban was promoted as one of the primary tools of JIT concepts
by both Taiichi Ohno (1988) and Shingo (1988). Inspired by this
technique, American supermarkets in particular replenished
shelves as they were emptied and thus reduced the number of
UNIT 2: Characteristics of a Lean Supply Chain

storage spaces and inventory levels. With a varied degree of 17


success outside Japan, Kanban has been applied to maintain an Notes

S
orderly flow of goods, materials and information throughout the ___________________
entire operation.
___________________

Kanban Pull System ___________________

Kanban literally means ‘card’. It is usually a printed card in a ___________________


transparent plastic cover that contains specific information
___________________

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regarding part number and quantity. It is a means of pulling parts
___________________
and products through the manufacturing or logistics sequence as
needed. It is, therefore, sometimes referred to as the ‘pull system’. ___________________
The variants of the Kanban system utilize other markers such as ___________________
light, electronic signals, voice command or even hand signals.
___________________
Following the Japanese examples, Kanban is accepted as a way of
maximising continuous flow and efficiency by reducing both cost ___________________

and inventory.
The key components of a Kanban system are:
z Kanban cards,
z Standard containers or bins,
)U
z Workstations, usually a machine or a worktable, and
z Input and output areas.
The input and output areas exist side by side for each workstation
on the shop floor. The Kanban cards are attached to standard
containers. These cards are used to withdraw additional parts from
the preceding workstation to replace the ones that are used. When
a full container reaches the last downstream workstation, the card
is switched to an empty container. This empty container and the
card are then sent to the first workstation signalling that more
parts are needed for its operation.
A Kanban system may use either a single card or a two cards
(move and production) system. The dual card system works well in
a high up-time process for simpler products with well-trained
(c

operators. A single card system is more appropriate in a batch


process with a higher changeover time and has the advantage of
being simpler to operate. The single card system is also known as
‘Withdrawal Kanban’ and the dual card system is sometimes called
‘Production Kanban’. The system has been modified in many
applications and in some facilities although it is known as a
Kanban system, the card itself does not exist. In some cases, the
Lean Supply Chain Management

18 empty position on the input or output areas is sufficient to indicate


Notes that the next container is needed.

S
___________________
Theory of Constraints (TOC)
___________________
The Theory of Constraints is a management philosophy developed
___________________ by Goldratt (1992). It enables the managers of a system to achieve
___________________ more of the goal that system is designed to produce. The concept or
the objective is not new. However, in service operations where it is
___________________

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often difficult to quantify the capacity constraint TOC could be
___________________
very useful. For companies that employ skilled workers and for
___________________ many service organizations the constraint is often the time of one
___________________ or a few key employees. The key steps in this process are:

___________________ z Identify: The first step in applying TOC is to identify the


constraining or bottleneck factor.
___________________
z Exploit: Determine the throughput per unit of the
constraining factor.
z Subordinate: Prevent the resources needed from waiting in a
queue at a non-constrained resource.
z Elevate: If it still cannot produce enough products to produce
demand, find ways to increase capacity.
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z Go back to step 1.
Implementation TOC, although simple in principle, is often
difficult because it may require a complete change in the way a
company operates. For example, TOC requires a shift from
cost-based decision making to decision-making based on
continuous improvement. The smooth operation flow of materials
and products are further enhanced by Lean Sigma methodology
where the variances within processes and between workstations
are minimized by the statistical techniques of Statistical Process
Control.

Check Your Progress


Fill in the blanks:
(c

1. The ………………… card system is also known as


‘Withdrawal Kanban’.
2. An optimum batch size is calculated starting with the
most critical work centres and the largest ………………..
carrying costs.
UNIT 2: Characteristics of a Lean Supply Chain

High Level of Efficiency 19


Notes

S
Activity
The more popular concepts of lean operations tend to be the
Visit___________________
any organization, which
concepts of muda, flow and pull system. A preliminary analysis of you think has lean supply
all these methods, as we have described earlier, however, ___________________
chain management, and see
what tools they are using for
highlights the fact that all assume sufficient machine availability of ___________________
ensuring a high level of
exists as a prerequisite. In our experience for many companies efficiency in a lean supply
___________________
chain.
attempting a lean transformation this assumption is not true.
Machine availability depends on maximizing the machine up time ___________________

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by eliminating the root causes of down time. The ratio of up time ___________________
and planned operation time is the efficiency of the operation. ___________________
Therefore, in order to make lean concepts work it is vital that the
___________________
pre-condition of running the operations at a high level of efficiency
should be met. The old approach of measuring labour efficiency ___________________
(e.g. the ratio of standard hours and hours worked) has now shifted ___________________
to the efficiency of the control or bottleneck workstation.
There are many methodologies and tools of ensuring a high level of
efficiency in a lean supply chain. We are going to describe one
such methodology (viz. TPM) and two such tools [e.g., Overall
Equipment Effectiveness (OEE) and Five Ss].
Total Preventative Maintenance (TPM) is a proven Japanese
)U
approach to maximizing Overall Equipment Effectiveness (OEE)
and utilization, and relies on attention to detail in all aspects of
manufacturing. TPM includes the operators looking after their own
maintenance and thus encourages the empowerment. The use of
the word ‘maintenance’ in the title is misleading. TPM includes
more than maintenance, it addresses all aspects of manufacturing.
The two primary goals of TPM are to develop optimum conditions
for the factory through a self-help people/machine system culture
and to improve the overall quality of the workplace. It involves
every employee in the factory. Implementation requires several
years, and success relies on sustained management commitment.
TPM is promoted throughout the world by the Japan Institute of
Plant Maintenance (JIPM).
(c

TPM is the manufacturing arm of TQM and is based on five key


principles:
1. The improvement of manufacturing efficiency by the
elimination of six big losses.
2. The establishment of a system of autonomous maintenance by
operators working in small groups.
Lean Supply Chain Management

20
3. An effective planned maintenance system by expert engineers.
Notes

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4. A training system for increasing the skill and knowledge level
___________________
of all permanent employees.
___________________
5. A system of maintenance prevention where engineers work
___________________ closely with suppliers to specify and design equipment, which
___________________ requires less maintenance.
___________________ TPM requires the manufacturing team to improve asset utilization

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___________________ and manufacturing costs by the systematic study and the
elimination of the major obstacles to efficiency. In TPM these are
___________________
called the ‘six big losses’ and are attributed to
___________________
z Breakdown,
___________________
z Set-up and adjustment,
___________________
z Minor stoppages,
z Reduced speed,
z Quality defects, and
z Start-up and shutdown.
The process of autonomous maintenance is to encourage operators
)U
to care for their equipment by performing daily checks, cleaning,
lubrication, adjustments, size changes, simple repairs and the
early detection of abnormalities. It is a step-by-step approach to
bring the equipment at least to its original condition. Some
managers may hold the belief that in TPM ‘you do not need
experienced craftsmen or engineers and all maintenance is done by
operators’. This is not true.
The implementation of a maintenance policy with appropriate
infrastructure is fundamental to planned maintenance. Planned
maintenance is the foundation stone of TPM. However, if the skill
and education levels of operators are high then a good proportion
of planned maintenance activities should be executed by operators
after proper training. Cleaning, lubrication and minor adjustments
together with an ability to recognize when a machine is not
(c

functioning correctly should be the minimum, which is required of


operators.
For TPM to succeed a structural training programme must be
undertaken in parallel with the stages of TPM implementation. In
addition, ‘one point lessons’ can be used to fill in a specific
knowledge gap. This uses a chart, which is displayed at the
UNIT 2: Characteristics of a Lean Supply Chain

workplace and describes a single piece of equipment and its setting 21


or repair method. Notes

S
Whilst great progress can be made in reducing breakdowns with ___________________
autonomous maintenance and planned maintenance, ‘zero ___________________
breakdowns’ can only be achieved by the specification of parts and
___________________
equipment which are designed to give full functionality and not to
fail. All engineers and designers of the user company should work ___________________

concurrently with the suppliers of equipment to achieve a system ___________________

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of maintenance prevention. ___________________
Although there is a special emphasis of input by different ___________________
employees to different aspects of TPM (e.g. ‘six big losses’ for
___________________
middle management, ‘autonomous maintenance’ for operators,
‘planned maintenance’ for middle management, ‘maintenance ___________________

prevention’ for senior management), TPM involves all employees ___________________


and the total involvement is ensured by establishing TPM work
groups or committees. Figure 2.2 illustrates an example of a TPM
organization.
)U

Source:http://fachmannhunter.com/doc/supply-chain/Lean_and_agile_supply.pdf

Figure 2.2: TPM Organization

To summarize, TPM is a factory-wide continuous improvement


programme with particular emphasis on changing the culture of
the shop floor through improved attitudes and skills. TPM progress
(c

is measured by the stages of autonomous maintenance completed,


and visible progress is also seen in the higher reliability of
equipment, reduction of waste and improvements in safety
statistics.
Lean Supply Chain Management

22
Check Your Progress
Notes

S
Activity Fill in the blanks:
Fix ___________________
an appointment with an
executive from quality 1. ……………….. maintenance is the foundation stone of
___________________
department of a shoe TPM.
manufacturing concern and
ask ___________________
him what measure they
2. TPM requires the manufacturing team to improve
use for quality assurance.
___________________ …………….. utilization.
___________________

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___________________ Quality Assurance
___________________ Womack Jones and Roos (1990) propose perfection as the fifth
___________________ Lean principle and according to this a lean manufacturer sets
his/her targets for perfection in an incremental (Kaizen) path. The
___________________
idea of TQM is to systematically and continuously remove the root
___________________
causes of poor quality from the production processes so that the
organization as a whole and its products are moving towards
perfection. This relentless pursuit of the perfect is key attitude of
an organization that is ‘going for lean’.
The incremental path to TQM progressively moves from earlier
stages of quality control and quality assurance. Quality assurance
focuses on the prevention of failures or defects in a process by
)U
analysing the root causes and sustaining the improved process by
documenting the standard operating procedure and continuous
training. TQM is quality assurance of all processes across the
organization involving everyone from the top manager to a trainee.
Therefore, the central driver towards perfection is quality
assurance. This drive for quality assurance has now been extended
beyond TQM to Six Sigma with additional rigour in training
deployment (e.g. Black Belts and Green Belts), the methodology of
DMAIC (e.g. Define, Measure, Analyse, Improve and Control), and
measurement (both variances and savings). The principles of Six
Sigma are embedded in the path towards perfection in a lean
supply chain and Six Sigma has now moved to Lean Sigma and Fit
Sigma. Basu and Wright (2003) explain that the predictable Six
Sigma precisions combined with the speed and agility of Lean
(c

produces definitive solutions for better, faster and cheaper


business processes. Through the systematic identification and
eradication of non-value added activities, optimum value flow is
achieved, cycle times are reduced and defects eliminated. The
dramatic bottom line results and extensive training deployment of
Six Sigma and Lean Sigma must be sustained with additional
UNIT 2: Characteristics of a Lean Supply Chain

features for securing the longer-term competitive advantage of a 23


company. Notes

S
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The idea of TQM is to systematically and continuously
___________________
remove the root causes of poor quality from the ………..
processes. ___________________

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2. The incremental path to TQM progressively moves from ___________________
earlier stages of quality ……………… and quality ___________________
……………………
___________________

___________________
Summary
___________________
Waste reduction is often a good place to start in the overall effort
to create a lean supply chain because it can often be done with
little or no capital investment. Inventory reduction attempts to
reduce inventory through such practices as enterprise resource
planning (ERP), JIT and modern approaches to supply chain
management have led to lower inventory levels, but there is still
)U
plenty of room for improvement. In practice an optimum batch
size is calculated starting with the most critical work centres and
the largest inventory carrying costs. The single card system is also
known as ‘Withdrawal Kanban’ and the dual card system is
sometimes called ‘Production Kanban’.
The implementation of a maintenance policy with appropriate
infrastructure is fundamental to planned maintenance. Planned
maintenance is the foundation stone of TPM.

Lesson End Activity


Conduct a survey in an industrial area and find out the wastage
reduction measures taken by manufacturing concerns and prepare
a short report.
(c

Keywords
Kanban: Kanban is a scheduling system for lean and just-in-time
(JIT) production.
Lean Supply Chain Management

24
Quality Assurance: Quality assurance refers to the systematic
Notes
activities implemented in a quality system so that quality

S
___________________ requirements for a product or service will be fulfilled.
___________________ Inventory: The raw materials, work-in-process goods and
___________________ completely finished goods that are considered to be the portion of a
business's assets that are ready or will be ready for sale.
___________________

___________________
Just-in-Time (JIT): Just-in-time is a production strategy that

PE
strives to improve a business return-on-investment by reducing in-
___________________
process inventory and associated carrying costs.
___________________
Enterprise Resource Planning (ERP): Enterprise resource
___________________ planning systems integrate internal and external management of
___________________ information across an entire organization — embracing
finance/accounting, manufacturing, sales and service, customer
___________________
relationship management, etc.

Questions for Discussion


1. What are the areas of waste in a supply chain?
2. What is the concept of Single Minute Exchange of Dies?
Explain with diagram.
)U
3. What do you mean by cellular manufacturing?
4. Briefly describe Kanban pull system.
5. What are the key steps in the success of theory of constraints?
6. Discuss high level of efficiency as a characteristic of lean
supply chain.

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
(c

Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain


Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
UNIT 2: Characteristics of a Lean Supply Chain

Web Readings 25
Notes

S
http://fachmannhunter.com/doc/supply-chain/Lean_and_agile_
supply.pdf ___________________

http://en.wikipedia.org/wiki/Kanban ___________________

___________________

___________________

___________________

PE
___________________

___________________

___________________

___________________

___________________
)U
(c
(c
)U
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S
UNIT 3: Lean Implementation in the Supply Chain

Unit 3
27
Notes

S
Lean Implementation in the
___________________

___________________

Supply Chain ___________________

___________________

Objectives ___________________

PE
After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Lean Principles
\ Common Mistakes When Implementing Lean Principles ___________________
\ Streamlining Processes ___________________

___________________
Introduction
Applying lean principles is a business philosophy and management
strategy that requires commitment from all levels of business. The
landscape of distribution centres and manufacturing environments
are changing and companies are looking for opportunities to
optimize people, processes and technology. Today’s business
)U
climate calls for companies to deploy lean principles to all aspects
of their operations. This frees up employees to focus on more
value-added work and to drive similar improvements throughout
the entire value stream.
So why do some businesses thrive in a Lean culture, while others
struggle with Lean implementation?
Applying Lean principles is not a short-term tactic or a
cost-reduction program, but instead a business philosophy and a
management strategy that develops into a work culture that
pursues the elimination of wastes in all phases of the business
processes. It takes commitment from all levels of the organization
to develop a true lean culture.
(c

Lean Principles
Lean principles at Toyota evolved out of their Toyota Production
System (TPS). There are many different principles, but we will
group them into four main groups:
z Seek the elimination of waste,
Lean Supply Chain Management

28
z Seek improved quality,
Notes

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Activity z Seek increased product flow, and
Find___________________
out the types of waste
found in a garment z Seek reduced cost.
___________________
manufacturing company and
prepare a slideshow on the Let us explain each of the above in more detail.
___________________
same.
___________________ Seek the Elimination of Waste
___________________ By removing wasted resources from any manufacturing or service

PE
___________________ system, the system's productivity can be enhanced. On increasing
productivity while reducing the resource inputs into the system,
___________________
the reduced costs, which are passed along to the customer in terms
___________________ of reduced prices, results in an increase in market share that will
___________________ improve profitability in the long-term. This has been a driving
___________________
strategy of all country's manufacturers that have embraced lean
principles.
Toyota classifies waste into following seven major categories:
1. Waste from Inventory: Idle stock (i.e. buffer stock or any
inventory that is not being used), which results in extra
storage and handling labour as well as equipment needed to
maintain it.
)U
2. Waste from Motion: Any unneeded movement of resources
caused by factors such as misplaced or lost tools or an
inefficient workstation layout.
3. Waste from Overproduction: Making additional inventory
for back-up purposes that may never be consumed.
4. Waste of Processing: Any scrap or wasted labour caused by
unnecessary processing or procedures, rework, or repairs from
damage incurred during the production process.
5. Waste from Production Defects: Any product returns
because of poor quality or engineering.
6. Waste of Transportation: Any time wasted by moving
resources around a poorly designed plant floor layout.
(c

7. Waste of Waiting Time: Any time wasted by employees


waiting for parts along an assembly line or from a supplier.
Of these seven, Wantuck views the greatest waste of all is
overproduction. This is because, it leads to the various other types
UNIT 3: Lean Implementation in the Supply Chain

of waste mentioned above. If we produce a large number of 29


products: Notes

S
z We waste motion by moving them to inventory. We waste ___________________
processing of a product that may never be consumed. ___________________

z We waste transporting it to distribution centres where it may ___________________


never be distributed to a final customer.
___________________
z We waste the costs of storing an inventory item, paying taxes ___________________

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on it, insurance, heating and security.
___________________
z We also incur unnecessary costs, like the cost of capital in the
___________________
labour and materials in the product. All of that waste is
incurred when a unit of product is overproduced. ___________________

___________________
Seek Improved Quality
___________________
Under this lean principle, the goal is to remove sources of defects,
errors and contributors to variation in the production processes.
Consider a situation where defective component parts are
delivered to a manufacturing facility. This poor quality disrupts
production schedules and reduces yield (e.g., extra production runs
because of shortages due to defective items), slows the speed of
)U
product flow in the system (e.g., defective components do not
always fit in modules that they were engineered to fit), adds to
overall processing time (e.g., time wasted on scrap work due to
poor quality), and wastes space (e.g., increased idle stock and
buffer inventory of parts given that greater scrap will be required
to make up for poor quality). Alternatively, if the quality of
component parts are ensured to be perfect, then lesser will be
needed (e.g., no need for buffer stock), product flow will increase
(e.g., no wasted labour time dealing with defective components),
and production space can be reduced (e.g., no need for buffer
inventory areas).

How do we Seek Improved Quality?


Following are some of the ways to improve quality:
(c

z Design processes to avoid mistakes caused by human or


mechanical error.
z Try to focus on identifying causes of variation in production
processes and try to eliminate them.
z Work with suppliers to ensure their quality.
Lean Supply Chain Management

30 Seek Increased Product Flow


Notes Lean operations need to be reactive to market changes. They need

S
___________________ to be responsive and able to quickly change processes and products
___________________
as changes appear from operations and market demand.
Considering the JIT ideas of having the supplier deliver items just
___________________
in time for their use in production, manufacturing producing the
___________________ product just in time for shipping to the customer, and order pulling
___________________ the product through the system just-in-time for its use are

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supported by the notion of increasing the product flow in an
___________________
operation.
___________________

___________________ How do we Achieve Increased Product Flow?


___________________ There are number of methods. One way to meet this goal is to
design a production system that will maximize the flow of the
___________________
product through operations quickly and efficiently. This might
require information technology that would harmonize not only
internal production operations, but also all external supply chain
partners, the supplier's supplier and customer's customers.
Everyone pulls together to keep the various WIP and finished
inventory in a constant movement toward the final consumer. This
system might also require the JIT approach to scheduling
)U
production and movement through operations in order to minimize
wasted time.

Seek Reduced Cost


As we reduce waste of labour time, equipment, physical space or
any resource, there is a corresponding reduction in the cost of the
process. With lean, movement of the product through a system is
increased. This by itself reduces the time, so materials and
components remain as idle stock. Imagine various costs that are
reduced by reducing the time whereby materials and components
arrive at a plant until the finished product is available to the
customer. The costs of capital, insurance, inspection, security,
taxes, maintenance, spoilage, material handling, damages,
auditing, accounting, and so on are all reduced proportionately by
(c

increasing the speed of flow in a lean facility. Minimizing waste,


improving quality, and increasing product flow all add up to reduce
the cost of production. This is true to great extent for all
manufacturing and service organizations.
UNIT 3: Lean Implementation in the Supply Chain

31
Notes

S
___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________

Figure 3.1: Lean Productivity Cycling Process


)U
Reducing costs is a key component to business success. By
identifying production problems and solving them (few of them
being related to quality), we may alternatively increase
productivity and thereby improve quality. This results in reduced
costs. If those reduced costs are passed on to the customer (rather
than paying them out in short-term dividends to stockholders) it
can lead to increased sales and market share. This will cause an
increase in product demand, which will place pressure on
production capacity, creating new production problems, requiring
an additional cycling of lean principles for resolution.
As the cycling repeats itself, it results in market dominance. To
implement the lean principles of eliminating waste, improving
quality, increasing product flow, and reducing cost requires
dedication and discipline on the part of everyone in an
(c

organization. As a way of integrating lean, a variety of lean


approaches and methodologies have been developed. They can be
applied in part or totally to make an organization a lean
enterprise. Firms like Toyota developed a generalized decision
making framework, called Plan-Do-Check-Act (PDCA) cycle, to aid
in the implementation of lean principles.
Lean Supply Chain Management

32
Notes Check Your Progress

S
Activity
Fill in the blanks:
Visit___________________
an organization, which
implemented lean principles to 1. Lean operations need to be …………. to market changes.
its ___________________
supply chain process
recently and identify what
___________________
mistakes it has done during
2. By removing wasted resources from any manufacturing
the process. or service system, the system's ……………….. can be
___________________
enhanced.
___________________

PE
___________________
Common Mistakes when Implementing Lean
___________________
Principles
___________________
Pull processing, perfect first-time quality, waste minimization,
___________________ continuous improvement, flexibility, building and maintaining
___________________ long-term relationships with suppliers, automation, load levelling,
production flow and visual control are all components of Lean.
Although these concepts are logical and somewhat intuitive in
nature, a comprehensive understanding of Lean is necessary to
avoid common mistakes made during Lean implementations. Some
of the common pitfalls are:
z Trying to implement Lean with a weak or incomplete strategy
)U
or with insufficient resources to gain significant traction.
Training, target setting, and communication tools all need to
be carefully planned for proper implementation of lean. Lean
embraces change and resources are necessary to drive the
process improvements. These improvements generate
incentive to implement other ideas, which fuels the continuous
improvement engine.
z Implementing Lean concepts beyond the Lean maturity level
of the organization. This is a common mistake made by Lean
implementers that have good theoretical knowledge, but lack
practical experience. Jumping too quickly to an across-the-
board JIT operation before completing a comprehensive
assessment of the supply chain is a common error of this type.
(c

z Having a deep understanding of your business. Lean doesn’t


offer cookie cutter solutions. The concepts need to be
customized to fit your business. What works perfectly well in
China, may fail miserably in Japan, how an automobile parts
distribution warehouse implements Lean to control inventory,
is going to be different from how a beverage warehouse
manages inventory. Each Lean solution must match with the
UNIT 3: Lean Implementation in the Supply Chain

company size, industry, ethnic cultures, product price 33


structure, location, environment and a number of other related Notes

S
Activity
variables. ___________________
Interview a Supply Chain
Executive and ask him about
Check Your Progress how___________________
lean concept can be
applied to a warehouse and
Fill in the blanks: ___________________
prepare a short report on it.

___________________
1. Lean embraces change and resources are necessary to
drive the process …………………… ___________________

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2. Lean doesn’t offer cookie cutter …………………. ___________________

___________________
Streamlining Processes ___________________

Lean supply chain management is not exclusively for those ___________________


companies who manufacture products, but by businesses who want ___________________
to streamline their processes by eliminating waste and non-value
added activities. Companies have a number of areas in their
supply chain where waste can be identified as time, costs or
inventory. To create a leaner supply chain companies must
examine each area of the supply chain.

Procurement
)U
Many businesses have complex purchasing operations. Large
companies often have corporate purchasing groups as well as local
purchasing. This can lead to vendors being given multiple
contracts leading to variations in prices depending on location.
Companies that practice lean supply chain management reduce
their procurement function so that each vendor has one point of
contact, one contract and offers one price for all locations.
Businesses are looking to new technologies to assist them in
improving procurement processes. These include internet based
purchasing that allows requisitioners to purchase items from
vendor’s catalogues containing company-wide contract prices.
Changes in payment options to vendors can also streamline
processes. Companies that use a two-way match, which is payment
(c

on receipt rather than payment on invoice, will reduce resources in


their purchasing department as well as improve supplier
relationships.

Manufacturing
Lean supply chain management gained popularity in the
manufacturing area, as this is where significant improvement can
Lean Supply Chain Management

34 be achieved. Manufacturing processes can be improved to reduce


Notes waste and resources while maintaining operational performance.

S
___________________
Companies who have adopted lean supply chain practices have
examined each of their routings, bill of materials and equipment to
___________________
identify where improvements can be achieved.
___________________

___________________
Warehousing
Warehouse processes should be examined to find areas of
___________________

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eliminating waste of resources and non-value added steps. One
___________________
area the companies should always be working on is the reduction
___________________ of unnecessary inventory. The accumulation of inventory requires
___________________ resources to store and maintain it. By reducing unnecessary
inventory, a company can minimize warehousing space and
___________________
handling, in turn reducing overall costs.
___________________
Transportation
Businesses who want to implement lean processes often look to
their transportation procedures to see where they can be
streamlined. In many instances companies find that their efforts to
improve customer satisfaction leads to poor shipping decisions.
Orders are shipped without combining additional orders to
)U
minimize costs or expensive shipping options are selected because
of a customer request. Businesses often find that they are using a
number of shippers unnecessarily when they could be reducing
their shipping options and reduce overall costs.
Lean supply chain management requires businesses to examine
every process in their supply chain and identify areas that are
using unnecessary resources, which can be measured in dollars,
time or raw materials. This will improve the company’s
competitiveness as well as improve the company’s overall
profitability.

Check Your Progress


Fill in the blanks:
(c

1. Warehouse processes should be examined to find areas


of eliminating …………… of resources and non-value
added steps.
2. …………………….. processes can be improved to reduce
waste and resources while maintaining operational
performance.
UNIT 3: Lean Implementation in the Supply Chain

Summary 35
Notes

S
Lean operations need to be reactive to market changes. They need
___________________
to be responsive and able to quickly change processes and products
as changes appear from operations and market demand. With lean, ___________________
movement of the product through a system is increased. That by ___________________
itself reduces the time materials and components remain as idle
___________________
stock. Reducing costs is a key component to business success.
___________________

PE
Many businesses have complex purchasing operations. Large
___________________
companies often have corporate purchasing groups as well as local
purchasing. Lean supply chain management requires businesses to ___________________
examine every process in their supply chain and identify areas ___________________
that are using unnecessary resources, which can be measured in
___________________
dollars, time or raw materials.
___________________

Lesson End Activity


Hold a group discussion in a group of 6 students on lean principles.

Keywords
)U
Motion: Change in the relative position of the parts of anything;
action of a machine with respect to the relative movement of its
parts.
Overproduction: It refers to production in excess of need or
demand.
Defect: The lack of something necessary or desirable for
completion or perfection.
Quality: Quality in business, engineering and manufacturing has
a pragmatic interpretation as the non-inferiority or superiority of
something.
Flow: The action or fact of moving along in a steady, continuous
stream.
(c

Questions for Discussion


1. Discuss the classifications of waste as per Toyota.
2. Explain cost reduction as a key to business success.
3. What are the common mistakes that suppliers do while
implementing lean principles?
Lean Supply Chain Management

36
4. Which areas of supply chain should be considered to create a
Notes
leaner supply chain?

S
___________________
5. In which area of supply chain, maximum improvement can be
___________________ achieved? Discuss.
___________________

___________________ Further Readings


___________________
Books

PE
___________________
Wincel, J. P., (2004), Lean Supply Chain Management: A
___________________ Handbook for Strategic Procurement, Productivity Press.
___________________
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
___________________ Management Essentials: A Framework for Materials Managers,
___________________
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
http://www.scdigest.com/assets/Experts/Seegrid_11-05-05.php
http://yourleanforum.blogspot.in/2006/10/5-lean-principles.html
)U
http://logistics.about.com/od/supplychainintroduction/a/Lean_SCM.
htm
(c
UNIT 4: Lean Thinking for the Supply Chain

Unit 4
37
Notes

S
Activity

Lean Thinking for the Supply


Take___________________
interviews from
customer as well as supplier
and___________________
find out the meaning of
Chain value from both sides.
___________________

___________________

Objectives ___________________

PE
After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Concepts of Value and Waste
\ Components of the Lean Supply Chain ___________________
\ Benefits of Lean Systems ___________________
\ Path Forward to a Lean Supply Chain
___________________

Introduction
Although lean thinking is typically applied to manufacturing lean
techniques and focus are applicable anywhere there are processes
to improve, including the entire supply chain. A lean supply chain
is one that produces just what and how much is needed, when it is
)U
needed, and where it is needed.
The underlying theme in lean thinking is to produce more or do
more with fewer resources while giving the end customer exactly
what he or she wants. This means focusing on each product and its
value stream. To do this, organizations must be ready to ask and
understand which activities truly create value and which ones are
wasteful. The most important thing to remember is that lean is not
simply about eliminating waste—it is about eliminating waste and
enhancing value.

Concepts of Value and Waste


Value, in the context of lean, is defined as something that the
customer is willing to pay for. Value-adding activities transform
(c

materials and information into something a customer wants.


Non-value-adding activities consume resources and do not directly
contribute to the end result desired by the customer. Waste,
therefore, is defined as anything that does not add value from the
customer’s perspective. Examples of process wastes are defective
Lean Supply Chain Management

38 products, overproduction, inventories, excess motion, processing


Notes steps, transportation, and waiting.

S
___________________ Consider the non-manufacturing example of a flight to the
___________________ Bahamas. The value-adding part of that process is the actual flight
itself. The non-value-added parts of that process are driving to the
___________________
airport, parking at the airport, walking to the terminal and then to
___________________ check-in, waiting in line at check-in, walking to the security check,
___________________ and so on. Many times the non-value-added time far exceeds the

PE
value-added time in this type of process. Where should our
___________________
improvement efforts be focused — on the non-value-added steps or
___________________
on making the plane fly faster?
___________________
Understanding the difference between value and waste and
___________________ value-added and non-value-added processes is critical to
___________________ understanding lean. Sometimes it is not easy to discern the
difference when looking at an entire supply chain. The best way is
to look at the components of the supply chain and apply lean
thinking to each one and determine how to link the processes to
reduce waste.

Creating Value
)U
Lean principles focus on creating value by:
z Specifying value from the perspective of the end customer
z Determining a value system by:
™ Identifying all of the steps required to create value
™ Mapping the value stream
™ Challenging every step by asking why five times
z Lining up value, creating steps so they occur in rapid sequence
z Creating flow with capable, available, and adequate processes
z Pulling materials, parts, products, and information from
customers
z Continuously improving to reduce and eliminate waste
(c

The value stream consists of the value-adding activities required to


design, order, and provide a product from concept to launch, order
to delivery, and raw materials to customers. To develop a value
stream map for a product, you select a product family and collect
process information. Then, you map the steps in sequence and by
information flows; this is called a current-state map. The current-
UNIT 4: Lean Thinking for the Supply Chain

state map provides a clear picture of the processing steps and 39


information flow for the process as it exists today. Next, you search Notes

S
the map for improvement opportunities using the concepts of lean, ___________________
and create a future-state map. This will portray a vision of the
___________________
future for the process or supply chain you are creating. This
future-state map helps you to visualize the roadmap to get from ___________________
the current state to the future state. ___________________
Mapping the value stream for the supply chain is a similar process. ___________________

PE
However, the current-state map includes product flow,
___________________
transportation links, defects and delivery time and steps, and
information flow. After creating the current-state map for the ___________________

supply chain’s value stream, supply chain partners should ___________________


scrutinize it for bottlenecks, waste, and process improvements.
___________________
They should use what they discover to create future-state maps for
the supply chain. An ideal-state map can also be created that ___________________

provides a vision of how the supply chain could look if perfect


integration of all components were to occur. This is in effect an
entitlement map for the supply chain process.
Here’s how it works: A current-state map might indicate that
flow within facilities is well defined, but that transportation
methods between facilities is creating excess inventory and is not
)U
cost effective. The current state map may also show a weakness in
the information flow that is not adding value to the process. The
future-state map should create flow between facilities, levelling
pull within each facility, and eliminating waste. The method for
levelling pull might be to install frequent transport runs or milk
runs. Information flow could be improved by installing a
Web-based process to allow real-time flow of information between
all supply chain partners as demand changes. The ideal-state map
of this supply chain might have a greatly compressed value system
with relocated operations and short transportation deliveries.

“Waste” Reduction
The “Waste” reduction process begins with the question “What can
we do to improve?” Some answers may include:
(c

z Stop defective products at their source,


z Flow processes together or change the physical relationship of
components of the process,
z Eliminate excess material handling or costly handling steps,
z Eliminate or reduce pointless process steps, and
Lean Supply Chain Management

40
z Reduce the time spent waiting for parts, orders, other people,
Notes
or information.

S
Activity
___________________
Browse through internet and
study the components of
In manufacturing environments, these waste reductions create the
___________________
supply chain of an benefits of reduced manufacturing cycle time, reduced labour
organization of your choice.
___________________ expenditures, improved product quality, space savings, reduced
inventory, and quicker response to the customer. When waste is
___________________
reduced or eliminated across the supply chain, overall cycle time is
___________________
improved, labour and staff costs are reduced, product quality and

PE
___________________ delivery are improved, inventories are reduced, and customer
___________________ lead-times are shortened. The net effect is the entire supply chain
is more efficient and responsive to customer needs.
___________________

___________________ Check Your Progress


___________________ Fill in the blanks:
1. When ……………… is reduced or eliminated across the
supply chain, overall cycle time is improved.
2. Understanding the …………….. between value and
waste and value-added and non-value-added processes
is critical to understanding lean.
)U
Components of the Lean Supply Chain
Following are the various components of Lean Supply Chain:

Lean Suppliers
Lean suppliers are able to respond to changes. Their prices are
generally lower due to the efficiencies of lean processes, and their
quality has improved to the point that incoming inspection at the
next link is not needed. Lean suppliers deliver on time and their
culture is one of continuous improvement.
To develop lean suppliers, organizations should include suppliers
in their value stream. They should encourage suppliers to make
the lean transformation and involve them in lean activities. This
(c

will help them fix problems and share savings. In turn, they can
help their suppliers and set continually declining price targets and
increasing quality goals.

Lean Procurement
Some lean procurement processes are e-procurement and
automated procurement. E-procurement conducts transactions,
UNIT 4: Lean Thinking for the Supply Chain

strategic sourcing, bidding, and reverse auctions using Web-based 41


applications. Automated procurement uses software that removes Notes

S
the human element from multiple procurement functions and ___________________
integrates with financials.
___________________
The key to lean procurement is visibility. Suppliers must be able to
___________________
“see” into their customers’ operations and customers must be able
to “see” into their suppliers’ operations. Organizations should map ___________________

the current value stream, and together create a future value ___________________

PE
stream in the procurement process. They should create a flow of ___________________
information while establishing a pull of information and products.
___________________

Lean Manufacturing ___________________

Lean manufacturing systems produce what the customer wants, in ___________________


the quantity the customer wants, when the customer wants it, and
___________________
with minimum resources. Lean efforts typically start in
manufacturing because they free up resources for continuous
improvement in other areas, and create a pull on the rest of the
organization. Applying lean concepts to manufacturing typically
presents the greatest opportunity for cost reduction and quality
improvement; however, many organizations have received huge
benefits from lean concepts in other functions.
)U
Lean Warehousing
Lean warehousing means eliminating non-value added steps and
waste in product storage processes. Typical warehousing functions
are:
z Receiving,
z Put-away/storing,
z Replenishment,
z Picking,
z Packing, and
z Shipping.
(c

Warehousing waste can be found throughout the storage process


including:
z Defective products which create returns;
z Overproduction or over shipment of products;
Lean Supply Chain Management

42
z Excess inventories which require additional space and reduce
Notes
warehousing efficiency;

S
___________________
z Excess motion and handling;
___________________
z Inefficiencies and unnecessary processing steps;
___________________
z Transportation steps and distances;
___________________
z Waiting for parts, materials and information; and
___________________

PE
z Information processes.
___________________
Each step in the warehousing process should be examined
___________________
critically to see where unnecessary, repetitive, and non-value-
___________________
added activities might be so that they may be eliminated.
___________________
Lean Transportation
___________________
Lean concepts in transportation include:
z Core carrier programs,
z Improved transportation administrative processes and
automated functions,
z Optimized mode selection and pooling orders,
)U
z Combined multi-stop truckloads,
z Cross-docking,
z Right sizing equipment,
z Import/export transportation processes, and
z Inbound transportation and backhauls.
The keys to accomplishing the concepts above include mapping the
value stream, creating flow, reducing waste in processes,
eliminating non-value-added activities and using pull processes.

Lean Customers
Lean customers understand their business needs and therefore can
specify meaningful requirements. They value speed and flexibility
(c

and expect high levels of delivery performance and quality. Lean


customers are interested in establishing effective partnerships—
they are always seeking methods of continuous improvement in the
total supply chain to reduce costs. Lean customers expect value
from the products they purchase and provide value to the
consumers who they interact with.
UNIT 4: Lean Thinking for the Supply Chain

43
Check Your Progress Notes

S
Activity
True or False: ___________________
Prepare a collage of various
benefits of lean systems
1. Lean suppliers deliver on time and their culture is one ___________________
explained above.
of continuous improvement.
___________________
2. Lean customers do not understand their business needs ___________________
and therefore cannot specify meaningful requirements.
___________________

PE
Benefits of Lean Systems ___________________

___________________
There are many benefits of lean systems, which are explained as
___________________
below:
___________________
Speed and Responsiveness to Customers
___________________
Lean systems allow a supply chain to not only to be more efficient,
but also faster. As the culture of lean takes over the entire supply
chain, all links increase their velocity. A culture of rapid response
and faster decisions becomes the expectation and the norm. This
does not mean that decisions are made without careful thought. It
simply means that a “bias for action” becomes the new corporate
)U
culture and anything less will not be tolerated. Slow response or no
response becomes the exception, rather than the rule.

Reduced Inventories
In the lean paradigm, inventory is considered waste. Many would
argue this point, but manufacturing can take place efficiently with
little or no raw material, work-in-process (WIP), or finished goods
inventory.
Many companies today produce directly into trailers and maintain
no other finished goods inventory. All quality inspections and
checks are performed within the process, rather than after
production is complete. In this true make-to-order scenario, all
goods are shipped directly to the next link in the supply chain
when the trailer is full, and overproduction is not possible and
(c

cannot be tolerated. No space is designated to store finished goods.


The system is not designed to carry them.
Applying one-piece flow and pull systems can reduce WIP
dramatically. Kanban or visual signal for more goods to be moved
forward to the next process can accomplish this procedure.
Although the ultimate goal is to eliminate WIP, minimal WIP is
Lean Supply Chain Management

44 normally the result. The elimination of bottlenecks is one goal of a


Notes lean supply chain, but a bottleneck will always exist to some

S
___________________
degree. As a result, WIP must always exist in front of a bottleneck
or the bottleneck operation will be starved and will stop.
___________________
Raw material inventory is a different matter. Although the leanest
___________________
organizations have arranged just in time deliveries to support
___________________ manufacturing, this approach requires the absolute highest degree
___________________ of competency and coordination within the supply chain.

PE
___________________
Reduced Costs
___________________
Traditional mass production tries to minimize unit costs by
___________________ increasing total production over the life cycle of the product. High
___________________ development costs are the result of this model. To recover the
enormous development and initial capital costs sunk into the
___________________
product before it was produced; mass producers forecast and run
long production cycles for each SKU. Consumer preferences and
variety suffer in this scenario. Costs still need to be minimized, but
not at the expense of what more sophisticated consumers now
demand.

Improved Customer Satisfaction


)U
Lean promotes minimizing new product development time and
expense. This delivers the product to market faster, making it
easier to incorporate current requirements into the product. Lean
also promotes the use of less capital-intensive machines, tools, and
fixtures, which results in more flexibility and less initial cost to
recover. As a result, product life cycles may be shorter and product
developments incorporated in newer versions of the product more
frequently. Profitability does not suffer and brand loyalty is
increased, as customers prefer to buy products and services from a
perceived innovator.

Supply Chain as a Competitive Weapon


A strong supply chain enables the member companies to align
themselves with each other and to coordinate their continuous
(c

improvement efforts. This synthesis enables even small firms to


participate in the results of lean efforts. Competitive advantage
and leadership in the global marketplace can only be gained by
applying lean principles to the supply chain. Thought,
commitment, planning, collaboration, and a path forward are
required.
UNIT 4: Lean Thinking for the Supply Chain

45
Check Your Progress Notes

S
Activity
Fill in the blanks: ___________________
Conduct a survey of ten retail
outlets and prepare a report
1. A strong supply chain enables the ……………… ___________________
on how important is it to apply
companies to align themselves with each other. lean systems in supply chains.
___________________
2. The elimination of ……………… is one goal of a lean ___________________
supply chain.
___________________

PE
Path Forward to a Lean Supply Chain ___________________

___________________
Lean is a cooperative process for survival and for success. Supply
___________________
chains that want to grow and continue to improve must adopt lean.
Lean concepts require an attitude of continuous improvement with ___________________
a bias for action. The concepts of lean apply to all elements of the ___________________
supply chain, including support departments such as product
development, quality, human resources, marketing, finance,
purchasing, and distribution. The challenge is to bring all of these
areas out of their traditional silos and make them work together to
reduce waste and create flow. Duplication and a lack of
appropriate and timely communication run rampant in these
)U
traditional organizations. A lean supply chain is proactive and
plans for the unexpected by positioning all resources for
effectiveness. Downturns in demand can be addressed without
layoffs or significant productivity losses.
Leaning “other” areas presents a larger challenge than it does in
manufacturing. Supervisors and factory workers embrace change
that results in making their lives less complicated and more
successful. In the hierarchy of support areas, it is more challenging
for the people to understand how lean can benefit them. The
answer is simple: What benefits the organization as a whole
benefits the supply chain?
Because the internet provides us with unprecedented opportunities
for sharing information and conducting transactions across the
supply chain, companies should have a sense of urgency about
(c

adopting lean concepts. However, all chain partners have to be on


the same playing field, and the lean concept is intended to let
everyone reach new levels of efficiency and effectiveness. Supply
chain leaders should not delay — it’s urgent to act now to
implement lean concepts in the supply chain.
Lean Supply Chain Management

46 Check Your Progress


Notes Fill in the blanks:

S
___________________
1. Lean concepts require ……………….. of continuous
___________________ improvement with a bias for action.
___________________ 2. Supervisors and factory workers embrace change that
___________________ results in making their lives less …………………. and
more ……………………
___________________

PE
___________________
Summary
___________________
Value-adding activities transform materials and information into
___________________
something a customer wants. Non-value-adding activities consume
___________________ resources and do not directly contribute to the end result desired
___________________ by the customer. Understanding the difference between value and
waste and value-added and non-value-added processes is critical to
understanding lean. Sometimes it is not easy to discern the
difference when looking at an entire supply chain. The best way is
to look at the components of the supply chain and apply lean
thinking to each one and determine how to link the processes to
reduce waste.
)U
When waste is reduced or eliminated across the supply chain,
overall cycle time is improved, labour and staff costs are reduced,
product quality and delivery are improved, inventories are
reduced, and customer lead-times are shortened. Lean systems
allow a supply chain to not only to be more efficient, but also
faster. Many companies today produce directly into trailers and
maintain no other finished goods inventory.

Lesson End Activity


Discuss within your group the elements of supply chain on which
lean systems can be implemented.

Keywords
(c

Value: Value is defined as something that the customer is willing


to pay for.
Waste: An act or instance of using or expending something
carelessly, extravagantly, or to no purpose.
Value-added: The enhancement a company gives its product or
service before offering the product to customers.
UNIT 4: Lean Thinking for the Supply Chain

47
Map: A map is a visual representation of an area – a symbolic
Notes

S
depiction highlighting relationships between elements of that
space such as objects, regions, and themes. ___________________

Procurement: Procurement is the acquisition of goods, services or ___________________

works from an external source. ___________________

Warehouse: A warehouse is a commercial building for storage of ___________________


goods. ___________________

PE
___________________
Questions for Discussion
___________________
1. Why is it important to understand the difference between ___________________
value and waste and value-added and non-value-added
___________________
processes?
___________________
2. What actions can a supplier perform to improve waste
reduction process?
3. What are the components of a lean supply chain process?
Explain with diagram.
4. Explain the benefits of lean systems.
5. “Lean is a cooperative process for survival and for success”.
)U
Comment.

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
(c

Web Readings
http://www.tompkinsinc.com/article/2004/lean-thinking-supply-
chain/
http://www.kaizen-training.com/tools-techniques/defining-value-
and-the-7-wastes
(c
)U
PE
S
UNIT 5: Case Study

Unit 5
49
Notes

S
Case Study
___________________

___________________

___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________

PE
___________________
Case Study: Cycle Time Reduction
___________________
Cycle time reduction Platinum catalyst is used for production of
an Active Pharmaceutical Ingredient (API) in an Eastern ___________________
European Pharmaceutical Company (henceforth referred as ___________________
‘company’). Used catalyst is sent back to supplier who recovers
platinum and uses it for production of fresh catalysts. During that ___________________

cycle, certain quantity of catalyst evanesces and new quantity has


to be purchased periodically to maintain required level of
inventory. The catalyst is expensive because of platinum and the
related cost of capital for required catalyst inventory is
significant. A task team led by a Six Sigma Black Belt was formed
to reduce the cycle time of procuring the platinum catalyst.
)U
Catalyst inventory required for normal production of the API
depends on catalyst consumption in production and catalyst
regeneration cycle time. Time required for cycle of regeneration of
catalyst (platinum recovery and new catalyst production) was
about 3 months. During that period, it was necessary to have
enough catalyst in possession for normal production. Since
significant improvements in the production of the API were
already achieved in reducing catalyst consumption, the scope of
the project included only activities related to the reduction of
regeneration cycle time. For the monitored period, the mean
regeneration times depending on the supplier varied between 77
and 69 days (year 2003) and during the year 2004 values were
marginally better than the year before. During the year 2004,
significantly better results were achieved also for the transport
time and the average transport time was 52 days what was
(c

acceptable.

Transport time had relatively less influence on overall cycle time.


Still and it was important to minimize mistake opportunities
during the transport. This was assured by proper planning (sales,
production, purchasing and distribution), regular communication
(all interested parties) and using only reliable and proved carrier
and forwarder. Addition to that all transport details were
Contd…
Lean Supply Chain Management

50 carefully specified and agreed, transport of catalyst always had


Notes high priority (because of high value of shipment) and the company

S
always had proper information about shipment status during the
___________________
transport. The biggest influence on overall cycle time was the
___________________ regeneration of catalyst. This was clearly the supplier’s
responsibility and the company could not directly influence that
___________________
process. The regeneration time specified in contract between the
___________________ company and each supplier was 10 weeks for one mayor supplier
___________________ and 11 weeks for another for year 2004.

PE
___________________ After brainstorming, the team identified only two possible
solutions:
___________________
1. To ask each approved supplier to prepare offer for year 2005
___________________
with maximum regeneration time of 8 weeks.
___________________
2. To find and develop new supplier for catalyst who can fulfil
___________________ our request.

Although the company developed four new suppliers for the


platinum catalyst, only two of them were reliable and another two
could not achieve required quality each time. Another problem
was that the specification for catalyst was quite general and
earlier analysis could not properly represent the regulated quality
of the catalyst. Consequently, the development of approved new
suppliers took a long time. Minimum regeneration time achieved
)U
in the past was 8 weeks and 6 days and because of all that the
team decided to ask each of qualified suppliers to regenerate
catalyst within 8 weeks and the team prepared negotiation
strategy for that.

To test supplier’s ability to fulfil new requirement, the company


asked each of the supplier to deliver next shipments of
regenerated catalyst until the end of the year 2004 within 9
weeks instead 11 (including transport). One of the approved
suppliers answered positively but asked for some adjustment in
packaging of spent catalyst, which did not require additional cost
that allowed the company not to buy new quantity of 1 kilogram
of fresh platinum catalyst and generated a saving in cost of
capital of US $20,000 in the last 3 months of the year 2004.

Negotiations with key suppliers for platinum catalyst finished


(c

successfully and resulted with new contracts where maximum


regeneration time is 8 weeks. New contract with one of them was
signed on February 2005, and with another one on March 2005.
New contract with supplier is a powerful tool for sustaining of
new agreed platinum catalyst regeneration performance, and
performance in the year 2005 is better than promised. All
Contd…
UNIT 5: Case Study

involved in platinum catalyst handling were educated against 51


that standard operating procedure. Notes

S
Both the improvements cycle times were reduced by 30% and the ___________________
inventory of the catalyst reduced from 7.728 to 4.500 kilograms.
___________________
The overall annual savings related to avoidance of cost of capital
needed for buying of new quantity of catalyst was US $408,615 ___________________
per annum.
___________________
Question:
___________________

PE
Discuss the activities related to the reduction of regeneration
___________________
cycle time in a group of three students.
___________________
Source:http://fachmannhunter.com/doc/supply-chain/Lean_and_agile_supply.pdf
___________________

___________________

___________________
)U
(c
(c
)U
PE
S
UNIT 6: Lean Approaches and Methodology

53
Notes

S
___________________

___________________

___________________

___________________

___________________

PE
___________________

___________________

___________________

___________________

___________________

BLOCK-II
)U
(c
Lean Supply Chain Management
Detailed Contents
54
Notes

S
UNIT 6: LEAN APPROACHES AND
___________________ UNIT 8: SUPPLY CHAIN: FLOWS AND PROBLEMS
METHODOLOGY
z Introduction
z ___________________
Introduction
z Supply Chain Facility FLow
z Process Mapping and Value Stream Mapping
___________________
z Supply Chain Problems
z 5 Ss
___________________

z Single Minute Exchange of Dies (SMED)


___________________ UNIT 9: ATTRIBUTES OF LEAN SUPPLY CHAIN

PE
z Stable Production Scheduling z Introduction
___________________
z Quality at the Source z Improved Demand Management
___________________
z Continuous Improvement (CI) z Waste and Cost Reduction
___________________
z Six Sigma z Process Standardization
___________________
z Total Productive Maintenance (TPM) z Industry Standards Adoption
___________________
z Green Manufacturing and Service z Cultural Change Agent

z Automation z Cross-Enterprise Collaboration

z Visual Management
UNIT 10: CASE STUDY
z Supplier Relationship Management

z Final Comments on Lean


)U
UNIT 7: SUPPLY CHAINS
z Introduction

z Supply Chain Management: Concept

z History and Trends of Supply Chain Management

z Decision-making in Supply Chain Management

z Supply Chain Information System and Technology

z Global Supply Chains


(c
UNIT 6: Lean Approaches and Methodology

Unit 6
55
Notes

S
Activity

Lean Approaches and


___________________
Make a webpage that covers
the issues about process
___________________
mapping and value stream
Methodology mapping.
___________________

___________________

Objectives ___________________

PE
After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Process Mapping and Value Stream Mapping
\ 5 Ss ___________________
\ Single Minute Exchange of Dies (SMED) ___________________
\ Stable Production Scheduling
___________________
\ Quality at Source
\ Continuous Improvement (CI)
\ Six Sigma
\ Total Productive Maintenance (TPM)
\ Green Manufacturing and Service
\ Automation
\ Visual Management
)U
\ Supplier Relationship Management
\ Final Comments on Lean

Introduction
To apply lean principles a number of conceptual and quantitative
approaches or methodologies have been developed. Those described
here, are more commonly reported in the literature. Some lean
approaches and methodologies are limited to manufacturing, while
others are equally applicable to service operations.

Process Mapping and Value Stream Mapping


Process mapping is a graphic aid that is used to describe the
(c

sequence of all process activities and tasks necessary to create and


deliver a desired product. It is a step-wise flow chart of the
activities and tasks that make up a process, which an employee or
technology performs to complete jobs. A closely related map is
called the value stream map. Value stream are the value-added
activities and tasks for designing, producing and delivering goods
and services to customers.
Lean Supply Chain Management

56
A value stream map (VSM) is identical to a process map in that it
Notes
shows the activities and tasks, which make up a process. However,

S
Activity
___________________
Create an interactive white in the VSM the value-added and non-value-added activities and
board activity that gets the
___________________ tasks are highlighted. In addition, cost and timing information on
other students on the topic of
5 Ss. the value added and non-value-added activities and tasks are
___________________
usually included for comparative analysis in waste removal.
___________________
An important measure in value stream mapping is takt time. Takt
___________________
time is the ratio of the available manufacturing or service time to

PE
___________________ the required production Volume necessary to meet customer
___________________ demand. We can use a VSM to measure the impact of value-added
and non-value-added tasks and activities on total lead-time of a
___________________
process, and compare it to takt time. In situations where the value
___________________ stream is faster than the takt time, it may mean waste in the form
___________________ of overproduction is occurring. When the value stream is slower
than the takt time, it may mean the firm cannot meet customer
demand.
The most fundamental lean principle is waste elimination from
processes. VSM is ideal for identifying wasteful value-added and
non-value-added activities and tasks. VSM is a primary tool for
finding and eliminating waste in manufacturing and service
)U
processes.

Check Your Progress


Fill in the blanks:
1. Process mapping is a graphic aid that is used to describe
the ………………. of all process activities and tasks
necessary to create and deliver a desired product.
2. A value stream map (VSM) is identical to a process map
in that it shows the ……………… and ……………., which
make up a process.

5 Ss
When workstations or employee tools are disorganized, employees
(c

can waste time looking for things they need to produce their
products or provide needed services to customers. The 5 Ss are
helpful guidelines on workspace organization.
They are:
z Sort: Identify unnecessary workspace items (e.g., tools,
equipment, materials, etc.) and remove them.
UNIT 6: Lean Approaches and Methodology

57
z Set in order: Arrange workspace items for quick
Notes

S
identification and use. Activity
___________________
Make a mini-documentary on
z Shine: Keep the workspace clean and equipment well the topic Single Minute
maintained (e.g., tools oiled and sharpened). ___________________
Exchange of Dies.

___________________
z Standardize: Formalize procedures to avoid wasted
indecision times. Practice procedures for efficient application, ___________________
for consistency in service implementation, and to ensure that ___________________

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all the steps are performed.
___________________
z Sustain: Use training, communication, and other
___________________
organizational methods to continuously perform all 5 Ss.
___________________
Check Your Progress ___________________
Fill in the blanks: ___________________
1. Arrange workspace items for quick ………………….. and
…………..
2. Formalize procedures to avoid wasted …………………..
times.

Single Minute Exchange of Dies (SMED)


)U
When a new product is to be manufactured or a new service is to be
offered to customers, there are some changeover efforts (e.g., new
tools for new equipment) necessary in most instances. As the name
implies, Single Minute Exchange of Dies refers to the desire to
reduce setup times (ideally to a minute) in changeovers during
alternations in production processes. A die is a stamp used to form
or press sheet metal into parts, like the hood of a car. This is
accomplished both by using technology and equipment designed for
quick changeovers and by encouraging employees to suggest new
approaches to setups that will cut time and wasted effort.
In Figure 6.1, lean group technology U-cell and C-cell layouts are
presented. In these Group Technology (GT) cells, the layout is
(c

designed to group production technology together to allow a rapid


changeover of production resources. The key element of GT cells
consists of grouping similar parts into families. Processes required
to make the parts are arranged into specialized cells (i.e., more
focused production cells on a limited number of products). In this
way, all of the operations need to complete a part (or any part
within the designated family of parts) that is located in one GT
Lean Supply Chain Management

58 cell. GT cells help eliminate movement, reduce inventory (less area


Notes for inventory means less buffer inventory), and reduce labour

S
___________________
(fewer numbers of employees because the employees are cross
trained to do a greater number of tasks). By placing large tools and
___________________
equipment on moveable platforms that move from one station
___________________ location along the assembly line to another (note darkened arrows),
___________________ distance of movement and time can be saved during setups and
changeovers in the U-cell and C-cell shapes. For example, in
___________________

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Figure 6.1 an employee X in the C-cell might be needed to perform
___________________ two tasks for each product. This employee would perform the first
___________________ task and then shift to a second position on the assembly line as the
___________________
product moves along. If a different product enters the line that
does not require the two tasks, the employee would simply stay in
___________________
the position needed. This provides greater flexibility without
___________________ having extra time and resources tied up in both locations.
Likewise, in the case of the U-cell, because of the reduced distance
resulting from the shape of the cell, tools can be moved quickly and
easily from one position on an assembly line to another,
minimizing waste of time and effort.
)U
(c

Figure 6.1: Lean Group Technology U-cell and C-cell Layouts

Check Your Progress


Fill in the blanks:
1. As the name implies, single minute exchange of dies
(SMED) refers to the desire to reduce …………… times

Contd…
UNIT 6: Lean Approaches and Methodology

(ideally to a minute) in changeovers during alternations 59


in ……………….. processes. Notes

S
Activity
2. The key element of GT cells consists of grouping similar ___________________
Give examples of those
products or companies, which
parts into ………………….. ___________________
have been successful in using
Stable Production Scheduling.
___________________
Stable Production Scheduling
___________________
The notion of stable production scheduling/level production ___________________

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scheduling is one where daily production is defined a week or a
___________________
month in advance. That is, the same amount of manufactured
units is produced or service units are delivered each day. Also, if ___________________

demand changes, then only very small increased changes in daily ___________________
production or delivery are allowed. This approach to scheduling
___________________
serves many purposes of waste elimination. Firstly, it will
___________________
eliminate the need for wasteful overtime. It will also help reduce
costs of hiring more employees during high demand periods or of
terminating or laying off employees during low demand periods.
Secondly, it makes the small but frequent unit production goal of
lean management possible. By having a stable production
schedule, small and frequent unit production becomes much easier
to implement and plan for in most demand environments.
)U
How do we achieve a stable production schedule with lean? Stable
production can be achieved by having uniform plant loading which
is accomplished by setting a specified plant production output rate
for a fixed period. As lean seeks to use an ordering pull-system
(i.e., pulling orders through the system by known customer
demand), these known orders can be grouped and produced-to-
order in fixed periods in focused factories. For products that do not
operate in a make-to-order environment (i.e., make-to-inventory),
improved forecasting and better utilization of salesforce product
demand estimates are essential to better match inventory to
demand levels.

Check Your Progress


(c

Fill in the blanks:


1. Stable production can be achieved by having …………….
plant loading.
2. The notion of stable production scheduling/level
production scheduling is one where daily ………………..
is defined a week or a month in advance.
Lean Supply Chain Management

60 Quality at the Source


Notes

S
Activity Quality at the source refers to employees maintaining quality and
___________________
Create a digital essay with doing their work right the first time. The employees performing
images and text on the topic
___________________
of quality at source. the production or service tasks are closer to the product or service
___________________ and therefore are in a better position to ensure quality. Under this
principle employees are asked to inspect the work that they do and
___________________
that others along the line have done in order to identify defects.
___________________ Moreover, employees are asked to inspect and analyse the work as

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___________________ it passes through their workspace for quality assurance in meeting
product specifications.
___________________

___________________ Whether the operation is a manufacturing assembly line or a fast


food restaurant, products go through a series of steps to
___________________
completion. As the product or service is passed along the
___________________ production process, each employee is asked to perform some basic
quality checks. If they find a defect from the work of an earlier
employee, they can send it back to that employee for improvement,
which helps the prior employees learn from their mistakes. If no
defect is found, the employee continues his or her work, but also
performs some quality checks of his or her own efforts. Not all
quality aspects of a product are checked by each employee, but
)U
enough checks and double checks are performed to ensure the
finished product is thoroughly inspected and is of high quality.

Check Your Progress


Fill in the blanks:
1. Quality at the source refers to employees maintaining
quality and doing their work right the ……………. time.
2. As the product or service is passed along the production
process, each employee is asked to perform some basic
…………… checks.

Continuous Improvement (CI)


(c

Seeking zero defects in manufacturing or zero errors in service is a


goal of JIT and lean programs. Continuous improvement is an
incremental conceptual approach for improving products and
processes. As shown in Figure 6.2, CI projects represent a method
of small, incremental improvements in manufacturing or service
processes, as well as product improvements over time. The CI
function in Figure 6.2 could be expressed as a linear function.
UNIT 6: Lean Approaches and Methodology

Depending on the number of CI improvements in a given period of 61


time, and their additive impact on the firm, a more realistic Notes

S
Activity
non-linear function that describes the potential enhancement ___________________
Create a collage or poster
impact of CI is presented in Figure 6.3. displaying your findings and
___________________
point of view on the topic of
Continuous Improvement.
___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________

Figure 6.2: Incremental CI Project Impact Behaviours for Improvement


)U

Figure 6.3: Typical Improvement Behaviours under Continuous


Improvement

CI primarily relies on employees, managers, consultants,


industrial engineers and more generally, everyone in an
organization to come up with ideas for improvements in processes,
(c

product innovations, product quality, etc. Replacing the old notion


of the “suggestion box”, where employees would make written
suggestions for improvements, a lean approach requires everyone
to come up with new suggestions to enhance business operations
and the products or services. CI is proactive. It invites, encourages,
and in most organizations rewards contributors of ideas. CI can
provide many opportunities for waste removal.
Lean Supply Chain Management

62
CI is embodied in other programs as well. In Japan, the CI
Notes
approach is called Kaizen, which similarly focuses on small,

S
Activity
With___________________
the help of internet, find gradual, and frequent improvements over a long period with a
four such organizations, which
minimum investment of financial resources. Like CI, everyone in
are ___________________
using Six Sigma.
an organization taking on Kaizen is expected to contribute to
___________________
improve every aspect of business operations. Most Kaizen
___________________ programs need operating practices like JIT to stimulate ideas for
___________________ improvement. Total involvement by all members in the

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organization with top management mastering the efforts must be
___________________
clearly promoted in any Kaizen program. A clear and consistent
___________________
program of support with reward systems helps Kaizen become a
___________________ habit. In addition, training is used to remind and support the
___________________ identification and application of new ideas to solve problems and
improve operations.
___________________

Check Your Progress


Fill in the blanks:
1. Continuous Improvement (CI) is ………………….
conceptual approach for improving products and
processes.
)U
2. Most ……………… programs need operating practices
like JIT to stimulate ideas for improvement.

Six Sigma
Six Sigma is a quality improvement approach that seeks to remove
causes of defects in manufacturing and service processes. The term
‘Six Sigma’ originates from the statistical measure that permits at
most 3.4 defects per million opportunities. In other words, virtually
no defects are allowed in products under this principle. A defect in
Six Sigma is defined as any error that is passed on to the customer
in a way that the customer views the error as product non-
conformance. We can measure output quality by Defects Per Unit
(DPU):
(c

DPU = Number of defects discovered/Number of units produced.


To illustrate, if we have a computer service centre that sells 500
computers in a day and only fails 4 times to properly set up
computers in the same day, their DPU would be 0.008 (i.e., 4/500).
UNIT 6: Lean Approaches and Methodology

The concept of Six Sigma characterizes quality performance by 63


Defects Per Million Opportunities (DPMO): Notes

S
DPMO = DPU × 1,000,000/Opportunities for error. ___________________

Again, looking at the computer service centre example, suppose ___________________

there are 100 possible items on a checklist that need to be ___________________


completed for each computer setup. For a day with 500 computers
___________________
at 100 opportunities per computer, that would translate to 50,000
___________________

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(i.e., 500 × 100) opportunities for error in the setup of the 500
computers. The resulting DPMO is 0.16 (0.008 × 1,000,000/50,000), ___________________
which is fairly high and should call for corrective actions to seek ___________________
approaches to lower the resulting value.
___________________
In service applications of Six Sigma the formula is changed to
___________________
Errors Per Million Opportunities (EPMO) or:
___________________
EPMO = DPU × 1,000,000/Opportunities for error.
Six Sigma is a program that organizations must embrace fully in
order to maximize its benefits. Key concepts to implement Six
Sigma are stated hereunder:
z Ensure appropriate metrics are properly traced in the
manufacturing or service processes that are focused on
)U
business results.
z Eliminating defects will result in less costs and more profit.
z Emphasize DPMO or EPMO as a standard metric that can be
applied to all functional areas in the organization.
z Eliminating defects is an organization-wide activity. Six Sigma
will work just as well in accounting as it will in
manufacturing.
z Establish a Six Sigma champion to sponsor and coordinate
team activities, help to overcome employee resistance to
change, seek funding and resources, and develop
implementation strategies.
z Develop in-house experts that can help to train others in Six
(c

Sigma, such as qualified process improvement experts


(referred to as black belts) who can lead teams and train
others in the use of improvement methodologies.
z Provide extensive training in quality project planning (since a
Six Sigma program is made up of Six Sigma projects) for
Lean Supply Chain Management

64 identifying non-value added activities and setup reduction


Notes opportunities.

S
___________________ z Develop a specific and detailed plan to aid Six Sigma
___________________ implementation.

___________________ There are many different tools that can supplement the Six Sigma
statistical approach. Some of these Six Sigma and lean related
___________________
tools are given in Table 6.1.
___________________

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Table 6.1: Six Sigma Tools
___________________
Six sigma tools Description
___________________
Cause-and-Effect A visual aid diagram that permits a user to hypothesize
___________________ Diagrams relationships between potential causes of a problem —
This diagram lists potential causes in terms of human,
___________________ technology, policy, and process resources. The diagram is
then used to trace the problem back to possible causes and
___________________ allows the user to better picture sources of potential
causes that could affect the problem. Sometimes referred
to as a fishbone diagram.
Check sheets A standardized listing of items to check —This tool helps
to ensure all the items on the list are checked (e.g., an
airline pilot checking necessary electrical switches before
take-off), promotes efficiency in inspection efforts and
helps in service jobs to perform all tasks required in the
delivery of a service product.
Pareto Charts A visual aid chart used to breakdown types of problems
)U
into several categories by frequency of occurrence — It is
based on the logic that the largest proportion of
manufacturing and service problems are usually small in
number, but occur frequently. The idea is to rank these
problems, usually based upon frequency of occurrence, and
then devote the most resources to solving the highest
ranked problem first, second highest ranked problem next,
and so forth.
Control Charts Statistically based charts that compute acceptable ranges
of performance with a mean value as a target for product
specifications — These visual aids are ideal for monitoring
how close production processes meet desired product
specifications. These charts have upper and lower control
limits based upon statistics, usually plus or minus three
sigma. Examples include a runs chart used for measuring
quality between production runs, Range chart, also called
an R-chart, used to measure range values between a
desired target specification and actual performance,
C-chart used to measure defects by counting and plotting
them by number of occurrences, and a P-chart used to
(c

measure and track percentage of defects in a production


process.
Opportunity Flow Flow charts are graphic aids that are used to identify the
Chart tasks that make up a process. Opportunity flow charts are
an application of flow charts that are specifically used to
identify tasks that have waste in them. Then the chart
can be used as an opportunity to remove or reduce the
tasks, which make up a process.
Contd…
UNIT 6: Lean Approaches and Methodology

Failure Mode and FMEA is a structured means to identify, estimate, 65


Effect Analysis prioritize, and evaluate risk of a manufactured product or Notes

S
(FMEA) service at each stage in the process of production. The
analysis helps to identify and assess the probability that a ___________________
product will fail (occurrence), the damage in a product
failure (severity), and the probability that failure will be ___________________
detected by the firm (detection). FMEA analysis also
includes suggested means by which to eliminate the ___________________
failure condition through redesign of the process.
___________________
Design of DOE is a statistical approach used for determining the
Experiments cause-and-effect relationships between process variables ___________________

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(DOE) and output variables.
___________________
One of the most recognized Six Sigma implementation planning
approaches is that of General Electric’s Define, Measure, Analyse, ___________________

Improve, and Control (DMAIC). ___________________

DMAIC (Define, Measure, Analyse, Improve and Control) ___________________

z Identify customers and their priorities. ___________________

z Define the project goals and customer (internal and external)


deliverables. Identify CTQs (critical-to-quality characteristics)
that the customer considers to have the most impact on
quality.
z Measure the process to determine current performance.
)U
z Identify the key internal processes that influence CTQs and
measure the defects currently generated relative to those
processes.
z Analyse and determine the root cause(s) of the defects.
z Improve the process by eliminating defects.
z Control future process performance.

Check Your Progress


Fill in the blanks:
1. Six Sigma is a quality improvement approach that seeks
to remove causes of defects in ………………….. and
…………. processes.
(c

2. Eliminating defects will result in less ………... and more


………….
Lean Supply Chain Management

66 Total Productive Maintenance (TPM)


Notes

S
Activity Total Productive Maintenance is a Lean concept based on three
___________________
Prepare a whitepaper on the simple ideas:
topic Total Productive
___________________
Maintenance. z Preventive maintenance schedules must be developed and
___________________ adhered to.
___________________ z Extensive maintenance history exists in a database, and
___________________ equipment failures may be predicted within reasonable

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___________________
timeframes.

___________________ z Simpler maintenance tasks may be delegated to those who


know the equipment the best.
___________________
Establishing a preventive maintenance schedule and a predictive
___________________
maintenance system are the basic necessities of lean
___________________
manufacturing. In addition, the operators should be totally
responsible and have ownership for all maintenance of the
equipment they operate. As operators know their machines the
best, they would be the first to detect variations in operation:
unusual sounds, vibrations, smell, etc. Only complex and
specialized maintenance functions are given to the maintenance
department.
)U
A series of methods, originally pioneered by Nippondenso (a
member of the Toyota group), to ensure every machine in a
production process is always able to perform its required tasks so
production is never interrupted.
Total Productive Maintenance is a new way of looking at
maintenance, or conversely, a setback to old ways but on a mass
scale. In TPM the machine operator performs much, and
sometimes all, of the routine maintenance tasks themselves. This
auto maintenance ensures appropriate and effective efforts are
expended since the machine is wholly the domain of one person or
team. TPM is a critical attachment to lean manufacturing. If
machine uptime is not predictable and if process capability is not
sustained, the process must keep extra stocks to buffer against this
(c

uncertainty and flow through the process will be interrupted. One


way to think of TPM is "deterioration prevention" and
"maintenance reduction", not fixing machines. For this reason
many people refer to TPM as "Total Productive Manufacturing" or
"Total Process Management". TPM is a proactive approach that
essentially aims to prevent any kind of slack before occurrence. Its
motto is "zero error, zero work-related accident, and zero loss."
UNIT 6: Lean Approaches and Methodology

67
TPM is a Japanese idea that can be traced back to 1951 when
Notes

S
preventive maintenance was introduced into Japan from the USA.
Nippondenso, part of Toyota, was the first company in Japan to ___________________
introduce plant wide preventive maintenance in 1960. In ___________________
preventive maintenance operators produced goods using machines
___________________
and the maintenance group was dedicated to the work of
maintaining those machines. However with the high level of ___________________

automation of Nippondenso maintenance became a problem as so ___________________

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many more maintenance personnel were now required. So the ___________________
management decided that the routine maintenance of equipment
___________________
would now be carried out by the operators themselves The
maintenance group then focussed only on 'maintenance' works for ___________________
upgrades. ___________________

The maintenance group performed equipment modification that ___________________


would improve its reliability. These modifications were then made
or incorporated into new equipment. The work of the maintenance
group is then to make changes that lead to maintenance
prevention. Thus preventive maintenance along with maintenance
prevention and maintainability improvement were grouped as
productive maintenance. The objective of productive maintenance
)U
was to enhance plant and equipment effectiveness to its maximum
to get the optimum life cycle cost of production equipment.
Nippondenso already had quality circles, which involved the
employees in changes. Therefore, now, all employees took part in
implementing productive maintenance. Based on these
developments Nippondenso was awarded the distinguished plant
prize for developing and implementing TPM, by the Japanese
Institute of Plant Engineers (JIPE). This Nippondenso of the
Toyota group became the first company to obtain the TPM
certifications.
TPM has five goals:
z Maximize equipment effectiveness.
Develop a system of productive maintenance for the life of the
(c

z
equipment.
z Involve all departments that plan, design, use, or maintain
equipment in implementing TPM.
z Actively involve all employees.
z Promote TPM through motivational management.
Lean Supply Chain Management

68 Check Your Progress


Notes
Fill in the blanks:

S
Activity
___________________
Survey 10 organizations of
paper industry and find out 1. Establishing a preventive maintenance schedule and a
how___________________
many of them are using predictive maintenance system are the basic necessities
green manufacturing and
___________________
prepare a presentation based of …………. manufacturing.
on your study.
___________________ 2. Only ……………… and …………………… maintenance
___________________ functions are given to the maintenance department.

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___________________
Green Manufacturing and Service
___________________

___________________
In line with the origins of JIT and lean from the 1950’s in Japan,
the idea of green manufacturing or green service focus to
___________________
converting what was waste into something of value. This lean
___________________ approach seeks to turn waste into a productive resource. At each
stage of the process of manufacturing a tangible product or
delivering a service, there are possibilities for waste. Some of that
waste (e.g., discarded napkins at a restaurant or discarded scrap
metal in a manufacturing facility) could be used again in a
different form or application. Today, wasted or soiled paper goods
are commonly recycled and used as housing insulation, printing
)U
paper, or other paper goods applications. Some of the common
“green” options are:
z Recycling: Glass, paper, and plastics are commonly recycled
in business operations and made into new products that serve
as inputs for both manufacturing and service operations.
z Repairing: High cost products (e.g., manufacturing
equipment, like robots and trucks) can be repaired for an
extended useful life.
z Refurbishing: Products that are returned by customers to
retailers can be cleaned up, sometimes requiring installation of
minor par, and resold.
z Remanufacturing: Products that are returned by customers
to retailers can be reengineered with newer features and
(c

resold as an improved or new product, rather than being


scrapped.
z Charitable reusing: Some products that are used can be
redistributed to other customers. For example, hotels often
donate their soap and towels to charitable organizations.
UNIT 6: Lean Approaches and Methodology

69
z Conservation of resources: Hotels and restaurants in areas
Notes

S
where water is limited often have programs to invite Activity
customers to use less water or fewer linen washings (to reduce ___________________
Search over internet and find
out when was the first robot
laundry water and pollution). ___________________
used in automation of
production process.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________

PE
1. At each stage of the process of manufacturing a
…………….. product or delivering a service, there are ___________________
possibilities for waste. ___________________

2. High cost products can be repaired for an ……………. ___________________


useful life.
___________________

___________________
Automation
Some of Six Sigma statistical tools (e.g., check sheet) embody
fail-safe procedures (in Japanese called poka-yoke), which seek to
ensure manufacturing and service product quality. This is an
approach for mistake-proofing processes using automated devices
or methods to avoid simple human error. Eliminating boring tasks
)U
for employees by allowing a robot to perform them not only can
improve product quality consistency, which is a quality attribute,
but frees the employees to perform more challenging tasks better
suited for taking advantage of their abilities and helps to improve
their jobs, which research demonstrates enhances employee
motivation and productivity.
There is a balancing factor that must be considered in a lean
enterprise regarding automation. The investment in automation
has to meet an acceptable Return on Investment (ROI). The ROI
may be qualitatively based upon achieving better quality or
quantitatively based upon a reduction in the cost of operations.
Service automation, like an X-ray machine in a hospital, has to be
justified in order to warrant the investment. Information system
technology to track and maintain production scheduling can be
(c

very expensive, but provides necessary communication to


coordinate production activities, particularly those in relation to
supply chain partners. Any production automation is usually
expensive and must achieve an ROI that justifies investment.
Lean Supply Chain Management

70 Check Your Progress


Notes
Fill in the blanks:

S
Activity
Visit___________________
a manufacturing concern
of your preference and find
1. There is a balancing factor that must be considered in a
out ___________________
which kind of visual lean enterprise regarding ……………………….
management is being used
___________________
there. 2. Information system technology to track and maintain
___________________ production scheduling can be very …………………….
___________________

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___________________ Visual Management
___________________ Visual management involves the actions of designing and running
___________________
facilities to maximize the use of visual observation in the
production process. On a macro-level, it might mean removing
___________________
walls so managers have a broad view of the work environment.
___________________ This allows one manager to see more of the operations from any
one place in the facility, thus facilitating visually managing
employees and improving the manager’s productivity.
On a micro-level, this might mean installing systems to enhance
employee control of tasks. Visual controls (i.e., electronic or
mechanical control gauges devices) can be positioned in
workstations or other locations where they can swiftly
)U
communicate if a production or service problem is present. For
example, production assembly line work stations can have
multi-colour lights (i.e., red means stop the line a serious problem
has been found, yellow means a possible problem with the line,
green means no problems) for employees to quickly and visually
communicate possible problems to managers, rather than wasting
time going and finding them to report difficulties.
There are other technologies used in visual management. The
Andon board, for example, is a large electronic sign board that
provides real-time operational performance and system status
information. These boards can communicate daily production goals
and current progress toward those goals. Andon boards can also
provide detailed assembly line work information on targets and
(c

progress toward targets, line stoppage information when problems


occur, and let managers know where the line stoppage occurred.
UNIT 6: Lean Approaches and Methodology

71
Check Your Progress
Notes

S
Fill in the blanks: Activity
___________________
Conduct a survey and find out
1. Visual management involves the actions of how many companies on an
___________________
average trust only on single
……………….. and ……………….. facilities. supplier.
___________________
2. Production assembly line workstations can have multi-
___________________
colour lights for employees to …………….. and
…………….. communicate possible problems to ___________________

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managers. ___________________

___________________
Supplier Relationship Management
___________________
Key to timing production scheduling is the delivery of materials ___________________
needed to produce a finished manufactured product or to deliver a
___________________
service. This needs a close relationship with suppliers, achieved in
part by giving most of a firm’s business to one or just a few
suppliers that can be trusted to perform deliveries without failure.
The idea of having only one or a few suppliers serves following two
purposes:
z The amount of business with the supplier will make the lean
)U
firm a main customer, which in turn can demand greater
respect and service.
z It reduces the paper work and unnecessary waste of time
dealing with large numbers of suppliers.
A lean operation seeks to establish long-lasting and trustworthy
relations with suppliers. This is a kind of relationship where the
lean firm supports and in some cases finances the supplier to
ensure continued support of the lean operation. While competitive
costing of suppliers is not ruled out of the relationship, it is
expected that suppliers will seek the lowest costs and pass those
savings on to the lean firm.
Today, most firms place orders over the Internet or use Electronic
Data Interchange (EDI) systems (i.e., hardware/software systems
(c

that automatically place orders between suppliers and customers).


As JIT and lean methods evolved, the least expensive means of
communicating and placing orders with suppliers were sought.
One such method was the Kanban card system, which does not use
computers or any electronic technology. Kanban card systems were
used to physically signal suppliers to deliver goods.
Lean Supply Chain Management

72
Kanban is a paper system where a card is employed to notify the
Notes
supplier that a unit or group of units is requested by the lean firm.

S
Activity
___________________
Recreate a newspaper front Typically, Kanban cards are placed in a location in the plant where
page covering Final
___________________ suppliers can visit, pick up the card (used here like an order form),
comments on lean.
and return with the necessary supplies. Kanban cards have uses
___________________
other than just ordering inventory from suppliers. They are also
___________________ used to signal the production of units and movement or conveyance
___________________ of units within a plant.

PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Kanban cards have uses other than just ordering
___________________ …………………. from suppliers.
___________________
2. A lean operation seeks to establish long-lasting and
……………………. relations with suppliers.

Final Comments on Lean


The reality is that JIT is incorporated within lean to achieve a
broader base of objectives and better coordination within a firm’s
)U
entire supply chain. Jacobs et al. views JIT principles as a
requirement for lean.
Another issue about lean principles concerns the nature of the
product being produced. Some scholars feel that lean will only
work in high volume operations that have a fairly standardized
product or family of products. They use as an example the focused
factory approach that limits product range flexibility, which
conflicts with lean principles seeking flexibility. Automobiles
increasingly have a wide range of car models with an even wider
range of options. Toyota utilizes mixed model production on a daily
basis in focused factories, so a small range of differing models are
produced each day in each plant. Thus, some focused effort
achieves the efficiencies on a limited number of models in any one
focused plan, yet other focused plants provide a variety of models
(c

at the same time. In addition, the layouts and automation of the


plants permit a wide range of optional features to be built into any
one vehicle, thus achieving a unity production of a custom product.
A final issue about lean principles concerns their failed
applications in industry. Some scholars believe lean principles are
not workable and do not always lead to world-class operations.
UNIT 6: Lean Approaches and Methodology

They point to firms, such as Chrysler and General Motors that 73


have had to shut down plants and waste millions of dollars in idle Notes

S
production resources. Operating under JIT, they became too ___________________
dependent on suppliers who did not deliver components and
___________________
materials when needed. Strikes can occur that delay shipments of
needed parts, and long supply chains reach into foreign countries ___________________

where wars and natural disasters can prevent timely shipment of ___________________
goods to manufacturing or service operations when needed.
___________________

PE
Decades ago, firms built up inventories in anticipation of labour
___________________
strikes, estimated stock out inventory levels based upon demand
surges or added wasteful inventory in anticipation of poor quality ___________________
components going into operations. All of these wasteful practices ___________________
are still available if firms want to revert back to them for security
___________________
purposes. However, under lean we seek to develop trusting
relationships with suppliers that will not disappoint a lean firm ___________________

partner. Even when natural disasters threaten, suppliers are


expected to deliver and provide what they promise. It should be
noticed that client lean firms must work with their suppliers to
help them provide the type of ensured coverage they need. For
firms where the likelihood of a production stoppage or costs are
very great, lean firms should seek to undertake a risk analysis of
)U
these factors and take measures to ensure against them.
Identifying problems and solving them to improve efficiency is
what lean is all about. Being caught in a situation where a firm is
stocked out is not a failure of lean, but one of management.
Not all, but lean principles can be applied to any one organization.
Lean must be customized to the requirements of the firm. It must
be adapted, and only those principles that have applicability
should be utilized. Regardless of whether the firm is a
manufacturing or service operation, lean collectively provides the
best and most common sense approach to world-class operations
devised.

Check Your Progress


(c

Fill in the blanks:


1. The layouts and …………... of the plants permit a wide
range of optional features to be built into any one
vehicle.
2. Even when natural disasters threaten, suppliers are
expected to ……….. and ……………. what they promise.
Lean Supply Chain Management

74 Summary
Notes

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Lean principles included seeking the elimination of waste,
___________________
improved quality, increased product flow, and reduced cost. Lean
___________________ methodologies included process mapping and value stream
___________________ mapping, the 5 Ss, single minute exchange of dies, stable
production scheduling, quality at the source, continuous
___________________
improvement, Six Sigma, total productive maintenance, green
___________________ manufacturing and service, automation, visual management, and

PE
___________________ supplier relationship management.
___________________

___________________
Lesson End Activity
___________________ Create a multiple-choice quiz on the topic of Six Sigma.

___________________
Keywords
Process Mapping: Process mapping is a graphic aid that is used
to describe the sequence of all process activities and tasks
necessary to create and deliver a desired product.
Value Stream: A value stream map (VSM) is identical to a
process map in that it shows the activities and tasks, which make
)U
up a process.
Die: A die is a stamp used to form or press sheet metal into parts,
like the hood of a car.
Single Minute Exchange of Dies (SMED): It refers to the desire
to reduce setup times (ideally to a minute) in changeovers during
alternations in production processes.
Quality at the Source: It refers to employees maintaining quality
and doing their work right the first time.
Continuous Improvement (CI): It is an incremental conceptual
approach for improving products and processes.
Six Sigma: It is a quality improvement approach that seeks to
remove causes of defects in manufacturing and service processes.
(c

Questions for Discussion


1. How do the 5 Ss help to implement lean?
2. How does SMED help to implement lean?
3. How does group technology help to implement lean?
UNIT 6: Lean Approaches and Methodology

75
4. How does stable production scheduling help to implement
Notes

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lean?
___________________
5. How does quality at the source help to implement lean?
___________________
6. How does Continuous Improvement (CI) help to implement
___________________
lean?
___________________
7. How does Total Productive Maintenance (TPM) help to
implement lean? ___________________

PE
8. How does green manufacturing and service help to implement ___________________

lean? ___________________

9. How does automation help to implement lean? ___________________

10. How does visual management help to implement lean? ___________________

___________________
Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
)U
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
http://en.wikipedia.org/wiki/Continual_improvement_process
http://en.wikipedia.org/wiki/5S_(methodology)
http://www.asq-1302.org/wp-content/uploads/2010/09/The-5Ss-of-
Workplace-Organization.pdf
(c
(c
)U
PE
S
UNIT 7: Supply Chains

Unit 7
77
Notes

S
Activity

Supply Chains
Make___________________
a slide show and have
your voice narration with each
___________________
slide on the topic of Supply
Chain Management.
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

PE
\ Concept of Supply Chain Management ___________________
\ History and Trends of Supply Chain Management
___________________
\ Decision-making in Supply Chain Management
___________________
\ Supply Chain Information System and Technology
\ Global Supply Chains ___________________

___________________
Introduction
In any organization, there is a great deal of material that is moved
in organizations for gathering raw materials from suppliers and
delivering finished goods to the customers. It is logistics that
executes this function. Here are some of the definitions of the term
logistics.
)U
Logistics is the function that moves both tangible materials and
intangible materials. Tangible materials include raw materials and
intangible materials include information through the operations to
the customers. We will know the meaning of supply chain. A
supply chain consists of a series of activities involving many
organizations through which the materials move from initial
suppliers to final customers. There may be different supply chain
for each product.
The chain of activities and organizations is named differently as
per the situation. If the emphasis is on operations, then it is called
process; if the emphasis is on marketing then it is called logistics;
if the emphasis is on value-addition then it is called value-chain; if
the emphasis is on meeting customer demand then it is called
demand chain; if the emphasis is on movement of material then we
(c

use the most general term, i.e. supply chain. Here, in this unit, we
will introduce you with the basic concept of a supply chain.

Supply Chain Management: Concept


Supply Chain Management is a set of approaches utilized to
efficiently integrate supplier, manufacturer, warehouse and stores
Lean Supply Chain Management

78 so that, merchandise is produced and distributed at the right


Notes quantities, to the right location and at the right time, in order to

S
Activity
___________________
minimize system under costs while satisfying service level needs.
Make a webpage that covers
history and trends in supply
___________________ Supply chain management seeks to integrate performance
chain management.
measures over multiple firms or processes, rather than taking the
___________________
perspective of a single firm or process.
___________________
Supply chain management has provided the next logical stage in
___________________
the evolution of competitiveness for the manufacturing

PE
___________________ organization and added, importantly, a concern for the flow of
___________________ materials to and from the organization. Supply chain management
integrated suppliers to the end consumers and emphasized the
___________________
need for collaboration to optimize the whole system.
___________________
As such, supply chain management is the process of designing,
___________________ planning and implementing change in the structure and
performance of the ‘total’ material flow in order to generate
increased value, lower costs, enhanced customer service and yield
a competitive advantage. In effect, the addition of supply chain
management to the marketing model created a truly ‘systems’
approach to the organization and its direct and indirect trading
relationships.
)U
Check Your Progress
Fill in the blanks:
1. Supply chain management seeks to ………………….
performance measures over multiple firms or processes.
2. Supply chain management is the process of designing,
planning and implementing change in the
………………….

History and Trends of Supply Chain Management


The term "supply chain management" entered the public domain
when Keith Oliver, a consultant at Booz Allen Hamilton, used it in
(c

an interview for the Financial Times in 1982. The term was slow to
take hold and the lexicon was slow to change. It gained currency in
the mid-1990s, when a flurry of articles and books came out on the
subject. In the late 1990s, it rose to prominence as a management
buzzword, and operations managers began to use it in their titles
with increasing regularity.
UNIT 7: Supply Chains

79
The major movements can be observed in the evolution of supply
Notes

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chain management studies: Creation, Integration and
Globalization. ___________________

___________________
Creation Era
___________________
The term ‘supply chain management’ was first coined by a U.S.
___________________
industry consultant in the early 1980s. However, the concept of a
supply chain in management was of great importance long before, ___________________

PE
in the early 20th century, especially with the creation of the ___________________
assembly line. The characteristics of this era of supply chain
___________________
management include the need for large-scale changes,
re-engineering, downsizing driven by cost reduction programs, and ___________________

widespread attention to the Japanese practice of management. ___________________

___________________
Integration Era
This era of supply chain management studies was highlighted with
the development of Electronic Data Interchange (EDI) systems in
the 1960s and developed through the 1990s by the introduction of
Enterprise Resource Planning (ERP) systems. This era has
continued to develop into the 21st century with the expansion of
internet-based collaborative systems. This era of supply chain
)U
evolution is characterized by both increasing value-adding and cost
reductions through integration.
In fact, a supply chain can be classified as a Stage 1, 2 or 3
network. In stage 1 type supply chain, various systems such as
make, storage, distribution, material control, etc. are not linked
and are independent of each other. In a stage 2 supply chain, these
are integrated under one plan and are ERP-enabled. A stage 3
supply chain is one in which vertical integration with the suppliers
in upstream direction and the customers in downstream direction,
is achieved. An example of this kind of supply chain is Tesco.

Globalization Era
The third movement of supply chain management development,
(c

the globalization era, can be characterized by the attention given


to global systems of supplier relationships and the expansion of
supply chains over national boundaries and into other continents.
Although the use of global sources in the supply chain of
organizations can be traced back several decades (e.g., in the oil
industry), it was not until the late 1980s that a considerable
number of organizations started to integrate global sources into
Lean Supply Chain Management

80 their core business. This era is characterized by the globalization of


Notes supply chain management in organizations with the goal of

S
Activity
___________________
increasing their competitive advantage, value-adding, and
Create a digital essay with
images and text on the topic reducing costs through global sourcing.
___________________
of decision-making in Supply
Chain Management.
___________________ Check Your Progress
___________________ Fill in the blanks:

___________________ 1. The third movement of supply chain management

PE
___________________
development, the globalization era, can be characterized
by the …………….. given to global systems of supplier
___________________
relationships.
___________________
2. This era is characterized by the globalization of supply
___________________ chain management in organizations with the goal of
___________________ increasing their …………………. advantage.

Decision-making in Supply Chain Management


Supply chain management decisions more often belong to one of
three levels; the strategic, the tactical, or the operational level as
there is no proper defined and unified use of these terms. Figure
7.1 shows the three level of decisions as a pyramid shaped
)U
hierarchy. The decisions on a higher level in the pyramid will set
the conditions under which lower level decisions are made.

Long-term
decisions
Strategic
level

Tactical level Medium-term


decisions

Day to day
Operational level
operation
(c

Figure 7.1: Hierarchy of Supply Chain Decisions

On the strategic level, long-term decisions are made. These


decisions are related to location, production, inventory, and
transportation.
UNIT 7: Supply Chains

81
z Location decisions are concerned with the size, number, and
Notes

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geographic location of the supply chain entities, such as plants,
inventories, or distribution centres. ___________________

z The production decisions are meant to determine which ___________________

products to produce, where to produce them, which suppliers ___________________


to use, from which plants to supply distribution centres, and so
___________________
on. Inventory decisions are concerned with the way of
___________________

PE
managing inventories throughout the supply chain.
___________________
z Transport decisions are made on the modes of transport to use.
___________________
Decisions made on the strategic level are interrelated. For
example, decisions on mode of transport are influenced by ___________________

decisions on geographical placement of plants and warehouses, and ___________________


inventory policies are influenced by choice of suppliers and ___________________
production locations. Modelling and simulation is frequently used
for analysing these interrelations, and the impact of making
strategic level changes in the supply chain.
On the tactical level, medium-term decisions are made, such as
weekly demand forecasts, distribution and transportation
planning, production planning, and MRP.
)U
The operational level of supply chain management is concerned
with the very short-term decisions made from day to day. The
border between the tactical and operational levels is
indistinguishable.

Supply Chain Decision-making Tools


Supply chain decision-making tools are:
z Information,
z Quality, and
z Integration.

Check Your Progress


(c

Fill in the blanks:


1. The decisions on a higher level in the …………….. will
set the conditions under which lower level decisions are
made.
Contd…
Lean Supply Chain Management

82
2. Modelling and simulation is frequently used for
Notes
analysing these interrelations, and the impact of

S
Activity
Visit___________________
a nearby retailing making ……………….. level changes in the supply chain.
showroom and prepare one
___________________
presentation on the
information system
___________________
technology being used by
and
Supply Chain Information System and Technology
them.
___________________ The evolution of Supply Chain Information Systems (SCIS) started
___________________
with manual processing of information and from there moved on to

PE
stand-alone computer systems. The next step was information
___________________
systems at the firm level and inter-firm integrated systems.
___________________ Concurrently, the speed of information transfer evolves such that
___________________ integrated systems can provide measurable speed that matches
operational decision-making.
___________________

___________________
The design and architecture of these advanced information system
makes possible the generation of reports and statistics that allow
the monitoring of supply chain performance. System-wide metrics
of supply chain performance can be measured through an
integrated information system. In addition, other impacts of IT on
supply chain are as follows:
z It has enabled the move from centralized to decentralized
)U
management without any loss of information at any level.
z It has improved speed/timely delivery, reliability, cost saving,
security, etc.
z It has resulted in the empowerment of individuals and teams
with the work environment progressively moving from
functional organizational arrangement to a team arrangement.
z It has enabled high-level connectivity, information sharing and
integration not only within a company and/or among
companies, within a nation and/or among nations, but globally.
Supply Chain Information System (SCIS) architecture embraces
the concept of distributed object technology to enable efficient data
exchange among various data objects, which may reside in
distributed platforms over geographically remote regions, thereby
(c

leveraging the receptiveness of the supply chain network. SCIS is


generated at each stage of the supply chain starting with the
customer order performance cycle.
UNIT 7: Supply Chains

83
Notes

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___________________

___________________

___________________

___________________

___________________

PE
___________________

___________________

Figure 7.2: Operational Architecture of Supply Chain ___________________


Information System
___________________
Figure 7.2 is a schematic presentation of a modern SCIS system. It ___________________
shows interfaces to the enterprise itself (intra-firm) and external
interfaces (inter-firm). These when put together, forms the SCIS
flow, which has five modules:
z Order entry,
z Order processing,
)U
z Transportation and shipping,
z Distribution operations, and
z Inventory management for both inbound and outbound
supplies.
It conceptualizes the major system elements and their structure. It
shows:
z Modules, the actual routines that process data or information;
data files, and
z The information structures that store task specific data such
as orders or inventory records; and management and data-
entry activities.
SCIS receives input from an external environment such as a
(c

decision maker or another firm to provide information and reports,


regarding supply chain activity. The reports generated normally
consist of numerous summary, detail, and exception listings and
information documenting system activities and performance.
In addition, architecture also provides for performance links and
communication links (at the internal and external interfaces)
Lean Supply Chain Management

84 between SCIS components and the outside environment. The links


Notes facilitate information flow between the subsystems, files, entry

S
___________________
activities, and reports.

___________________ Objectives of SCIS


___________________ The prime objective of SCIS is to apply itself to the effective flow of
___________________ related information from the point of origin until the point of their
consumption, in order to assist the firm in satisfying customer
___________________

PE
demand the best possible way.
___________________
Information technologies for supply chains constitute application
___________________
programs used for processing transactions, management control,
___________________ decision analysis, and strategic planning. Based on the managerial
___________________ scope of application, the objectives of IT applications for the supply
chain can be classified from the point of view of functionality as
___________________
follows:

Data Capture, Display and Organization


This is the basic object of IT is to capture data that will help the
firm satisfy customer demand. This includes recording inventory,
production, resource availability (e.g. machine availability status),
etc. using a variety of automated techniques.
)U
Its functionality is enhanced by the manner it is displayed. Data
display is ideally in graphical form, or in formats that are close to
what managers find convenient, such as tables. Data organization
is achieved through a database management system that has been
discussed earlier.

Communication
Data needs to be made available across spatially dispersed
decision-making units. This data collection starts from the point of
origin until it reaches the point of consumption, in a manner that
there is no loss or distortion in the data. The database must
support the major database structures, which are as follows:
(c

z Order file,
z Inventory and warehouse files,
z Accounts receivable file, and
z Distribution requirements file.
UNIT 7: Supply Chains

85
These inputs from the internal and external environment are
Notes

S
collected to create reports that decision makers need, when they
need it, to make correct decisions. ___________________

Communication of data across distances is now possible through a ___________________

variety of technologies. Communicating despatch advices about ___________________


shipments from warehouses to distributors, tracking dispatches,
___________________
reporting stock availability at distribution nodes, recording
___________________

PE
customer orders from multiple distributors are some transactions
that require efficient communication networks that support ___________________
effective data transfer. ___________________

Processing ___________________

___________________
The processing of data is required so that it may be converted into
information. SCIS obtains data and creates an information base to ___________________

support the communications activities. This is becoming


increasingly the most important objective of SCIS. The information
that is collected and provided is critical for processing transactions,
management control, decision analysis, and strategic planning.
For example, scheduling component supplies, deciding shipment
contents, use of transport mode (trucks or railway rakes, etc.),
)U
reconciling backorder status requires analysis of data such as
demand for different products, quantity to be shipped, network
destinations etc.
IT plays a very important role in providing such valuable
information. This information is important for both coordination
and operations. The primary objective of SCIC is twofold.
Information is required for,
z Coordination, and
z Operational activities, which are ultimately the two of the
major objectives of SCIS.
The effectiveness of the SCIS is determined by the manner in
which it enhances the ability in these two areas.
(c

In supply chain management, the suppliers, producers, retailers,


customers, and service providers are the members and are
connected through the ultimate level of integration. These
members are constantly supplied with information in real time.
The base of the ability to share information is the effective use of
Information Technology within the supply chain. Appropriate
Lean Supply Chain Management

86 application of these technologies provides decision makers with


Notes timely access to all required information from any location within

S
the supply chain. Recognizing the critical importance of
___________________
information in an integrated supply chain environment, many
___________________
organizations are implementing some form of an
___________________ Inter-organizational Information System (IOIS). Inter-
___________________
organizational information systems are the systems, which are
based on information technologies that cross organization
___________________
boundaries.

PE
___________________
An IOIS is an integrated data processing/data communication
___________________ system mainly utilized by two or more distinct organizations.
___________________ These organizations may be either buyer-supplier or may not be
credit clearing house have a pre-existing business relationship.
___________________
What must exist in a computer-based electronic link between the
___________________ two organizations that automatically activate some element of
work, such as order processing, order-status checking, inventory-
level review, shipment tracking information or, minimally,
transaction transfer, which would earlier have been performed
manually or through other media, such as the mail.
Among the earliest forms of IOISs were those developed by
time-sharing services and online database vendors. The potential
)U
impact of such systems on the way business is conducted was
recognized as early as the 1960s. Since that time, new technologies
have been integrated to produce systems of increasing capability.
Examples of such implementations include Electronic Funds
Transfer (EFT) systems, the Treasury Department’s decision
support system, a variety of buyer-supplier order processing
systems, and online professional tool support systems. Existing
implementations serve the grocery industry, the drug wholesaling
industry, the insurance industry, and the transportation industry,
with more systems coming into existence each year.
The development of an IOIS for the supply chain has three
advantages: cost reductions, productivity improvements, and
product/market strategy. The five basic levels of participation for
individual firms within inter organizational system are:
(c

z Remote I/O node, in which the member participates from a


remote location within the application system supported by
one or more higher-level participants;
z Application processing node, in which the member develops
and shares a single application such as an inventory-query or
order-processing systems;
UNIT 7: Supply Chains

87
z Multi participant exchange node, in which the member
Notes

S
develops and shares a network inter-linking itself and any
number of lower-level participants with whom it has an ___________________
established business relationship; ___________________

z Network control node, in which the member develops and ___________________


shares a network with diverse applications that may be used
___________________
by many different types of lower-level participants; and
___________________

PE
z Integrating network node, in which the member literally
___________________
becomes a data communications/data-processing utility that
integrates any number of lower-level participants and ___________________

applications in real time. ___________________

The participant shares a network of dissimilar applications with ___________________


any number of participants with whom it has an established ___________________
business relationship. IOIS participants may, therefore, be at a
level lower, higher, or equal to the IOIS sharing organizations. As
organizations explore development of IOISs to support their supply
chain management efforts, they will be faced with several
challenges. Developing a common language in terms of planning,
format, and priority across several vastly different constituencies.
Information sharing requirements are well beyond those of a
)U
manufacturer, and its distributor’s need to process orders in a
consistent way.
All relevant information ultimately must circulate to and among
all organizations between the supply chain’s point of origin and its
point of consumption, such as ordering (i.e., orders for component
parts, services, and finished products), inbound transportation,
manufacturing, warehousing, inventory management, outbound
transportation, sales, marketing, forecasts, and customer service
information. Although organizations recognize the importance of
an IOIS for effective supply chain management, no one standard
approach is being utilized in terms of technology or information.

Check Your Progress


(c

Fill in the blanks:


1. System-wide metrics of supply chain performance can be
measured through an …………….. information system.
2. Inter-organizational Information Systems are the
systems which are based on information technologies
that cross organization ……………………
Lean Supply Chain Management

88 Global Supply Chains


Notes

S
Activity Presently globalisation is built around falling transportation and
___________________
Recreate a newspaper front telecommunication costs. The fact that low transportation costs
page covering the topic of
___________________
Global Supply Chains. have been reinforced by low communication costs means that
___________________ developing countries do not have to merely send their raw
materials to the industrialized nations and get finished products in
___________________
return. It also means that developing countries can become major
___________________ procedures as well. People can offer and trade services globally.

PE
___________________ Companies can locate different parts of their manufacturing
research and development, financing, and marketing units in
___________________
different countries and still tie them all up together.
___________________
The following are the characteristics of global competition:
___________________
z Companies competing globally seek to create standardized and
___________________
yet customized marketing.
z Product life cycles are shortening for certain high-tech
products such as computers and peripherals, photography
items, and audio-visual equipment. Sometimes, the PLC lasts
less than one year. Global companies can extending
geographically.
)U
z More companies are utilizing outsourcing and offshore
manufacturing.
z Marketing and manufacturing activities and strategies tend to
converge and the better coordinated in firms operating
globally.
As companies service global markets, logistics networks tend to
become more expensive and complex. The lead-times thereby
increase and inventory levels rise. The world has greatly
experienced a long-term divergence in the levels of per capita
income among countries over the past two centuries. The
international policy agenda reproduces the traditional
asymmetries in the world economy and creates new ones. It is
particularly visible in trade in services and trade in hard currency,
(c

in the form of currency substitution. The uncertainty of


globalization is shown by concerns about global imbalances and
institutions, protectionism coupled with nationalism, the
emergence of new power centres and miscellaneous geo-political
and even biological hazards.
UNIT 7: Supply Chains

89
To successfully operate in a time-based competitive environment,
Notes

S
firms have to emphasize managing logistics as a system,
shortening lead times when possible, and move towards the use of ___________________
worldwide sourcing and manufacturing facilities that are focused ___________________
to produce limited product lines for geographically specific areas.
___________________
The most important step in designing and implementing global
logistics strategic is to learn what the service needs of customers ___________________

are, dispersed throughout the world, and how to meet these needs. ___________________

PE
This is a prerequisite to developing effective operations in the ___________________
global marketplace.
___________________
To be successful, more and more companies are trying to become
___________________
increasingly customer, rather than internally focused. The main
key is to do so in a way that balances customer requirements with ___________________

company requirements for profitability. The first thing companies ___________________


realize on the way to becoming more customer-focused is the
reality that you cannot plan the customer. This makes
responsiveness a core requirement for companies to thrive in
today’s globalized markets.
Global companies are growing more rapidly than transactional and
multi-domestic companies are. Global structures provide volumes
)U
sufficient to absorb the significant cost outlays essential for global
business. These companies are more likely to strategically source
materials and components worldwide, select global locations for
key supply depots and distribution.
Global companies design their operating strategy objectives around
four components:
z Technology,
z Manufacturing,
z Marketing, and
z Logistics.
Logistics is the key for functioning the four areas synchronously.
(c

The logistics system serves as the global infrastructure upon which


the other systems operate. Different approaches to globalization
need different degrees of supply chain integration as well as
different supply chain structures, resulting in different strategies.
Lean Supply Chain Management

90
The important processes that make global strategies effective are:
Notes

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z Strategic fit.
___________________
z Risk management viewed from the perspective of operating
___________________
knowledge of the global environment and minimization of
___________________ foreign exchange risks. It also includes understanding the
___________________ inherent risks in context of difference in language and culture.
___________________ z Knowledge and technology management.

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___________________ z Development of organizational capability in terms of ability
___________________ operating flexibility to respond to changes, dealing with
differences in financial accounting systems, decision support
___________________
tools that incorporate global variables.
___________________
z Channel management/outsourcing decisions, which means
___________________
developing the capability and infrastructure to manage these
activities on a global basis, and the different cultures,
languages and business environments.
z Information management needs reflect the ability of the
system to standardize and manage data to integrate supply
chain operations on a global basis.
)U
A number of factors and relationship in this regards shown in
Figure 7.3.

Figure 7.3: Factors Influencing Global Logistics

The prime challenges of the logistics system are to manage


(c

complexity, size, and decrease lead time and inventory levels.


Perhaps the most important requirement is to understand well,
the service needs to customers in locations dispersed throughout
the world. As consumers have greater access to more goods and
services, a firm’s competitive position largely depends on
UNIT 7: Supply Chains

understanding changes in consumer demand and the speed of 91


response. Notes

S
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Presently globalisation is built around falling
___________________
……………… and …………………….. costs.
___________________

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2. The logistics system serves as the global ………………….
upon which the other systems operate. ___________________

___________________
Summary ___________________

A supply chain is a network of facilities and distribution options ___________________


that performs the functions of procurement of materials, ___________________
transformation of these materials into intermediate and finished
products, and the distribution of these finished products to
customers. Supply chains exist in both service and manufacturing
organizations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
Supply chain management (SCM) is the management of a network
)U
of interconnected businesses involved in the provision of product
and service packages required by the end customers in a supply
chain. Supply chain management spans all movement and storage
of raw materials, work-in-process inventory, and finished goods
from point of origin to point of consumption.

Lesson End Activity


Create a multiple choice quiz on the topic of Global Supply Chains.

Keywords
Inter-organizational Information System (IOIS): These are
the systems, which are based on information technologies that
(c

cross organization boundaries.


Supply Chain Management (SCM): Supply chain management
is the management of a network of interconnected businesses
involved in the provision of product and service packages required
by the end customers in a supply chain.
Lean Supply Chain Management

92
Decision-making: Decision-making can be regarded as the
Notes
mental processes resulting in the selection of a course of action

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___________________ among several alternative scenarios.
___________________ Information System (IS): Information systems is the study of
___________________ complementary networks of hardware and software that people
and organizations use to collect, filter, process, create, and
___________________
distribute data.
___________________

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___________________
Questions for Discussion
___________________
1. Discuss the concept of Global Supply Chains.
___________________
2. Explain integration era of supply chain management.
___________________
3. What are the five basic levels of participation for individual
___________________
firms within inter-organizational system?
4. What are the characteristics of global competition?
5. Describe the objectives of SCIS.

Further Readings
)U
Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
http://www.epiqtech.com/supply_chain-Global-Management.htm
http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html
(c
UNIT 8: Supply Chain: Flows and Problems

Unit 8
93
Notes

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Activity

Supply Chain: Flows and


Visit___________________
a textile concern, study
the information flow and
___________________
prepare a poster as per your
Problems learning.
___________________

___________________

Objectives ___________________

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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Supply Chain Facility Flow
\ Supply Chain Problems ___________________

___________________
Introduction ___________________
In today’s increasingly turbulent commercial world, achieving an
efficient and effective supply network is central to business
success.
Every single item in your view right now from the shirt you are
wearing to the screen of your computer came from somewhere. The
world we live in depends on logistics and supply chain managers to
)U
make products available to us. These managers are the ultimate
back-room power players moving millions of dollars of product
every day.
Logistics and supply chain managers are the air traffic controllers
of the global market and can give a company the advantage it
needs to surge ahead of its competition. If any part of the supply
chain fails, then a business can find itself with a big problem. That
is why, good supply chain managers are such valued professionals.

Supply Chain Facility Flow


Supply Chain Management involves the proactive management of
a two-way movement and flows of goods and services, information,
(c

and funds. It begins with the raw material and flows through to
the end user or customer. The key functions in the supply chain
are shown by the flows of the supply chain.
All supply chain functions revolve around the flow of
material/product, information and funds. Here, we will discuss
supply chain functions in terms of various flows. Figure 8.1 depicts
the flows in a supply chain. While the product/service flows
Lean Supply Chain Management

94 outwards from the manufacturer to the customer, both information


Notes and funds flow from the customer to the manufacturer.

S
___________________
Product, Service
___________________ Ultimate
Customer
___________________ Tier 1
Customer
Our
___________________ Operation
Tier 1
___________________ Supplier

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Tier 2
___________________ Supplier Information, Cash

___________________

___________________
Figure 8.1: Supply Chain Flows
___________________

___________________ Product/Material Flow


For clear and better understanding, it is very much useful to
divide product/service flows into three areas: procurement,
manufacturing support and physical distribution.

Procurement
Procurement is concerned with purchasing and arranging inbound
)U
movement of materials, parts, and/or finished inventory from
suppliers to manufacturing or assembly plants, warehouses, or
retail stores. Whereas physical distribution is concerned with
outbound product shipments, it is inbound movement to the buyer
of the product.
Inbound logistics or the process of acquisition of materials is
typically called purchasing. Materials are involved in the process of
adding value through manufacturing. Purchasing is concerned
with availability of the desired material assortments where and
when needed.
Procurement involves five activities:
z Sourcing,
(c

z Order placement and expediting,


z Supplier relationship,
z Transportation (inbound and outbound logistics), and
z Receiving.
UNIT 8: Supply Chain: Flows and Problems

95
These activities are shown in Figure 8.2.
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________

___________________
Figure 8.2: Procurement Activities
___________________
On the operational side, inventory turns is a key performance
___________________
measure that be observed very closely. Consider an example. There
___________________
are two companies, ‘A’ and ‘B’, who have identical sales and profit
margins over a one-year period.
‘A’ buys one crore worth of parts at the beginning of the year. It
sells the finished products by year's end at a 10% profit, which
generates ` 1.1 crore in total revenues.

‘B’ uses a more aggressive inventory management strategy. It buys


)U
parts four times during the year, spending only ` 25 lakh at a time,
and reordering just before running out of components. Essentially,
the company reinvests the same ` 25 lakh to replace sold
inventory. By year's end, ‘B’ generates the same ` 1.1 crore.

However, since ‘B’ is only investing ` 25 lakh at a time, it is


spending ` 75 lakh less on inventory than ‘A’. Considering an
interest rate of 15%, ‘B’ pays an interest of ` 5 lakh for inventory,
while ‘A’ pays ` 20 lakh. If ‘A’ makes a profit of ` 10 lakh, the ‘B’
has made a profit of ` 25 lakh. ‘B’ has also reduced his capital risk
for the year compared to ‘A’.
This example shows that simply by increasing inventory turnover,
the company generates greater profit and receive more free cash
flow. The procurement system has the ability to control inventory
(c

turnover as it starts ordering.


In retailing and wholesaling, buying is the most widely used term
for procurement. It is also called outbound logistics. Products
(inventory that is available for consumer purchase) are ready for
consumption. A unique characteristic of outbound logistics is that
Lean Supply Chain Management

96 the customer base it services is typically more than the number of


Notes suppliers a firm uses.

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___________________ In its physical distribution operations, each firm is only one of
___________________ many participants in an overall supply chain. Materials and parts
are often purchased directly from either the original manufacturer
___________________
or a specialized industrial wholesaler. The utilization of direct
___________________ channels is an important factor in the design of a supply chain
___________________ system for procurement.

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___________________ It is more complex than inbound logistics, since customer order
___________________ processing handles orders in response to customers’ requirements;
random ordering must be accommodated by the physical
___________________
distribution system. The ability to determine when and where
___________________ products are purchased serves to significantly reduce operational
___________________ variance as compared to purchasing where operational variances
are much fewer.

Physical Distribution
The area of physical distribution concerns movement of a finished
product to customers. In physical distribution, the customer is
considered the final destination of a marketing channel. It is
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through the physical distribution process that the time and space
of customer service become an integral part of marketing.
Linking marketing channels with its customers: This links
marketing and the supply chain, the interface between these two
functions is critical. In this relationship, there is a potential for
conflict.
In a typical organization, marketing tries to accommodate
customer needs, while manufacturing requires long stable
production runs to control costs. Inventory is used to reunite the
difference in perspectives of marketing and manufacturing. This
compels supplies to use forward deployment throughout the system
on the basis of forecasted sales. This is often the reason for the
conflict with marketing as there is always the possibility that
(c

inventories are moved to the wrong markets and at the wrong


time.
The key to understanding physical distribution dynamics is to
realize that customers initiate the process by placing an order.
Although similar or even identical requirements may be involved,
the degree of managerial control and risk related to performance
UNIT 8: Supply Chain: Flows and Problems

failure varies substantially between physical distribution and 97


procurement. Notes

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Typical physical distribution involves five activities: Order ___________________
transmission, order processing, order selection, order ___________________
transportation and customer delivery. These activities have been
___________________
shown in Figure 8.3.
___________________

Order Order Customer ___________________

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processing transmission order
___________________

___________________
Order Order Customer
selection transportation delivery ___________________

___________________

Figure 8.3: Physical Distribution Cycle Activities ___________________

Analysis, of how customers order products, is necessary to


minimize operational variance and simplify transactions. This
requires improving forecast accuracy. There should be proper
coordination between customers and order management to reduce
uncertainties. Finally, the physical distribution system should be
designed to be as flexible as possible.
)U
Manufacturing Support
The area of manufacturing support focus on managing an orderly
and economic flow of materials and work-in-process inventory
between the different stages of manufacturing. This constitutes
movement and storage of product, materials, semi-finished parts
and materials between the firm’s facilities.
Manufacturing support is treated as a distinct operating area. This
is because manufacturing support represents the most complex
internal support operations and has one significant difference
when compared with physical distribution. Unlike physical
distribution, which attempts to service the desires of customers
and therefore must accommodate the uncertainty of consumer and
(c

industrial demand, manufacturing support involves supply and


movement requirements that are under the control of the
manufacturing enterprise.
Supply chain capabilities are expanded by the needs of quick
manufacturing switchover and shorter production runs. This
demands plentiful handlings and transfers of materials and
Lean Supply Chain Management

98 economies of scale have often to be redundant. As the number of


Notes plants with specific production activities of the firm increase, the

S
___________________
manufacturing support system gets to become more complex.

___________________ Information Flows


___________________ Within individual supply chain areas, different requirements exist
___________________ with respect to size of order, availability of inventory, and urgency
of movement. Information flow identifies specific locations within a
___________________

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supply chain that demands attention. The main objective of
___________________
information sharing is to reunite any discrepancy in the system.
___________________ Accurate information makes the supply chain become more
___________________ effective.

___________________ Supply chain information also integrates different operating areas.


The information facilitates coordination of planning and control of
___________________
day-to-day operations. This integration of different areas involves
three major types of information flows:
z Coordination flows,
z Cash flows, and
z Operational flows.
)U
As mentioned earlier, the flow of goods/inventory is in forward
direction, the direction of money flow is in the backward direction
and the flow of information is in both directions.
Forward information deals with the availability of goods, order
processing, inventory status, documentation, quality assurance
reporting, warranty, etc. Backward information provides quality
feedback, customer orders, procurement quality, quantity,
specification and timing, production and despatch planning. These
information flows facilitate the coordination function.

Fund Flows
The ability to convert purchased components into products — and
then cash — in the most efficient way possible reflect on the profits
of the supply chain. There is only one source of funds - the
(c

customer. You pay for the product, the retailer pays the
wholesaler, and the wholesaler pays the manufacturing company.
Similar information, material, and fund flows take place across the
entire supply chain. Hence, it is also transfer of money.
There are solutions that reduce processing costs significantly by
offering enhanced visibility and less uncertainty in accounts
UNIT 8: Supply Chain: Flows and Problems

receivable and accounts payable, with a significant reduction in 99


working capital needs. Furthermore, they also accelerate the Notes

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process of procuring goods, accelerating payment and invoice ___________________
reconciliation. Sainsbury, the leading food retailer in UK, for
___________________
example, has introduced a system that enables its suppliers to get
access to sources of funds potentially using their borrowing rate ___________________

rather than the rate they might be used to using. They found this ___________________
very attractive as according to them, financing methods can add up
___________________

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to 4% of the cost of goods.
___________________
The higher the speed of transfer of money, the better is the
___________________
financial position of the firm, as the flow of money supports the
movement of products and may also add to the cost. It is ___________________
important, therefore, to expedite the flow of funds because it ___________________
determines the financial position of the company. Dell, for
___________________
example, manages its cash flows very effectively. By managing
receivables and payables very closely, it is able to collect cash from
its customers, on average, ten to fifteen days before it has to pay
its suppliers. This is one of Dell’s major competitive advantages.
Supply chain decisions in the management of product, information,
and cash flows play a key role in the success or failure of a firm.
)U
The information flow determines the speed of material flow and
increased responsiveness to customer requirements, which will in
turn ensure faster money flow back into the supply chain and
greater supply chain profits.
Logistics and supply chain functions can overlap. Different
companies define them in their own ways. Logistics is generally
concerned with strategy and coordination of flows between
marketing and production (i.e. transportation and distribution).
However, it cuts across many functions such as Supply Chain.

Check Your Progress


Fill in the blanks:
1. The main objective of …………………. sharing is to
(c

reunite any discrepancy in the system.


2. The area of manufacturing support focus on managing
an orderly and ……………… flow of materials and work-
in-process inventory.
Lean Supply Chain Management

100 Supply Chain Problems


Notes

S
Activity The implementation of Supply Chain Management (SCM) can be
Fix ___________________
an appointment with a both beneficial and challenging to your business. Determining
supply chain executive of an
___________________
organization and find out the supply chain challenges before they happen is critical to SCM
problems in its supply chain.
___________________ success, as the failures and successes are extremely visible to your
trading partners. In order to achieve successful implementation of
___________________
SCM, take note of the following supply chain challenges:
___________________

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___________________ Don’t Assume SCM Technology Fixes Everything

___________________
SCM technology does many things, but it cannot do it all. One of
the most unrealistic assumptions is that SCM technology will help
___________________
you control your supply chain and vendor resources. Before you
___________________ rely too heavily on SCM technology, you must first have a specific
___________________ level of organized control within your supply chain relationships.
Supply chain management technology is most effective when you
have the ability to control your logistic providers and trading
partners.

Don’t Use the Past to Predict the Future


Relying on past performance to predict future sales can cause big
problems. Instead, track actual sales as they happen, the supply
)U
chain network will react quickly to any changes in consumer
trends. This tactic is particularly beneficial in a retail supply
chain, when the item being sold is unremarkable and can be
purchased from a variety of retailers.

Don’t Rely on Sale Data


Never rely solely on sale data when making critical decisions. It’s
important to understand and utilize real-time inventory levels,
cash flow and financial ratings when making critical supply chain
decisions. If you maintain your supply chain metrics, you’ll avoid
making partnership errors with both suppliers and customers.

Don’t Forget to Communicate


(c

Another common supply chain challenge is lack of communication.


Both suppliers and customers need continuous monitoring, as well
as collaboration to ensure supply meets demand. Nothing can
replace face-to-face communication; by fostering personal
relationships with both customers and suppliers, the entire supply
chain process will be embraced by all.
UNIT 8: Supply Chain: Flows and Problems

Don’t Forget about a Supplier’s Capability 101


Notes
One of the more difficult aspects of supply chain management is

S
trying to understand the full capabilities of your suppliers. By ___________________
understanding what a supplier can do during critical times can ___________________
greatly increase your response time to changes in demand. Skilled
___________________
supply chain managers will often review lead times, burst capacity,
standard capacity and quick turn capabilities with their suppliers ___________________

to ensure the supplier’s capabilities meet the needs of the ___________________

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company.
___________________

Bullwhip Effect ___________________

The 'Forrester Effect', is now popularly called the 'bullwhip effect' ___________________
and shows how information gets distorted as it moves along the ___________________
network and results in excess inventory at times and inventory
___________________
shortage at other times. With each stage having very different
estimates of what demand looks like, it results in the lead-lag
effect and a change in amplitude in the inventory which, in turn,
creates two possible situations:
z Too Much Stock that results in increase in costs, e.g. storage
and handling, insurance, interest etc.; loss of productivity due
)U
to existing inventory; high opportunity cost; and stockpiling of
unsold stock, etc.
z Too Little Stock that results in the firm's inability to cope with
demand which results in loss of customers; delays often halt
production, which leads to idle labour and machinery; and loss
of discounts for bulk buying, etc.
In effect, this effect increases manufacturing cost, increases
inventory cost, increases replenishment lead times, increases
transportation cost, increases labour costs associated with shipping
and receiving, hurts the level of product availability and results in
more stock outs, and lower profitability.
Forrester explained this phenomenon was due to the fact that
complete information is not shared between stages due to
(c

conflicting objectives. In other words, when each member of a


group tries to maximize his or her own benefit without regard to
the impact on other members of the group, the overall effectiveness
of the group may suffer. Inefficiencies creep in when rational
members of supply chains optimize individually instead of
coordinating their efforts.
Lean Supply Chain Management

102
It took sometime for industry to absorb the implications of the
Notes
effect noticed by Forrester, but it ultimately led to the concept of

S
___________________ the supply chain in the 1990s. The supply chain is based on two
___________________ core concepts.

___________________ Firstly; practically every product that reaches an end user


represents the cumulative effort of multiple organizations. These
___________________
organizations are referred to collectively as the supply chain. A
___________________
supply chain consists of multiple firms, both upstream (suppliers)

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___________________ and downstream (distribution).
___________________ Secondly; organizations have to minimize conflicts in objectives
___________________ outside their "four walls" and manage the entire chain of activities
that ultimately delivers products to the final customer in order
___________________
that each stage of the supply chain and all its constituents can
___________________ maximize profits.

Snowball Effect
Variability in supply quantities and supply delays increase as one
moves downstream in the supply chain. For example, a small
breakdown in a machine in a thread manufacturing plant in India
can cause a four-day delivery delay to the Knitter in Malaysia,
)U
which can result in a seven-day delivery delay to the Dyer in Hong
Kong and finally snowball into a 10-day delivery delay of a hot,
new model to the clothing manufacturer in Europe. Thus, resulting
in loss of sales worth millions of dollars.

Supply Chain Disruptions


Significant supply chain disruptions can reduce your company’s
revenue, cut into your market share, inflate your costs, send you
over budget and threaten production and distribution.
One of the most effective and efficient way to manage supply chain
risks is to keep them away from happening. Just as Six Sigma
companies utilize data and statistical analysis to measure and
improve operational performance to prevent quality problems, so,
too can companies use data and analysis to significantly reduce the
(c

likelihood of supply chain disruption.


The supply chain problem solving system enables you to:
z Reduce the cost of supplier defects: Drive Root Cause
analysis into your supplier plants, understand reoccurring
problems, eliminate them, and reuse the data.
UNIT 8: Supply Chain: Flows and Problems

103
z Improve supplier/quality team efficiency: Drive quality
Notes

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while not actually being on-site. As the suppliers get better at
problem solving, they will need less of Supplier-Quality ___________________
professional's time. ___________________

z Facilitate scalability and reuse of information: Collect ___________________


problem solving knowledge and reuse it. As demand changes
___________________
with economic cycles, knowledge and experience can be
___________________

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accessed and reapplied when demand increases.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. ……………….. in supply quantities and supply delays
___________________
increase as one moves downstream in the supply chain.
___________________
2. ……………. on past performance to predict future sales
can cause big problems.

Summary
Supply Chain Management (SCM) maximizes profit by integrating
three key flows across the boundaries of the companies that form
)U
the supply chain: flow of value (product/materials), information,
and funds. Successful integration or coordination of these three
flows produces improved efficiency and effectiveness for business
organizations.
Effective supply chain management is all about delivering the
right product in the right quantity and in the right condition with
the right documentation to the right place at the right time at the
right price. If only it were as simple as it sounds. Supply chains
must periodically be assessed and redesigned in response to
market changes, including new product launches, global sourcing,
new acquisitions, credit availability, the need to protect
intellectual property, and the ability to maintain asset and
shipment security. In addition, supply chain risks must be
(c

identified and quantified. SCC members report that less than half
of their organizations have metrics and procedures for assessing,
controlling, and mitigating such risks.
Lean Supply Chain Management

104 Lesson End Activity


Notes

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Create a digital essay with images and text on the topic of supply
___________________
chain facility flows.
___________________

___________________ Keywords
___________________ Procurement: Procurement is the acquisition of goods or services.
___________________
Physical Distribution: Handling, movement, and storage of

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___________________ goods from the point of origin to the point of consumption or use,
___________________ via various channels of distribution.

___________________ Fund Flow: The ability to convert purchased components into


products and then cash.
___________________

___________________
Manufacturing: Manufacturing is the production of goods for use
or sale using labour and machines, tools, chemical and biological
processing, or formulation.
Information Flow: Information flow is the transfer of information
from a variable to a variable in a given process.

Questions for Discussion


)U
1. Define procurement.
2. Explain physical distribution of material.
3. What do you mean by information flow?
4. Describe various problems of supply chain.
5. What do you understand by fund flows?

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
(c

Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain


Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
UNIT 8: Supply Chain: Flows and Problems

Web Readings 105


Notes

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http://www.usanfranonline.com/supply-chain-management-
challenges/ ___________________

http://supply-chain.org/top-supply-chain-challenges ___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________
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(c
(c
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UNIT 9: Attributes of Lean Supply Chain

Unit 9
107
Notes

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Attributes of Lean Supply Chain
___________________

___________________

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Improved Demand Management ___________________
\ Waste and Cost Reduction
___________________
\ Process Standardization
___________________
\ Industry Standards Adoption
\ Cultural Change Agent ___________________
\ Cross-enterprise Collaboration ___________________

Introduction
Lean supply chain management requires retailers to examine
every process in their supply chain and identify areas that are
using unnecessary resources, which can be measured in dollars,
time, or raw materials. A lean supply chain will improve your
)U
company's competitiveness as well as improve your company's
overall profitability. Retailers can expect reduced inventories and
costs as well as speed and responsiveness to their multichannel
customers as a result of a lean supply chain.
Building and maintaining a Lean supply chain revolves around six
key attributes. Mastering the six attributes will lead to a Lean and
effective supply chain.

Improved Demand Management


One of the key principles of Lean is moving to a pull system. That
is, products or services are pulled when requested by the final
customer. In its purest form, this would be developed using data
from the point of sale and conveyed upstream to all members of the
(c

supply chain from point to point without a change in the volume.


Clearly, the end-user requirement for the finished product will
generally be meaningless to a third-tier supplier, as they likely
only provide a fraction of the materials for the finished product and
most probably do not understand how they contribute to the
end-product structure.
Lean Supply Chain Management

108
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________
Source: http://manrodt.com/pdf/lean_2008.pdf

Figure 9.1: Attributes of Lean Supply Chain

Therefore suppliers at each level of the process must receive the


customer’s demand signal and convert it to something usable (part
number and quantity) to their upstream partners. From a supply
chain perspective, this can be rather difficult. How can the demand
)U
signal be sent from the end customer all the way back through the
supply chain? The consequences of not managing the demand
signal are clearly documented. They are often referred to as the
“bullwhip effect,” where additional units are added to the original
demand signal as the signal moves farther upstream.
For instance, an order may grow 10% at each node as it moves
from the retailer to the distributor, then to the manufacturer, its
tier-one supplier, and their suppliers. A Lean supply chain will
work to have products pulled through the channel using customer
demand from point-of-sale systems (POS) in real time. This
minimizes the need to forecast demand, given the actual and real
demand for the product.

State of the Lean Supply Chain: Demand Management


(c

In order to understand the state of the Lean supply chain, different


facets of each of the attributes were tested. In the case of the
demand management, four different facets were benchmarked:
Demand Signal, Demand Collaboration, Sales and Operations
Planning, and Inventory Management Practices.
UNIT 9: Attributes of Lean Supply Chain

109
Check Your Progress Notes

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Activity
Fill in the blanks: ___________________
Create a digital essay with
images and text on the topic
1. The end-user requirement for the finished product will ___________________
of waste and cost reduction.
generally be ……………………. to a third-tier supplier.
___________________
2. One of the key principles of Lean is moving to a ………. ___________________
system.
___________________

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Waste and Cost Reduction ___________________

___________________
Elimination of waste is one of the key tenets of Lean
___________________
manufacturing. In the broadest sense, waste can be time,
inventory, process redundancy, or even digital waste. Supply chain ___________________
partners have to work together and individually to eliminate ___________________
wasteful processes and excess inventory across the chain.
This elimination of waste should have one significant by-product: a
reduction in cost for the supply chain. This is not to say that all
costs are going to decrease, but rather that the supply chain costs
will decrease. It is possible that some costs for suppliers may go up;
however, these increases should be offset by reductions in other
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areas. For instance, a supplier may hold inventory (vendor-
managed inventory) for a client. The supplier’s costs go up, as they
are still responsible for the product, but the customer’s costs
should decrease.
Please note that the initial emphasis is placed on reducing waste,
and not cost. This is not a matter of semantics, but one of
philosophy. A pre occupation with reducing costs may lead a firm
down a sub optimal path, as not all waste can easily be tied to
costs, yet still have a significant impact on them.
The focus on waste, and not cost, also makes the conversation with
suppliers and customers less threatening. If the goal is to reduce
waste, most parties are more willing to discuss their processes
with one another. An initiative to reduce cost is typically viewed as
(c

an approach to raise profitability.


With a joint goal of reducing waste, supply chain partners can
work together to modify policies that produce or encourage it.
Typically, waste across the supply chain will be made manifest in
excess inventory. Reducing inventory can be aided by introducing
postponement and customization strategies, which push the final
Lean Supply Chain Management

110 assembly of a completed product to the last practical point in the


Notes chain.

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Activity
___________________
Within your group, discuss
process standardization.
Check Your Progress
___________________
Fill in the blanks:
___________________
1. This elimination of waste should have one significant
___________________ by-product: a …………………… in cost for the supply
___________________ chain.

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___________________ 2. An initiative to reduce cost is typically viewed as an
___________________ approach to raise ………………….

___________________
Process Standardization
___________________

___________________ The third attribute of a Lean supply chain is process


standardization. Process standardization enables continuous flow
to occur in the company, a major tenet of Lean manufacturing.
Flow is the uninterrupted movement of a product or service
through the system to the customer. Major inhibitors of flow are
work in queue, batch processing, and transportation. These
roadblocks slow the time from product or service initiation to
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delivery.
The “flow” or “value-stream” perspective represents a shift from
vertical to horizontal thinking. Horizontal thinking means looking
across the traditional vertical structures of functions and
departments to connect activities in the stream of the value
flowing from suppliers, through the organization, and on to
customers. In other words, concentrating on overall flow means
focusing on system efficiency rather than just on the point
efficiency of individual elements in an organization. Flow is
enabled when materials and processes are standardized across the
supply chain to reduce complexity.
These efficiencies can only be gained through collaboration across
the supply chain and by developing standardized processes for use
(c

in providing products and services that add value and eliminate


wasted or duplicated steps.
In addition to process of standardization, benefits can be derived
from standardizing products used in the manufacturing or
assembly of goods in other words, sharing sub components across
product lines. This way, fewer unique components are needed,
reducing manufacturing, warehousing, and development costs.
UNIT 9: Attributes of Lean Supply Chain

111
Check Your Progress Notes

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Activity
Fill in the blanks: ___________________
Create an interactive white
board activity that gets the
1. Flow is the ………………….. movement of a product or ___________________
other students on the topic of
service through the system to the customer. industry standards adoption.
___________________
2. ………………….. thinking means looking across the ___________________
traditional vertical structures of functions and
___________________

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departments.
___________________

Industry Standards Adoption ___________________

___________________
Product and process standardization between trading partners can
still lead to waste, especially where common components are not ___________________
common practice. For instance, plugging a telephone into a wall ___________________
outlets the same in all fifty states; in this case an industry
standard was developed and accepted. When that does not happen,
as in Europe, multiple standards and products to meet these
standards have to be developed and maintained.
Industry standards should be utilized wherever possible, and
supply chain members should participate in industry standards
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bodies. Standardization of products is a benefit to customers who
are using the products and enhances service ability. However, it
also decreases the proprietary nature of the product, making other
competitive factors such as an efficient supply chain more
important.
Standardization is not limited to products, but it can also dictate
how information is shared across the supply chain. As companies
increase their supply chain systems capabilities they increase the
amount of data to organize, understand, and leverage. Add in
RFID capabilities, POS data, and collaboration with trading
partners, and the data increases exponentially. As data increases,
so too does the risk of digital waste. Digital waste is defined as
information that is not related to or supporting of defined goals
and metrics. If data cannot be tied to specific objectives and
(c

therefore be germane to decision-making processes, it is worthless


to the organization. Worse, digital waste can cloud and congest
decision making unnecessarily. Digital waste can be minimized by
agreeing to data standards that will enable the free flow of
information.
Lean Supply Chain Management

112 Check Your Progress


Notes Fill in the blanks:

S
Activity
___________________
Write a magazine style article 1. …………………… is not limited to products, but it can
about cultural change agent.
___________________ also dictate how information is shared across the supply
chain.
___________________
2. Digital waste is defined as ………………… that is not
___________________ related to or supporting of defined goals and metrics.
___________________

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___________________
Cultural Change Agent
___________________ Supply chain partners including the upstream suppliers and
downstream customers work together as a team to provide value to
___________________
the end-user customer.
___________________
Collaboration must begin through a management understanding
___________________
and acceptance of the concept, followed by a clear conveyance of
this approval and its need to the workforce. It will continue
through the use of period meetings, discussions, and exchange of
information between supply chain partners.
There is one problem with applying Lean concepts they have to be
applied by people. These are the same people who are doing things
the old way today, the same people who have been doing things the
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old way for a long time, the same people who have a vested interest
in doing things the way they have always done. This is one of the
biggest challenges in getting Lean.

Check Your Progress


Fill in the blanks:
1. Supply chain partners including the ……………..
suppliers and ……………….. customers work together as
a team to provide value to the end-user customer.
2. There is one problem with applying Lean concepts they
have to be applied by ……………

Cross-enterprise Collaboration
(c

Leveraging the Lean principles of defining value and


understanding the value stream, supply chain partners work to
maximize the added value provided to the customer. This is
accomplished in part by fulfilling the principles described here, but
the objective must be to understand value as it applies to the
customer.
UNIT 9: Attributes of Lean Supply Chain

113
Added services, regardless of the perceived value of the supply
Notes

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chain partners, are only of true value if they are understood and Activity
desired by the customer. One of the enablers of cross-enterprise ___________________
Recreate a newspaper front
collaboration is the use of teams. In a Lean supply chain, these page covering
___________________
cross-
enterprise collaboration.
teams are not functionally oriented, or focused on their
___________________
organization. Rather, they have a broader perspective, and
consider what is right for the supply chain. ___________________

Supply chain partners should focus on development of cross- ___________________

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partner teams to improve their working relationship and provide a ___________________
foundation for any Lean supply chain activities.
___________________

Check Your Progress ___________________


Fill in the blanks: ___________________

1. One of the enablers of cross-enterprise …………………. ___________________


is the use of teams.
2. Supply chain partners should focus on ……………………
of cross-partner teams.

Summary
Suppliers at each level of the process must receive the customer’s
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demand signal and convert it to something usable (part number
and quantity) to their upstream partners. From a supply chain
perspective, this can be rather difficult. Elimination of waste is one
of the key tenets of Lean manufacturing. With a joint goal of
reducing waste, supply chain partners can work together to modify
policies that produce or encourage it. Typically, waste across the
supply chain will be made manifest in excess inventory. The “flow”
or “value-stream” perspective represents a shift from vertical to
horizontal thinking.
Industry standards should be utilized wherever possible, and
supply chain members should participate in industry standards
bodies. Standardization of products is a benefit to customers who
are using the products and enhances service ability. Added
(c

services, regardless of the perceived value of the supply chain


partners, are only of true value if they are understood and desired
by the customer.

Lesson End Activity


Create a multiple-choice quiz on cultural change agent.
Lean Supply Chain Management

114 Keywords
Notes

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Flow: Flow is the uninterrupted movement of a product or service
___________________
through the system to the customer.
___________________
Digital waste: Digital waste is defined as information that is not
___________________ related to or supporting of defined goals and metrics.
___________________ Standardization: A framework of agreements to which all
___________________ relevant parties in an industry or organization must adhere to

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___________________
ensure that all processes associated with the creation of a good or
performance of a service are performed within set guidelines.
___________________
Change Agent: A change agent is an event, organisation, material
___________________
thing or, more usually, a person that acts as a catalyst for change.
___________________

___________________ Questions for Discussion


1. What are the consequences of not managing the demand?
2. Why does focus on cost makes the conversation with suppliers
and customers more threatening?
3. What is horizontal thinking? Discuss the shift from vertical to
horizontal thinking.
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4. Discuss the problem with applying lean concepts.
5. What is the objective of leveraging the lean principles?

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
(c

Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
http://manrodt.com/pdf/lean_2008.pdf
http://www.smthacker.co.uk/lean_supply_chains.htm
UNIT 10: Case Study

Unit 10
115
Notes

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Case Study
___________________

___________________

___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________

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___________________
Case Study: Lean Supply Chain in Seagate, USA
___________________
Seagate Technology is the world’s largest manufacturer of disc ___________________
drives and HDD recording media. With its headquarters at Scotts
Valley, California, the company employs 62,000 people and its ___________________

turnover in 2000 exceeded US $7 billion. The business operates in ___________________


a market environment of short product life cycle and quick ramp
to high volume. The data storage market is growing 10–20 per
cent per year and the technology content doubles every 12
months. Volume products remain in production for only 6–9
months.

Approach
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In 1998, Seagate’s senior executive team was concerned that
business performance was not on par with expectations and
capabilities. The quality group was charged with recommending a
new model or system with which to run the business. The Six
Sigma methodology was selected and launched in 1998 to bring
common tools, processes, language and statistical methodologies
to Seagate as a means to design and develop robust products and
processes. Six Sigma helps Seagate to make data-based decisions
that maximize customer and shareholder value thus improving
quality and customer satisfaction while providing bottom line
savings. Six Sigma was one of the three key activities seen as
essential for Seagate’s continuing prosperity. The other two were:

z Supply chain: How to respond to demand changes in a


timely manner, execute to commitments and provide
flexibility to customers?
(c

z Core teams: How to manage product development from


research not sure what you are saying hereto volume
manufacture?

Contd…
Lean Supply Chain Management

116
Implementation
Notes

S
Seagate Springtown (which is part of Seagate Recording) started
___________________ a supply chain project to improve materials management and
___________________ develop a strategic vendor relationship. The fabrication plan at
Springtown introduced the Lean Manufacturing philosophy that
___________________
recognizes waste as the primary driver of cycle time and product
___________________ cost. Very soon a change had taken place at Springtown and Lean
Manufacturing was wholly integrated with the supply chain
___________________

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initiative. The corporate office at Scotts Valley was rolling out a
___________________ global Six Sigma deployment programme. The Springtown site
___________________ followed the Six Sigma training programme and implemented a
number of tools and techniques including the process map,
___________________
sampling plan, cause and effect analysis and control plans, which
___________________ identified a ‘hidden factory’. The less visible defects of this ‘hidden
factory’ included:
___________________
z Repeated measurements (in and out),

z Repeated chains (post and pre),

z Transits between manufacturing areas,

z Process steps conducted in ‘non-standard operating


conditions’, and
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z High rework on a process.

Results and Learning Points

The Six Sigma methodology proved a key enabler for supply


chain/Lean Manufacturing and the integrated programme
achieved improved process capability and quality as shown by:

z Increased throughput by 31 per cent,

z Significant impact on capital expenditure due to increased


efficiency of existing equipment,

z Lower work in progress, and

z 80% pass rate on qualifications for vacuum tools (previously


40%).

The main learning points from the Six Sigma programme at


Seagate Technology include:
(c

1. Companies using Six Sigma need to learn how to use the


metrics to manage – to make appropriate decisions on a
holistic basis, avoiding sub-optimization. This task of
integration with the whole of the company’s business process
is the key.

2. Set aggressive goals – do not make them too easy.


Contd…
UNIT 10: Case Study

117
3. Develop a system for tracking ‘soft savings’.
Notes

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4. Develop a common language and encourage its use on a
widespread basis early in the program. ___________________

5. Embed the business process within the organization by ___________________

training all functions – use green, black belt and customized ___________________
programs as appropriate.
___________________
Question:
___________________

PE
Explain the consequences of implementing lean supply chain at
___________________
Seagate.
___________________
Source:http://fachmannhunter.com/doc/supply-chain/Lean_and_agile_supply.pdf
___________________

___________________

___________________
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(c
(c
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UNIT 11: Lean Supply Chain Leadership

119
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________

BLOCK-III
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(c
Lean Supply Chain Management
Detailed Contents
120
Notes

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UNIT 11: LEAN SUPPLY CHAIN LEADERSHIP
___________________ UNIT 13: CUSTOMER VALUE FOCUS
z Introduction z Introduction
___________________
z Traits of Successful Leaders z Lean Customer Value Principles
___________________
z Leadership Styles and Skills z Implementing a Customer Value Focus
___________________
z Teams z Customer Focus in a Service Supply Chain
___________________ Environemnt

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z Obstacles to Leadership
___________________ z Integrating Marketing and Supply Chain
z Lean Supply Chain Leadership
Management for Improved Customer Value
z
___________________
Elements of Lean Ledership
z Creating Customer Value
___________________
UNIT 12: CUSTOMER VALUE
___________________ UNIT 14: ETHICS, TRUST AND ENVIRONMENT
z Introduction
z Introduction
___________________
z Concept of Customer Value
z Trust in Lean Supply Chain
z Components of Customer Value
z Environmental Issues in Lean Supply Chains
z Customer Value Payoff
z Ethics Expectations in Supply Chains
z Customer Satisfaction
UNIT 15: CASE STUDY
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(c
UNIT 11: Lean Supply Chain Leadership

Unit 11
121
Notes

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Lean Supply Chain Leadership
___________________

___________________

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Traits of Successful Leaders ___________________

\ Leadership Styles and Skills ___________________

\ Obstacles of Leadership ___________________


\ Leadership in Lean Supply Chain ___________________
\ Elements of Lean Leadership ___________________

Introduction
Leadership is an individual's or organization's ability to inspire
confidence and influence people to act in a coordinated fashion in a
common direction or with a shared focus.
Broadly speaking, leadership is a process by which a person
)U
influences others to achieve an objective and direct the
organization in a way that makes it more cohesive as well as
coherent. Usually leaders carry out this process by applying their
leadership attributes, e.g., beliefs, values, ethics, character,
knowledge, and skills.
Good leaders develop through a never-ending process of self-study,
education, training, and experience. This implies that good leaders
are made, not born. If you have the strong desire and willpower,
you may become an effective leader. Good leaders develop through
a never-ending process of self-study, education, training, and
experience. There are certain things you must be, know, and, do to
inspire your workers into higher levels of teamwork. These do not
come naturally, but are acquired through continual work and
(c

study.
Lean Supply Chain Management

122 Traits of Successful Leaders


Notes

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Activity The term ‘trait’ simply refers to a variety of individual attributes,
___________________
Make students team and work including different aspects of personality, temperament, needs,
on historical background of
___________________
traits of successful leaders. motives and values.
___________________ Personality traits are relatively old dispositions to act in a
___________________ selective style. Different examples include self-confidence,
extroversion, emotional maturity, and energy level. The prime
___________________

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need or a motive is a strong desire for a particular type of stimuli/
___________________
experience. Psychologists usually differentiate between
___________________ physiological needs (e.g., hunger, thirst) and social motives such as
___________________ achievement, esteem, affiliation, power, and independence. Needs
and motives are considered essential and important because they
___________________
greatly influence attention to information and events and they
___________________ guide, energize, and sustain the human behaviour.
Values are closely connected attitudes for anything to be either
right or wrong, ethical or unethical, moral or immoral. Examples
include fairness, justice, honesty, freedom equality
humanitarianism, loyalty, patriotism, progress, self-fulfilment,
excellence, pragmatism courtesy, politeness, and cooperation.
Values are considered important as they highly influence a
)U
person's preferences, perception of problems, and choice of
behaviour.
Different evidences have shown that traits are jointly determined
by learning and by an inherited capacity to gain satisfaction from
particular types of stimuli or experiences. Some of the traits, e.g.,
values, social needs are probably more influenced by learning than
temperament and physiological needs.
The Trait Approach originates from the “Great Man” theory as a
best and most effective way of identifying the key characteristics of
successful leaders. It was supposed that through this approach
critical leadership traits could be isolated and that people with
such traits could then be recruited, selected, and installed into
leadership positions. This approach was common in the military
(c

and is still used as a set of criteria to select candidates for


commissions.

Problem with the Trait Approach


The problem with the trait approach lies in the fact that almost as
many traits as studies undertaken were identified. After several
UNIT 11: Lean Supply Chain Leadership

years of such research, it became evident that no consistent traits 123


could be identified. Although some traits were found in a Notes

S
considerable number of studies, the results were generally ___________________
inconclusive. It is the fact that some leaders might have possessed
___________________
certain traits but the absence of either of them did not means that
the person was not a leader. ___________________

Although there was minor consistency in the results of the various ___________________

trait studies, however, some traits appeared more frequently than ___________________

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others, including technical skills, friendliness, task motivation, ___________________
application to task, group task supportiveness, social skill,
___________________
emotional control, administrative skill, general charisma, and
intelligence. The table below lists the main leadership traits and ___________________
skills identified by Stogdill in 1974. ___________________

Table 11.1: Leadership Skills and Traits ___________________

Traits Skills

Adaptable to situations Clever (Intelligent)


Alert to social environment Conceptually skilled
Ambitious and achievement-oriented Creative
Assertive Diplomatic and tactful
Cooperative Fluent in speaking
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Decisive Knowledgeable about group task
Dependable Organised (administrative ability)
Dominant (desire to influence others) Persuasive
Energetic (high activity level) Socially skilled
Persistent
Self-confident
Tolerant of stress
Willing to assume responsibility

The various studies have shown great variations in leadership


traits. On the basis of their source, the various traits can be
classified as innate and acquirable traits. Innate traits are those
traits, which are possessed by various individuals since birth or
are God-gifted. These qualities cannot be acquired by the
individuals. On the basis of such qualities, it is said that ‘Leaders
are born and not made.’ These traits are:
(c

z Physical features, and


z Intelligence.
Acquirable traits are those, which can be acquired and increased
through various processes. Such behavioural patterns are
developed among the child as various traits over period of time.
Lean Supply Chain Management

124 Many of these traits can be increased through training


Notes programmes. These traits are:

S
Activity
___________________
Present drafts of written z Emotional stability,
assignments leadership styles
and___________________
skills. z Human relations,
___________________ z Empathy,
___________________
z Objectivity,
___________________
Motivating skills,

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z
___________________
z Technical skills,
___________________
z Communication skills, and
___________________
z Social skills.
___________________

___________________ Check Your Progress


True or False:
1. The problem with the trait approach lies in the fact that
almost as many traits as studies undertaken were
identified.
2. Personality traits are not old dispositions to act in a
)U
selective style.

Leadership Styles and Skills


Following section focuses on leadership styles and skills:

Leadership Styles
Leadership has a formal aspect as in most political or business
leadership or an informal one as in most friendships. Saying
"leadership" rather than of "leading" basically implies that the
entities doing the leading have some "leadership skills" or
competencies.
z The bureaucratic leader (Weber, 1905) is very structured
and follows the procedures as they have already been
(c

established. Such type of leadership usually has less scope to


explore new ideas to solve problems and is usually slow-paced.
Leaders ensure that all the steps have been followed prior to
sending it to the next level of authority. Universities,
hospitals, banks and government usually appreciate to have
such type of leader in their organizations. They demand for
UNIT 11: Lean Supply Chain Leadership

such types of leader in order to ensure quality, increase 125


security and decrease corruption. Notes

S
z The charismatic leader (Weber, 1905) leads by feeding ___________________
energy and excitement into their team members. Such type of ___________________
leader has to be committed to the organization for the long
___________________
run. If the success of the division or project is attributed to the
leader and not the team, charismatic leaders may become a ___________________

risk for the company by deciding to resign for advanced ___________________

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opportunities. It takes the company time and hard work to ___________________
gain the employees' confidence back with other type of
___________________
leadership after they have committed themselves to the
magnetism of a charismatic leader. ___________________

z The autocratic leader (Lewin, Lippit & White, 1939) is ___________________

given the power to make decisions alone, having total ___________________


authority. Such leaders are good for employees that need close
supervision to perform certain tasks. Creative employees and
team players resent such type of leadership, since they are
unable to improve processes or decision-making, resulting in
job dissatisfaction.
z The democratic leader (Lewin, Lippitt & White, 1939)
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listens to the team's ideas and studies them, but will make the
final decision. Team players contribute to the final decision
thus increasing employee satisfaction and ownership, feeling
their input was considered when the final decision was taken.
During changes, this type of leadership helps the team
assimilate the changes better and more rapidly than other
styles, knowing they were consulted and contributed to the
decision-making process, lessening resistance and intolerance.
A major shortcoming of this leadership style is that it faces
difficulty when decisions are needed in a short span of time .
z The laissez-faire ("let do") leader (Lewin, Lippitt &
White, 1939) gives no regular feedback or supervision as the
employees are too much experienced and need less supervision
(c

to obtain the expected outcome. On the other hand, this type of


style is also related to leaders that do not lead at all, failing in
supervising team members, resulting in lack of control and
higher costs, poor service or failure to meet deadlines.
z The people-oriented leader (Fiedler, 1967) is the one that,
in order to comply with effectiveness and efficiency, supports,
Lean Supply Chain Management

126 trains and develops his personnel, increasing job satisfaction


Notes and genuine interest to do a good job.

S
___________________ z The task-oriented leader (Fiedler, 1967) focuses on the job,
___________________ and concentrates on the specific tasks assigned to each
employee to reach goal achievement. This leadership style
___________________
suffers the same motivation issues as autocratic leadership,
___________________ showing no personal involvement in the team’s needs. It needs
___________________ close supervision and control to get desired results. Another

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name for this is dealmaker (Rowley & Roevens, 1999) and is
___________________
linked to a first phase in managing change, enhance, according
___________________
to the organize with Chaos approach.
___________________
z The servant leader facilitates goal accomplishment by giving
___________________ its team members what they require in order to be fruitful.
___________________ Such leader is an instrument, which employees use to reach
the goal rather than a commanding voice that moves to
change. Such leadership style, in a manner similar to
democratic leadership, tends to achieve the results in a slower
timeframe than other styles, although employee engagement is
higher.
z The transaction leader (Burns, 1978) is given power to
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perform certain tasks and reward or punish for the team’s
performance. It gives opportunities to the manager to lead the
group and the group agrees to follow his lead to accomplish a
predetermined goal in exchange for something else. Power is
assigned to the leader to evaluate, correct and train
subordinates when productivity is not up to the desired level
and reward effectiveness when expected outcome is reached.
z The transformation leader (Burns, 1978) motivates its
team to be effective and efficient. Communication is the base
for goal achievement focusing the group in the final desired
outcome or goal accomplishment. This leader is highly visible
and uses chain of command to get the job done.
Transformational leaders focus on the big picture, needing to
be surrounded by people who take great care of the
(c

description. Such leader is always looking for new innovative


ideas that move the organization to reach the company’s
vision.
z The environment leader is the one who nurtures group or
organisational environment to affect the emotional and
psychological perception of an individual’s place in that group
UNIT 11: Lean Supply Chain Leadership

or organisation. An understanding and application of group 127


psychology and dynamics is essential for this style to be Notes

S
effective. The leader uses organisational culture to inspire ___________________
individuals and develop leaders at all levels. This leadership
___________________
style relies on creating an education matrix where groups
interactively learn the fundamental psychology of group ___________________

dynamics and culture from each other. The leader uses this ___________________
psychology, and complementary language, to influence
___________________

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direction through the members of the inspired group to do
___________________
what is required for the benefit of all.
___________________
Leadership Skills
___________________
The process of successfully influencing the activities of a group
___________________
towards the achievement of a common goal. A leader has the
ability to influence others through qualities such as personal ___________________

charisma, expertise, command of language, and the creation of


mutual respect. As well as requiring strong communication skills
and personal skills, leadership uses the background skills of
mentoring, decision-making, delegation and motivating others.

Networking
)U
The ability to actively seek, identify and create effective contacts
with others, and to maintain those contacts for mutual benefit. In
addition to strong communication skills and personal skills,
networking uses the background skills of network building and
motivating others.

Teamwork
It involves working with others in a group towards a common goal.
This requires cooperating with others, being responsive to others'
ideas, taking a collaborative approach to learning, and taking a
responsibility for developing and achieving group goals. Teamwork
uses the background skills of collaboration, mentoring, decision-
making and delegation.
(c

Mentoring
It is:
z being a trusted advisor and helper with experience in a
particular field. Actively supporting and guiding someone to
develop knowledge and experience, or to achieve career or
Lean Supply Chain Management

128 personal goals (for example, a third-year student mentoring a


Notes first year student, helping to adjust to the university

S
___________________
experience);

___________________ z a mentoring relationship may be formal or informal, but must


involve trust, mutual respect, and commitment as both parties
___________________
work together to achieve a goal (for example, mentoring a
___________________ younger member of a team to achieve better performance in
___________________ the lead-up to a sporting event);

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___________________
Group Work
___________________
It is:
___________________
z any activity in which students work together;
___________________
z any activity which has been specifically designed so that
___________________
students work in pairs or groups, and may be assessed as a
group (referred to as formal group work); or
z when students come together naturally to help each other with
their work (referred to as informal group work);
z peer group activity in lab classes, tutorials etc.
)U
Decision-making
It is:
z identifying appropriate evidence and weighing up that
evidence to make a choice (for example, gathering and
assessing information to find the best way to perform an
experiment).
z taking responsibility for a decision and its outcomes (for
example, choosing a topic for a group presentation from a
number of suggestions).

Delegation
It is:
(c

z taking responsibility for determining when to ask someone


else to make a decision or carry out a task (for example,
figuring out what is a fair distribution of the workload in a
group project, and sharing responsibility with others); and
z distributing responsibility and authority in a group by giving
someone else the discretion to make decisions that you have
the authority to make (for example, as the chosen leader of a
UNIT 11: Lean Supply Chain Leadership

lab experiment team, you could assign tasks and decisions to 129
different group members). Notes

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___________________
Collaboration
___________________
It is working cooperatively and productively with other team
___________________
members to contribute to the outcomes of the team's work (for
example, dividing the workload and sharing the results of your ___________________
own work with others in the group, or assisting members of the ___________________

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group who are having difficulty completing their tasks).
___________________

Network Building ___________________

It is: ___________________

z creating contacts with other people and maintaining those ___________________

contacts (for example, meeting someone at a seminar with ___________________


similar interests, and swapping email addresses with them);
z acquiring and maintaining information about people who
might be useful contacts for specific purposes (for example,
seeking out people established in an industry you hope to work
with one day); and
)U
z using a contact in an ethical manner to help each of you meet
specific goals, (for example, collaborating on projects of
importance to both of you).

Motivating Others
It is:
z generating enthusiasm and energy by being positive, focussing
on finding solutions and maintaining a positive attitude even
when things are not going well (for example, when something
goes wrong, asking "What can we try now?" instead of saying,
"That should have worked better."); and
z encouraging others to come up with solutions, listening
carefully to their ideas and offering constructive feedback (for
(c

example, gathering suggestions for a group project, and giving


each person's ideas fair discussion).

Coaching Leadership
Coaching is a form of leadership based upon feedback and
communication. In keeping with lean supply chain management
principles, it is a process of giving motivational feedback to
Lean Supply Chain Management

130 maintain and improve performance. Coaching seeks to maximize


Notes supply chain partner strengths, while minimizing weaknesses. It

S
___________________
helps leaders to focus efforts on goals and to develop resiliency and
interpersonal skills. As observed by Hunt and Weintraub (2002),
___________________
organizations are training managers to be coaches as a means of
___________________ improving organizational performance.
___________________ Coaching, when referring to getting coached by a professional
___________________ coach, is a teaching or training process in which an individual gets

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support while learning to achieve a specific personal or
___________________
professional result or goal. The individual getting coached may be
___________________
referred to as the client, the mentee or coachee, or they may be in
___________________ an intern or apprenticeship relationship with the person coaching
___________________ them. Coaching may also happen in an informal relationship
between one individual who has greater experience and expertise
___________________
than another and offers advice and guidance, as the other goes
through a learning process.
Coaching guidelines for leaders include the following:
z Have supply chain partners assess their own performance
z Avoid blaming or embarrassing supply chain partners
)U
z Develop a supportive relationship with supply chain partners
z Focus on the desired behaviours of the supply chain partner,
not simply on the supply chain partner itself
z Give praise and recognition when possible
z Give specific and descriptive feedback
z Give coaching feedback to managers in the supply chain
z Provide coaching training to managers in the supply chain
z Make feedback timely.

Teams
A "team" is defined as a group of people who collaborate or work
(c

together toward a common prescribed goal. A team implies


synergy, meaning the whole is greater than the sum of their parts.
The spirit of a team is a common commitment, because without it,
the members are simply a group of individuals.
UNIT 11: Lean Supply Chain Leadership

131
A team comprises a group of people linked in a common purpose.
Notes

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Teams are especially appropriate for conducting tasks that are
high in complexity and have many interdependent subtasks. ___________________

A group in itself does not necessarily constitute a team. Teams ___________________

normally have members with complementary skills and generate ___________________


synergy through a coordinated effort, which allows each member to
___________________
maximize his or her strengths and minimize his or her
___________________

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weaknesses.
___________________
Team size and composition greatly affect the team processes and
outcomes. The optimal size (and composition) of teams is debated ___________________

and will vary depending on the task at hand. At least one study of ___________________
problem-solving in groups showed an optimal size of groups at four
___________________
members. Other works estimate the optimal size between 5–12
___________________
members. Less than 5 members results in decreased perspectives
and diminished creativity. Membership in excess of 12 results in
increased conflict and greater potential of sub-groups forming.
Regarding composition, all teams will have an element of
homogeneity and heterogeneity. The more homogeneous the group,
the more cohesive it will be. The more heterogeneous the group,
the greater the differences in perspective and increased potential
)U
for creativity, but also the greater potential for conflict.
Team members normally have different roles, like team leader and
agents. Large teams can divide into sub-teams according to need.
Many teams go through a life-cycle of stages, identified by Bruce
Tuckman as: forming, storming, norming, performing and
adjourning.
The Forming – Storming – Norming – Performing model of group
development was first proposed by Bruce Tuckman in 1965, who
maintained that these phases are all necessary and inevitable in
order for the team to grow, to face up to challenges, to tackle
problems, to find solutions, to plan work, and to deliver results.
This model has become the basis for subsequent models of group
(c

development and team dynamics and a management theory


frequently used to describe the behaviour of existing teams. It has
also taken a firm hold in the field of experiential education since in
many outdoor education centres team building and leadership
development are key goals.
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132
Notes Check Your Progress

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Activity
___________________ Fill in the blanks:
Create a digital essay with
images and text on the topic
___________________ 1. A major shortcoming of ………………… leadership style
of obstacles of leadership.
is that it observes difficulty when decisions are needed
___________________
in a short span of time.
___________________
2. ……………….. is a form of leadership based upon
___________________
feedback and communication.

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___________________
3. Coaching seeks to maximize supply chain partner
___________________ strengths, while minimizing ……………………….
___________________ 4. Team size and composition greatly affect the team
___________________ ……………… and outcomes.
___________________
Obstacles to Leadership
As a leader, you are judged on your ability to deliver results. While
at times this might seem tough and unfair, at the end of the day it
is results that matter. In theory, delivering results is simple but in
practice can be more difficult. So, what are main obstacles you
need to address to deliver results and be an effective leader?
)U
Old Mindsets
This might not be the thing that you would automatically expect to
see at the top of the list. Truth is that when we become a leader it
is easy to forget that there are different expectations and
challenges. If as a new leader you are still in the manager mindset,
you are going to struggle. Even if you are not a new leader, old
mindsets and complacency can be an obstacle.

Personal Rather than Corporate Agenda


Ever noticed how someone’s leadership career evolves. At the start
they are a breath of fresh air, full of new ideas and enthusiasm,
after a while, especially if the going gets tough, they start to focus
on their own survival rather than on delivering success. Be alert to
(c

becoming too focussed on your personal agenda.

Vagueness about Direction


As the leader, people will look to you to provide clear direction.
After all, unless you have a clear direction in which you want to
UNIT 11: Lean Supply Chain Leadership

take the organisation or team forward in, how are you going to 133
communicate it and get the support you need. Notes

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___________________
Micromanaging Everything
___________________
One of the areas, which differentiates the best from the poorer
leaders is their ability to let go of things. When a leader spends all ___________________

of their time micromanaging everything they get lost in the detail ___________________
of the day to day stuff and lose sight of the bigger picture.
___________________

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Failure to Act ___________________

We have all probably encountered this situation at some point in ___________________


our career. The organisation is facing some struggles, needs to take ___________________
some decisions and most importantly act on them. Yes, it takes
___________________
courage but failure to act is a recipe for disaster in the long term.
___________________
Having to be Right
Of course, it is great to be the person who comes up with the ideas,
turnaround or transformation plan or initiative. On the other
hand, when this becomes essential to you as the leader you stop
listening, taking ideas on board and potentially miss out on real
opportunities.
)U
Failing to Adapt
Every situation requires a different response. Failing to adapt
leads to a situation where you become stuck. In the worst case
scenarios, this failure to adapt can result in a whole organisation
collapsing. Always be ready to adapt to new and changing
circumstances.
Would love to know what other obstacles you would add to the list
so please leave your best ideas.

Check Your Progress


Fill in the blanks:
1. When a leader spends all of their time micro managing
(c

everything they get lost in the detail of the day to day


stuff and lose sight of the ………………… picture.
2. Failing to …………… leads to a situation where you
become stuck.
Lean Supply Chain Management

134 Lean Supply Chain Leadership


Notes

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Activity Here, you will come across current strategies and ideas that can
List ___________________
down any five books on serve to implement lean supply chain management principles,
leadership in lean supply
___________________
chain. overcome difficulties, and provide practical information on how
___________________
lean supply chains can be successfully operated.

___________________ Importance of leadership in the implementation of lean principles


within supply chains, there will exist two phases of decision
___________________
making effort: an initiation phase and an implementation phase.

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___________________
There is a difference between the factors that enable a successful
___________________ change and those that enable a sustainable, lean change. While
___________________ effective leadership and senior management commitment are vital.
Successful change largely depends upon leaders who justify
___________________
change, communicate a clear and unambiguous reason for change,
___________________
and convince people of the need to change.
Sustainable change requires leaders who “walk the talk” and
utilize key performance indicators to measure and monitor
progress. “Walking the talk” is a reverse visual management
approach that helps employees at the shop floor level see a clear
demonstration of lean values from their managers.
)U
In lean, effective key performance measures are those that are
related to process improvement, as well as performance or
financial measures. Found and Harvey (2007), go on to report that
the roles of leaders change during the implementation of a lean
transformation. During the lean initiation decision-making phase
when lean changes are begun, leaders have to provide the vision,
guidance, and resources to justify to employees the need for change
and to accept the reasons for change. This calls for strategic or
transformational leadership where goals and policies are clearly
defined about the lean implementation.
Once these lean goals of change have been defined, they can be
deployed throughout the organization. During this process, the
leadership is dispersed as groups and teams take responsibility for
objectives. This phase of the implementation is the decision-taking
(c

phase and is best met by dispersed or adaptive leadership that can


take responsibility for the incremental continuous improvement
characteristic of lean.

Strong Leadership
Cappello (2006) argues that wherever lean principles are applied,
they must be enforced by strong leadership. It is, “a battle not only
UNIT 11: Lean Supply Chain Leadership

for minds, but for hearts as well.” When lean principles are 135
applied, managers must convince employees (and supply chain Notes

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partners) that lean is not just a short-term campaign, but a ___________________
program that is characterized as a long-term proposition. This
___________________
requires determined, day-in-and-day-out promotion and selling
efforts to continually remind, educate, and enforce lean policies. ___________________

Part of that selling process may be showing kindly enthusiasm for ___________________
lean.
___________________

PE
Nevertheless, a greater part of leading lean in supply chains ___________________
should be accomplished by actually leading employees through the
___________________
transformational process that converts a supply chain into a lean
supply chain. Providing leadership, allaying fears about changes to ___________________
lean thinking, and guiding employees to overcome problems is ___________________
what strong leadership can do to help implement lean supply
___________________
chains.

Leading with Lean Certification


Regardless of the amount or quality of in-house lean education
programs, it may not be sufficient for the amount of
encouragement leaders need to demonstrate in order to motivate
employees to think lean or to embrace and successfully implement
)U
lean principles in service operations and supply chains. The
Society of Manufacturing Engineers (SMEs) offers lean
certification that assists senior staff and subordinates learn and
value lean principles. They in turn help to transfer and champion
that knowledge to others to keep staff current with lean thinking
and practices.

Leadership Training
As Li observes, lean principles and lean policies are not only about
eliminating waste, but also about human behaviour, culture,
teamwork, leadership, and executive force. At one Shanghai,
Chinese manufacturing plant, shop floor employees, executives,
and the logistics department adopted and advanced lean principles
(c

through a carefully created plan of human resource management.


It was suggested that human resource management can help to
accelerate a successful lean transformation by:
z developing teams as a supporting structure for lean learning
and implementation;
Lean Supply Chain Management

136
z communicating among members, particularly across
Notes
organizational barriers and between supply chain partners;

S
___________________ and
___________________ z clarifying roles and responsibilities in lean transformation.
___________________ The application of lean in this Shanghai facility has some
___________________ interesting teaching for learning. At a shop floor level, the firm set
___________________
up lean teams and appointed a leader. Basic training and

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leadership workshops followed. Some operators from the low-level
___________________
processes were promoted to fill permanent lean positions, which
___________________ gave them greater responsibilities and ownership of new tasks.
___________________ The spirit of the company shifted immediately as a result of these
simple changes. This spirit instilled willingness of employees to
___________________
work harder and in a different manner as and when needed.
___________________ Considering these changes motivated and led other employees to
embrace lean principles. This led the organization to focus on
leadership, cooperation, shared mindset, readiness for change and
improvement, and human resource management tasks. Using
HRM personnel to train employees in leadership supported lean
implementation and turned a failing company into a well-defined
successful operation in this Shanghai facility.
)U
Leadership Training from a Lean Consultant
In an open forum for lean experts, Elliott Butch suggested a
leadership role for the implementation of lean in the Toyota way.
He suggested that a plan to train management to be adept in the
Total Philosophy of the Toyota Production System (TPS). Success
cases for lean are primarily characterized by management teams
that are needed to learn, do and teach all the TPS foundational
philosophies, including 5S, pull production, standardized work,
mutual trust and understanding, in problem-solving to identify the
root causes and to implement countermeasures to eliminate the
problem (e.g., Plan-Do-Check-Act), cellular manufacturing,
elimination of waste, quick changeover and TPM.
They need managers to teach lean to subordinates and continue to
(c

mentor them so they can teach team members. Beyond that, they
should implement and track lean performance metrics against
expectations to identify opportunities for improvement. The
managers should encourage employees to form teams to solve
problems and execute solutions. They should be allowed to develop
new innovative ideas for process design and other production
UNIT 11: Lean Supply Chain Leadership

activities and to implement them. Leading by example and 137


applying lean education will result in an improvement in morale Notes

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Activity
and productivity increase. As Elliott Butch suggests, “Reap the ___________________
Make a presentation on the
rewards of mining the gold and diamonds of ideas that lay hidden elements of lean leadership.
___________________
in the minds of the hourly workers.”
___________________
Check Your Progress ___________________
Fill in the blanks:
___________________

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1. Successful change largely depends upon leaders who ___________________
justify ……………..
___________________
2. A greater part of leading lean in supply chains should be
___________________
accomplished by actually leading employees through the
……………………. process. ___________________

___________________

Elements of Lean Leadership


In terms of lean leadership, we need to articulate those things that
an executive sponsor must do so they are not doomed to failure. It
is not good enough to be a big talker or a half-hearted cheerleader;
it takes someone willing and able to walk the talk and fulfil their
)U
role as the executive sponsor.
Leveraging with successful lean transformations, a few specific
elements appear to be associated with lean leadership. Four
specific elements convey what an executive sponsor must do to
provide lean leadership. These elements are as follows:

Organize for Success


Get the right people on the bus. Every lean initiative should have a
qualified project manager supported by a cross functional team, a
steering committee, and all affected stakeholders. The executive
sponsor is the only one that can effectively pull together the right
people and get their commitment for the role they need to perform.
Anything worthwhile should have active participation from the
suppliers and customers of the value stream that is being
(c

improved.
Lean Supply Chain Management

138
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________
Source: http://www.scdigest.com/assets/Experts/Loughrin_10-04-26.php
___________________
Figure 11.1: Affected Stakeholders
___________________
Promote Education
Get everyone on the same page and using the same cookbook.
While there is flexibility in defining a strategy for crafting a lean
supply chain, an organization must follow the five principles of
lean, focus on the systematic elimination of waste, and define
organizational standards for using lean tools such as value stream
)U
mapping. The executive sponsor should obtain a solid
understanding of lean supply chains and lean leadership
techniques. They must then begin the cultural transformation by
changing the conversation to defining value, eliminating waste,
employee empowerment, and other lean concepts. The project
manager must acquire extensive training on using lean tools and
managing a lean project. They must then develop an education
plan for everyone in the organization.
(c

Source: http://www.scdigest.com/assets/Experts/Loughrin_10-04-26.php

Figure 11.2: Lean Concepts


UNIT 11: Lean Supply Chain Leadership

139
Demonstrate Support
Notes

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Remove roadblocks and show you care. A good project manager will
___________________
bring obstacles to an executive sponsor and will also bring the
___________________
solution. As they say in Maine - let’s get the moose on the table;
with lean transformations, most obstacles are people who don’t ___________________
want to change. The executive sponsor can keep things moving and ___________________
avoid future catastrophe by clearing small obstacles early and
___________________

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quickly. Many times, clearing these obstacles will involve a short
and precise telephone call to someone not yet with the program. ___________________

This conversation does not need to be a big confrontational ___________________


meeting.
___________________
Another means of demonstrating support is to be visible and ___________________
engaged with all employees working on lean improvement
___________________
activities. An executive sponsor should attend some of the training
courses and many presentations from kaizen blitz events. One
example of lean leadership is an executive who attended training
for warehouse personnel on the 5S system and then committed to
implement the concepts to clean up and organize her own office.

Track Accomplishments
)U
Leverage that steering committee and standard methodology we
discussed earlier. The standard methodology used for guiding your
lean transformation will provide ideal points for updating the
steering committee. The executive sponsor must own the schedule
of steering committee meetings and set expectations with the
project manager on the accomplishments to be discussed at each
meeting. One standard methodology recommends the following
steering committee meetings for a lean project:

Confirmation of the Business Case


The steering committee approves the overall scope of the project
after discussion of the benefits, costs, and other relevant
information. The executive sponsor must invest time in the details
(c

of the business case paying close attention to the scope of the


project. An effective outline for the business case is:
z Current Situation,
z Trends and Best Practices,
z Statement of Need,
Lean Supply Chain Management

140
z Scope,
Notes

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z Benefits and Objectives,
___________________
z Costs and Resources,
___________________
z Justification, and
___________________

___________________ z Organize for Success.

___________________ Define Value

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___________________
The project team presents the information obtained from
___________________ customers of a value stream or a segment of value stream. For a
___________________ complete value stream, external customers will have provided their
feedback on what they value in your products and/or services.
___________________
When the scope is the segment of a value stream, the feedback will
___________________ generally be from internal customers. The executive sponsor must
ensure that external or internal customers have been contacted
and that the correct conclusions have been drawn from their
responses.

Current State Value Stream Map


The project team will present the current state value stream map
)U
and identify the waste they have found. There may also be a
number of quick wins that have been implemented. It is very
important for the steering committee to see the actual map and
understand where the opportunities exist. The executive sponsor
must look closely at the current state value stream map and agree
that it covers the scope of the project and that it provides the level
of detail required to identify waste.

Future State Value Stream Map


The project team will present a proposal for the future state value
stream where much of the waste has been eliminated and a
number of new best practices are adopted. It is very important for
the steering committee to see the actual map and understand how
the future state will be an improvement from the current state. As
(c

with the prior meeting, there should be a number of quick wins


that have been identified and implemented. The executive sponsor
must evaluate the proposed future state map and ensure that best
practices have been incorporated into the design.
UNIT 11: Lean Supply Chain Leadership

141
Implementation Plan for Future State
Notes

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The project team lays out a plan that will create flow, leverage
___________________
pull, and then stabilize the value stream in a mode of continuous
improvement. This will also include a discussion of costs. The ___________________

executive sponsor must ensure the implementation plan is ___________________


balanced in terms of technology, people, processes, customers, and ___________________
suppliers; it should have milestones and deliverables that will help
___________________

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in tracking progress.
___________________
Implementation ___________________
Depending on the scope of the improvement, there may be multiple ___________________
updates to the steering committee as the future state is
___________________
implemented. The executive sponsor must remain engaged during
the implementation and keep the steering committee active as ___________________

each major milestone is achieved. At some point, performance


measurements will require adjustment and the executive sponsor
will need to approve the strategy to address this area.

Check Your Progress


Fill in the blanks:
)U
1. …………………….. traits are relatively old dispositions
to act in a selective style.
2. …………………….. is a form of leadership based on
feedback and communication.

Summary
This unit has covered the various aspects related to the
understanding of the concept of leadership. Great leadership
encompasses confidence, assertiveness and mutual respect. Great
leaders take calculated risks and are innovative and confident in
their decisions to do so.
They realize that being timid will not get them where they want to
(c

go. This confidence and assertiveness will usually trickle down to


the team members. Great leaders come in many forms. In one
sense solid leadership is a subjective thing, in another there are
certain characteristics that are, by consensus, typical of quality
leadership.
Lean Supply Chain Management

142 Lesson End Activity


Notes

S
Create a multiple choice quiz on elements of lean leadership.
___________________

___________________
Keywords
___________________
Leadership: Leadership is a process of social influence in which
___________________ one person can enlist the aid and support of others in the
___________________ accomplishment of a common task.

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___________________ Traits: The term “trait” refers to a variety of individual attributes,
___________________ including aspects of personality, temperament, needs, motives, and
values.
___________________
Values: Values are internalized attitudes about what is right and
___________________
wrong, ethical and unethical, moral and immoral.
___________________
Coaching: Coaching, when referring to getting coached by a
professional coach, is a teaching or training process in which an
individual gets support while learning to achieve a specific
personal or professional result or goal.

Questions for Discussion


)U
1. What traits are expected of a successful leader?
2. How does a “belief structure” impact leadership?
3. How does a leadership style impact what a leader does?
4. Which communications skills are expected of a leader?
5. What is “coaching leadership”?
6. How do teams help to lead a lean supply chain effort?
7. What obstacles to leadership can lead to poor lean supply
chain performance?
8. Why is strong leadership needed for introduction and use of
lean?
(c

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
UNIT 11: Lean Supply Chain Leadership

143
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Notes

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Management Essentials: A Framework for Materials Managers,
CRC Press. ___________________

Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean ___________________

Management into the Supply Chain, Butterworth-Heinemann. ___________________

Web Readings ___________________

___________________

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http://www.scdigest.com/assets/Experts/Loughrin_10-04-26.php
___________________
http://www.lean.org/images/october_webinar_project_slides.PDF
___________________

___________________

___________________

___________________
)U
(c
(c
)U
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S
UNIT 12: Customer Value

Unit 12
145
Notes

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Activity

Customer Value
___________________
Prepare a short report on
customer value.
___________________

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

PE
\ Concept of Customer Value ___________________
\ Components of Customer Value
___________________
\ Customer Value Payoff
___________________
\ Customer Satisfaction
___________________

Introduction ___________________

Strategic value is the sum total profit a firm could gain from a
customer if it developed a strategy or took some marketing
initiative with that particular customer. It represents the
customer's potential business, much of which may never be
realized. Imagine, you run a retail bank and you have a banking
customer who has a checking account, savings account and car
)U
loan with your bank. This customer provides a certain regular
profit to your bank every month, generated by transaction fees and
the investment spread between what your borrowing and lending
rates are and the rates the customer pays you.

Concept of Customer Value


Customer value is defined as the difference between what a
customer gets from a product, and what he or she has to give in
order to achieve it. It helps people and companies unlock their
inner creative power and achieve amazing results. Relative
performance identifies how the product or service gives customer
value relative to what competitors offer. In order to generate more
thought about customer value, and to reach out to a customer base,
(c

a business might promote a customer value proposition. The


customer value proposition is basically a promise of benefits from a
vendor to customers.
Customer value is the benefit that a customer will get from a
product or service in comparison with its cost. This benefit might
be measured in monetary terms, such as when a product helps
Lean Supply Chain Management

146 save the customer money that would have been spent on
Notes something else. A benefit also can be difficult to quantify, such as

S
Activity
___________________
the enjoyment that a customer receives from a product or service.
Make a webpage that covers
components of customer The term "customer value" should not be confused with the value
___________________
value. of customers to businesses. It refers to the value that the
___________________ customers receive, not to how valuable customers are.
___________________
Realization vs. Sacrifice
___________________

PE
Some business people explain customer value as realization
___________________
compared with sacrifice. "Realization" is a formal term for what
___________________ customers get out of their purchases. Sacrifice is what they pay for
___________________ the product or service.

___________________ Check Your Progress


___________________ Fill in the blanks:
1. Customer value is the benefit that a customer will get
from a product or service in comparison with its
…………..
2. Sacrifice is what they …………. for the product or
service.
)U
Components of Customer Value
Customers buy when they recognize that the value outweighs the
cost of the investment. There are three components of value:
z Economic Value,
z Business Value, and
z Personal Value.
All the above have an impact on the customer’s view of the
investment.

Economic Value
Economic value is the financial impact of the investment. It will be
(c

your return-on-investment. Economic value is of most importance


to the economic buyer – someone who makes decisions solely based
on financial elements of the solution.

Business Value
Business value is the primary consideration to the user of the
solution. What can the investment do for the organization and how
UNIT 12: Customer Value

can it increase productivity, efficiencies and effectiveness for those 147


that use the solution. Even those sold on this value can meet Notes

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Activity
obstacles when they try to convey the value. In other words, the ___________________
Recreate a newspaper front
business value needs to be conveyed in economic terms to other page covering customer value
___________________
payoff.
involved decisions makers.
___________________
Personal Value ___________________
Personal value is the third type to be considered. This is more of an
___________________

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intangible value, which answers the question, what will the
___________________
decision do for me personally? Will I get a promotion, a bonus,
peace of mind, or improve my influence with other organizations? ___________________
Personal value is equally as important as the business and ___________________
economic, and sometimes can be the determining factor in the
___________________
decision. We make decisions based on emotion and then back them
up logically. Personal value can only be uncovered when there is ___________________

trust and a strong relationship with the decision maker. We also


need to realize that personal value will be different for each person
involved in the decision making process since personality styles
influence what is valued.

Check Your Progress


)U
Fill in the blanks:
1. Personal value can only be uncovered when there is
……………. and a strong ……………………… with the
decision maker.
2. Economic value is the ………………… impact of the
investment.

Customer Value Payoff


Delivering good customer value has many important quantifiable
results. Good value leads to higher customer loyalty and retention.
Good value leads to higher market share. Good value leads to
reduced operating costs. Good value leads to more positive
(c

attitudes among both customers and employees. These improved


performance measures then lead to improved profitability and
better stock market performance. The relationship among these
concepts is presented in the model. Examining each of these
concepts in more detail will clearly demonstrate the value of
delivering good customer value.
Lean Supply Chain Management

148
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________
Source: http://www.endoc.net/PDF2/0225.pdf
___________________
Figure 12.1: Value Payoffs
___________________

___________________ Customer Loyalty and Retention


___________________ High customer value leads to high levels of customer retention.
This fact sounds very simple, logical, and straightforward.
However, it is truly surprising how few firms actually measure this
relationship. The revenue impact can be very impressive and
enlightening. Delivering good value has a major impact on
customer loyalty and retention. As the Siemens quality motto
states, “quality is when our customers come back and our products
don’t”. However, there are additional impacts of value on market
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share.

Market Share
The relationship between the customer’s perception of value for the
money and market share is strong and direct.
Delivering good value enhances market share by enhancing sales
and marketing effectiveness. Customer turnover is normally
highest among new customers, those who have dealt with a firm
less than one year. By providing high value, a firm will retain a
larger proportion of these new customers. This means fewer new
customers have to be acquired to replace those who defect. By
delivering good value, the firm will lose fewer customers of any
type.
(c

For many firms, word of mouth referrals and recommendations


from current customers are a good source of new customers.
Research shows that the higher the customer’s perception of value,
the greater the propensity of the customer to recommend the firm
to a friend.
For virtually all industries, the customer’s perception of value is
directly related to market share for a variety of reason. In some
UNIT 12: Customer Value

industries, value is the single best predictor of market share. The 149
implication is that the value-market share relationship is Notes

S
important to understand and manage. ___________________

Cost Savings ___________________

Firms that deliver high value typically have lower cost structures ___________________

than their competitors. One of the reasons is that high value firms ___________________
normally pay more attention to re-aligning their internal value
___________________

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creating processes.
___________________
High value firms pay more attention to the customer; they listen
___________________
better to what the customer says. Then they use the customer as
the key driver for continuous process improvement. Very detailed, ___________________

actionable data is gathered directly from the customer and fed to ___________________
process owners. The result of this is more efficient processes that
___________________
deliver better value to the customer. There are fewer errors,
mistakes, and defects and much more of a “do it right the first time
mentality”.

Employee Attitudes
Employee attitudes and employee retention are higher at firms
that deliver high value to their customers. In particular, the
)U
linkage between employee satisfaction and the customers’
perceptions of service quality are strong and positive. Positive,
enthusiastic employees build positive relationships with
customers. Disgruntled employees convey negativism both directly
and indirectly. So the employee-customer relationship is directly
influenced by employee attitudes. However, there is another
benefit from employee attitudes.
Most firms acknowledge that continuous improvement is a critical
success factor in our rapidly changing business environment.
Satisfied employees are willing to suggest ways of innovating and
improving an organization. Disgruntled employees are often
cynical about changes and are usually not willing to improve. The
result is that intra-organizational communication, trust, and
(c

employee satisfaction are strongly related to innovation and


continuous improvement. Employee dissatisfaction is an
impediment.

Profitability
Firms that deliver high customer value, relative to the competitors
in their industry, are more profitable. They grow faster and have
Lean Supply Chain Management

150 higher profit margins. The American Customer Satisfaction Index


Notes surveys several hundred firms across numerous industries. Their

S
Activity
___________________
research shows that firms delivering high customer value are
Make a PowerPoint
presentation on customer consistently more profitable than firms with lower value
___________________
satisfaction. perceptions. This finding is very consistent with other studies.
___________________
The PIMS studies (Profit Impact of Market Strategies) involve
___________________ thousands of firms and over five thousand business units. The
___________________ primary goal of the PIMS studies is to determine which factors

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drive profitability in a business unit. Though not traditionally
___________________
measuring value, the PIMS studies found the market perceived
___________________
quality was the single best predictor of market share, which in
___________________ turn leads to higher return-on-investment.
___________________
Check Your Progress
___________________
Fill in the blanks:
1. Firms that deliver high customer value, relative to the
competitors in their industry, are more …………………..
2. Employee ………………… and employee ………………
are higher at firms that deliver high value to their
customers.
)U
Customer Satisfaction
Satisfaction is a state of mind that occurs when the customer feels
that his expected requirement is fulfilled by what is offered by the
organisation. The ultimate satisfaction a customer aims for has
four major components, namely:

Product Satisfaction
It covers the tangible core benefits provided by the product. It is
related to the basic minimum function expected to be performed by
the product.

Peripheral Satisfaction
(c

It is in addition to the core benefit. It adds value to the core


benefits expected. Peripheral satisfaction helps the customer to
enhance his desire for personal attention.

Ambience Satisfaction
It is a blend of tangible and intangible factors, which the customer
experiences, in the purchase and consumption process. The
UNIT 12: Customer Value

tangible aspects of ambience satisfaction include appearance of 151


sales point, services available, competitive pricing, and the like. Notes

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The intangible aspects include the courtesy extended by sales ___________________
persons, the rapport generated and so on.
___________________

Psychic Satisfaction ___________________

It is related to the satisfaction extended in tune with the ___________________


individuality of the customer concerned. It depends more on the
___________________

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personality traits of the customer. A talkative customer would be
___________________
much satisfied if the sales personnel engages in a lengthy dialogue.
A suspicious customer would be satisfied if all his latent and ___________________
expressed doubts are clarified. Psychic satisfaction provides the ___________________
customer an arena to reduce his anxieties and fear with respect to
___________________
the purchase and use of as product.
___________________
Each one of the above components of satisfaction contributes
towards total satisfaction, which has direct linkage to customer
retention. Therefore, it is imperative that the organisation has to
carefully monitor the level of satisfaction that their customers are
enjoying, and initiate measures to enhance the level of satisfaction.
Surely, it should be done on a continuous basis.
)U
Though there appears to be a direct correlation between
satisfaction and retention the condition cannot be taken for
granted by any organisation, because even a satisfied customer can
join the attrition process, when he changes his expectation in
terms of the various components of satisfaction as discussed above.
The levels of satisfaction a customer normally expects can be
booked under any one of the following categories:

Expected Satisfaction
It is the “Must be” condition the customer expects from a product
performance; those attributes contributing to expected satisfaction
must be present. In the absence of which, any customer will be
dissatisfied.
(c

Desired Satisfaction
This is a most desirable condition the customer expects, however
the presence or absence of the attributes contribute to preferred
satisfaction would have no effect on the level of satisfaction.
Lean Supply Chain Management

152
Exciting Satisfaction
Notes

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Indicates a condition in which the presence of certain attributes
___________________
leads to a surprisingly attractive performance. The presence of
___________________ these attributes will further add to the level of satisfaction.
___________________
The customer, whom an organisation can retain by rendering
___________________ expected satisfaction, cannot continue to be retained when the
___________________ customer changes his satisfaction level from expected to desired

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level and further from desired level to exciting level. Therefore,
___________________
organizations must keep on building up their ability to
___________________ continuously satisfy their target customers so as to have customer
___________________ retention. A suitably designed customer satisfaction audit would
serve the purpose.
___________________

___________________ A well-structured customer care programme will go a long way in


gradually furthering the customer satisfaction in tune with their
expectations. Customer care that exceeds customer expectation
will lead to higher rate of retention. In the absence of due customer
care, it is likely that the customers will be dissatisfied and will be
left with three options viz.:
z Rejection,
)U
z Postponement, and
z Substitution.
Any option the customer selects, will lead him only to the attrition
process. To prevent this, the organisation should design and
implement a well-designed customer segment specific (if not
customized) customer care-programmes and thereby increase the
rate of retention.

Check Your Progress


Fill in the blanks:
1. A ……………….. customer would be satisfied if all his
latent and expressed doubts are clarified.
(c

2. ………………. satisfaction helps the customer to enhance


his desire for personal attention.

Summary
Delivering good customer value is critical to the success of any
business. But customer expectations are continually evolving,
UNIT 12: Customer Value

changing, and increasing so that today’s “good” value proposition 153


may be obsolete tomorrow. Firms must be searching for ways to Notes

S
improve and expand or risk failure. The old axiom that ___________________
management’s primary responsibility is to “manage change or
___________________
change management” has never been more true. Today’s rapidly
changing business environment places a huge penalty on ___________________

complacency and status quo management. ___________________

Relationships with customers and suppliers alike have become ___________________

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more important. Designing good customer information systems ___________________
that allows data mining will help in the design and delivery of a
___________________
value proposition. Because of increased outsourcing, firms are
more reliant upon suppliers. Firms need to form partnerships and ___________________
alliances with key suppliers so that value-creating processes can be ___________________
coordinated and harmonized. The ultimate success of a business is
___________________
dependent upon the ability to align both internal and external
processes to deliver good value to the customer.

Lesson End Activity


Prepare a multi-choice quiz on components of customer value.
)U
Keywords
Strategic Value: Strategic value includes synergies and special
features, usually hidden, that give the buyer a quicker, less costly
and lower risk way to achieve goals.
Business Value: Business value is the primary consideration to
the user of the solution.
Satisfaction: Satisfaction is a state of mind that occurs when the
customer feels that his expected requirement is fulfilled by what is
offered by the organisation.
Attitude: A position of the body or manner of carrying oneself.

Questions for Discussion


(c

1. What do you mean by customer value?


2. Describe various components of customer value.
3. Write short note on customer satisfaction.
4. How can you relate profitability to customer value?
5. What are the various levels of customer satisfaction?
Lean Supply Chain Management

154 Further Readings


Notes

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___________________ Books

___________________ Wincel, J. P., (2004), Lean Supply Chain Management: A


Handbook for Strategic Procurement, Productivity Press.
___________________
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
___________________
Management Essentials: A Framework for Materials Managers,
___________________ CRC Press.

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___________________ Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
___________________ Management into the Supply Chain, Butterworth-Heinemann.
___________________ Web Readings
___________________
http://www.endoc.net/PDF2/0225.pdf
___________________
http://www.walkerinfo.com/knowledge-center/walker-library/
article.asp?id=892
)U
(c
UNIT 13: Customer Value Focus

Unit 13
155
Notes

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Activity

Customer Value Focus


Make___________________
a webpage that covers
lean customer value
___________________
principles.

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Lean Customer Value Principles ___________________
\ Implementing a Customer Value Focus
___________________
\ Customer Focus in a Service Supply Chain Environment
___________________
\ Integrating Marketing and Supply Chain Management for Improved
Customer Value ___________________
\ Creating Customer Value by Resource Alignment
___________________
\ Creating Customer Focused Value during Recessions

Introduction
Lean is successful in large part because of its focus on the
customer. It puts a great deal of emphasis on the concept of value.
Value Stream Maps and the practice of distinguishing value-added
)U
and non-value-added activities both immediately come to mind.
‘Voice of the customer’ (VOC) also helps the company look at its
products and services through the eyes of its customers. Many of
these concepts, though, are much more powerful when you have a
deeper understanding of how customers determine value.
This unit explains several ‘Customer Value Principles’ to keep in
mind when looking at how your processes in a Lean company affect
the value that your customers receive.

Lean Customer Value Principles


Several lean customer value principles are explained below:

The Amount of Waste in your Processes has no Bearing on


(c

Customer Value
Think about this. Would you be willing to pay a different price for
a product based on how efficient a manufacturer is? Do you even
know how efficient a manufacture is most of the time?
Consider an item like batteries. When you go to the store, you base
your purchasing decision on a variety of factors like reputation,
Lean Supply Chain Management

156 prior experiences with the product, or price. You never even
Notes consider whether one manufacture has a lower cost structure than

S
___________________
another. So, if customers never link waste to value, why do
companies?
___________________

___________________ Value is Subjective


___________________ How much would you pay for a candy bar? A price probably jumped
into your mind. Even though I did not give you any context. What
___________________
if I asked this question instead: How much would you be willing to

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___________________ pay for a candy bar in a movie theatre?
___________________ Some customers would be willing to pay more money without
___________________ blinking an eye. Some would never, on general principle, pay
___________________
US $4.00 for something that normally costs US $0.50. Some people
would only be willing to pay it if they were trying to impress a date
___________________
or to quell a pleading child.
The point is that value has to be considered in context, or it is
meaningless.

Customers Pay more than Money


Far more gets passed back and forth in an exchange than currency.
Some of these things have value to a company—customer contact
)U
information, word-of-mouth marketing, and brand loyalty.
Other things that a customer pays, though, might not matter as
much to the business. A customer might give time (willingness to
wait in line for the best restaurants), reputation (do business with
a shady company, and be guilty by association), and energy (every
winter, parents chase the latest ‘must-have’ toy around town).
However, regardless of how the company values the ‘payment’, it
goes into the customers’ evaluation of whether they are making a
good trade.

Customers don’t Look at Value Individually


Customers have limited resources and unlimited demand.
Therefore, they have to pare down what they want into a bucket
(c

that gives them the optimum value based on their own set of
criteria.
If a customer buys a big house, she has less money left over for
other products, and less time left over for entertainment. If the
rents a small apartment, he has less space to put big furniture.
Every choice a customer makes about one product or service affects
every subsequent choice.
UNIT 13: Customer Value Focus

Value is not Rational 157


Notes
Emotion plays a big role in value. Consider a product that has

S
Activity
following of loyal supporters. The feelings that a person gets from Visit___________________
an organization and ask
owning that product can play a large role in the purchasing a senior official if they want to
___________________
implement customer value
decision. When emotions play a role in decision-making, customer focus in their system and will
behaviour is harder to predict. they___________________
do it.
___________________
This emotion can drive people to make uninformed decisions. Late
night TV is filled with miracle cures for baldness and get-rich- ___________________

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quick programs that all have the standard ‘results not typical’ ___________________
disclaimer on the bottom of the screen. Yet, those companies sell a ___________________
lot of product. So, what do these customer value principles mean to
___________________
you?
___________________
On the shop floor, they mean making sure that you focus on the
things that add value to the customer before you look at reducing ___________________

waste. Waste reduction helps you, not the customer.

Check Your Progress


Fill in the blanks:
1. Customers have limited ……………… and unlimited
…………….
)U
2. ………………… plays a big role in value.

Implementing a Customer Value Focus


In business and industrial markets, companies face high levels of
competition in rapidly changing environments. This is generally
due to no. of facts that include:
z the impact of globalization,
z maturity of business markets in most developed countries,
z the increased buying power of customers, and
z the impact of information and communication technologies and
mass customization.
(c

In order to bring stability to their operations, to respond quickly


and flexibly to accelerating changes in technology, opposition and
customer preferences, companies have tried to create new forms of
organizations.
This unit concerning to enhance the benefit of all organizations
which recognize that customer focus is not only important for their
Lean Supply Chain Management

158 business but also critical to the success in integration of market


Notes orientation in order to achieve the customer value creation.

S
Activity
Visit___________________
a garment retailer and Customer Value Creation is a customer-centric framework for
find out what is their customer
___________________ helping companies choose the best opportunities for growth by
focus in supply chain and
prepare a presentation. optimizing the value creation between the enterprise and its
___________________
customers. Besides, this also to establish the importance of good
___________________ coordination with the market orientation in order to achieve the
___________________ customer value creation towards professional services. It also aims

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to observe the research conducted to date the area of marketing
___________________
and sales integration and provide guidance to help mix these
___________________
functional areas better in professional marketing firms. It get
___________________ benefits from understanding the concept of internal customers and
___________________ how this can deliver greater productivity and enhance the creation
of customer value.
___________________
With the increased globalization of markets nowadays, competition
among market players has become more severe. In this competitive
market, one of the most important factors is the getting customer
satisfaction and quality in service. The concept of customer
satisfaction is not new, the relationship between customers and
corporations has been changing regularly. Customers are becoming
the absolute entity for corporations as the final decision makers for
)U
business deals and repeat purchases of products. The customer
keeps switches over to different service providers and products or
packages so often, if the products are offering value. The customer
is buying satisfaction. Highest value is resulted when the customer
is satisfied.

Check Your Progress


Fill in the blanks:
1. Customer focus is not only important for their business
but also critical to the ………………. in integration of
market orientation.
2. The customer is buying ……………………
(c

Customer Focus in a Service Supply Chain


Environment
The current competitive environment is the result of the union of
many different forces on all supply chain members and to compete
in it, organizations need to do more than optimize their supply
UNIT 13: Customer Value Focus

chain activities. These forces include the development of new 159


technologies, increase in communication capabilities, increasing Notes

S
demand for better quality and customer services, and the demand ___________________
for quick and efficient response to market.
___________________
Earlier, supply chain members who were away from the end
___________________
consumers stressed factors that directly affected their own
immediate customer and supplier. Now, they too need to focus on ___________________

the end customers and see how these forces affect their end ___________________

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customers. The key to survival depends on the supply chain ___________________
members' focus on the demand side of the supply chain equation.
___________________
From the corporate perspective, end-use forces like technology and
changing lifestyles will help in determining the supply chain. ___________________
Thus, customer focused analysis influences the objectives and goals ___________________
of supply chain activities. The efficacy of "push" and "pull"
___________________
strategies has always been debatable. Of late, the consumer
provides both the strategies in the demand-chain management
process.

Demand-Chains
Instead of building and operating a supply chain from
manufacturer to market, demand-chain leaders focus on
)U
developing alliances with those channel partners who can meet
customer requirements. The focus on end-users directed the
attention of all supply chain partners to the demand side of the
supply chain equation and made them remind their roles in the
supply chain. The roles and responsibilities of players in today's
emerging demand chains have changed compared to those in
traditional chains. In a demand chain, the products are developed
which are primarily based on consumer research and information
gathered by any of the supply chain partners and not necessarily
by the manufacturers.
For example, retailers provide comprehensive information on
consumer spending patterns and preferences to the manufacturer
and this information helps in producing products with attributes
(c

that meet customer requirements. Consumers are now interacting


with different entities in the purchasing process. Therefore, every
member of the demand chain needs to monitor consumer needs
and wants. This knowledge makes it easier for all the members to
identify the product and packaging requirements and marketing
opportunities, and in turn helps to determine the need for brand
extension. The success of a product and the channel members
Lean Supply Chain Management

160 depends on the level of participation and coordination between the


Notes channel members from the time the product is conceptualized to

S
___________________
the time it is launched in the market. This is essential if supply
chains are to be transformed into demand chains.
___________________

___________________ Board Trends and Misconceptions


___________________ While developing a demand chain, channel partners should be
aware of the broad demand trends in consumer markets based on
___________________

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demographics, lifestyle, and other social factors. For example, the
___________________ overall size of the average family has shrunk due to a fall in the
___________________ birth rate in industrialized nations, thus bringing down the
___________________
number of new consumers. In addition, the workforce size has
reduced due to an increase in automation. These changes greatly
___________________
influence the way in which consumers purchase goods and where
___________________ they purchase them.

Modular Supply Chain Management


Modular supply chain management is a method of working with
suppliers to deliver products in a shorter time frame. With the
complexity and speed of manufacturing increasing, modular supply
chain management allows suppliers to create complete components
)U
quickly.

Function
In a traditional supply chain model, suppliers send basic parts for
en element, such as an automobile seat, to the manufacturer. The
manufacturer then assembles the parts into a complete seat as the
car is assembled. In modular supply chain, the supplier creates the
complete seat, and sends it ready to install.

Benefits
In modular supply chain management, suppliers have considerable
design and innovation leeway. Suppliers often provide design and
cost saving development because they are given such a degree of
freedom in production. With long-term commitments and
(c

aggressive cost goals, the suppliers and manufacturers work


together to create value. Modular components can be reused in a
variety of models of similar products, saving money and time.

Scope
Automotive companies were among the first to adopt
modularization in supply chain management, but other industries
UNIT 13: Customer Value Focus

embraced the concept. The electronics industry makes heavy use of 161
modularization, as do the toy, software and airline industries. Notes

S
Modularized supply chains create efficiency in a global ___________________
marketplace as well.
___________________
Customers will always buy from retailers. Consumers are actively
___________________
searching for new sources from which they may obtain products
and services. In this process, to get value for money, they are ___________________

prepared to buy products and services from any channels member ___________________

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who can provide them with quality products, timely delivery and a ___________________
reasonable price.
___________________
B2B companies or industrial organizations need to monitor only
___________________
their customers. In industrial organizations, solving customers'
problems sometimes means solving your customer's customers' ___________________

problems. All customer/industrial demand for products or services ___________________


across the supply chain is derived from end-user demand.
Industrial customers will not order more parts if consumers are
not buying their end-products.
Demand chains are intended to bring together channel members to
delight customers and solve their problems by:
gathering and analysing information about consumers, their
)U
z
problems, and their needs;
z identifying and choosing the right channel partners;
z developing a system for information sharing among channel
partners;
z developing products and services, which are capable of solving
customers' problems;
z choosing the most optimal transportation and distribution
methods.

Check Your Progress


Fill in the blanks:
(c

1. The key to ……………….. depends on the supply chain


members' focus on the demand side of the supply chain
equation.
2. Consumers are actively searching for new ……………..
from which they may obtain products and services.
Lean Supply Chain Management

162 Integrating Marketing and Supply Chain


Notes
Management for Improved Customer Value

S
Activity
___________________
Write a magazine style article
about integrating marketing A network-based business model has evolved over the past few
and___________________
supply chain decades as companies have transitioned from a hierarchical,
management for improved
___________________
customer value. vertically integrated format to a much looser, even virtual,
___________________ network of partnerships with key suppliers.

___________________ The relationship between different functions sharing the same

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customer focus and market commitment has always had an
___________________
underlying internal competition for primacy, i.e. it is also related
___________________ to how each of the functions add value to the company. Over the
___________________ last decade, critical voices have stressed that marketing has
___________________ generally not been very good at managing out-of-the-box and
across boundaries, has been complacent in its view that marketing
___________________
is the function which “owns the customer”, has failed to provide the
coherence to corporate organisation, operations and processes that
its proponents claim, and, consequently, was outpaced by new
models aimed at building value which originated mainly in
manufacturing, operations or IT, but not in marketing.
The old “mantra” of marketing success, i.e. having the right
product in the right place at the right time, suggests why SCM has
)U
increasingly gained influence in areas, which were originally the
domain of marketing and marketing channel management. At the
same time, however, it also demonstrates the synergies between
both disciplines.
In SCM, much of the recent debate has centred on the ability of the
supply chain to be either “lean” or “agile”. Lean supply chains on
the one hand focus on doing “more with less” by reducing waste or
“muda” through inventory reduction, lean manufacturing, and a
just-in-time approach.
A lean approach is said to be most suitable for markets which are
characterised by predictable demand, high volume and low
requirements for product variety. Agile supply chains, on the other
hand, are designed for flexibility, emphasising the supply chain’s
(c

ability to respond rapidly to changes in demand, both in terms of


volume and variety. The market conditions in which companies
with agile supply chains find themselves are characterised by
volatile demand and high requirements for variety.
The trend towards commoditisation in many industries today has
pushed lean as well as agile SCM to the front. In markets where
UNIT 13: Customer Value Focus

customers perceive little difference between products and in which 163


brand loyalty dwindles, timely availability becomes a major Notes

S
Activity
determinant of success. Still, the tempting promises of SCM, which
Visit___________________
a food chain and see how
aims at “lowering the total amount of resources required to provide customer value is created by
___________________
aligning a person’s capabilities
the necessary level of customer service”, should not disguise its and prepare a write-up.
limitations: SCM focuses on the efficient matching of supply with ___________________

demand but does not provide answers to the customer conundrum, ___________________
i.e. it does not help the company to find out what the customer
___________________

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perceives as valuable, and how this customer-perceived value can
___________________
be translated into customer value propositions. In other words,
supply chain efficiency by itself will not increase customer value ___________________
and satisfaction. ___________________

Check Your Progress ___________________

Fill in the blanks: ___________________

1. Lean supply chains on the one hand focus on doing


“more with less” by reducing ………………..
2. SCM focuses on the efficient matching of supply with
…………….. but does not provide answers to the
customer conundrum.
)U
Creating Customer Value
Customer value can be created through resource alignment and
recessions as explained below:

Creating Customer Value by Resource Alignment


Customer value segments at different levels in value chain impact
the demand for products and services to a different varying extent.
The prime key is to deploy the right customer value commitments
for each customer value segment so that you’re not deploying
resources unnecessarily, and so that customers can appreciate the
value they’re receiving from you and appreciate the real value of
your customer value commitments. If an individual needs to
(c

capture the true value for his/her customer value commitments,


he/she must commit to fulfilling the customer value segment’s
needs and expectations.
Lean Supply Chain Management

164
Creating customer value includes five major actions:
Notes

S
Activity
z Define customer value segment strategy: It must be based
___________________
Prepare a short report on
creating customer focused
on choosing the customer value commitments on which you’re
___________________
value during recessions. going to compete in your target customer value segments.
___________________ z Develop superior offering: Customer value commitments
___________________ have to embody superior values and benefits for the respective
___________________
customer value segment and link the customer value

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commitments to the brand.
___________________
z Create the right organization: This requires assessment of
___________________
person’s current capabilities against the capabilities needed to
___________________ deliver the customer value commitments competitively and
___________________ effectively to the target customer value segment and a plan to
fill the gaps.
___________________
z Define Key Performance Indicators (KPIs): KPI include
the key measures and benchmarks customers use to track your
value performance.
z Communicate internally and externally: The customer
value commitments must be communicated to the target
customer value segments and within your own organization.
)U
This means managing both the sales, the marketing
communications, and the internal communications processes
to provide a clear, consistent message.
Customer value segment objectives are an evolution of strategic
decisions. When first targeting a customer value segment, it is
expected to pursue a growth strategy, investing in sales, expanding
channels, and offering incentives to penetrate the market. As
relationship with the customer value segment matures, the
strategy shifts to maintenance, consolidating the customer
interfaces and channels; investment is made in this customer value
segment only to protect a defined position Exit is a strategy many
companies adopt far too late for their own good.

Creating Customer Focused Value during Recessions


(c

An economic recession is the toughest time for all businesses,


whether it is big or small. Companies sees for new and innovative
ideas to scale down their operations and cut expenses. If a
company has been hit by a recession, there is no need to
limit/stop/alter marketing operations. Instead, one must develop
UNIT 13: Customer Value Focus

low-budget and cost-effective marketing strategies that will help to 165


survive during chaotic course of times. Notes

S
z Focus on Value: During recessions, customers become more ___________________
value oriented. If your product is no longer seen as providing ___________________
value, you may have to improve quality or resort to price cuts
___________________
and temporary price promotions to keep existing customers
and get new ones. ___________________

___________________

PE
z Alter Product Portfolio: During difficult economic
conditions, consumers may change their financial habits. They ___________________
may start holding onto their money, or spend it on necessities ___________________
rather than luxuries. If your company markets several
___________________
products and brands, it may be wise to focus on
brands/products that customers view as offering greater value. ___________________

A recession is usually not a good time to launch new brands; ___________________


however, there are exceptions. Some of your brands may have
to repositioned so that they match the customers’ new mind-
set and priorities.

Check Your Progress


Fill in the blanks:
)U
1. KPI include the key measures and …………………..
customers use to track your value performance.
2. During recessions, customers become more ………………
oriented.

Summary
Customers have limited resources and unlimited demand. So, they
have to pare down what they want into a bucket that gives them
the optimum value based on their own set of criteria. Customer
Value Creation is a customer centric framework for helping
companies choose the best opportunities for growth by optimizing
the value creation between the enterprise and its customers. The
customer keeps switches over to different service providers and
(c

products or packages so often, if the products are offering value.


The customer is buying satisfaction. Highest value is resulted
when the customer is satisfied.
The key to survival depends on the supply chain members' focus on
the demand side of the supply chain equation. From the corporate
Lean Supply Chain Management

166 perspective, end-use forces like technology and changing lifestyles


Notes will help in determining the supply chain.

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___________________

___________________
Lesson End Activity
___________________ Discuss within your group about the various resources through
which customer value can be created.
___________________

___________________
Keywords

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___________________
Operational Excellence: Operational excellence is a philosophy
___________________
of leadership, teamwork and problem solving resulting in
___________________ continuous improvement throughout the organization.
___________________
Key Performance Indicators (KPI): A set of quantifiable
___________________ measures that a company or industry uses to gauge or compare
performance in terms of meeting their strategic and operational
goals.
Modular Supply Chain Management: Modular supply chain
management is a method of working with suppliers to deliver
products in a shorter time frame.
Demand Chain: The demand chain is that part of the value chain
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which drives demand.

Questions for Discussion


1. Discuss the principles of lean customer value.
2. What is customer value creation?
3. What is the effect of globalisation on customer satisfaction and
quality in service?
4. Explain the concept of demand chains. Discuss its benefits and
scope.
5. How can value be created for customer through resource
alignment?
(c

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
UNIT 13: Customer Value Focus

167
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Notes

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Management Essentials: A Framework for Materials Managers,
CRC Press. ___________________

Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean ___________________

Management into the Supply Chain, Butterworth-Heinemann. ___________________

Web Readings ___________________

___________________

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http://www.velaction.com/customer-value-principles/
___________________
http://www.europeanbusinessreview.com/?p=8437
___________________

___________________

___________________

___________________
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(c
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UNIT 14: Ethics, Trust and Environment

Unit 14
169
Notes

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Activity

Ethics, Trust and Environment


___________________
With the help of internet, find
out the example of trust in
___________________
supply chain of any other
organization like the Toyota
___________________
way.
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Trust in Lean Supply Chain ___________________
\ Environmental Issues in Lean Supply Chains
___________________
\ Ethics Expectations in Supply Chains
___________________

Introduction ___________________

___________________
Transforming a disjointed supply chain into a lean supply chain
need a great deal of analysis and coordination. An organization
must identify all non-value-added activity; address fragmented
functions, adversarial supplier relationships, and an unwillingness
to share important information. Basic processes such as order
fulfilment, production and logistics flows need to be analysed.
Operational areas must be fully aligned with business strategies,
)U
goals, and performance metrics. Every relationship must be clearly
defined and their impact on the value stream be understood.
Lean Supply Chain Management (LSCM) is not exclusively for
those companies who manufacture products, but by businesses who
want to streamline their processes by eliminating waste and
non-value added activities. Companies have a number of areas in
their supply chain where waste can be identified as time, costs or
inventory. To create a leaner supply chain companies must
examine each area of the supply chain.

Trust in Lean Supply Chain


A lean supply chain is defined as a set of organizations directly by
(c

upstream and downstream flow of products, services, finances and


information that collaboratively work to reduce cost and waste by
efficient and effectively pulling what is needed to meet the needs of
the individual customer. This strategic decision to implement the
lean production system is a managerial approach, but it affects
from the top to the bottom in every stage of works, because the
lean principles enable the employers to have the authority. A trust
Lean Supply Chain Management

170 is an arrangement made that gives control or ownership of a


Notes property to someone for the benefit of another person. A good and

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___________________
regularly experienced example of trust is showing faith that things
will be much better in the future.
___________________

___________________ Trust: The Toyota Way


___________________ Toyota Way is more than just Japanese Way. It is about constant
improvement. If it were Japanese Way only, then we would not
___________________

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have Japanese companies that perform poorly or go into
___________________
bankruptcy. Toyota does not monopolize this idea. Moreover, it has
___________________ to translate beyond Japanese culture to be successful. Of that, a
___________________ significant number are Japanese. However, there are people from
every culture working for Toyota that share the concept and this
___________________
way of doing business. From that viewpoint, growing larger does
___________________ not suggest that we are stepping out of anything that is part of our
culture.
Toyota really believes and nurtures the idea that the company
should be able to build a car with no problems or flaws. When this
does business with Ford and GM, those companies strive to be
better, but you do not get the idea they think a perfect car is
possible.
)U
With the Toyota Way, one of the key elements is kaizen:
continuous improvement. There is no end to it. It is a never-ending
journey. Respect for people is another important element.
Employees, Customers, Suppliers.
When it comes to consumers, they demand changes from time to
time.
Toyota's thinking based on the Toyota Way is teamwork with
suppliers. This teamwork is going to be a long-lasting relationship.
Price is only one element. Trust is a more important element. The
relationship is a sharing concept, and should always be win-win.
Price is important, too. Trust is perhaps more so. Toyota is only
doing intelligently what the business schools are teaching.
(c

In the church when you get married, the priest or minister does
not ask each partner how much each will get from the other in
terms of money. You are asked about how well you get along. What
is your commitment to one another? Now, in real-life situations,
some companies practice this, and some do not. Some practice this
in the U.S. Some do not. A similar scenario is found in Japan.
Therefore, there are fantastic achievements in both countries, and
UNIT 14: Ethics, Trust and Environment

there are bankruptcies in both countries. Therefore, it is not a 171


Japanese issue or an American issue. It is a company-culture Notes

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Activity
issue. Find___________________
out 5 such organizations
who consider environmental
Check Your Progress issues in their lean supply
___________________
chain.
Fill in the blanks: ___________________

1. A trust is an ………………….. made that gives control or ___________________

ownership of a property to someone for the benefit of ___________________

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another person.
___________________
2. Toyota's thinking based on the Toyota Way is ___________________
………………… with suppliers.
___________________

Environmental Issues in Lean Supply Chains ___________________

___________________
Climate change and the environment are the some of the biggest
issues facing the world today. Greenhouse gas emissions,
particularly CO2, are the major contributing factor global warming.
The majority (56%) of Australia's energy-related greenhouse gases
were emitted in the production and consumption of goods and
services for the purpose of household final consumption, including
the storage and transportation of these. The non-household
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transportation sector alone contributed 10% of Australia’s total
greenhouse emission in 2004, making it a critical element for its
sustainability targets.
The environment has been a constant presence in the global media
and now we are seeing the governmental and corporate response in
the emergence of green strategies.
As the public becomes more aware of environmental issues and
global warming, consumers will be asking more questions about
the products they are purchasing. Companies will have to expect
questions about how green their manufacturing processes and
supply chain are, their carbon footprints and how they recycle.

Profiting from Being Green


(c

A number of companies have shown that there is a proof of the link


between improved environmental performance and financial gains.
Companies have looked to their supply chain and seen areas where
improvements in the way they operate can produce profits.
General Motors reduced disposal costs by US $12 million by
establishing a reusable container program with their suppliers.
Perhaps General Motors may have been less interested in green
Lean Supply Chain Management

172 issues if they were making record profits, but in an attempt to


Notes reduce costs in their supply chain, GM found that the cost

S
___________________
reductions they identified complemented the company’s
commitment to the environment.
___________________

___________________ Unaware of Potential Benefits


___________________ Companies can find cost savings by reducing the environmental
impact of their business processes. By re-evaluating the company's
___________________

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supply chain, from purchasing, planning, and managing the use of
___________________
materials to shipping and distributing final products, savings are
___________________ often identified as a benefit of implementing green policies.
___________________ Despite the public’s focus on the environment, benefits attributed
___________________ to reducing a company’s environmental impact are not in the
forefront of supply chain executive’s minds. It appears that many
___________________
executives are still unaware that improved environmental
performance means lower waste-disposal and training costs, fewer
environmental-permitting fees, and, often, reduced materials costs.
It is expected that the interest in green issues and environmental
concern by the public will not decline as economic issues become
more important due to the faltering economy.
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Lean Environmental Benefits in ISO 9000 and ISO 14000
Programs
Following are the lean benefits:

Benefits of ISO 9000


The ISO 9000 and ISO 14000 families are among ISO's most
widely recognized and successful standards. While ISO 9000 has
become an international reference for quality requirements in
product development and operations, ISO 14000 is achieving as
much in helping organizations meet their environmental
challenges.
The ISO 9000 and ISO 14000 families of standards are considered
worldwide as "generic quality management system standards."
(c

"Generic" signifies that the same standard can be applied to any


organization, large or small, whether it is a business enterprise, a
public administration, or a government department. The term
"generic" also signifies that ISO 9000/ISO 14000 Quality and
Environmental Management Systems feature a number of
essential requirements which an organization of any size would
need to implement.
UNIT 14: Ethics, Trust and Environment

173
z The "Management system" refers to how the organization
Notes

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manages its processes, or activities.
___________________
z "Quality management" refers to the organizational activity
that enhances customer satisfaction by meeting customer and ___________________

applicable regulatory requirements. ___________________

More companies start to realize that there is a link between lean ___________________
and their environmental performances. How strong is the link? ___________________

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Until now, a few researchers have looked into the relationship
___________________
between lean and green and there is already a fierce debate about
whether lean benefit the green or not. ___________________

According to King and Lenox (2001), improved environmental ___________________

performance may be a significant public good spill over of lean ___________________


production. However, empirical evidence of the link between lean ___________________
production practices and environmental performance has not
resolved the nature of the relationship. It finds strong evidence
that lean production, as measured by ISO 9000 adoption and low
chemical inventories, is complementary to waste reduction and
pollution reduction.

Benefits of ISO 14000


)U
The ISO 14000 standards are practical tools for organizations who
are not satisfied with mere compliance with legislation – which
may be perceived as a cost of doing business. They are useful tools
for proactive organizations who understand that implementing a
strategic approach can bring return on investment in environment-
related measures.
The systematic ISO 14001:2004 approach requires the
organization to take a hard look at all areas where its activities
have an environmental impact. A properly designed ISO
14001:2004 Environmental Management System (EMS) allows
efficient identification of opportunities for cost savings. It can
trigger procedural and/or technological changes that reduce the
total cost of a product or improve its value.
(c
Lean Supply Chain Management

174
Some of the benefits of implementing an ISO 14000 Environmental
Notes
Management System (EMS) in accordance with the ISO 14000

S
___________________ standards include:
___________________
Operational Benefits
___________________
z Efficiency, discipline and operational integration with ISO
___________________
9000
___________________

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z Greater employee involvement in business operations with a
___________________ more motivated workforce
___________________
z Easier to obtain operational permits and authorizations
___________________
z Assists in developing and transferring technology within the
___________________ company
___________________ z Helps reduce pollution
z Fewer operating costs
z Savings from safer workplace conditions
z Reduction of costs associated with emissions, discharges,
waste handling, transport and disposal
Improvements in the product as a result of process changes
)U
z

z Safer products

Environmental Benefits
z Minimizes hazardous and non-hazardous waste
z Conserves natural resources - electricity, gas, space and water
with resultant cost savings
z Prevents pollution and reduces wastage

Marketing Benefits
z Demonstrates to customers that the firm has met
environmental expectations
Meets potential national and international government
(c

z
purchasing requirements
z Delivers profits from marketing "green" products
z Provides a competitive marketing tool
z Improves international competitiveness
UNIT 14: Ethics, Trust and Environment

Financial Benefits 175


Notes

S
z Improves the organization’s relationship with insurance Activity

companies ___________________
Conduct a survey of 10
suppliers and find out their
z Elimination of costs associated with conformance to conflicting ___________________
ethical expectations from lean
supply chains.
national standards ___________________
z Process cost savings by reduction of material and energy input ___________________
z Satisfying investor/shareholder criteria ___________________

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z Helps reduce liability and risk ___________________
z Improved access to capital ___________________

Check Your Progress ___________________

Fill in the blanks: ___________________

___________________
1. Climate change and the …………………… are some of
the biggest issues faced by the world today.
2. More companies start to realize that there is a link
between ………………… and their ………………………
performances.
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Ethics Expectations in Supply Chains
Today consumers are not only concerned with product quality but
also the integrity of supply chain inputs when differentiating
between products. As consumers look beyond the tangible product
on the shelf and deeper into supply chain inputs, there is
significant pressure for greater supply chain transparency.
A decade ago, consumers were beginning to take an overt interest
in environmentally sustainable materials, such as recycled
materials, being integrated into the production process. This
interest has now peaked into an expectation. Not surprisingly, in a
global economy where the difference between competitors’ unit
price is often minimal, some of the less tangible factors such as
supply chain inputs and whether or not these are deemed to be
(c

‘ethical’ in the eyes of the consumer are now coming to the fore and
(in many instances) driving the decision making process of
consumers.

Transparency of Supply Chains


In a society where publicly accessible information is only a key
stroke away and a good reputation is priceless, one of the ways a
Lean Supply Chain Management

176 company can achieve competitive advantage is to ensure the


Notes integrity of supply chain inputs. This means ensuring that inputs

S
___________________
such as raw materials, employees, employee conditions and
distribution networks (among others) are set up to withstand
___________________
public scrutiny and meet (or preferably, exceed) consumer
___________________ expectations. In order to achieve these lofty ideals companies are
___________________ expected to internalise values-based decision-making and
processes into their day-to-day business.
___________________

PE
___________________ Product Differentiation
___________________ Ethical supply chains are influencing the way in which products
___________________ are differentiated. Products are no longer differentiated by
rudimentary characteristics such as colour and price. Rather, less
___________________
tangible factors such as the beliefs and values system to which the
___________________ parent company subscribes, the values of the people the company
employs and the way in which it in return values and looks after
those employees, as well as the sustainability of inputs and
business practices are all under the microscope. All of these factors
are becoming pivotal in a consumer’s decision making process.
Those companies able to meet the expectations of consumers are
becoming ‘blue chip’ investments.
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Declaration of Interests
Interestingly, this new global supply chain phenomenon is forcing
many companies to look inwards, create performance measures
other than the bottom line and declare their interests (or risk
becoming ‘guilty by association’). In the eyes of consumers, it is no
longer acceptable for large companies to ‘pass the buck’ and permit
subsidiaries or subcontractors to be unethical and/or do their ‘dirty
work’. Instead, consumers are holding parent companies, Chief
Executive Officers and Boards to account for the products and
supply chains they are creating. A consequence of this is that many
large companies have had to dedicate resources to track and
monitor the operations of contractors, sub-contractors and
subsidiaries in an effort to ensure their own reputation remains
(c

untarnished by the actions of those with whom they are associated.

Ethics ahead of Profits


Rather than just ‘talking the walk’, companies are expected to
‘walk the talk’ with respect to ethical supply chains. Where
consumer expectations have not been met, evidence is showing
that consumers are more than willing to shop elsewhere and where
UNIT 14: Ethics, Trust and Environment

necessary, pay ‘extra’ to those companies that are listening and 177
responding to their demands. Notes

S
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Today consumers are not only concerned with product
___________________
quality but also the ………………. of supply chain
inputs. ___________________

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2. ……………… supply chains are influencing the way in ___________________
which products are differentiated. ___________________

___________________
Summary ___________________
The implementation of a Supply Chain Management system is not ___________________
just about reinventing the business. Most of the companies may
pay tremendous lip service to people and the Cultural Value
System, but when it comes to a major SCM initiative these are
ignored to their peril. The task of effectively changing the daily
activities and behaviour of many of these employees is highly
daunting. From an organizational point of view, SCM concepts are
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especially tricky because they go against the mantra of
decentralization, which many companies adopted in 70's and 80's
to spur innovation among business units.
The concept of SCM requires a switch from a functional to process
orientation. That is tough for companies with myriad independent
business units that are unaccustomed to sharing information or
coordinating with other divisions. Finally, the spate of strategic
alliances without proper cultural compatibility has made the
integration problem even more vexing. A major reason why SCM
results can fall through is that the top management typically
overestimates the degree of cooperation it will get and
underestimate the integration cost of change in the organizational
processes into the organizational system. SCM can give results
only with building of strong commitment, integrity of
(c

transparency, goodwill and fair play among the partners.

Lesson End Activity


Conduct a survey and find out the percentage of such organizations
out of your surveyed ones how much of them do consider all these
issues mentioned in this unit.
Lean Supply Chain Management

178 Keywords
Notes

S
Trust: Trust means being able to predict what other people will do
___________________
and what situations will occur. If we can surround ourselves with
___________________ people we trust, then we can create a safe present and an even
___________________ better future.

___________________ Collaboration: Collaboration is a mutually beneficial and


well-defined relationship entered into by two or more organizations
___________________

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to achieve results they are more likely to achieve together than
___________________
alone.
___________________
Green Supply Chain: A Green Sustainable Supply Chain can be
___________________ defined as "the process of using environmentally friendly inputs
___________________ and transforming these inputs through change agents – whose
by-products can improve or be recycled within the existing
___________________
environment.
ISO: ISO is a network of the national standards institutes of 164
countries, one member per country, with a Central Secretariat in
Geneva, Switzerland, that coordinates the system.

Questions for Discussion


)U
1. What do you mean by green supply chain management?
2. What is trust as per Toyota way?
3. Describe the environmental issues in lean supply chain.
4. What are the ethical expectations in supply chains?
5. Distinguish between ISO 9000 and ISO 14000.

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
(c

Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain


Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
UNIT 14: Ethics, Trust and Environment

179
Web Readings Notes

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___________________
http://valuestream2009.wordpress.com/2010/12/16/lean-green-
manufacturing-and-its-role-in-sustainable-supply-chain- ___________________
management/
___________________
http://www.greenbiz.com/research/report/2003/12/06/lean-and- ___________________
green-supply-chain
___________________

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___________________

___________________

___________________

___________________

___________________
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UNIT 15: Case Study

Unit 15
181
Notes

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Case Study
___________________

___________________

___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________

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___________________
Case Study: Wal-Mart’s Keys to Successful Supply Chain
Management ___________________

___________________
Over the past ten years, Wal-Mart has become the world’s largest
and arguably most powerful retailer with the highest sales per ___________________
square foot, inventory turnover, and operating profit of any
___________________
discount retailer. Wal-Mart owes its transition from regional
retailer to global powerhouse largely to changes in and effective
management of its supply chain.

Wal-Mart began with the goal to provide customers with the


goods they wanted when and where they wanted them. Wal-Mart
then focused on developing cost structures that allowed it to offer
low everyday pricing. The key to achieving this goal was to make
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the way the company replenishes inventory the centrepiece of its
strategy, which relied on a logistics technique known as cross
docking. Using cross docking, products are routed from suppliers
to Wal-Mart’s warehouses, where they are then shipped to stores
without sitting for long periods in inventory. This strategy
reduced Wal-Mart’s costs significantly and they passed those
savings on to their customers with highly competitive pricing.
Wal-Mart then concentrated on developing a more highly
structured and advanced supply chain management strategy to
exploit and enhance this competitive advantage.

Components of Supply Chain Management (SCM)

The main elements of a supply chain include purchasing,


operations, distribution, and integration. The supply chain begins
with purchasing. Purchasing managers or buyers are typically
(c

responsible for determining which products their company will


sell, sourcing product suppliers and vendors, and procuring
products from vendors at prices and terms that meets profitability
goals.

Supply chain operations focus on demand planning, forecasting,


and inventory management. Forecasts estimate customer demand
Contd…
Lean Supply Chain Management

182 for a particular product during a specific period based on


Notes historical data, external drivers such as upcoming sales and

S
promotions, and any changes in trends or competition. Using
___________________
demand planning to develop accurate forecasts is critical to
___________________ effective inventory management. Forecasts are compared to
inventory levels to ensure that distribution centres have enough,
___________________
but not too much, inventory to supply stores with a sufficient
___________________ amount of product to meet demand. This allows companies to
___________________ reduce inventory carrying costs while still meeting customer

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needs.
___________________
Moving the product from warehouses or manufacturing plants to
___________________
stores and ultimately to customers, is the distribution function of
___________________ the supply chain.

___________________ Supply chain integration refers to the practice of developing a


collaborative workflow among all departments and components
___________________
involved in the supply chain to maximize efficiencies and build a
lean supply chain.

Wal-Mart’s Method of Managing the Supply Chain

Wal-Mart has been able to assume market leadership position


primarily due to its efficient integration of suppliers,
manufacturing, warehousing, and distribution to stores. Its
supply chain strategy has four key components: vendor
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partnerships, cross docking and distribution management,
technology, and integration.

Wal-Mart’s supply chain begins with strategic sourcing to find


products at the best price from suppliers who are in a position to
ensure they can meet demand. Wal-Mart establishes strategic
partnerships with most of their vendors, offering them the
potential for long-term and high volume purchases in exchange
for the lowest possible prices.

Suppliers then ship product to Wal-Mart’s distribution centres


where the product is cross docked and then delivered to Wal-Mart
stores. Cross docking, distribution management, and
transportation management keep inventory and transportation
costs down, reducing transportation time and eliminating
inefficiencies.
(c

Technology plays a key role in Wal-Mart’s supply chain, serving


as the foundation of their supply chain. Wal-Mart has the largest
information technology infrastructure of any private company in
the world. Its state-of-the-art technology and network design
allow Wal-Mart to accurately forecast demand, track and predict

Contd…
UNIT 15: Case Study

inventory levels, create highly efficient transportation routes, and 183


manage customer relationships and service response logistics. Notes

S
Benefits of Efficient Supply Chain Management ___________________

Wal-Mart’s supply chain management strategy has provided the ___________________


company with several sustainable competitive advantages,
___________________
including lower product costs, reduced inventory carrying costs,
improved in-store variety and selection, and highly competitive ___________________
pricing for the consumer. This strategy has helped Wal-Mart
___________________

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become a dominant force in a competitive global market. As
technology evolves, Wal-Mart continues to focus on innovative ___________________
processes and systems to improve its supply chain and achieve ___________________
greater efficiency.
___________________
Questions:
___________________
1. Discuss, in detail, the components and methods of Supply
___________________
Chain Management for Wal-Mart.

2. Do a SWOT analysis of Supply Chain of Wal-Mart.

Source: http://www.usanfranonline.com/wal-mart-successful-supply-chain-management/
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UNIT 16: Outsourcing in SCM

185
Notes

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___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________

BLOCK-IV
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Lean Supply Chain Management
Detailed Contents
186
Notes

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UNIT 16: OUTSOURCING IN SCM
___________________ UNIT 18: LEAN SUPPLY CHAIN NEW PRODUCT
DEVELOPMENT
z Introduction
___________________ z Introduction
z Meaning and Definition of Outsourcing
___________________ z New Product Development Process
z Reasons and Types of Outsourcing
___________________ z Lean Product Development
z Outsourcing Planning Process
___________________ z Seven Principles to Maximize Productivity in NPD

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UNIT 17: LEAN OUTSOURCING STRATEGY
___________________
UNIT 19: STRATEGIES AND TACTICS IN LEAN
z Introduction
___________________ SUPPLY CHAIN
z Strategic Lean and Outsourcing z Introduction
___________________
z Trends in Outsourcing z Basics of Strategy, Tactics and Operational
___________________
z Myths of Supply Chain Outsourcing Planning
___________________ z Aligning Supply Chain Strategic Goals for Strategic
Fit

z Alignment of Strategies with Lean Supply Chain

z Interest in Lean and SCM as a Combined Strategy

UNIT 20: CASE STUDY


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UNIT 16: Outsourcing in SCM

Unit 16
187
Notes

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Activity

Outsourcing in SCM
___________________
With the help of internet,
search different definitions of
___________________
outsourcing.
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Meaning and Definition of Outsourcing ___________________
\ Reasons and Types of Outsourcing ___________________
\ Outsourcing Planning Process
___________________

Introduction ___________________

___________________
"Outsourcing", in most cases, involves transferring or sharing
management control and/or decision-making of a business function
to an outside supplier, which involves a degree of two-way
information exchange, coordination and trust between the
outsourcer and its client. Such a relationship between
organizations is qualitatively different from traditional
relationships between traditional buyers and sellers.
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In the earlier years, manufacturing firms procured only raw
materials. They manufactured most of the components needed for
end products. For example, a car company handled all activities
from rolling sheet to making spring, axle, car body, casting of
engine block and cylinder head. In addition, support services like
maintenance, utilities, security, canteen, town maintenance,
education, health services and the likes were part of the firms.
However, managing all activities efficiently was becoming difficult.
In addition, a large number of suppliers emerged. As a result, the
company started outsourcing a part of its activities in recent years.
Outsourcing began with services like security and canteens and
went on extending its coverage to maintenance, IT, utilities,
workshop and a large part of production activities.
Outsourcing has become a concern for the union, the management
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and the government.

Meaning and Definition of Outsourcing


Outsourcing is a practice used by different companies to reduce
costs by transferring portions of work to outside suppliers rather
than completing it internally.
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188
Outsourcing is an effective cost-saving strategy when used
Notes
properly. It is sometimes more affordable to purchase a good from

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Activity
Make___________________
a mini-documentary on companies with comparative advantages than it is to produce the
the topic reasons and types of
___________________ good internally. An example of a manufacturing company
outsourcing.
outsourcing would be Dell buying some of its computer components
___________________
from another manufacturer in order to save on production costs.
___________________ Alternatively, businesses may decide to outsource bookkeeping
___________________ duties to independent accounting firms, as it may be cheaper than

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retaining an in-house accountant.
___________________

___________________ Outsourcing means that firms hand over work they used to
perform in-house to outside firms. In another words, it is a sharing
___________________
of work of making products with others. Outsourcing can offer
___________________ greater budget flexibility and control. Outsourcing lets
___________________ organizations pay for only the services they need, when they need
them. It also reduces the need to hire and train specialized staff,
brings in fresh engineering expertise, and reduces capital and
operating expenses.

Check Your Progress


Fill in the blanks:
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1. Outsourcing is a practice used by different companies to
reduce costs by transferring portions of work to outside
…………… rather than completing it internally.
2. Outsourcing can offer greater ……………. flexibility and
control.

Reasons and Types of Outsourcing


The following section explains the reasons and types of
outsourcing:

Reasons for Outsourcing


Companies outsource to avoid certain types of costs. The reasons
include avoidance of burdensome regulations, high taxes, high
(c

energy costs, and unreasonable costs that may be associated with


defined benefits in labour union contracts and taxes for
government mandated benefits. Perceived or actual gross margin
in the short run incentivizes a company to outsource.
With reduced short run costs, executive management sees the
opportunity for short run profits while the income growth of the
UNIT 16: Outsourcing in SCM

consumer base is strained. This motivates companies to outsource 189


for lower labour costs. However, the company may or may not Notes

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incur unexpected costs to train these overseas workers. Lower ___________________
regulatory costs are an addition to companies saving money when
___________________
outsourcing.
___________________
Companies may seek internal savings to focus money and
resources towards core business. A company may outsource its ___________________

landscaping functions irrelevant to the core business. Companies ___________________

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and public entities may outsource certain specialized functions, ___________________
such as payroll, to ADP or Ceridian. Companies may find the same
___________________
level of consumer satisfaction.
___________________
Import marketers may make short run profits from cheaper
overseas labour and currency mainly in wealth consuming sectors ___________________

at the long run expense of an economy's wealth producing sectors ___________________


straining the home county's tax base, income growth, and
increasing the debt burden. When companies offshore products and
services, those jobs may leave the home country for foreign
countries at the expense of the wealth-producing sectors.
Outsourcing may increase the risk of leakage and reduce
confidentiality, as well as introduce additional privacy and security
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concerns.

Types of Outsourcing
It is not just information systems but service functions, in general,
have developed in the last few years. This has given rise to a new
breed of specialists has changed the way in which organizations
operate their supply chains. By partnering with existing logistics
companies in specific marketplaces and creating strategic alliances
with knowledge-based partners, i.e. Third Party Logistics
Providers (3PLs) and Fourth Party Logistics Providers (4PLs),
organizations can extend their supply chains and they do not have
to build a costly global presence in each marketplace they serve.

Third Party Logistics Providers (3PLs)


(c

Beginning in the mid-1990s, multinational companies began to


turn to qualified single-source logistics providers, working across
geographic boundaries, to provide an integrated, regional approach
to logistics. 3PLs have led the way in logistics outsourcing.
Drawing on its core business, whether it be forwarding, trucking or
warehousing, 3PL operators moved into providing other services
Lean Supply Chain Management

190 for customers. They found this a convenient way for a commodity-
Notes service logistics provider to move into higher margin, bundled

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___________________
services.

___________________ Successful 3PLs serving multinationals began purchasing or


taking equity interests in existing logistics companies in key global
___________________
economic regions to extend their reach and build a more seamless
___________________ supply chain. This partnership approach to global logistics, using a
___________________ regional and more culturally sensitive economic model, creates

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increased short-term market visibility and immediate cost and
___________________
service benefits for all trading partners within the global supply
___________________
chain.
___________________
The decision to utilize third-party or contract logistics companies
___________________ has been fostered in part by the interest in reducing asset
___________________ investment to improve asset productivity. Another rationale is the
focus of the company on its core competencies as a strategy to
operate more effectively and efficiently. A company may see its
core competency, for example, in production and marketing. A
company will, therefore, be more effective if it focuses upon its two
core competencies.
Companies, anxious to reduce costs, want what 3PLs have to offer.
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Since no single logistics provider is truly capable of handling all
aspects of the global logistics management process, the key to any
successful international 3PL lies in establishing a regionally based
3PL partner relationship that can function as an integrated global
logistics network that can be tailored to the multinational
company’s needs. The 3PL must be able to integrate critical
databases across customer levels while addressing the strategic,
tactical and operating philosophy of the multinational company
throughout the global supply chain.
The potential market opportunity for outsourced logistics service
providers, whether domestic, international and/or global is huge.
There is a current trend toward the involvement of 4PL providers,
to help manage a number of 3PLs that may be involved with a
company's operations. This is the result of the rapidly advancing
(c

information age. Multinational companies increasingly require


logistics services that are much more complex and specific.
As countries, regions and multinational companies become more
successful, their supply-chain expectations and demands become
more standardized, regardless of the market. This requires higher
levels of international service, using proven supply-chain models.
UNIT 16: Outsourcing in SCM

It also means increased emphasis on information technologies and 191


integrated logistics services between trading partners to ensure a Notes

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more seamless and cost-effective supply chain process for the ___________________
customer.
___________________

Fourth Party Logistics Providers (4PLs) ___________________

A 4PL is an integrator that assembles the resources, capabilities, ___________________


and technology of its own organization and other organizations to ___________________

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design, build and run comprehensive supply chain solutions. Apart
___________________
from managing a number of 3PL operations, a 4PL is looked to for
the provision of competencies relating to knowledge availability, ___________________

information technology, and skills in forming and sustaining ___________________


successful supply chain relationships. ___________________
Using a 4PL is different from the traditional 3PL. The 4PL is a ___________________
BPO provider. This lead logistics provider will bring value and a
reengineered approach to the customer's need. A 4PL is neutral
and will manage the logistics process, regardless of what carriers,
forwarders or warehouses are used. The 4PL can and will even
manage 3PLs that a customer uses.
This new international logistics service provider helps develop
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solutions tailored to meet the unique and special needs of each
customer, without regard to a parent company's service offerings
and operations. The firm understands the key to success with
process, people and technology. A good 4PL has a better
understanding of the complexity of the customer's requirements.
However, when taking the outsourcing decision, there are two
things that are important, the first is that the specific needs of the
organization match the supplier's capabilities and, secondly,
outsourcing should provide the firm advantages such as when
processes or products are completed faster, cheaper, or better by
the outside organization.

Check Your Progress


(c

Fill in the blanks:


1. Focus of the company on its core …………………….. as a
strategy to operate more effectively and efficiently.
2. The firm understands the key to success with process,
people and ……………………

Contd…
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192
3. Outsourcing may increase the risk of ………………. and
Notes
reduce ……………….

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Activity
___________________
Re-create an aged looking
diary or journal recording
4. Companies may seek internal savings to focus
___________________
outsourcing planning at …………….. and …………………. towards core business.
different levels.
___________________

___________________ Outsourcing Planning Process


___________________ There are so many different schools of thought on outsourcing

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___________________ facilities management services that deciding where to begin can be
overwhelming. With a variety of outsourcing options to choose
___________________
from, facility executives may have difficulty deciding the best way
___________________ to approach the decision-making process.
___________________
To develop a strategic sourcing plan, facility executives should
___________________ explore their motives for outsourcing, identify actions needed to
make the best selection of partners, and establish a methodology
for determining and measuring the critical success factors.
The first step in the strategic sourcing plan is reviewing the vision
for the facility management enterprise. Many outsourcing ventures
have failed because of insufficient attention upfront to where the
facility management organization is headed and what it wants to
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accomplish through outsourcing. The direction of the facility
management enterprise needs to be analysed in relation to the
overall corporate vision to make certain facility management goals
and objectives are in sync with those of the organization.
Core services are the seeds of the organization, the essential
services that have to be performed for customer organizations to
achieve their business missions. Core services vary from one
corporate entity to another, depending on mission, culture and
other factors that shape the way the facility organization serves its
customers. Typically, core functions are retained in-house.
Non-core services do not necessarily contribute directly to the
corporate mission and could be performed by external service
providers.
(c

The facility management test for core and non-core services is to


assess how customers react if a particular service is not performed
by in-house personnel. If a service passes the test, it more than
likely can be outsourced.
Once core and non-core functions have been identified, the facility
executive should determine whether there is a good reason for
UNIT 16: Outsourcing in SCM

undertaking outsourcing. To rationalize the outsourcing effort, 193


facility executives should be certain they understand the motives Notes

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for considering externally provided services. Seasoned outsource ___________________
veterans give several compelling reasons why most facility
___________________
organizations elect to move into an outsource relationship.
___________________
z Facility management is not a core function of the
organization. Although a facility organization may be ___________________

successful in delivering world-class services, sometimes senior ___________________

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corporate officials determine that the overall facility function ___________________
is not strategically linked to the corporate business mission
___________________
and is not one of the company’s core competencies. Typically,
this means that the facility organization is considered to be an ___________________
operational function that could just as easily be performed by ___________________
an external source, so the company redirects its resources to
___________________
core functions performed in-house and selects facility
management as a candidate for outsourcing.
z The organization is looking for facility management
best practices. Because internal facility organizations are
busy performing routine services, they often are not current on
the latest trends and best practices. Time constraints may
)U
make it impossible to keep in-house staff trained and versed in
the latest facility management tools and strategies. Internal
facility organizations are fairly insulated from competitive
market pressures that service providers face to have the latest
skills, systems and information. Senior management often
believes outsourcing providers deliver best-practice
performance because otherwise the firms could not compete in
the marketplace.
z The workforce is variable. When companies and institutions
are in flux with respect to the contraction and expansion of
their workforce, using an external resource pool may be
attractive because staff can be delivered “just-in-time.” This
flexibility allows the company to maintain a smaller in-house
workforce, which reduces overhead and administrative costs,
(c

while having the ability to staff up quickly when service


demand increases.
z The outsourcing provider offers value-added services. In
companies where the facility organization has negotiated
service-level agreements with customer organizations and
those organizations pay for services, using an external service
Lean Supply Chain Management

194 provider may allow facility management to offer higher levels


Notes of service than the baseline or standard service provided. Some

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___________________
customer units may need facility management services that
are different from what is provided by the facility department
___________________
directly, but that can be offered through an external provider.
___________________ Driving consistency of service also may be part of the
___________________ value-add concept. For example, a provider may support a call
centre, Web-based CAFM systems or other technology that can
___________________

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be applied uniformly across all customer organizations.
___________________
Following is an explanation of outsourcing at different levels of
___________________
management:
___________________
Strategic Outsource Planning
___________________
Outsourcing is a contractual agreement between the customer and
___________________
one or more suppliers to provide services or processes that the
customer is currently providing internally. The fundamental
difference between outsourcing and any other purchasing
agreement is that the customer contracts-out a part of their
existing internal activity. There are many reasons why a company
may choose to outsource and rarely will it be for one single reason.
While they are normally specific to the particular situation, some
)U
commonly-cited reasons are:
z To reduce cost
z To improve quality, service and delivery
z To improve organisational focus
z To increase flexibility
z To facilitate change
"Strategic planning is a process by which we can envision the
future and develop the necessary procedures and operations to
influence and achieve the future" Clark Crouch. Preparation of a
strategic plan and on-going business reviews ensure that you take
the most positive step you can to mitigate the risk of failure.
(c

A sound plan should:


z Serve as a framework for decisions
z Provide a basis for more detailed planning (all organisational
projects should be working toward achieving the high level
strategy)
UNIT 16: Outsourcing in SCM

195
z Provide a reference point for stakeholders to educate, motivate
Notes

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and involve them.
___________________
z Assist performance measurement and benchmarking
___________________
z Become the building block for the next plan.
___________________
Tactical Outsource Planning ___________________
Tactical planning is the process of taking the strategic plan and ___________________

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breaking it down into specific, short term actions and plans. The
___________________
relative length of the planning horizon will vary from one market
to another but typically; the strategic plan will cover a period ___________________

greater than three years while the tactical plan covers the period ___________________
from today through to the end of year three.
___________________
The content of any business plan will depend on why the plan is ___________________
being produced. Some plans are for internal use only and act as a
common reference during the preparation of budgets and
appraisals. Some plans are basically sales documents aimed at
persuading banks to provide loans and investors to provide equity.
The process of producing a useable tactical plan is not easy, as
some flexibility is required to allow response to unplanned events.
)U
There are a large variety of strategic planning models and
organisations that provide strategic planning consulting. Some of
these are useful and can be used a check lists to ensure
completeness and as facilitators to ask the awkward questions that
people would prefer to leave unanswered.
It is important that the tactical plan should be checked to ensure it
is aligned with the strategic plan and that all activities are aimed
at moving closer to the goals defined in the strategic plan. It is
very easy for the tactical plan to diverge at a tangent because of
someone’s interests or disagreement with the strategic plan.

Operational Outsource Planning


Operational planning translates your high level strategic plan into
a more detailed plan of who will do what and when. Operational
(c

plans usually relate to the short to medium term, maybe one to


three years, and may relate to your whole organisation, or a
particular project or area of work.
Operational plans should flow logically from the strategic plan.
Management should review and revise them at least annually.
Operational planning focuses on short-term actions and
Lean Supply Chain Management

196 incorporates the annual budget process. Management should


Notes reference the strategic plans and adjust operational plans based on

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___________________
changes in the underlying business needs.

___________________ Operational planning addresses the near-term support for business


operations. Specifically, operational planning focuses on immediate
___________________
concerns such as adequate IT resources, sufficient budget, and
___________________ appropriate risk identification.
___________________
Operational planning is the process of developing, utilizing and

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___________________ analysing financial models to arrive at and evaluate business
___________________ alternatives and decisions.

___________________ The operational planning process encompasses the following:

___________________ z Creating financial projections linked to business plans;


___________________ z Developing financial models to analyse business decisions such
as make or buy, lease or purchase and hire or outsource;
z Establishing common reporting standards for business units;
z Creating analytical tools that allow management to evaluate
the operational effectiveness and cost efficiency of the current
business model;
)U
z Developing real-time reporting systems that produce financial
information which allows decisions to be made between formal
reporting cycles;
z Creating scenario & simulation financial models;
z Establishing non-financial objectives to improve work;
z Establishing firm-wide fixed asset acquisition programs and
inventory analysis.

Check Your Progress


Fill in the blanks:
1. The direction of the facility management enterprise
needs to be analysed in relation to the overall
……………… vision.
(c

2. Core services are the ……………. of the organization.

Summary
Outsourcing is growing and it provides firms with a competitive
advantage. This is reflected in the many examples of outsourcing
UNIT 16: Outsourcing in SCM

related to the supply chain functions and in other support 197


functions, once taboo to outsiders. The decision to utilize Notes

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third party or contract logistics companies has been fostered in ___________________
part by the interest in reducing asset investment to improve asset
___________________
productivity. Another rationale is the focus of the company on its
core competencies as a strategy to operate more effectively and ___________________

efficiently. A company may see its core competency, for example, in ___________________
production and marketing.
___________________

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___________________
Lesson End Activity
___________________
Discuss within group the types of outsourcing and their
___________________
implications.
___________________

Keywords ___________________

Outsourcing: Outsourcing is a practice used by different


companies to reduce costs by transferring portions of work to
outside suppliers rather than completing it internally.
Third Party Logistics (3PL): A third party logistics provider is a
firm that provides service to its customers of outsourced logistics
)U
services for part, or all of their supply chain management
functions.
Fourth Party Logistics (4PL): The concept of a fourth-party
logistics (4PL) provider is defined as an integrator that assembles
the resources, capabilities, and technology of its own organization
and other organizations to design, build, and run comprehensive
supply chain solutions.
Tactical Planning: Tactical planning is the process of taking the
strategic plan and breaking it down into specific, short term
actions and plans.

Questions for Discussion


(c

1. Define outsourcing.
2. What are the reasons for outsourcing to external suppliers?
3. What are the types of outsourcing?
4. What is outsourcing planning process?
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198
5. How outsourcing is done at strategic, tactical and operational
Notes
level of management?

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___________________

___________________ Further Readings


___________________
Books
___________________
Wincel, J. P., (2004), Lean Supply Chain Management: A
___________________
Handbook for Strategic Procurement, Productivity Press.

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___________________
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
___________________ Management Essentials: A Framework for Materials Managers,
___________________ CRC Press.

___________________ Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean


Management into the Supply Chain, Butterworth-Heinemann.
___________________

Web Readings

http://en.wikipedia.org/wiki/Logistics#Fourth-party_logistics

http://outsourcingreasons.blogspot.in/
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(c
UNIT 17: Lean Outsourcing Strategy

Unit 17
199
Notes

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Lean Outsourcing Strategy
___________________

___________________

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Strategic Lean and Outsourcing ___________________
\ Trends in Outsourcing
___________________
\ Myths of Supply Chain Outsourcing
___________________

Introduction ___________________

___________________
‘Outsourcing’ involves the transfer or sub-contracting of the
management and/or day-to-day execution of an entire business
function to an external service provider. Until recently i.e. the end
of the 1980s, the manufacture of parts and components through
third party participation i.e. sourcing was the largest part of
purchasing. The bulk of purchasing was focused on these items
with some peripheral services such as legal and travel services as
)U
add-ons. However, this pattern has undergone a sea change.
Statistics of US companies show that, by the mid-1990s, legal
work, which constituted 29% of outsourcing activities by value
followed by logistics at 21%, and computer information systems
with 16%, were the main components of purchasing. Purchasing
activity has dramatically changed from sourcing i.e. the traditional
manufacture of parts and components (which accounts for only
31%), to outsourcing activities (which constitute 69% of purchasing
activities) in business organizations.
This change has come about because companies no longer assume
that all organizational services must be provided and managed
internally. Many products or services, when produced by outside
suppliers who are more effective and efficient, can provide
(c

competitive advantage to the firm. Because of this phenomenon,


the outsourcing of selected organizational activities has become an
integral part of corporate strategy. Many tasks like human
resources, payroll and benefits, information systems, etc., that are
not considered core competencies of the organization, are being
contracted out.
Lean Supply Chain Management

200 Strategic Lean and Outsourcing


Notes

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Activity Following points will facilitate you on the relationship of lean and
___________________
Collect some data and find out outsourcing:
the relationship between
___________________
strategic lean and
outsourcing. Moving Supplier to be Lean with an Outsourcing Strategy
___________________
Having explored the current market situation and the changes
___________________
required to make the transition to a lean supply chain to help you
___________________ understand what customers are demanding and how you need to

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___________________ respond, we would like to examine some of the lean supply chain
___________________
components your organization will need to consider in making the
transition.
___________________
Outsourcing is the transfer of control of a process or product to a
___________________
supplier. An example of a manufacturing process is plating of a
___________________ part. Plating is difficult and messy and is often treated as a process
"orphan" in a plant. In these cases, companies have not invested
the time and money into plating process improvements. Outside
suppliers who focus on this business and have better equipment
and technology, as an automated plating line, will outperform the
process with better control, quality, and cost.
Companies outsource parts or components that are not one of their
)U
critical core processes for economic gain or better quality. An
electronics manufacturer may choose to outsource its sheet metal
work for control panels. Alternatively, an off-road equipment
manufacturer may outsource a sub-assembly, such as a cab for a
tractor. At the strategic level, outsourcing allows not only the
transfer of control to an outsider, but also the method of
manufacture using a different technology or process. In strategic
outsourcing, a company may transfer an entire product, a product
line, or an entire plant for strategic value.
The benefits generally are lower costs, higher quality, and shorter
lead times. The term "lean manufacturing" is coined to represent
half the human effort in the company, half the manufacturing
space, half the investment in tools, and half the engineering hours
(c

to develop a new product in half the time.

Supplier–Buyer Relationships
The traditional relationship between a buyer and its suppliers
needs to be transformed into one that helps build closer ties and
fosters continued collaboration between both parties to the
relationship. The philosophy your organization applies has to lead
UNIT 17: Lean Outsourcing Strategy

to "win-win" results for buyer and suppliers. Any other approach, 201
such as the traditional scenario where negotiations are one-sided, Notes

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will result in a suboptimal situation and impact the overall ___________________
effectiveness– the leanness–of the value chain.
___________________
A collaborative relationship means a readiness on both sides to
___________________
discuss future plans, a willingness to understand each other’s
business processes, a commitment to share in each other’s long- ___________________

term strategies and an agreement to share in cost savings realized ___________________

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by any joint activities. What this comes down to is a culture change ___________________
where top management and anyone else in your organization who
___________________
interact with suppliers begin to treat them as partners rather than
servants. It means communication and cooperation that is two-way ___________________
from product design to delivery at the end-user. ___________________

___________________
Balancing In-House and Outsourcing Production
Outsourcing is a business strategy that moves some of an
organization’s functions, processes, activities and decision
responsibility from within an organization to outside providers.
This is done through negotiating contract agreements with a
vendor who takes on the responsibility for the production process,
people management, quality, customer service and key asset
)U
management of the function. The process can greatly reduce fixed
overhead costs of an organization.
Produce in-house those products that are critical to the success of
the product or customers perception of important attributes,
require specialized design and manufacturing skills or equipment,
or fits within existing or planned core competencies.
After evaluating the opportunities strategically, it is now time to
evaluate tactically. Tactically it comprises considerations of
efficiency, control of quality and reliability, cost, capacity
utilization, cost, etc.
In addition to these, it demands answers to following questions:
z Can it be made (feasibility)?
(c

z How great is the need (buy what from whom)?


z What will it cost (total of all costs to the firm with and without
the product)?
Lean Supply Chain Management

202
z What will be included in the cost (direct costs of materials,
Notes
labour, energy, overhead, transportation, inventory, quality,

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___________________ obsolescence, and capital costs)?
___________________ After all costs have been identified and the marketing opportunity
___________________ evaluated, a break-even analysis must be performed to identify
what sales volumes would be necessary to product a profit and
___________________
whether your market share would be great enough.
___________________

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At times, outside forces make the decision for the company. If you
___________________
have unsatisfactory supplier performance, you may have to bring it
___________________ in-house. If you have changing sales demands, you may be
___________________ forced to buy supplemental support. If you have restricted
manufacturing capacity, you may have to outsource production.
___________________
However, if you need modifications of an existing product or your
___________________ firm already possesses most of the necessary production resources,
it may make sense to produce in-house.
Many considerations go into the make or buy decision in addition
to cost and availability of production capacity such as purchase
strategies, quality, quantity, service, specialized knowledge, design
or production process secrecy, urgency, labour problems, plant
capacity, capital equipment, use of idle resources. It is desirable to
)U
see that we must take into consideration a variety of issues when
considering a make or buy decision of a product or service. If the
decision is to buy, then usually some sort of outsourcing for the
product or service is initiated.
Many chief executives consider the make-or-buy decision to be
among the most critical and most difficult confronting their
organizations. Not only are billions of dollars needlessly wasted if
the wrong decision is made, but scarce management resources
frequently are stretched past the breaking point. Outsourcing is a
term being also used by service organizations primarily relating to
services such as accounting, maintenance, computer operations,
security, marketing, supply rooms, and the like. The basic issues
are the same concerning the question of doing it yourself or
(c

contracting with an independent outside firm. The strategic issue


requires the firm to identify its core competencies – the things that
differentiate it and make it viable. If a product or service at or near
the heart of the firm's core competencies is to be outsourced, it
should only be supplied by a carefully selected supplier under a
tightly woven strategic alliance.
UNIT 17: Lean Outsourcing Strategy

203
Top management has the ultimate responsibility for make-or-buy
Notes

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decisions. In most cases, this responsibility can be satisfied
through operating procedures that develop and pool all relevant ___________________
information surrounding a make-or-buy issue. Purchasing is a ___________________
source of much of this information. In addition, Purchasing
___________________
frequently should identify candidates for a make-or-buy analysis.
___________________
Major problems are common in the make-or-buy area such as:
___________________

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z Make-or-buy decisions are made at too low a level in the
___________________
organization.
___________________
z Not all factors are considered when conducting a make-or-buy
analysis. ___________________

z Decisions are not reviewed on a periodic basis; circumstances ___________________

change! ___________________

z The estimates underlying the cost of making are less objective


and accurate than the purchase facts.
z Members of the buying company assume that they know more
than the supplier about the material or service.
z Management and technical problems are unanticipated.
)U
z Reciprocity.
z Loss of supplier goodwill when production move in-house.
z Unanticipated costs of research and development to stay
abreast of technology for in-house production.
These decisions must be reviewed on a periodic basis as they are
influenced by a multitude of diverse factors that are constantly
changing due to different points in time and under different
operating conditions. The climate will change due to the following
factors:
z Changing costs,
z Technology innovations,
(c

z Customer demand,
z Expansion capital,
z Depreciation or taxing policy,
z Labour relation’s climate, and
z The decision is a composite effect of all these factors.
Lean Supply Chain Management

204
Notes Check Your Progress

S
Activity
___________________ Fill in the blanks:
Prepare a site white paper on
the topic of trends in
___________________ 1. Many chief executives consider the ………………….
outsourcing.
decision to be among the most critical and most difficult
___________________
confronting their organizations.
___________________
2. Outsourcing is a business strategy that moves some of
___________________
an organization’s functions, processes, activities and

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___________________ decision responsibility from ………………. an
___________________ organization to ……………. providers.

___________________
Trends in Outsourcing
___________________

___________________ In the following section, you will study about the trends in
outsourcing:

Trends in Outsourcing Distribution Management


(Downstream)
Many smaller Internet companies have come into existence
because establishing a shop and accessing a broad range of
customers is easy if this channel is chosen. Often, the shop
)U
involves a small one-man company that buys and sells niche
products, for example, organic children’s toys. If such an Internet
company is to succeed, it is important that customers can easily
order and pay for products online. It is very important that
deliveries and possible return happen fast and effectively. It would
require large investments if the one-man company had to invest in
warehousing and distribution facilities as well as a means of
transport and drivers so the solution is to buy services from a
supplier who already has these facilities.

Trends in Outsourcing Sourcing and Procurement (Upstream)


Procurement outsourcing is maturing. Buyers in the first wave
outsourced primarily transactional-rules-based activities, with
labour arbitrage in low-cost countries being a key benefit. As those
(c

relationships mature, buyers look to their providers to create


additional value beyond labour arbitrage.
Procurement is transactional activities such as requisitions,
purchase orders, capital management, simple ordering, etc. and
sometimes linked with accounts payable. Sourcing is more about
understanding what is to be purchased, doing supplier market
UNIT 17: Lean Outsourcing Strategy

research, category management, supplier performance 205


management, and devising the sourcing strategy. Buyers can Notes

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realize benefits from the procurement side very quickly because of ___________________
labour arbitrage.
___________________
Procurement outsourcing is no longer synonymous with
___________________
transactional procurement but has expanded to include strategic
aspects of procurement including category management, strategic ___________________

sourcing, supplier management, analytics and knowledge ___________________

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management. Market trends and information from transactions ___________________
point to procurement outsourcing growing at the highest rate
___________________
relative to all other areas of outsourcing in business processes.
___________________
One of the strongest drivers fuelling the unprecedented interest is
the realignment of procurement organizations and their focus on ___________________

areas that either help create or strengthen competitive advantage ___________________


for the overall supply chain.
)U
Figure 17.1: Realignment of Procurement Organizations

However, the focus on year-over-year procurement cost savings for


traditional categories will produce diminishing returns after these
categories are optimized. In addition, over the long term, similar
rates of savings for these categories are not sustainable. This does
not mean that the value being provided to the corporation by the
procurement function is diminishing. In fact, the opposite is true.
(c

However, traditional ways of accounting for the impact of


procurement must be re-examined to reflect the long-term sources
of value. To this end, there is a clear shift in the way procurement
teams are being reorganized to:
z leverage increased integration with internal business
stakeholders in co-sourcing;
Lean Supply Chain Management

206
z create sourcing centres of excellence (CoEs) and scalable
Notes
knowledge management framework.

S
Activity
Visit___________________
a manufacturing concern z redefine activities and focus areas within the realm of supplier
and see if the above-
___________________
mentioned myths are still management.
present in the industry, and
___________________
prepare a slideshow based on
your findings. Co-sourcing
___________________
Co-sourcing can provide continued value when the procurement
___________________

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function and internal business stakeholders align to form a
___________________ procurement council and jointly drive spend optimization strategy
___________________ focused on lowering the overall cost of acquisition by approaching
___________________
the end-to-end supply value chain. Implementing co-sourcing
requires expert help to run advanced market analytics and
___________________
benchmarking, which are difficult to sustain internally due to lack
___________________ of tools and skilled, dedicated resources. By virtue of providing
category sourcing services, outsourcing providers have access to a
wide range of databases, analytics tools and expert resources.
Categories that are common across industries tend to be the ones
where service providers have better market information and
benchmarking data, and they can therefore bring in a higher level
of expertise. The value creation occurs through the coupling of the
)U
category insights from the service provider with the business
insights from the internal stakeholders to drive innovative
strategies specific to the client’s situation. If governed well, this
combination can be a powerful differentiator in business
effectiveness.

Check Your Progress


Fill in the blanks:
1. …….. is the transfer of control of a product to a supplier.
2. …………………………. involves transactional activities
such as requisitions, ordering and purchase order.

Myths of Supply Chain Outsourcing


(c

These seven myths can help manufacturers realize the original


vision of this option.

Myth 1: My Outsourced Partners are all Supply Chain Experts


The reality is that they know very little about your (or anyone
else’s) supply chain. What they are experts in is producing the
UNIT 17: Lean Outsourcing Strategy

maximum volume of product at the minimum cost? Doing this does 207
not require much visibility into their supply chains; it requires Notes

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focusing on their internal business processes. The old saying of ___________________
‘garbage in, garbage out’ applies here. The best partner in the
___________________
world will do a great job of building perfectly to specifications and
delivering on time a product that never has and never will work. It ___________________

is your responsibility to ensure that your outsourcing partner ___________________


knows your current specifications (not those planned three to six
___________________

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months ago, which may now be obsolete), and that you have real
___________________
time, web-based access to their work in progress and bills of
materials. Only through such oversight, can you enable your ___________________
outsourced partners to produce as though they actually were ___________________
supply chain experts.
___________________

Myth 2: My Partners have State-of-the-art Information ___________________


Technology (IT) Infrastructures
You may assume that your outsourcing provider has a fully
automated system and end-to-end electronic data interchange or
web-based links with its suppliers. Unfortunately, this assumption
is not grounded in reality. The reason is that most outsourcers
have net profit margins in the 2 per cent to 4 per cent range, and
)U
any cost centre that does not directly relate to product quality
becomes a candidate for the ‘budget axe’. Consequently, new
investments in IT infrastructures are about as common as ice
storms in the Sahara. Instead, legacy systems that predate the
Internet and that lack supply chain-specific functionality are
common. When you choose an outsourcing provider, your challenge
is to provide him with a way to access integratable state-of-the-art
supply chain systems without his having to invest a penny in the
procurement of those systems.

Myth 3: By Outsourcing Production and Fulfilment, I will not


have to Worry about Execution
The issue here is that you, and you alone, are responsible for the
ultimate execution of your project and delivery of your products.
(c

Outsourcing is a means to an end, and your ends are necessarily


different from those to whom you outsource. Consider that
multiple subsets of unfinished goods generally comprise finished
goods. Each unfinished good has a particular process, timetable,
set of inefficiencies and potential obstacles. The result is that the
acceptance of an order can be followed by missteps and missed
deadlines by a variety of third parties, and any of these problems
Lean Supply Chain Management

208 can cause serious problems with manufacturing and fulfilment. It


Notes has been said that when everyone is in charge, no one is in charge,

S
___________________
and the proliferation of these third parties makes that aphorism a
reality. Therefore, you must take direct responsibility for end-to-
___________________
end execution or suffer the consequences.
___________________

___________________
Myth 4: My Outsourced Partners will Provide Expert Project
Management
___________________

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It is better to view these partners as renegade divisions of your
___________________ company. They may get the job done, but they will do it their way,
___________________ with their own processes and without an interest in integrating
their data with yours. How can you reconcile these apparent
___________________
conflicts of interest? Firstly, you must recognize that your
___________________
outsourcing partners would not be in business unless they had
___________________ many other customers’ demands to satisfy, many other deadlines
to meet, and a high attention to cost containment.
Secondly, you should understand that your partners will be, by the
nature of their businesses, paying attention only to that small
portion of the manufacturing fulfilment process with which they
are concerned — not to the entire supply chain, which must be
your concern. Ultimately, you must accept that outsourcing and
)U
retaining control of your supply chain network are complementary,
not antagonistic, activities.

Myth 5: Outsourcing Automatically gives me a Time-to-market


Advantage
In many cases, this myth is the most compelling driver of an
outsourcing policy. But unless you carefully select your partners,
provide them with integrated access to your supply chain systems,
and enable your company to supervise the relevant projects, it will
be your more nimble competitors who will realize the advantage.
Why? Because contract manufacturers’ processes and systems have
been designed for mass production, not for mass customization and
weekly new product introductions. It is easy to s that you should
select your outsourced partners based on their demonstrated
(c

commitment to fast-paced manufacturing environments. It is easy


to suggest that your partners should implement strict
management oversight and control mechanisms to ensure that
their subcontractors respond rapidly to fast-changing deadlines.
The reality is that these bromides should not and cannot substitute
for your enabling your partners by providing them with cost-free
UNIT 17: Lean Outsourcing Strategy

access to a real-time, web-enabled, collaborative software platform 209


that instantaneously shares and distributes management, Notes

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scheduling and other data to all relevant parties. This is how to ___________________
gain a real time-to-market advantage over your competitors, who
___________________
will still be relying on their partners to shoulder such unwanted
burdens. ___________________

___________________
Myth 6: Outsourcing is the Key to Making my Operations
Highly Scalable ___________________

PE
Vertically integrated companies have to scale linearly, not ___________________

exponentially. Real estate and labour pools inherently grow in a ___________________


linear fashion. Exponential growth, on the other hand, arises only ___________________
from leveraging the efforts of multiple contractors, who in turn
___________________
leverage other contractors. Outsourcing is then, in principle, a
direct application of the network effect. ___________________

However, if you lose control of your supply chain network,


outsourcing may introduce interminable delays instead of
exponential growth. Specifically, at each step along your supply
chain, you need to make decisions. Some of these decisions can be
automated, while others require the intervention of individuals
with domain-specific knowledge. If you lack information about your
)U
outsourcing partners’ activities and visibility into their supply
chain networks, these will together prevent decisions from being
made quickly and often prevent them from being made at all.
Again, only by offering and requiring your partners to collaborate
in real time with you (at no IT cost to them), can you achieve the
scalability that outsourcing promises.

Myth 7: Fulfilment is Easier to Outsource than Manufacturing


Fulfilment companies, like manufacturers, have to optimize their
cost structures. These firms are, therefore, also reluctant to invest
in IT systems that would optimize the management of inventory
and accelerate their own supply chains. Moreover, because
fulfilment firms are, therefore, also reluctant to invest in IT
(c

systems that would optimize the management of inventory and


accelerate their own supply chains. Moreover, because fulfilment
firms typically pass on their costs to their customers, there is, in
the short term, no market imperative for such firms to become
more efficient.
Lean Supply Chain Management

210
Nevertheless, there are strategies that you can employ that will
Notes
deliver meaningful benefits to your fulfilment partners and that

S
___________________ will enable you to capture the business of the best of these
___________________ partners. Specifically, you can deploy a system that automates the
replenishment of stock prior to the occurrence of a product
___________________
shortage. The benefit to your partner will be direct and compelling:
___________________ lower inventory carrying costs. The benefit to you will be that you
___________________ can now gain from the outsourcing of fulfilment the same

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advantages as you would from the outsourcing of manufacturing.
___________________

___________________ Check Your Progress


___________________ Fill in the blanks:
___________________ 1. Legacy systems that predate the …………….. and that
___________________ lack supply chain-specific functionality are common.
2. Vertically integrated companies have to scale linearly,
not ………………….

Summary
Outsourcing’s value is built upon a fundamental presumption that
)U
strength comes in numbers—that best-of-breed logistics providers
or an end-to-end integrator, sometimes both, give shippers greater
visibility to supply chain challenges than going it alone. Its success
is driven by a collective synergy that tears down walls between
functional silos, pulls together disparate parts, and creates an
integrated network bound by demand.
Reflecting how unique market circumstances have twisted and
torqued supply chains, how innovations in technology, the
Internet, and business process strategies have facilitated the
movement of information and inventory around the world, and how
outsourcing has gained widespread traction, the third party
logistics industry has become somewhat of a paradox. Businesses
rely on logistics providers as fixed assets, fundamental partners
that strengthen and support the enterprise. At the same time,
(c

3PLs are fluid, flexible, even fleeting. It is a matter of perspective.

Lesson End Activity


Create a multi-choice quiz on the myths of supply chain
outsourcing.
UNIT 17: Lean Outsourcing Strategy

Keywords 211
Notes

S
Supplier: Someone whose business is to supply a particular
___________________
service or commodity.
___________________
Strategy: It is a plan of action or policy designed to achieve a
major or overall aim. ___________________

Co-sourcing: Co-sourcing is a business practice where a service is ___________________

performed by staff from inside an organization and also by an ___________________

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external service provider. ___________________
Procurement: Procurement is the acquisition of goods or services. ___________________
It is favourable that the goods/services are appropriate and that
___________________
they are procured at the best possible cost to meet the needs of the
purchaser in terms of quality and quantity, time, and location. ___________________

___________________
Outsourcing: Outsourcing is a practice used by different
companies to reduce costs by transferring portions of work to
outside suppliers rather than completing it internally.

Questions for Discussion


1. Discuss supplier-buyer relationships in terms of lean
)U
outsourcing.
2. How in-house and outsourcing production can be balanced?
3. Discuss the trends in outsourcing in distribution management.
4. What are the trends in outsourcing of sourcing and
procurement?
5. What are the seven myths of supply chain outsourcing?

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
(c

Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain


Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
Lean Supply Chain Management

212 Web Readings


Notes
http://www.ventureoutsource.com/contract-

S
___________________ manufacturing/benchmarks-best-practices/lean-outsourcing/lean-
___________________
outsourcing-its-coming

___________________ http://en.chinasourcing.org.cn/content2.jsp?id=5794

___________________

___________________

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___________________

___________________

___________________

___________________

___________________
)U
(c
UNIT 18: Lean Supply Chain New Product Development

Unit 18
213
Notes

S
Lean Supply Chain New Product
___________________

___________________

Development ___________________

___________________

Objectives ___________________

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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ New Product Development Process
\ Lean Product Development ___________________
\ Seven Principles to Maximize Productivity in NPD ___________________

___________________
Introduction
Product features are basically defined by New Product
Development (NPD) process so as to fulfil clients' requirements.
Supply chain performances are affected by product features. The
magnitude of this effect is determined by supply chain decisions. In
order to satisfy client's needs, in terms of new products, service
)U
level and costs, Supply Chain Management (SCM) decisions should
be aligned to product features, i.e., to the output of NPD process.
Developing new products could be both advantageous and risky for
firms. Despite risks, failure to introduce new products is risky, too.
Why have computers and cellular phones become so successful?
Highly successful new products are always superior to competing
products, are fine-tuned to consumer needs and wants, and enable
consumers to do unique tasks. According to Robert G. Cooper and
Elko J. Kleinschmdt, a unique and superior product becomes
successful 98 per cent of the time. Products with moderate
advantage have 58 per cent success rate, and products with
minimal advantage only 18 per cent.
Several factors contribute to new product development and the
(c

primary objective of companies for developing most new products is


to accomplish future profits and growth. Most of these factors
relate to changes in the external environment such as new
technology and intensifying competition from domestic and foreign
firms, and changes in customer lifestyles and tastes, and also
social and economic changes may bring new products to market.
For example, growing anti-American sentiments of Muslims in
Lean Supply Chain Management

214 some countries have given rise to new products such as Mecca
Notes Cola.

S
Activity
Visit___________________
a research firm and study
the process of new product
___________________
New Product Development Process
development and prepare a
report.
___________________ Consumer lifestyles and tastes are changing as a result of increase
in literacy levels, exposure to other cultures, changing role of
___________________
women, increasing shift from joint family system to nuclear
___________________
families, availability of newer media, and impact of fast

PE
___________________ technological changes. We see a host of on-going changes taking
___________________ place in ready-to-wear garments, footwear, appliances, health
foods, plastic money, and availability and consumption of many
___________________
new services, etc. All these changes are a result of lifestyle
___________________ changes. Therefore, there is a continuous need for new product
___________________ development. The stages or process or steps involved in a
new-product development are depicted in the image given below:
)U

Figure 18.1: Stages of New Product Development

Idea Generation
(c

The first step in new-product development is idea generation. New


ideas can be generated by:
z Conducting marketing research to find out the consumers'
needs and wants.
z Inviting suggestions from consumers.
UNIT 18: Lean Supply Chain New Product Development

215
z Inviting suggestions from employees.
Notes

S
z Brainstorming suggestions for new-product ideas.
___________________
z Searching in different markets viz., national and international
___________________
markets for new-product ideas.
___________________
z Getting feedback from agents or dealers about services offered
___________________
by competitors.
___________________

PE
z Studying the new products of the competitors.
___________________
Idea Screening ___________________
Most companies have an "Idea Committee." This committee studies ___________________
all the ideas very carefully. They select the good ideas and reject
___________________
the bad ideas. Before selecting or rejecting an idea, the following
questions are considered or asked: ___________________

z Is it necessary to introduce a new product?


z Can the existing plant and machinery produce the new
product?
z Can the existing marketing network sell the new product?
When can the new product break even?
)U
z

If the answers to these questions are positive, then the idea of a


new-product development is selected, else it is rejected. This step is
necessary to avoid product failure.

Concept Testing
Concept testing is done after idea screening. It is different from
test marketing. In this stage of concept testing, the company finds
out:
z Whether the consumers understand the product idea or not?
z Whether the consumers need the new product or not?
z Whether the consumers will accept the product or not?
(c

Here, a small group of consumers is selected. They are given full


information about the new product. Then they are asked what they
feel about the new product. They are asked whether they like the
new product or not. Therefore, concept testing is done to find out
the consumers' reactions towards the new product. If most of the
consumers like the product, then business analysis is done.
Lean Supply Chain Management

216 Business Analysis


Notes Business analysis is a very important step in new-product

S
___________________ development. Here, a detailed business analysis is done. The
___________________
company finds out whether the new product is commercially
profitable or not. Under business analysis, the company finds out:
___________________
z Whether the new product is commercially profitable or not?
___________________
z What will be the cost of the new product?
___________________

PE
___________________
z Is there any demand for the new product?

___________________ z Whether this demand is regular or seasonal?

___________________ z Are there any competitors of the new product?

___________________ z How the total sales of the new product be?


___________________ z What will be the expenses on advertising, sales promotion,
etc.?
z How much profit the new product will earn?
Thus, the company studies the new product from the business
point of view. If the new product is profitable, it will be accepted
else it will be rejected.
)U
Product Development
At this stage, the company has decided to introduce the new
product in the market. It will take all necessary steps to produce
and distribute the new product. The production department will
make plans to produce the product. The marketing department
will make plans to distribute the product. The finance department
will provide the finance for introducing the new product. The
advertising department will plan the advertisements for the new
product. However, all this is done as a small scale for Test
Marketing.

Test Marketing
Test marketing means to introduce the new product on a very
(c

small scale in a very small market. If the new product is successful


in this market, then it is introduced on a large scale. However, if
the product fails in the test market, then the company finds out
the reasons for its failure. It makes necessary changes in the new
product and introduces it again in a small market. If the new
product fails again, the company will reject it.
UNIT 18: Lean Supply Chain New Product Development

217
Test marketing reduces the risk of large-scale marketing. It is a
Notes

S
safety device. It is very time-consuming. It must be done especially
for costly products. ___________________

___________________
Commercialization
___________________
If the test marketing is successful, then the company introduces
___________________
the new product on a large scale, say all over the country. The
company makes a large investment in the new product. It produces ___________________

PE
and distributes the new product on a huge scale. It advertises the ___________________
new product on the mass media like TV, Radio, Newspapers and
___________________
Magazines, etc.
___________________
Review of Market Performance ___________________
The company must review the marketing performance of the new
___________________
product. It must answer the following questions:
z Is the new product accepted by the consumers?
z Are the demand, sales and profits high?
z Are the consumers satisfied with the after-sales-service?
z Are the middlemen happy with their commission?
)U
z Are the marketing staffs happy with their income from the
new product?
z Is the Marketing Manager changing the marketing mix
according to the changes in the environment?
z Are the competitors introducing a similar new product in the
market?
The company must continuously monitor the performance of the
new product. They must make necessary changes in their
marketing plans and strategies, else the product will fail.

Check Your Progress


Fill in the blanks:
(c

1. The marketing department will make plans to


……………… the product.
2. …………… marketing means to introduce the new
product on a very small scale in a very small market.
Lean Supply Chain Management

218 Lean Product Development


Notes

S
Activity Lean Product Development can mean many different things. In
___________________
Create a multiple choice quiz some companies, lean product development simply stands for
on the topic of lean product
___________________
development. “doing more with less.” In others, it has become a euphemism for
___________________
downsizing, off-shoring, and de-investing in product development.
Companies with “Lean” or “Six Sigma” corporate initiatives often
___________________
use lean product development to describe how they apply their
___________________ toolkit in the product development function. However, very few of

PE
___________________
these definitions describe how a lean approach can help a product
development team deliver products better, faster, and cheaper
___________________
than they have been able to do in the past.
___________________
Lean Product Design
___________________
This approach optimizes product designs so that they are easier to
___________________
make in a lean production environment, including the
manufacturing, assembly, supply chain, and distribution. Much of
the impetus for applying this approach has been from the
manufacturing functions, particularly as companies make
increasing efforts to move lean tools and practices through the
enterprise. Although some teams have focused exclusively here,
most have combined this approach with one or more of the other
approaches to lean.
)U
This approach consists of a set of tools for reducing the
downstream costs of the product in manufacturing, service, and
support. The tools draw from methods used inside Toyota and
elsewhere to make products easier to manufacture and assemble.
Design for lean production does not attempt to change the product
development system at all and says nothing about how to help a
product development organization work more effectively, so
changes in time-to-market or engineering capacity will be small.
The techniques, however, can dramatically lower total product
costs and improve product reliability.

Six Sigma for Product Development, but not New Product


Development
Developing a product that meets the customer’s requirements
(c

requires a collaborative effort from marketing, technology,


manufacturing and other functions across the organization.
Customer’s requirements should be translated to specific product
properties and specifications. The designed product must be robust
during manufacturing and should be shipped to the customer on
time and with the right quality.
UNIT 18: Lean Supply Chain New Product Development

219
Six sigma is an effective and important management approach
Notes

S
particularly used by multinational companies with manufacturing
bases in the Asian and Pacific rim. One of the key issues facing ___________________
businesses today is how to eliminate the high cost of developing ___________________
new products. This is an area where the potential of six sigma has
___________________
not been widely appreciated before. Six Sigma and the Product
Development Cycle brings the six sigma approach up-to-date and ___________________

explains it in a way that appeals to today’s management teams. It ___________________

PE
makes the concept of six sigma easy to understand and accessible ___________________
with the statistics necessary for its implementation clearly
___________________
explained. Six Sigma and the Product Development Cycle covers
the integration of quality function deployment with Taguchi’s ___________________
methods of experimental design and statistical process control. ___________________

These tools gather detailed insights into customer needs, optimize ___________________
the products or services to meet these needs at the lowest practical
cost, and ensure that this performance is maintained. It is a book
about both six sigma and product and service development.
Through this approach, an organization can gain greater
flexibility, shorter timescales, and the ability to react more quickly
to changes or new demands in the marketplace.
)U
Lean as an Aid in NPD
Many companies refer to the innovative arm of the business as
New Product Development (NPD). The application of Lean
principles and concepts to efficiently deliver high quality products
to market timely with minimal investment is relatively new and
therefore limited.
Once a process has been modelled and understood, it can be more
intelligently changed. Work in an office based process can be
divided to creative work and transactional work; the latter can be
standardised and the lean principles applied.

Check Your Progress


Fill in the blanks:
(c

1. Customer’s requirements should be translated to


specific product properties and ………………….
2. Six-Sigma is an effective and important management
approach particularly used by ………………………
companies.
Lean Supply Chain Management

220 Seven Principles to Maximize Productivity in NPD


Notes

S
Activity These seven drivers – we call them “principles” – of
___________________
Search through the internet high-productivity. NPD have been identified from a long tradition
about different ways of
___________________
maximizing productivity in of research investigations; each principle is thus very much
NPD and prepare a slideshow.
___________________ fact-based. The research reveals that businesses that employ each
principle achieve superior performance results.
___________________

___________________ Customer Focused

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___________________ Developing and delivering new products that are differentiated,
___________________
solve major customer problems, and offer a compelling value
proposition to the customer or user is the number one key to NPD
___________________
success and profitability. However, conceiving such unique,
___________________ superior products is not easy. Sometimes it is the result of a
___________________ genuine technological breakthrough or a disruptive technology.
However, most often, developing a differentiated, superior product
begins with a thorough understand of the customers’ and users’
unmet and often unarticulated needs through in-the-field voice-of-
customer (VoC) work. That is, the customer or user must be an
integral part of the entire development process from scoping,
through product definition, development and right to validation
and beyond.
)U
Front-end Loaded
Due diligence in the early days of a new product project pays off!
The right up-front homework saves development time and also
results in higher success rates. Consistently, high-productivity
businesses excel here: they demand and get the right front-end
homework done on projects – the right market, technical and
business assessments. This homework is not excessive, but is
designed to yield just enough of the vital information to make the
Go-to-Development decision, and to define the product and project
sufficiently to proceed. The right homework is also instrumental to
yielding a winning product and project definition.

Spiral Development
(c

In traditional linear development, the project team moves into the


Development Stage with a locked-in product definition. However,
things go wrong, and when it comes time for field trials, everything
has changed – and the product is not what the customer wanted.
Thus, launch is delayed and it is back to the drawing boards! Note
that unstable product specs and project scope creep are two of the
UNIT 18: Lean Supply Chain New Product Development

main causes of long times to market, significant project delays, and 221
even product failure. Notes

S
___________________
A Holistic Approach Driven by Effective Cross-functional
Teams ___________________

Product innovation is very much a business function (not just an ___________________


R&D activity) and team-based endeavour. In addition, the core ___________________
team – an effective cross-functional project team – is the number
___________________

PE
one key to cycle time reduction and to getting to market on time.
Many firms miss the keys to fostering a team culture, however. In ___________________

high-productivity businesses, effective cross-functional teams are ___________________


comprised of members from different parts of the organization; and
___________________
team members are clearly assigned with release time from normal
work. ___________________

___________________
Further, each team member has an equal stake in and
commitment to the project, while the team members remain on the
project until the end, not just for one phase of the project. The
team is led by a carefully-selected leader, driving the project in an
entrepreneurial fashion, and who also remains leader until the
end. Team accountability – results measured against success
criteria – is also key to effective team performance. Moreover,
)U
senior management provides strong support and commitment to
the project team.

Metrics, Accountability and Continuous Improvement


You cannot manage what you do not measure. Yet only 30% of
businesses measure the outcomes of new product projects once
launched. Further, the post-launch review is one of the worst rated
activities in the entire innovation process, and is executed
proficiently by only 22.1% of businesses.
Top performing businesses put metrics in place: They measure how
well projects perform by building a post-launch review into their
idea-to-launch process. Here, project teams are held accountable
for delivering promised results against these metrics. When gaps
are identified, problem-solving sessions are held that focus on root
(c

causes, and corrective actions designed to stop future recurrence


are identified. Thus, learning and continuous improvement become
an integral part of the development process.

Focus and Effective Portfolio Management


Most businesses have too many development projects underway,
and often the wrong ones. That is, they fail to focus, spreading
Lean Supply Chain Management

222 their resources too thinly across too many initiatives; and their
Notes project choices result in the wrong mix and balance of development

S
___________________
projects in the portfolio. Making the right Go/Kill decisions and
effectively allocating development resources is fundamental to
___________________
maximizing productivity in NPD. Recognize that every
___________________ development project is an investment, and like stock market
___________________ investments, these development investments must be carefully
scrutinized and focused through an effective portfolio management
___________________

PE
system. This is achieved through a funnelling approach. Start with
___________________ many solid new product concepts, and successively remove the
___________________ weak ones via a series of tough gates with teeth. The result is
___________________
fewer projects, but higher value projects to the company, and a
significant improvement in productivity.
___________________

___________________ The NexGen Stage-Gate Process – A Flexible, Adaptable,


Scalable, Efficient and Open NPD Process
Many businesses’ idea-to-launch processes contain much
bureaucracy, time wasters and make-work activities. Even worse,
they are rigid procedures, demanding too much paperwork, forms,
meetings and committees, regardless of the project. By contrast,
smart companies have streamlined their NPD processes, removing
)U
waste and inefficiency at every opportunity. Stage-Gate systems in
high-productivity businesses are also flexible and scalable,
designed to suit the needs and risk levels of different types of
projects.

Check Your Progress


Fill in the blanks:
1. The customer or user must be an ……………. part of the
entire development process.
2. Many firms miss the keys to fostering a team
………………

Summary
(c

Shortening product life cycles, rapidly changing customer needs,


and breakthrough technological developments make the new
product development (NPD) challenging in most industries. In
combination with increased pressure on margins and/or growth,
managing the new product development process is a highly
complex task for many companies.
UNIT 18: Lean Supply Chain New Product Development

Lesson End Activity 223


Notes

S
Discuss within a group of 5 students Metrics, Accountability and
___________________
Continuous Improvement discussed in this unit.
___________________

Keywords ___________________

___________________
Product: The product is defined as a "thing produced by labour or
effort" or the "result of an act or a process". ___________________

PE
New Product Development (NPD): New product development is ___________________
the term used to describe the complete process of bringing a new ___________________
product to market.
___________________
Lean Product Development: Lean Product Development can
___________________
mean many different things. In some companies, lean product
___________________
development simply stands for “doing more with less.”
Six Sigma: Six sigma is an effective and important management
approach particularly used by multinational companies with
manufacturing bases in the Asian and Pacific rim.

Questions for Discussion


)U
1. Distinguish between product and production.
2. Explain new product development process in detail.
3. Explain how to maximize productivity with NPD and lean.
4. Describe various benefits of NPD in supply chain
management.
5. What is focus and portfolio management?

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
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Handbook for Strategic Procurement, Productivity Press.


Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.
Lean Supply Chain Management

224 Web Readings


Notes http://kalyan-city.blogspot.com/2012/02/stages-process-steps-of-

S
___________________ new-product.html
___________________ www.icmis.net/infoms/icoqm10/ICOQM10CD/pdf/P438-Final.pdf.
___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________
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(c
UNIT 19: Strategies and Tactics in Lean Supply Chain

Unit 19
225
Notes

S
Activity

Strategies and Tactics in Lean Visit___________________


a small organization and
study the planning stages and
___________________
present a report in the class.
Supply Chain ___________________

___________________

Objectives ___________________

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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Basics of Strategy, Tactics and Operational Planning
\ Aligning Supply Chain Strategic Goals for Strategic Fit ___________________
\ Alignment of Strategies with Lean Supply Chain ___________________
\ Interest in Lean and SCM as a Combined Strategy
___________________

Introduction
A lean supply chain has proven itself a good enabler for any
organization that strives to become more lean and efficient.
Organizations within a lean supply chain are more able to
influence their own lean journey more easily, imparting better
)U
customer value by responding more efficiently, quickly, and
predictably, to customer needs, which in turn, facilitates the
operation of the lean supply chain, creating a virtuous cycle that
ultimately translates to superior financial performance for these
organizations.

Basics of Strategy, Tactics and Operational Planning


Strategies are considered as a set of important decisions derived
from a decision making process of the top management in the
organization. To ensure success, the strategic changes that are
being incorporated in the supply chain, have to conform to
well-defined strategies formulated by the company from time to
time. The top management in the company forms the strategic
(c

decisions and successful execution of these decisions should


provide a progressive way to the organization. Areas that require
strategic decisions are warehousing, transportation, IT, and make
versus buy.
Lean Supply Chain Management

226
As per Burt and Dobler, supply management focus on the following
Notes
strategic activities:

S
___________________
z Environment Monitoring: Monitoring the supply
___________________ environments to identify threats and opportunities, is an
___________________ important task of supply managements. It aims to include
material shortages affecting both price and availability of
___________________
purchased materials and services. They can further be
___________________
classified as:

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___________________
™ Changes in legislation: affecting the workplace can affect
___________________ both price and availability.
___________________ ™ Wars and conflicts can affect availability of materials
___________________ resulting in price increase.
___________________ ™ Consolidation among suppliers: to the extent of monopoly.
A firm should change its strategy based on various
changes.
z Integrated Supply Strategy: Supply management should
develop and manage the firm’s supply strategy based on
wholesome integration strategy and not in isolated strategies.
Commodity Strategy: Must develop and update sound
)U
z
commodity supply strategy. The following activities have to be
performed to ensure effectiveness of the strategies:
™ Strategy Updating: Commodity teams must identify
materials, items of equipment and services that are
strategic in nature or should formulate a strategic plan for
obtaining them.
™ Technology Access Control: All supply management
organizations develop and update technology road maps,
which lists critical current and future technologies to be
pursued. Proper action should be taken at hand to protect
the technologies, which give a competitive edge, are not
transferred to competitors.
(c

™ Supply Management Organization: The organization of the


supply management system must boost the effectiveness
and efficiency of the system in attaining the main
objective.
™ Risk Management: Actions should be taken to ensure
minimum disruption of supplies and price increase.
UNIT 19: Strategies and Tactics in Lean Supply Chain

227
z Data Management: Supply management, accounting and
Notes

S
information technology must cooperate in the collection and
application of supply data to facilitate the strategic supply ___________________
planning. ___________________

z Corporate Strategic Plan: Supply management should join ___________________


the marketing and operations as the key players in
___________________
development of each of the firm’s corporate strategic plan.
___________________

PE
Supply management provides input to the strategic planning
process on threats and opportunities in the supply world. It ___________________
also provides inputs on constraints that may affect strategic ___________________
initiatives. Its knowledge of the firm’s supply world may be a
___________________
vital source of input for strategic planning.
___________________
z Strategic Sourcing: The firm should manage and develop its
___________________
supply base in line with firm’s strategic objectives. Several
actions that should be taken are:
™ Periodic review of the active suppliers.
™ Identification of the appropriate relationship
(transactional, collaborative or alliance) for each
commodity class.
)U
™ Optimization of supply base with coordination and
combination with several forces to increase the importance
of the firm’s supply base.

Strategic Planning Stage


This is one of the most challenging – and exciting – exercises in
any organization. Strategic planning allows an organization to
make fundamental decisions or choices by taking a long-range view
of what it hopes to accomplish and how it will do so. A strategic
plan is built on a thorough analysis of the organization’s existing
structure, governance, staff, program or service mix,
collaborations, and resources (financial, human, technical, and
material). This analysis is vital because it allows an organization
to perceive which of its above aspects it must change in order to
(c

achieve its goals. A well-developed strategic plan serves as a


blueprint for making these changes. It basically describes the
following:
z A vision for the future
z Strengths and weaknesses of the organization
Lean Supply Chain Management

228
z The nature of the changes contemplated for future sustainable
Notes
growth and development

S
___________________
z The sequence of these changes
___________________
z Those who are responsible for guiding change
___________________
z The resources required, whether they currently exist within
___________________ the organization or must be generated from external sources.
___________________ What do we hope to What are you capable of

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accomplish? doing?
___________________

___________________
Strengths and Weaknesses
___________________ z Capabilities
Mission z Resources

___________________

___________________

Opportunities and Threats What is needed and


z Needs of customers and other stakeholders
feasible in your service
z Competitors and allies
area?
z Social, economic, political and
technological forces

Figure 19.1: Strategic Fit


)U
Figure 19.1 shows how these and other issues “converge” in a plan
that most fits the organization. A strategic plan represents an
organization-wide consensus among staff, directors, and other
stakeholders concerning what represents success and how it is to
be achieved. It therefore allows a manager to approach the
strategic plan’s activities with confidence. Strategic plans must be
institutionalized so that they serve as the basis for performance
standards, decision-making, planning, and resource mobilization
and allocation. Strategic plans must also be systematically
reviewed and revised so they remain topical, relevant, and “cutting
edge.” The whole organization must embrace the plan so that the
“daily decisions are then made on the basis of this plan, which
must be both practical – based upon your organization’s mission –
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and flexible, to allow for rapid change.”

Key Benefits of Strategic Planning


It becomes the duty and responsibility of a manager to outline the
benefits of strategic planning to others. The various benefits are:
z Motivating staff and volunteers: Thinking about the future
is a stimulating and energizing process. It can create a shared
UNIT 19: Strategies and Tactics in Lean Supply Chain

vision, with concrete ideas about how to surmount obstacles in 229


order to achieve that vision. Notes

S
z Building a planning team with a common vision: The ___________________
strategic plan that emerges from the process is generally more ___________________
realistic and achievable, and working or interdependent
___________________
relationships within the organization are strengthened.
___________________
z Confronting key issues and solving problems: Strategic
planning sets in motion a dynamic process that allows the ___________________

PE
organization to continually reassess, confront change, and ___________________
grow within an agreed-upon framework.
___________________
z Defining roles and responsibilities: Measurable
___________________
performance objectives are set and the person(s) who is
responsible for specific activities is identified. ___________________

z Challenging the status quo: The process creates an open ___________________

atmosphere, stressing the interests of the whole organization.


It often answers the question “How can we do things better?”
in a more systematic and thorough way.
z Allowing busy managers and policy makers to
concentrate exclusively on the organization’s future for a
short period of time, meaning that they will be able to focus
)U
their expertise and insights on self-assessment and planning
future directions.
z Explaining or exposing your organization to others,
particularly donors. A thoughtful and clear strategic plan is
often a good marketing tool and can encourage donor support
for the organization and its future directions.
z Developing a renewed sense of organizational mission
and consensus, so that individual perspectives, roles, and
problems are subsumed by an overall plan that coordinates all
staff members and volunteers so that agreed-upon goals and
objectives are achieved in a timely manner.

Key Steps in Strategic Planning


(c

There are several steps in the strategic planning process. Many


experts or facilitators vary the sequence of these steps, but there is
general consensus about the most important ones to include.
z Step 1: Analyse the shared values and experiences of staff and
board. Plan a meeting or workshop to facilitate strategic
planning.
Lean Supply Chain Management

230
z Step 2: Review and update or prepare a Mission Statement for
Notes
the organization.

S
___________________
z Step 3: Analyse the organization’s external environment
___________________ (“PEST” – Political, Economic, Social, and Technological
___________________ factors) and internal environment (resources or inputs,
processes, and performance or outputs).
___________________
z Step 4: Conduct a SWOT analysis (assessing the
___________________

PE
organization’s internal strengths and weaknesses, and its
___________________
external opportunities and threats).
___________________
z Step 5: Create smaller groups for more in-depth planning
___________________ activities in key areas.
___________________ z Step 6: Review the organization’s existing strategic plan (if
___________________ there is one) to identify aspects of the plan that are still
strategic, those that are no longer strategic due to changing
environments, and gaps or new issues that should be
addressed in a revised plan.
z Step 7: Outline a vision of where the organization should be
three to five years from today (the “vision of success”).
z Step 8: Identify the strategic issues facing the organization.
)U
z Step 9: Formulate goals and strategic objectives to address
major issues facing the organization and ensure its longer-
term growth and sustainability.
z Step 10: Develop work plans showing specific activities,
persons responsible, resources needed, and indicators by which
performance will be measured.
z Step 11: Identify next steps for resource mobilization and
create a sustainability and financial plan that costs activities
and outlines approaches for generating sufficient revenue or
funding.
z Step 12: Prepare the written detailed five-year strategic plan
(mission statement, environmental or situational analyses,
(c

strategic issues, goals and strategic objectives, activities plans,


sustainability and financial plans, monitoring and evaluation
procedures or cycles).
z Step 13: Seek ratification and disseminate the plan to staff,
stakeholders, and potential donors, using this as an
opportunity to market the organization or to build useful
working relationships and coalitions.
UNIT 19: Strategies and Tactics in Lean Supply Chain

231
z Step 14: Implement and institutionalize the plan as a basis for
Notes

S
setting performance standards, decision-making, planning,
monitoring, and resource mobilization and allocation. Use and ___________________
review the plan systematically, updating or revising it after ___________________
two or three years, if needed.
___________________

___________________

___________________

PE
___________________

___________________

___________________

___________________

___________________
)U
Figure 19.2: Strategic Planning Process

Tactical Planning Stage


Tactical planning is developed by those who regularly deal with
getting the work done, day by day. They draw up a tactical plan so
they know what to do, when they need to do it, and this will help
them deal with the “how” part of the plan. The main question for
them is: “How can the strategic goals be accomplished within the
designated limits of resources and authority?” The only way that
can happen is to insure that the tactics create results, which lead
to the strategic benefits you desire.
As a small business owner, you need to make plans that include
specific activities that are arranged on specified time frames and
(c

have specific outcomes. It is suggested to ensure the performance


of all tactical planning activities and calculate their effects; then
help connect the tactical moves to the strategic plan.

Operational Planning Stage


Operational planning sets the implementation phase of the
strategic plan in motion. This is the process through which the gap
Lean Supply Chain Management

232 between the present and the vision of the future are strategically
Notes managed.

S
___________________
Develop an Operational Plan
___________________
The Operational Plan is the executive management plan for
___________________ translating performance measures and targets from the strategic
___________________ plan into performance initiatives. It coordinates the overall scope
of the implementation. It is also the approved charter for
___________________

PE
authorizing initiatives and appropriating resources.
___________________
Always use operational planning tools to coordinate all activities
___________________
emerging from the Strategic Plan. It must be including:
___________________
z Operations (on-going efforts or activities that are built into the
___________________ daily routine to generate repetitive products or services)
___________________
z Projects (temporary and unique initiatives with definite
perimeters), and
z Programs (service delivery systems).

Create Performance Action Plans


Performance (action) plans define and clarify details that link
strategic plan objectives, performance measures, and targets to
)U
specific tasks and performance milestones.
Action plans formulate:
z Implementation activities into performance projects, on-going
operations, and programs,
z Assignments and responsibilities,
z Communication tools and methods,
z Resources, and
z Expected deliverables, timelines, and completion deadlines.
The operational plan is an essential component in any business
plan and it tells the reviewer how is any going to get
product/service out to market. This means, how does an individual
(c

is going to get product out of the production stage to the approach


of a target customer.
UNIT 19: Strategies and Tactics in Lean Supply Chain

233
Check Your Progress
Notes

S
Fill in the blanks: Activity
___________________
Make a slide show and have
1. ……………… planning sets the implementation phase of your voice narration with each
the strategic plan in motion. slide___________________
on the topic aligning
supply chain strategic goals
___________________
for strategic fit.
2. …………….. planning sets in motion a dynamic process
___________________
that allows the organization to continually reassess,
confront change, and grow within an agreed-upon ___________________

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framework. ___________________

___________________
Aligning Supply Chain Strategic Goals for Strategic
___________________
Fit
___________________
The foremost step for supply chain executives is to clearly
___________________
understand how the enterprise chooses to compete. This is
important not only for the clear reason of working off the “same
play book,” but also for the reason that it forces the supply chain
operation to see itself as a customer facing entity serving the
competitive goals of the enterprise—not merely an operational
department. Supply chain strategy is not simply a linear derivative
of the business strategy. At best, supply chain strategy can be the
)U
enabler of the business strategy.
If the business strategy is to be the low cost provider, the supply
chain strategy should support this. And just like when developing
a business strategy, look to your core competencies, focus, and
means of differentiation when developing a supply chain strategy.
Being able to strategically source parts at an attractive price may
support both your supply chain strategy and business strategy, but
only if you have the capabilities to do so effectively. Look to your
supply chain competencies and leverage what you do well.

Assess the Extended Supply Chain


The next step is to conduct a detailed, realistic assessment of the
capabilities that exist within the organization and even the
(c

extended supply chain. Begin by closely scrutinizing your


organization’s assets and evaluate how well they support the
strategy. Old machinery and disparate systems may mean high
operational overhead and costly process inefficiencies and
redundancies – clearly not supportive of a low cost provider
strategy. A formal supply chain assessment by a non-biased
outside party may assist you in better understanding your
Lean Supply Chain Management

234 operational strengths and opportunities for improvement. Look for


Notes a firm that can provide you with operational benchmarks both

S
Activity
___________________
inside and outside of your industry in order to gauge core
Create a multiple-choice quiz
on the alignment of strategies competencies. Once the assessment is complete, assemble a team
with___________________
lean supply chain. to review and prioritize recommendations, validate the
___________________ opportunities, define the risks, and the requirements for
___________________ implementation. Ultimately, if there is an inequality between the
supply chain strategy and the operational assets, you may have to
___________________

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make capital investments.
___________________

___________________ Develop an Implementation Plan


___________________ From this critical work emerges the “go forward” supply chain
strategy – directly tied to the business strategy, highly specific as
___________________
to enablers and metrics, and with a defined set of implementation
___________________ requirements and contingencies. The development of an
implementation plan should include activities and tasks, roles,
responsibilities, a corresponding timeline, and performance
metrics. Establish a sub-team to shepherd the execution and
provide project management responsibility to resolve issues and
track status.
)U
Check Your Progress
Fill in the blanks:
1. The foremost step for supply chain executives is to
clearly understand how the enterprise chooses to
…………………
2. Once the …………………… is complete, assemble a team
to review and prioritize recommendations.

Alignment of Strategies with Lean Supply Chain


A new emerging trend is hybrid approach that leanness and agility
can be combined with strategic use of decoupling point, to optimize
the benefit of both concepts by adopting leagile supply chain and
(c

getting the best of the both worlds. This combined approach is


known as ‘Leagility’ and, as a consequence, the supply chain can
thereby adopt a lean manufacturing approach upstream, enabling
a level schedule and opening up an opportunity to drive down costs
upstream while simultaneously still ensuring that downstream of
the de-coupling point there is an agile response capable of
delivering to an unpredictable demand of marketplace.
UNIT 19: Strategies and Tactics in Lean Supply Chain

235
Leagile is one of suitable ways to exploit both the approaches, lean
Notes

S
and agile. It requires the selection and setting up of a material flow
decoupling point. Upstream of this decoupling point, the processes ___________________
are designed to be lean (Level scheduling) and downstream, ___________________
processes are designed to be agile.
___________________

Supply Chain Capabilities and Strategies ___________________

The choice for selection of a supply chain strategy and value focus ___________________

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should be supported by specific enterprise capabilities and ___________________
ultimately result in intended logistical performance. For admirable
___________________
firms, a demand focus on customer service and proactive quality is
more apparent at both the capability and performance levels than ___________________

a supply focus on cost, productivity, distribution, and speed. ___________________


Reasons are offered. Strategic intent and normative value
___________________
congruency for competitive advantage also mean that customer
closeness strategies such as customized logistics and agility tend to
be supported particularly by demand-side capabilities, while
operational excellence strategies such as time-based strategies
(e.g., JIT) or lean networks tend to be supported more by supply-
side capabilities. While on-time performance and absence of
loss-and-damage are minimum order qualifiers, other logistical
)U
performance outcomes are order winners depending on the chosen
value discipline. Doing it right the first time is more important
than problem recovery, yet service failures do provide valuable
information for problem diagnosis, organizational learning, and
future improvements. Similarly, advanced notification of problems
to customers and total performance measurement like overall
customer satisfaction are also characteristic of best-in-class firms.

Combining Lean Supply Chain Strategies for Organizational


Change
Due to global economy, volatile markets, competitive pressure,
shortened-life-cycle product, more rigorous quality and quicker
response requirements, rising ecology consciousness: the survival
of many companies depends on the ability to continuously improve
(c

quality while reducing costs. Manufacturing systems have to


respond to continuous changes and sustainability requirements.
Therefore, significant interest has been shown in recent years in
the idea of “lean manufacturing” and the wider concepts of the
“lean enterprise”. Lean operations with low inventory have become
an essential practice. Many organizations have adopted the lean
Lean Supply Chain Management

236 thinking paradigm in order to optimize performance and


Notes competitive advantage.

S
___________________ Then, in recent times, the emergence of customer-driven markets
___________________ has resulted in rapid changes to strategies adopted by
organizations. The agile manufacturing paradigm has been
___________________
highlighted as an alternative to leanness. Agile manufacturing
___________________ systems work in a constantly changing global market, particularly
___________________ assembly systems at the last stage of product differentiation. In

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these changing conditions, one of the more interesting debates in
___________________
recent years was about the creation of lean production and agile
___________________
organization as the key to survival for companies.
___________________
Indeed, in some situations it is advisable to utilize a leagile
___________________ paradigm to ensure optimal supply chain performance. Meanwhile,
___________________ in the wake of concerns regarding climate change, pollution and
non-renewable resource constraints, sustainability is becoming a
key issue for manufacturing strategy and supply chains. These
paradigms (lean, agile, leagile and sustainable) should not be
considered alone or in isolation within the supply chain although
they show up with opposed characteristics. Trade-offs between
these management paradigms may help organization and their
supply chain to become more competitive and sustainable.
)U
The sustainability paradigm has opened the gate for revisiting
various established strategies of supply chain management to
reassess their viability with new angle of sustainability. Supply
chains are increasingly global and complex, as companies aspire to
support a variety of strategies, such as entering new markets,
increasing speed to customers, and lowering costs. An effective
Lean supply chain strategy must provide the disciplines, methods
and tools necessary to segment the customer against growth and
value-contributing factors, link trading partners through
collaborative planning and forecasting regimens, match supply and
demand for the most appropriate use of enterprise-wide capacity
and drive the selection and integration of strategic suppliers that
offer the skills necessary to augment the entire supply chain for
(c

the benefit of the ultimate customer.


Although Lean concepts and disciplines have long been associated
with dramatic improvements in the manufacturing arena including
waste elimination, throughput improvements, line changeover
cycle time reductions and substantial quality improvements,
supply chains today face enormous pressures linked to competitive
UNIT 19: Strategies and Tactics in Lean Supply Chain

forces, ever-exacting customer demands and “non-Lean” practices: 237


Simply put, Lean supply chains are those where end-customer Notes

S
demand permits the smooth, synchronized flow of materials, ___________________
information and physical assets (up or down) based on period-
___________________
specific demand requirements.
___________________
Far too often, supply chain management programs focus on the
optimization of intra-supply chain components such as inventory ___________________
management, warehousing operations or production scheduling. In ___________________

PE
the Lean environment, such producers of waste are eliminated in
___________________
favour of a universal supply chain mechanism that rapidly
self-adjusts to the pull of end-customer demand through the use of ___________________

three Lean supply chain concepts: (1) Demand-Driven Operations ___________________


Planning, (2) Lean Strategic Sourcing & Supplier Integration,
___________________
(3) Lean Distribution Operations. Fact-based demand signals are
required to plan supply chain capacity. Without all three, the Lean ___________________

supply chain cannot be realized.

Strategic Sourcing
Strategic sourcing is a supply management tool that delivers
significant cost reductions and other benefits. More specifically, it
is a periodic event that includes the identification and selection of
)U
initial commercial arrangements with a selected supplier that
either creates or resets a relationship. That sounds simple enough,
but what makes strategic sourcing different from a traditional
sourcing activity? After all, "identifying and selecting initial
commercial arrangements" can just as easily be accomplished with
the old "lowest of three bids" process, right? Not quite. Strategic
sourcing requires that organizations divide their spend into
categories and then classify the categories based on the importance
of that product or service, and on the complexity of the supplier
marketplace. From there, the purchasing organization – and the
supplier organization – must recognize that various relationships
are required.
At one end, the least strategic relationships might be based on
(c

cost, but at the other end, the most strategic suppliers are chosen
for their ability to create new business opportunities or
technological advances. Specifically targeting or searching for
suppliers in such a formalized manner, to fill this role is what
strategic sourcing is all about.
Lean Supply Chain Management

238
Notes Check Your Progress

S
Activity
___________________ Fill in the blanks:
Interview a supplier and find
out how SCM and Lean work 1. ……………….. is one of suitable ways to exploit both the
as ___________________
a combined strategy and
prepare a term paper. approaches, lean and agile.
___________________
2. Strategic sourcing is a supply management tool that
___________________
delivers significant cost …………………. and other
___________________
benefits.

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___________________

___________________ Interest in Lean and SCM as a Combined Strategy


___________________ Supply chain management has received a great deal of interest
___________________ during the past few years. There is a concurrent view that a ‘save
___________________ all’ strategy applicable to all circumstances is available to
industrialists. The general principles behind the two recent
popular supply chain approaches, Lean and Agile are presented
along with the combination of the two into a single holistic
approach called Leagility.
Customer requirements are diverse in the house-building sector
and as a result, the supply chain must be matched to best service
)U
these alternative marketplace conditions. The Leagile strategy is
expanded via different positions of the strategic stock, de-coupling
point into four alternative strategies: Make to stock, fit out to
order, shell and fit out to order and design to order.
The principles of Lean and Agile supply chain management
strategies are explained in the context of house building supply
chains. A combination of the two; called leagility is presented along
with four alternative de-coupling point positions. Finally a matrix
is developed that provides a framework for matching these
alternative supply chain strategies to different customer
requirements, so to overcome costs and ineffective mismatches of
strategy and market place conditions.
A supply chain is a system, consisting of material suppliers,
(c

production facilities, distribution services and customers. These


are all linked together through the downstream feed forward flow
of materials and the upstream feedback flow of information.
Several organizations have adopted the concept of “Lean” to
improve the performance and position in the market place and.
The “Agile” manufacturing has been recently emerged as a
customer demand driven option. It defines as using market
UNIT 19: Strategies and Tactics in Lean Supply Chain

knowledge and virtual corporation to exploit profitable 239


opportunities in a volatile marketplace, leanness stands for Notes

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developing a value stream to eliminate all waste, including time ___________________
and to ensure a level schedule.
___________________
The positioning of the decoupling point, therefore, depends upon
___________________
the longest lead-time and at the same time customer is prepared to
tolerate this time lag and the point at which variability in product ___________________

demand dominates. Downstream from the decoupling point all ___________________

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products are pulled by the customer demand, that is why that part ___________________
of supply chain is market driven. Upstream from the decoupling
___________________
point the supply chain is essentially forecast driven.
___________________
Check Your Progress ___________________
Fill in the blanks:
___________________
1. A combination of the two called leagility is presented
along with four alternative ……………… point positions.
2. The …………….. manufacturing has been recently
emerged as a customer demand driven option.

Summary
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The key supply chain processes are procurement, customer service,
warehouse, planning, distribution, transportation, information
systems, and inventory control. Activities that emanate from these
key processes are sales, planning, order entry, receiving, shipping,
inspection, purchasing, production scheduling, master scheduling,
warehouse management, and supplier management among others.
These functions and activities represent an average of between 4%
and 20% of sales. In a synchronized manner, these key processes
provide a seamless and well-coordinated supply chain to respond to
customers and end-users. The goal of the lean supply chain is to
deliver products at the lowest total cost while developing value-
added processes.
(c

Lesson End Activity


Search over the internet and find out two recent case studies on
strategies in Lean Supply Chain and prepare a presentation to
present in the class.
Lean Supply Chain Management

240 Keywords
Notes

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Strategy: A strategy is a plan of action designed to achieve a
___________________
vision. Strategy is all about gaining (or being prepared to gain)a
___________________ position of advantage over adversaries or best exploiting emerging
___________________ possibilities.

___________________ Data Management: The concept of "Data Management" arose in


the 1980s as technology moved from sequential processing (first
___________________

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cards, then tape) to random access processing.
___________________
Strategic Planning: Strategic planning is an organization's
___________________
process of defining its strategy, or direction, and making decisions
___________________ on allocating its resources to pursue this strategy.
___________________ Operational Plan: The operational plan coordinates the overall
___________________ scope of the implementation.

Questions for Discussion


1. What do you mean by strategy?
2. Describe supply chain capabilities and strategies in detail.
3. Explain strategic sourcing.
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4. What do you mean by environmental monitoring?
5. Explain the strategic planning stage in detail.

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
(c

Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
http://www.industryweek.com/articles/the_goal_of_the_lean_supply
_chain_14935.aspx
www.epa.gov/oppt/library/pubs/archive/acct-archive/pubs/lean.pdf
UNIT 20: Case Study

Unit 20
241
Notes

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Case Study
___________________

___________________

___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________

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___________________
Case Study: India: A Growing Link in the Global Supply Chain
___________________
A look at the nation's success stories, and the challenges that
___________________
persist, in autos, oil, power, steel, and electronics.
___________________
With more than 500,000 new engineering graduates each year,
India is in a strong position to be an engineering powerhouse. ___________________
However, while India is one of the biggest players in the services
and information technology sector, the same cannot be said of our
supply chain and engineering capability. India's manufacturing
exports still amount to less than 10% of gross domestic product,
whereas more than one-third of China's GDP comes from
manufacturing.
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India still does not have the most congenial business
environment. Bureaucratic hurdles and a tough approvals system
for setting up new businesses are not as severe as in the past, but
they continue to create bottlenecks. Land acquisition is a major
hindrance to setting up new plants, as the problems of Tata
Motors in West Bengal last year demonstrated. Illiteracy and
unskilled labour are disincentives to modern organizations that
thrive on high productivity. So, too, are infrastructure problems
such as clogged ports and roads, power failures, and water
shortages.

In spite of these many challenges, India is slowly but surely


making a mark in the global supply chain. We are still a long way
behind China and Japan, but there has been definitive progress.
Let us discuss the challenges and success stories, sector-wise.

Automobiles
(c

The Indian triumph in the auto supply industry is well known. A


small set of Indian manufacturing companies are vendors of
choice for global automobile multinationals that purchase small
parts. These suppliers are valued for their reliable, high-quality
products and on-time delivery. Four Indian auto parts companies
have received the coveted Deming Prize for excellence in quality.
Contd…
Lean Supply Chain Management

242
Notes The next challenge for Indian component suppliers is to upgrade

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from supplying simple parts to complex assemblies and
___________________
transmissions.
___________________
The transition to high-end manufacturing already is in progress.
___________________ In the automobile sector, quality is crucial for the top players. In
addition, in a vote of confidence for India, leading carmakers such
___________________
as Hyundai, General Motors (GM), Toyota (TM), and Ford (F)
___________________ have either tied up with a local operator or opened their own

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___________________ manufacturing units and are supplying cars from India to the rest
of the world.
___________________
With India's manufacturers combining engineering excellence and
___________________
low costs, more companies are discovering the benefits of
___________________ operating out of the country. In the coming years, India should
continue to be a major manufacturing base for auto companies.
___________________
Local demand for small and midsize cars is growing, thanks to
increasing disposable income. The current global recession has
dampened automobile demand, but it should encourage more
cost-conscious manufacturers to shift operations out of Europe
and the U.S. to India.

Oil Exploration and Petroleum Refining

India currently imports nearly two-thirds of its crude oil. With


)U
volatile oil and gas prices worldwide, self-sufficiency in energy is a
national imperative. The Indian government has come up with a
National Exploration Licensing Policy, or NELP, under which
exploration and production companies (E&P) have acquired
exploration blocks. Aggressive implementation of NELP has
resulted in quite a few new gas discoveries in the last few years.
Oil refining companies in India have world-class capabilities.
However, the government's oil subsidy policy and differential
pricing has been hurting their bottom line. Future growth in the
oil and gas sector depends on new discoveries. To be more self-
sufficient and globally competitive, India needs to shift from
pricey crude imports to higher volumes of Indian crude.

India also is looking toward adapting cheaper, greener


alternatives such as liquefied natural gas, biofuels, and hydrogen
(c

energy. However, for this movement to pick up momentum, the


government needs to offer more incentives for research and
adoption of these fuels. More state governments should follow the
example of Delhi, where enforced use of compressed natural gas
for commercial vehicles has led to cheaper transportation costs
and a cleaner environment.

Contd…
UNIT 20: Case Study

243
Power
Notes

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Power generation, transmission, and distribution have
historically been dominated by central and state government ___________________

electricity boards. More than 86% of India's total capacity is ___________________


owned by the central or state governments, with the private
___________________
sector contributing just 13.5%. Saddled by transmission and
distribution losses and rampant power theft, the state electricity ___________________
boards have not been very efficient organizations, but private
___________________

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players have been unable to make significant inroads primarily
because pricing remains subject to government control. ___________________
Introduction of private power distribution players in Delhi and ___________________
Mumbai has reduced theft and streamlined the distribution
___________________
process. Kolkata's RP Goenka-owned Calcutta Electric Supply
Corp. (CESC.BO), the city's sole electricity provider, has brought ___________________
near self-sufficiency to Kolkata through a combination of adopting
___________________
modern technology in power generation and an efficient
distribution mechanism. It is a strategy worthy of emulation.

Three factors are crucial for growth and self-sufficiency in Indian


power: a concerted public-private partnership in generation,
transmission, and distribution; a financially viable pricing
structure that is not subject to state government controls; and
assured supply of fuel. Since a power plant and its fuel source
)U
could be in different states, a predefined, mutually acceptable
agreement between the state governments to facilitate smooth
supply is critical.

Steel

India is one of the world's leading iron ore exporters, but Indian
steel manufacturers have had trouble obtaining it. Only a handful
of manufacturers have their own captive iron ore mines; the rest
depend on government-owned mines. Many states with high
reserves have poor infrastructure. Therefore, in recent times
global steel manufacturers have set up steel plants in raw-
material-rich states such as Orissa and Bihar.

To drive growth in the Indian steel industry, the government


should encourage investment in fresh mining of iron ore, coal, and
gas. The government should also formulate a policy to encourage
(c

investors to buy (or lease) iron ore and coking coal deposits
abroad. In the short term, the government should narrow the
supply gap by diverting some iron ore exports to domestic steel
producers. In addition, since economy of scale is a proven success
factor for growth in the steel industry, the government should
encourage global manufacturers to tie up with Indian
manufacturers.
Contd…
Lean Supply Chain Management

244
Hardware and Consumer Electronics
Notes

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Electronics hardware is one of the largest and fastest-growing
___________________ industries in the world. The Indian government's special economic
___________________ zone policy encourages duty-free imports and tax concessions.
Global manufacturers such as Samsung, Nokia (NOK), Motorola
___________________
(MOT), and Texas Instruments (TXN) have already established
___________________ manufacturing operations in India. That's because the
government allows 100% foreign direct investment in this sector.
___________________

PE
As per the investment commission's estimate, India is expected to
___________________ attract a total of US $6 billion to US $10 billion in foreign direct
___________________ investment by the end of 2010. With the availability of cheap
skilled manpower, incentives on exports and imports, and an
___________________
ever-growing domestic market, this industry should see rapid and
___________________ continued growth in the next few years.

___________________ Question:

Discuss the Lean Supply Chain strategies adopted by India in


various sectors as a whole.
Source:http://www.businessweek.com/stories/2009-04-10/india-a-growing-link-in-the-global-
supply-chainbusinessweek-business-news-stock-market-and-financial-advice
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(c
UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

245
Notes

S
___________________

___________________

___________________

___________________

___________________

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___________________

___________________

___________________

___________________

___________________

BLOCK-V
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(c
Lean Supply Chain Management
Detailed Contents
246
Notes

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UNIT 21: GLOBALISATION AND CULTURAL
___________________ UNIT 23: LEAN SUPPLY CHAIN AND
IMPACT ON LEAN SUPPLY CHAIN E-COMMERCE
MANAGEMENT
___________________
z Introduction
z Introduction
___________________
z Defining E-commerce
z Lean Supply Chain Globalization
___________________
z E-commerce and Supply Chain Management
z Lean Supply Chain Management and Cultural
___________________
Impact CSF in Implementing an E-commerce System

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z

___________________
UNIT 22: ERP IN LEAN SUPPLY CHAINS UNIT 24: INTEGRATING E-COMMERCE AND
___________________ SUPPLY CHAINS
z Introduction
___________________ z Introduction
z Information, Automation and Lean
___________________ z Internet-based EDI and Supply Chains
z Integrated Global Information Systems
z E-trust and Supply Chains
z
___________________
Information: A Key Supply Chain Practice
z Integration of Supply Chain and E-commerce
z Ways to Improve Supply Chain Performance Function
through Integrated ERP System

UNIT 25: CASE STUDY


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(c
UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

Unit 21
247
Notes

S
Globalisation and Cultural Impact
___________________

___________________

on Lean Supply Chain ___________________

Management ___________________

___________________

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Objectives ___________________

After completion of this unit, the students will be aware of the following ___________________
topics:
___________________
\ Lean Supply Chain Globalization
___________________
\ Lean Supply Chain Management and Cultural Impact
___________________

Introduction
Business today is in a global environment. This environment forces
companies, regardless of location or primary market base, to
consider the rest of the world in their competitive strategy
analysis. Firms cannot isolate themselves from or ignore external
)U
factors such as economic trends, competitive situations or
technology innovation in other countries, if some of their
competitors are competing or are located in those countries.
Companies are going truly global with Supply Chain Management
(SCM). A company can develop a product in the United States,
manufacture in India and sell in Europe. Companies have changed
the ways in which they manage their operations and logistics
activities. Changes in trade, the spread and modernization of
transport infrastructures and the intensification of competition
have elevated the importance of flow management to new extent.
Today’s globalisation is built around falling transportation and
telecommunication costs. The fact that low transportation costs
have been reinforced by low communication costs means that
(c

developing countries do not have to merely send their raw


materials to the industrialized nations and get finished products in
return. It also means that developing countries can become major
procedures as well. People can offer and trade services globally.
Companies can locate different parts of their manufacturing
research and development, financing, and marketing units in
different countries and still tie them all up together.
Lean Supply Chain Management

248 Lean Supply Chain Globalization


Notes

S
Activity Operations management, in fact, is largely, supply chain
Visit___________________
a major FMCG player management. As Scary and Larsen observe, “managing the supply
and study how they are
___________________
operating their lean supply chain is vital for international business”.
chain while going global and
___________________
prepare a detailed report. The alternate objective is to deliver products to market with
___________________ variety, responsiveness, timeliness and efficiency. Corporate
strategy must include organizing, coordinating and executing the
___________________

PE
processor product flow as a competitive necessity and as a source of
___________________
potential competitive advantage. The strategic requirements of
___________________ international business determine the extent, characteristics and
___________________ strategic direction of the supply chain. Some businesses are only
involved with international operations to secure a supply of
___________________
materials and components; marketing is domestic. Other
___________________ businesses manufacture and export from a home base and procure
materials overseas. Some corporations serving global markets
rationalize production using international factory networks for
supply.
z A company’s supply chain encompasses the coordination of
materials, information, and funds from the initial raw
material supplier to the ultimate.
)U
z It is the management of the value added process from the
suppliers’ supplier to the customers.
z The scope of supply chain, thus, encompasses almost the entire
system of business process.
According to Houlihan, the underlying concept of the supply chain
embraces the following points:
z The supply chain identifies the complete process of providing
goods and services to the final user.
z It includes all parties and logistics operations from supplier to
customer within a single system.
z The scope of the supply chain includes procurement,
(c

production and distribution operations.


z The supply chain extends across organizational boundaries.
z It is coordinated through an information system accessible to
all members.
z The primary objective of the supply chain is service to
customers. This must be balanced against costs and assets.
UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

249
z Objectives of individual supply chain members are achieved
Notes

S
through the performance of the chain as a whole.
___________________
The above exposition of the scope of the supply chain connotes that
operations management is, by and large, supply chain ___________________

management (note, particularly, the third point). As the supply ___________________


chain becomes more complex, there is an increasing need to
___________________
integrate each stage as part of a larger system.
___________________

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Global Integration with Information System Software ___________________
The success of most of the organizations, private, public, and ___________________
military, depends on their ability to manage the flow of materials,
___________________
information, and money into, within, and out of the organization.
Such a flow is referred to as a supply chain. Because supply chains ___________________
may be long and complex and may involve many different business ___________________
partners, we frequently see problems in the operation of the supply
chains. These problems may result in delays, in customers’
dissatisfaction, in lost sales, and in high expenses of fixing the
problems, once they occur. World-class companies, such as Dell
Computers, attribute much of their success to effective Supply
Chain Management (SCM), which is largely supported by IT.
)U
Effective solutions to supply chain problems have been provided by
IT for decades. Indeed, the concept of the supply chain is
interrelated with the computerization of its activities, which has
evolved over 50 years.
Historically, many of the supply chain activities were managed
with paper transactions, which can be very inefficient. Therefore,
since the time when computers first began to be used for business,
people have wanted to automate the processes along the supply
chain. The first software programs, which appeared in the 1950s
and early 1960s, supported short segments along the supply chain.
Typical examples are inventory management systems, production
scheduling, and billing. The major objectives were to reduce costs,
expedite processing, and reduce errors. Such applications were
developed in the functional areas, independent of each other, and
(c

they became more and more sophisticated with the passage of


time. However, it was difficult to combine them.
In a short time, it became clear that interdependencies exist
among some of the supply chain activities. One early realization
was that production schedule is related to inventory management
and purchasing plans. As early as the 1960s, the Material
Requirements Planning (MRP) model was devised. This model
Lean Supply Chain Management

250 essentially integrates production, purchasing, and inventory


Notes management of interrelated products. It became clear that

S
computer support could greatly enhance the use of this model,
___________________
which may require daily updating. This resulted in commercial
___________________ MRP software packages coming on the market.
___________________
MRP packages were useful in many cases, and they are still in use
___________________ today, helping to drive inventory levels down and streamlining
___________________ portions of the supply chain. However, some of the MRP

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applications failed. One of the major reasons for such failure was
___________________
that schedule-inventory-purchasing operations are closely related
___________________ to both financial and labour resources, but was not included in the
___________________ MRP packages. The realization of this failure resulted in an
enhanced MRP methodology and software called Manufacturing
___________________
Resource Planning (MRP II), which adds labour and financial
___________________
planning to the simpler MRP model.

System Integration
Creating the 21st century enterprise cannot be done effectively with
twentieth century computer technology, which is functionally
oriented. Functional systems may not let different departments
communicate with each other in the same language. Worse yet,
)U
crucial sales, inventory, and production data often have to be
painstakingly entered manually into separate computer systems
every time they need to be processed together. In many cases,
employees simply do not get the information they need, or they get
it too late.
(c

Figure 21.1: Evolution of Integrated Systems


UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

The following are the major tangible and intangible benefits of 251

systems integration: Notes

S
Activity
___________________
z Tangible benefits: Inventory reduction, personnel reduction, Interview a repatriate and find
out what cultural impacts he
productivity improvement, order management improvement, has___________________
seen in lean supply chain
financial-close cycle improvements, IT cost reduction, management when he was an
___________________
expatriate and prepare a
procurement cost reduction, cash management improvements, presentation.
___________________
revenue/profit increases, transportation and logistics cost
reduction, maintenance reduction, and on-time delivery ___________________

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improvement. ___________________

z Intangible benefits: Information visibility, new/improved ___________________


processes, customer responsiveness, standardization, ___________________
flexibility, globalization, and business performance.
___________________

Check Your Progress ___________________

Fill in the blanks:


1. Some businesses are only involved with international
operations to ……………. a supply of materials and
components; marketing is domestic.
2. A company’s supply chain encompasses the
)U
…………………. of materials, information, and funds
from the initial raw material supplier to the ultimate.

Lean Supply Chain Management and Cultural Impact


Understanding cultural differences may considerably smooth the
making of business deals by reducing unnecessary cultural
barriers.
Cultural differences can impact on interactions among operations
managers and employees from different cultural backgrounds on
how resources are used on how technologies are transferred across
borders, and on how process improvements are achieved. For
instance, Japanese workers are more accustomed to the
participative management style. Authoritative management style
(c

may make them uncomfortable and prove ultimately unproductive.


People in some areas view certain forests and mountains as
embodying special spiritual meanings, and therefore unplanned
and excessive tapping of resources in those regions may be
regarded as a lack of respect for the local culture.
Lean Supply Chain Management

252 Cultural Distance and Global Start-up Enterprises


Notes High tech firms, which are internationally active from or near

S
___________________ their inception, have increasingly been receiving international
___________________
attention from academics, the media and politicians in recent
times. These firms are widely recognised as drivers of national
___________________
economies, in that they play an important role in creating
___________________ employment and in the redistribution of wealth. National
___________________ governments and private enterprises are investing vast sums in

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R&D trying to create new technologies in the new knowledge
___________________
driven competitive landscape.
___________________
With the significant investment across regional, national and
___________________
European level, it is important to have a fundamental
___________________ understanding of how these new firms work what their needs are
___________________ and how they can be better supported to achieve success. However,
this has been made difficult by the plethora of terms and
definitions, which have been used in academia in examining the
phenomenon of early internationalisation of start-up firms.
The differences between national cultures – is an important
determinant of organizational actions and performance, both
empirical and theoretical concerns abound.
)U
The concept of "culture" is very complex and is used with various
meanings. Under a pragmatic definition, one can say that any
group of human beings whose thinking and acting differs from that
of other groups has a "culture". Hofstede likewise emphasizes the
relationship between culture and group affiliation. He clearly
defines culture as "collective programming of the mind which
distinguishes the members of one group or category of people from
another". According to Fukuyama, culture encompasses the values,
norms, interpretations and modes of behaviour that characterise
societies or other social groups.
The different definitions clearly show culture to be always a
collective phenomenon, for it is shared, at least in part, with
humans living in the same social environment or belonging to the
(c

same group. Accordingly, any human being belongs to different


social groups and thus carries different layers of "mental
programming". In addition to a national level, which is commonly
understood under the term "culture", there is also a regional level,
an ethnical, religious and gender level.
Culture is learnt consciously and unconsciously. It should therefore
be distinguished from human nature, on the one hand, and from
UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

the individual personality, on the other. Cultural features are 253


passed on in socialisation processes. That is why culture cannot be Notes

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changed in the short term, but has a long-term character. Against ___________________
this background, it becomes evident already at this point that
___________________
political programmes can only ever have a conditioned and long-
term impact on cultural features. ___________________

___________________
International Culture in Supply Chains and Ethics
___________________

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It is very much known that firms in developed nations have
___________________
practised Supply Chain Management (SCM) for decades, but we
ask here if they will be able to progress well under the modern ___________________
regime of harder and faster e-just-in-time systems. The end-to-end ___________________
supply chain is both a virtual and a physical reality linking the
___________________
customer to many value-added manufacturers and assemblers with
the intervention and support of logistics providers; and we must be ___________________

concerned with the reverse supply chain. For the purposes of this
section, we assume the chains to be terminated mainly in Europe
and the USA, but with origins having global outreach.
We further assume SCM to be concerned not only with data and
goods, but also in managing cultural and ethical issues. Essentially
we shall discuss the challenges of Knowledge Management (KM)
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and Organisational Learning (OL) in SCM systems that embrace
firms located in many countries, western as well as Asian, which,
to promote KM and OL must have more (or less) permeable
organisational boundaries and must learn to trust each other
regardless of their ethnic differences.
Supplier Ethics Management is the management of suppliers and
supply relationships with strategies, programs, and metrics that
better align supplier business conduct with purchaser standards,
with the goal of reducing the purchaser’s overall risk of corporate
integrity failure in the supply chain. “Corporate integrity failure”
embraces any enterprise-level scandal involving a violation of
compliance, ethics, or corporate responsibility standards.
A supply chain may not be quite as dynamic or complex as capital
(c

markets, but when it comes to managing supply chain risk the


challenge is, arguably, can be as formidable as managing risk for
instruments such as mortgage-backed securities or credit default
swaps. Perhaps that is because of all the moving parts that are
there in a supply chain, which we define as a network of companies
that cooperate to convert ideas into goods or services for their
Lean Supply Chain Management

254 customers. In an ideal world, the interests of these companies are


Notes aligned. They adapt to structural shifts in the market, such as

S
___________________
currency fluctuations or other economic shifts, and are agile
enough to respond quickly to changing supply and demand.
___________________

___________________ Check Your Progress


___________________ Fill in the blanks:

___________________ 1. Cultural differences can impact on …………………..

PE
___________________
among operations managers and employees from
different cultural backgrounds.
___________________
2. A supply chain may not be quite as ……………. or
___________________
…………….. as capital markets.
___________________

___________________ Summary
To manage supply chain disruptions, many diverse organizational
cultures must work together to restore services and help ensure
resiliency. As manufacturing operations are relocated around the
world, the efficient movement of goods is becoming more and more
important. Logistics providers are responsible for the movement of
goods and face different cultural challenges in each region that
)U
these goods move. People must realize and accept cultural
differences to develop strong working relationships.

Lesson End Activity


Discuss within your group cultural distance and lean supply
chains.

Keywords
Globalization: Globalization refers to the process or processes of
international integration.
Liberalization: Liberalization refers to a relaxation of previous
government restrictions, usually in areas of social or economic
(c

policy.
Culture: Culture is a powerful human tool for survival, but it is a
fragile phenomenon. It is constantly changing and easily lost
because it exists only in our minds. Our written languages,
governments, buildings, and other man-made things are merely
the products of culture.
UNIT 21: Globalisation and Cultural Impact on Lean Supply Chain Management

255
Critical Success Factor (CSF): Critical success factor is the
Notes

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term for an element that is necessary for an organization or project
to achieve its mission. ___________________

___________________
Questions for Discussion ___________________

1. What do you mean by globalization? ___________________

2. Explain global supply chain managing process in detail. ___________________

PE
3. Describe the globalization impact on lean supply chain ___________________

management. ___________________

4. Describe various features of globalization. ___________________

5. Write short note on global supply chain management. ___________________

___________________

Further Readings

Books
Wincel, J. P., (2004), Lean Supply Chain Management: A
Handbook for Strategic Procurement, Productivity Press.
)U
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann.

Web Readings
www.epa.gov/oppt/library/pubs/archive/acct-archive/pubs/lean.pdf
http://www.sdcexec.com/article/10289860/a-lean-supply-chain-
manifesto
(c
(c
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PE
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UNIT 22: ERP in Lean Supply Chains

Unit 22
257
Notes

S
ERP in Lean Supply Chains
___________________

___________________

___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________

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\ Information, Automation and Lean ___________________
\ Integrated Global Information Systems
___________________
\ Information as a Key Supply Chain Practice
___________________
\ Ways to Improve Supply Chain Performance through Integrated ERP
System ___________________

___________________
Introduction
ERP systems are now being observed everywhere, in large
businesses and the current move by vendors is to repackage them
for Small to Medium Enterprises (SMEs). This transformation has
number of consequences that have to be addressed through
understanding the history and evolution of ERP systems and their
)U
current architectures. The merits and demerits of the ERP systems
will impact their penetration in this new market.
Today, Enterprise Resource Planning (ERP) systems have come to
signify a never-before opportunity for organisations to gain a clear
edge over their competitors. In order to compete and grow, many
organisations in India either have already implemented or are at
the threshold of acquiring ERP systems. ERP is a high-end
sophisticated software solution that reduces the pressure and
workload of the managers and provides accurate, timely
information for taking appropriate business decisions. Enterprise
Resource Planning is the latest high-end solution that information
technology has lent to business application.
Information Technology (IT) has transformed the way we live in
(c

and the way we do business. Since the last decade, IT has made a
drastic change in our life. As compared to earlier stage, when
computer was used just as a typewriter, nowadays users have
become more intelligent and IT literate. Now the user knows that a
PC can do many more things rather than just typing a letter in a
word processing software or making balance sheets in Excel. They
expect more things out of their PC. During this phase of industry,
Lean Supply Chain Management

258 every one of us must have heard the word ERP in one or the other
Notes form. It may be in the title of any IT magazine or may be a point of

S
Activity
discussion in any IT seminar or may be in an advertisement of big
Visit___________________
an export house and
analyse their information, IT company. Thus in any form, we all have been through this word.
___________________
automation and lean systems. In fact, ERP software consists of multiple software modules that
___________________ integrate activities across functional departments - from
___________________ production planning, parts purchasing, inventory control and
product distribution to order tracking. Most ERP software systems
___________________

PE
include application modules to support common business activities
___________________ like finance, accounting and human resources.
___________________

___________________ Information, Automation and Lean


___________________ Supply chain management involves the integration of business
___________________ processes across organizations, from material sources and
suppliers through manufacturing and processing to the final
customer. The program provides students with the core knowledge
related to a wide variety of supply chain activities, including
demand planning, purchasing, inventory control, material
handling, product and service support, information technology, and
strategic supply chain management. In addition, the program
)U
offers two concentrations: logistics and operations. The logistics
concentration focuses on transportation, distribution, warehousing,
facility location analysis, and packaging. The operations
concentration focuses on the analysis, design, implementation,
planning, control, and improvement of manufacturing and service
processes.
One way to automate supply chains is to gather companies into
e-marketplaces, where they can negotiate for goods and services.
However, because companies must participate independently, such
centralization does not foster the kinds of alliances or long-term
relationships that can significantly improve supply-chain
efficiency.
A distributed architecture with point-to-point connections is thus
preferable, but computer applications that automate supply chains
(c

require several properties beyond traditional software approaches:


z Disintermediation: Seamless access to and interaction with
remote information, application, and human resources
requires a distributed active-object architecture.
UNIT 22: ERP in Lean Supply Chains

259
z Dynamic composability and execution: A system should
Notes

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execute as a set of distributed parts, but the resources Activity
required will be mostly unknown until runtime. Thus, the Make___________________
a mini-documentary on
the topic integrated global
infrastructure must enable resource discovery and composition ___________________
information systems.
as needed.
___________________
z Interaction: Interaction among participants might include
___________________
subtle and critical patterns, but the specific interactions might
___________________

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be variable and unknown until runtime. The patterns must
therefore be explicitly represented and reasoned with. Recent ___________________
work describes the power of interactions. ___________________

z Error tolerance and exploitation: As the deployed systems ___________________


gain complexity, they should anticipate and compensate for
___________________
errors in their components and interaction protocols.
___________________
Lean supply chain management is not exclusively for those
companies who manufacture products, but by businesses who want
to streamline their processes by eliminating waste and non-value
added activities. Companies have a number of areas in their
supply chain where waste can be identified as time, costs or
inventory. To create a leaner supply chain companies must
examine each area of the supply chain.
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Check Your Progress
Fill in the blanks:
1. Supply chain management involves the integration of
business …………………. across organizations.
2. A system should execute as a set of ……………… parts,
but the resources required will be mostly unknown until
runtime.

Integrated Global Information Systems


A global information system is a data communication network that
crosses national boundaries to access and process data in order to
(c

achieve corporate goals and strategic objectives. Its allied


technology offers the essential competence to achieve these
functions. Therefore, multinational corporations face the challenge
of developing the global information systems for global data
processing and decision-making.
Lean Supply Chain Management

260
The organizational decision-making process in a multinational
Notes
corporation is very different from that of a domestic corporation.

S
___________________ The heterogeneity of language, cultural, regulation, currency,
___________________ government, and time zone causes complexity and uncertainty of
corporate decision-making. Therefore, a global information system
___________________
should include the following components:
___________________
z Compatibility in data formats and structures.
___________________

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z A database of local regulatory and legal systems.
___________________
z A database of cultural patterns of management and decision-
___________________
making.
___________________
z Security provisions.
___________________
z The ability to accommodate differences in time zones
___________________
z A multi-language processor.
In addition, a decision-support-oriented global information system
needs to possess the following characteristics (Chou, 1996):
z It performs global coordination within the system.
z It performs system integration.
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z It has a powerful repository for storing system-wide data and
information.
z It can perform the intelligent work.
z It has an integrated CASE-based environment.

Lean and IT Integration


Lean Integration builds on these prior works by applying their
principles to the process of integration. The definition of
integration used in this unit is “the process of making independent
information technology elements work together as a cohesive
system”.
Lean integration may be applied in various integration domains
including:
(c

z System integration is the bringing together of component


subsystems into one cohesive system and ensuring that they
interoperate effectively.
z Data integration accesses data and functions from disparate
systems to create a combined and consistent view of core
UNIT 22: ERP in Lean Supply Chains

information for use across the organization to improve 261


business decisions and operations. Notes

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Activity
z Enterprise Application Integration enables information ___________________
Create a digital essay with
images and text on the topic
exchange and process automation across business applications ___________________
of information as a key supply
that were independently developed, may use incompatible chain practice.
___________________
technology, are typically based on different data models, and
remain independently managed. ___________________

___________________

PE
Lean Integration can be summarized as seven principles similar to
Lean manufacturing and Lean software development: ___________________

z Eliminate waste ___________________

z Sustain knowledge ___________________

___________________
z Plan for change
___________________
z Deliver fast
z Empower the team
z Build quality in
z Optimize the whole

Check Your Progress


)U
Fill in the blanks:
1. A global information system is a data communication
network that crosses national boundaries to access and
process data in order to achieve corporate ………….. and
strategic ………………….
2. The organizational decision-making process in a
………………… corporation is very different from that of
a ……………….. corporation.

Information: A Key Supply Chain Practice


Supply chain management is the integration and management of
supply chain organizations and activities through collaboration,
(c

effective business processes and high levels of information sharing.


The supply chain concept has become a concern due to global
competition and increasing customer demand for value. Thus, the
information must be available in real time across the supply chain
and this cannot be achieved without an integrated software system
for supply chain management. Supply chain members have to
Lean Supply Chain Management

262 collaborate, sharing information for improving customer


Notes satisfaction.

S
Activity
___________________
Create a collage or poster Web technologies enable enterprises to become more effective, to
displaying your findings and
___________________ trade with suppliers and customers over the Internet in real time.
point of view on the topic
ways to improve supply For this, businesses have to integrate their information systems
___________________
chain performance through and applications with those of their suppliers and customers.
integrated ERP system.
___________________
First, companies have to redesign their supply chain to create an
___________________
integrated value system and afterwards, companies can develop

PE
___________________ business-to-business applications across supply chain structure for
___________________ the optimization of the supply chain. The implementation of the
supply chain information systems in companies facilitates an
___________________
increase in their competitiveness and profits.
___________________

___________________
Check Your Progress
Fill in the blanks:
1. The supply chain concept has become a concern due to
global ………………… and increasing customer demand
for value.
2. Supply chain members have to collaborate, sharing
information for improving customers
)U
……………………….

Ways to Improve Supply Chain Performance through


Integrated ERP System
Manufacturers in today's global markets are experiencing
dramatically reduced margins coupled with rising customer
expectations. Being a successful supply chain partner for your
customers’ demands up-to-the-minute information visibility. You
need information on everything from supply chain inventories, to
production planning and shop-floor scheduling, to the increasingly
robust set of data collected on customer demographics and order
preferences. The ability of manufacturers to collect, analyse, and
(c

share this information has become a basic operating requirement


for global supply chain operations.
An integrated enterprise resource planning system can help
manufacturers achieve the efficient and effective use of their
manufacturing assets and provide customers with the visibility
they need. In addition, an ERP system can provide a powerful
opportunity for many manufacturers to gain critical insight and
UNIT 22: ERP in Lean Supply Chains

competitive advantage by taking them beyond simply managing 263


internal business processes. You can find valuable information at Notes

S
the edge of the company—along those boundaries and interaction ___________________
points that occur between the manufacturer and its customers and
___________________
suppliers.
___________________
Savvy manufacturers have recognized the benefits of investing in
integrated ERP systems, realizing that it enables them to fulfil ___________________

their mission: to provide a platform that enables effective response ___________________

PE
to the changing supply chain with reduced long-term information ___________________
technology (IT) costs.
___________________
Here are four ways an integrated ERP system can help improve
___________________
supply chain performance.
___________________
Develop better Customer Insight and Interaction ___________________
To build long-term relationships with customers today, you need to
listen to and understand them. This requires that you maintain a
holistic view of those customers. You can obtain such a broad-
spectrum view from a variety of data sources, including your
supply chain systems; sales and marketing; customer service and
field service systems; internal database information; and
)U
knowledge gathered from unstructured interaction with customers.
This integrated view—which an ERP system helps provide—can
enable manufacturers to look beyond tactical order fulfilment and
gain a better understanding of customer wishes for customized
products and services—which can help the company differentiate
its offerings and increase profits. It can also lead to insight and
answers to questions such as: What are the buying patterns? Are
we driving larger orders to customers? What does our pipeline look
like? Are we seeing demand increases or downturns that we must
react to?

Achieve Global Visibility in a Demand-driven Supply Chain


It is critical in an age of tight cost management that
manufacturers optimize inventory investment and continue to
(c

provide excellent customer service. To do so, manufacturers need


to know where inventory is throughout the entire supply chain —
the information which an ERP system can help to provide.
Knowing when and where inventory is needed enables
manufacturers to develop the best plan for production and
Lean Supply Chain Management

264 resupply in critical customer relationships—building only what is


Notes required for shipments.

S
___________________ Beyond having the right data for internal operations,
___________________ manufacturers must also be able to provide customers with
visibility into inventory and product availability. In a demand-
___________________
driven world, real-time intelligence—not nightly batch updates—is
___________________ required to make timely and effective decisions. This now means
___________________ systems must be open to the new ways of working—including

PE
mobile and Radio Frequency Identification (RFID) technologies
___________________
and support for tracing and other regulatory compliance
___________________
requirements. The right ERP system can help meet your needs in
___________________ all these areas.
___________________
Lean Manufacturing, Global Sourcing and Supplier Integration
___________________
Managing to the lowest possible manufactured cost is essential.
This means applying lean manufacturing practices and connecting
to the best suppliers on a global basis.
Today, lean operations are driving an increase in speed and
response time for all supply chain participants. Unfortunately, for
most manufacturers, the new lean business processes are not
)U
supported by their legacy systems and must be implemented as
manual processes, which can defeat the information visibility
crucial to state-of-the-art supply chains.
Locating the best suppliers requires a comprehensive supplier
database that enables a manufacturer to recognize where new
opportunities for lower costs exist—such as suppliers in emerging
countries. This means that manufacturers must have real-time
connections to suppliers to respond to changing production
demands. Once identified, these new suppliers must be brought on
board quickly and cost effectively with the ability to share—and
respond to—real-time demand and production data, including new
product designs and critical engineering changes. The current
generation of integrated ERP systems includes the processes and
capabilities to help ensure lean operation, including the need for
(c

real-time production data exchange with suppliers.

Managing for Higher Performance


Executives know that measurement and performance are
inextricably linked. Whole new metrics, Key Performance
Indicators (KPIs), and benchmarks can give advance warning of
UNIT 22: ERP in Lean Supply Chains

problems managers may face in their operations. The real power of 265
these metrics comes when managers can quickly access real-time Notes

S
data that reflects the global domain of their operations. Done well, ___________________
performance analytics can make manufacturers significantly more
___________________
agile – an important consideration in today’s very lean supply
chains. ___________________

However, measuring performance is often far too difficult in the ___________________

world of disparate legacy systems, the result being that most ___________________

PE
companies do not currently have a standardized and automated ___________________
performance analysis capability to manage for higher performance.
___________________
Integrated ERP systems today include business analytics that
___________________
enable executives to standardize metrics across the organization
and monitor production and profitability. In fact, ERP systems can ___________________

provide actionable information to employees at all levels of the ___________________


organization and make it accessible through their familiar desktop
tools, bringing speed and quality to their decision making.
By integrating data, standardizing processes, and opening up
visibility to the global supply chain, an integrated ERP system can
offer manufacturers a fast path to reduced cost structures,
increased speed, and improved transparency that can improve
)U
customer satisfaction and company profitability.
The bottom line: Today's ERP systems have become an operating
platform that can scale and deal with the global competition that is
in every manufacturer's future.

Check Your Progress


Fill in the blanks:
1. ..................... systems can provide actionable information
to employees at all levels of the organization.
2. An ERP system can provide a powerful opportunity for
many manufacturers to gain critical insight and
………………… advantage.
(c

Summary
A robust supply chain must work with accurate information
starting with forecasting to delivery of products to end-users.
Supply and demand should be synchronized considering factors
Lean Supply Chain Management

266 such as service levels, variability, events, and capacity as


Notes processed by technology platforms and users of the information.

S
___________________ Virtual networks (e-commerce) link participants and activities
___________________ including raw material suppliers, manufacturers, distributors,
wholesalers, and consumers. Enterprise resource planning systems
___________________
and the Internet are now the technology platforms that process
___________________ information quickly and efficiently.
___________________

PE
___________________ Lesson End Activity
___________________ Discuss within a group of 3 students the ways by which supply
___________________ chain performance can be improved through ERP systems.

___________________

___________________
Keywords
Enterprise Resource Planning: ERP is an industry term for the
broad set of activities that helps a business to manage the
important parts of its operations.
Purchasing: Purchasing refers to a business or organization
attempting for acquiring goods or services to accomplish the goals
of the enterprise.
)U
Inventory Management: Inventory management is the process of
efficiently overseeing the constant flow of units into and out of an
existing inventory.
Information Technology: Information Technology is a principle
driver of business productivity and profitability, and an enabler of
organizational process improvement and innovation.

Questions for Discussion


1. What do you mean by enterprise resource planning?
2. Describe various modules of ERP.
3. Explain ERP implementation in detail.
(c

4. Describe global information system.


5. What are the ways by which supply chain performance can be
improved?
UNIT 22: ERP in Lean Supply Chains

Further Readings 267


Notes

S
Books ___________________

Wincel, J. P., (2004), Lean Supply Chain Management: A ___________________


Handbook for Strategic Procurement, Productivity Press.
___________________
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
___________________
Management Essentials: A Framework for Materials Managers,
CRC Press. ___________________

PE
___________________
Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean
Management into the Supply Chain, Butterworth-Heinemann. ___________________

___________________
Web Readings
___________________
http://www.microsoft.com/dynamics/en/gulf/industries/manufacturi
ng-erp-supply-chain.aspx ___________________

http://www.infosys.com/Oracle/white-papers/Documents/ERP-
way.pdf
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(c
(c
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PE
S
UNIT 23: Lean Supply Chain and E-commerce

Unit 23
269
Notes

S
Lean Supply Chain and
___________________

___________________

E-commerce ___________________

___________________

Objectives ___________________

PE
After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Defining e-commerce
\ E-commerce and Supply Chain Management ___________________
\ CSF in Implementing an E-commerce System ___________________

___________________
Introduction
Electronic commerce (E-commerce) and the Internet are
fundamentally changing the nature of supply chains, and
redefining how consumers learn about, select, purchase, and use
products and services. The result has been the emergence of new
B2B supply chains that are consumer-focused rather than product-
)U
focused. They also provide customized products and services.
E-commerce is a selling and transfer process requiring several
institutes. It is systematic and organized network for the exchange
of goods between producers and consumers. The Net aims to
establish the interconnections between producers and consumers
directly and in this process; the Internet embraces all those related
activities, which are indispensable for maintaining a continuous,
free and uninterrupted distribution and transfer of goods. The
Website or portals may be categorized into commercial and
non-commercial.
Any website or portal that offers products and/or services for sale
is a commercial website. There are thousands of commercial web
sites on the Internet. Some of them have been successful, and some
(c

were not so lucky. What elements make up a good commercial


website? Of course, web pages should look attractive to a customer.
However, even the most attractive web pages will not make a
person come back to a website where it takes too long to find the
right product or where order forms do not work.
Lean Supply Chain Management

270 Defining E-commerce


Notes

S
Activity E-commerce is a general concept covering any form of business
___________________
Search over the internet and transaction or information exchange executed using Information
write an article on
___________________
e-commerce organizations. and Communication Technologies (ICTs). E-commerce takes place
___________________ between companies, between companies and their customers, or
between companies and public administration. E-commerce
___________________
includes electronic trading of both goods and electronic material.
___________________

PE
"E-commerce denotes the use of electronic transmission media
___________________
(telecommunication) to engage in the exchange of products and
___________________ services requiring transportation either physically or digitally, from
___________________ location to location".

___________________ – M. Greenstein and T.M. Feinman

___________________ "E-commerce describes the process of buying and selling (or


exchanging) of products, services and information via computer
networks including the internet".
– E. Turban and others
E-commerce is the means to complete online transaction and
integrate the supply chain into the transaction management
process such as receiving orders, making payments and tracking
)U
down the deliveries or order.
"E-commerce can be defined as the technology-mediated exchanges
between parties (individuals, organisations, or both) as well as the
electronic based intra or inter organisational activities that
facilitate such exchanges".
– J.F. Rayport and B.I. Jaworski
E-commerce as a commercial process includes production,
distribution, marketing, sale or delivery of goods and services
electronically.
– World Trade Organization (WTO)
E-commerce is used everywhere in everyday life. It ranges from
credit/debit card authorization, travel reservation over a
(c

phone/network, wire fund transfers across the globe, point of sale


(POS) transactions in retailing, electronic banking, electronic
insurance, fund raising, political campaigning, online education
and training, online auctioneering, online lottery and so on. Many
people use the term e-commerce and e-business interchangeably,
which is factually wrong.
UNIT 23: Lean Supply Chain and E-commerce

271
Check Your Progress
Notes

S
Activity
Fill in the blanks:
___________________
Research an organization that
1. E-commerce is a general concept covering any form of uses e-commerce in its supply
___________________
chain and prepare a
business transaction or ……………… exchange executed presentation based on your
___________________
using information and communication technologies. findings.
___________________
2. E-commerce is the means to complete ……………..
transaction. ___________________

PE
___________________

E-commerce and Supply Chain Management ___________________

There are several categories of e-commerce listed in Table 23.1 ___________________


(Balasubramanian and Mahajan, 2001; Pant and Ravichandran, ___________________
2001).
___________________
Table 23.1: Categories of E-commerce

From/To To Customer To Business To Government


Transactions
From Customer Customer-to- Customer-to- Customer-to-
Customer (C2C) Business (C2B) Government (C2G)
From Business Business-to- Business-to- Business-to-
Customer (B2C) Business (B2B) Government (B2G)
)U
From Government-to- Government-to- Government-to-
Government Customer (G2C) Business (G2B) Government (G2G)

Many transactions relevant to supply chain management are those


from the B2C and B2B categories. The B2C organizations are now
able, through online registration, to keep better track of their
customers for purposes of product recalls and product updates. The
B2B organizations can transact product and material purchases,
share design specifications for new products, and perform research
and development activities, all online.
Yet, in a global context, all of the categories of e-commerce have
applications to supply chain operations. For example, the G2C,
G2B and G2G organizations share information required by law and
current legislation on truck transportation requirements that
(c

might otherwise take years to convey. These governmental


organizations allow for much needed expedience in the
dissemination of information concerning the governance of people
and assurance that laws will be promptly obeyed.
Focusing on the roles of e-commerce and its technologies in B2B
and B2C, Figure 23.1 presents a multi-stage sequence of activities
Lean Supply Chain Management

272 that either purchasing agents (for a B2B transaction) or customers


Notes (for a B2C transaction) experience in e-commerce business

S
___________________
activities.

___________________

___________________

___________________

___________________

PE
___________________

___________________

___________________

___________________

___________________

Figure 23.1: Multi-stage E-commerce B2B and B2C Model

Search and Identify Product or Service


The Web page provides comparative cost and availability
)U
information (the latter if the ERP system is integrated with the
warehousing and inventory functions). Using a Web page of a
supplier, a purchasing agent or customer can place an order for
supplies, spare parts, etc. In this role, the Web technology has
helped bring the customer and purchasing agent into the
business’s supply chain by having them perform the selling
function through internet; improved access to purchasing options.
It also helps achieve the lean demand-pull principle. Since the
customer or purchasing agent will make the purchasing decision, it
will be known demand once the order is placed in the system.

Selection and Negotiation


For many customers the price quoted on the Web is the price
(c

required for purchase. In other customer and purchasing agent


settings, a price can be negotiated between parties. The Web is
ideal for this communication exchange. Suppliers, whose intranet
is linked (perhaps with an ERP system) to those of their
manufacturers, can be informed on a real time basis as to the
actual cost of a part. This gives the manufacturer negotiation room
in setting a price that will permit profitable operations, while
UNIT 23: Lean Supply Chain and E-commerce

opening up opportunities for bids from other competitive suppliers. 273


Some purchasing agents utilize e-commerce auctions (i.e., match Notes

S
buyers and sellers by using an e-commerce version of a standard ___________________
auction) to further drive down purchase prices.
___________________

Purchasing ___________________

Using the Web, customers or purchasing agents can complete their ___________________
orders specifying the final agreed-to terms and prices.
___________________

PE
Complications can arise due to the payment process. Customers
and purchasing agents can use credit cards to facilitate payments ___________________

or electronic checks (Haag et al., 2007) as a form of exchange for ___________________


hard cash. Another technology for placing and purchasing orders in ___________________
B2B operations is through Electronic Data Interchange (EDI)
___________________
systems, a technology that enables corporations to exchange data
electronically with their suppliers. EDI generally refers to ___________________
computer-to-computer exchange of high-volume, routine business
information between trading partners, using a national or
international standard format (Walton and Marucheck, 1997;
Attwood, 1998). When combined with the Internet technology for
portals in data entry tasks and linked into other ERP systems, it is
referred to as Internet/Extranet Data Exchange (IEDE) or
)U
Internet-based EDI (IEDI).

Product and Service Delivery


Electronic distribution refers to products that can be downloaded
over the internet (e.g., music, written material, etc.). Physical
distribution refers to the delivery of tangible items that must be
physically moved from one location to another (i.e., via rail, road,
by truck or ship). Web technology allows the customer and
purchasing agent to track delivery information on orders. Web
technology also allows the manufacturer to trace missing orders
and provide up-to-date delivery information to customer service
agents, who in turn can provide information directly to preferred
B2C customers and other B2B purchasing agents.
(c

After Sales Service


Given that all of the transactions have been online, the
information system (like ERP) will be able to capture information
to complete the order (e.g., special follow-up services to ensure
customers have received complete orders). In addition, the
information can be incorporated into a Customer Relationship
Management (CRM) software system. Other supply chain
Lean Supply Chain Management

274 information can be placed in the database of a supply chain


Notes management software system. Such supply chain information, as

S
___________________
complaints about the condition, timeliness, or convenience of
deliveries are reported by customers, provides useful future
___________________
planning guidelines to further achieve customer satisfaction. With
___________________ e-commerce and Web technology, the speed with which this
___________________ information can reach decision makers is greatly increased over
other, less integrated information systems.
___________________

PE
The impact of e-commerce and its technology enablers, such as the
___________________
Internet, have on supply chain activities can be dramatic. To
___________________
illustrate this impact we can theorize and estimate the timing
___________________ difference between the manufacturing agent’s physical method
___________________ (i.e., more traditional) of purchasing a component for a product and
an e-commerce method focused on internet technology as presented
___________________
in Table 23.2. As can be seen in Table 23.2, there are substantial
differences between these methods and the resulting time required
to implement the purchase of a component part. The time saved
using e-commerce is one example of how it can enforce the lean
supply chain management principle of waste removal.

Table 23.2: Purchasing Process Enhanced by E-commerce Technology


)U
Order Physical Method E-commerce Method
Process Steps (Time) (Time)
Search for Visit with suppliers (15 Use Internet to search
product days) supplier Web sites (1 day)
Check Read hard mail literature Use Internet email exchanges
availability and sent from suppliers and as contact agent to negotiate
price negotiate by phone and availability and price (2 days)
personal interviews
regarding availability and
price (15 days)
Customer Visit with selected supplier Use Internet email or EDI to
places order and place order (1 day) place order (30 minutes)
Check order Phone supplier (1 hour) Use Internet tracking (5
status minutes)
Ship order Process order in shipping Ship from third party in
department from virtual business (1 day)
manufacturing plant (1 day)
(c

Invoice to Obtain and fill out hardcopy Use Internet or EDI to fill
customer forms, mail to customers (3 out forms and send to
day) customer (20 minutes)
Pay invoice Issue check or credit card Use Internet or EDI to issue
exchange on hardcopy forms credit or send an electronic
(2 hours) check to supplier (1 minute)
Total Time 35 days and 3 hours 4 days and 56 minutes
UNIT 23: Lean Supply Chain and E-commerce

275
The illustration in Table 23.2 also provides some idea as to the
Notes

S
profound role changes taking place as e-commerce becomes an Activity
important part of supply chain management systems. Note Find___________________
out ten such
organizations who have
particularly in the example that most of the activities, which ___________________
recently implemented
required staff in the physical method, now only require the time of e-commerce system.
___________________
the purchaser in the e-commerce method. Indeed, the use of
e-commerce models have done more to integrate the customer into ___________________

supply chains as an active participant than any other marketing ___________________

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effort to date. ___________________

Check Your Progress ___________________

Fill in the blanks: ___________________

1. The ………………… can be incorporated into a customer ___________________

relationship management software system. ___________________

2. ………………… distribution refers to products that can


be downloaded over the internet.

CSF in Implementing an E-commerce System


Gide and Soliman (1998), who studied success factors for the
)U
implementation of e-commerce, identified ten Critical Success
Factors for the implementation of e-commerce in manufacturing:
z Management commitment and support for e-commerce (e.g.,
financial, time, etc.),
z Organizational and management objectives for e-commerce
(i.e., aligning them and defining them),
z Communication between users and e-commerce department
(i.e., improving interface),
z E-commerce system security and reliability (i.e., reducing
security risks and ensuring useful, timely, and accurate
information),
z E-commerce department’s service function (i.e., defining the
(c

role of e-commerce in providing services to the firm),


z Integrating e-commerce into existing business functions
(i.e., utilizing existing software platforms and fully integrating
e-commerce systems to take advantage of communication
capabilities),
Lean Supply Chain Management

276
z Change management for e-commerce system implementation
Notes
(i.e., utilize change management methodologies to ready the

S
___________________ organization for the implementation of the e-commerce
___________________ system),

___________________ z Appropriate e-commerce system applications (i.e., build an


e-commerce system around needed organizational goals and
___________________
objectives),
___________________

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z User participation and satisfaction for e-commerce
___________________
implementation (i.e., like lean, users will be in a better
___________________ position to make suggestions on implementation, based upon
___________________ their potential satisfaction using the system.), and

___________________ z Technological competence for e-commerce implementation (i.e.,


A firm must have technically competent technology staffers to
___________________
answer implementation questions and avoid constraints in the
implementation process).
These critical success factors are related to the lean supply chain
management principles in many ways. Leadership and growth
(management commitment), focusing on the customer
(organizational and management objectives), waste elimination
)U
(reliability), demand synchronization (integrating into existing
systems), and seeking customer demand-pull systems (service
function) are all lean supply chain management principles.

Check Your Progress


Fill in the blanks:
1. User participation and ……………….. for e-commerce
implementation.
2. Build an ………………. system around needed
organizational goals and objectives.

Summary
E-business involves the execution of business transactions over the
(c

Internet. Companies conducting ebusiness perform some or all of


the following activities over the Internet across the supply chain:
Providing product and other information, Negotiating prices and
contracts, Placing and receiving orders, Tracking orders, Filling
and delivering orders, Paying and receiving payment. All these
activities have been conducted in the past using existing
UNIT 23: Lean Supply Chain and E-commerce

"channels" such as retail stores, sales people, and catalogues. For 277
example, companies like Lands End and W.W. Grainger have used Notes

S
catalogues to provide product information to customers. ___________________
Companies have used the internet in a variety of ways to enhance ___________________
supply chain performance. Dell uses the Internet to display all its
___________________
product options to customers. Companies like Solectron and Ford
have used the Internet to increase collaboration in product design. ___________________

UPS and Federal Express have used the Internet to allow ___________________

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customers to track their packages. ___________________

___________________
Lesson End Activity
___________________
Discuss within a group of 5 students about B2B type of e-commerce
___________________
transactions.
___________________

Keywords
E-Commerce: E-commerce refers to the buying and selling of
products or services over electronic systems such as the Internet
and other computer networks.
Manufacturing: Manufacturing is the production of goods for use
)U
or sale using labour and machines, tools, chemical and biological
processing, or formulation.
Information flow: Information flow is the transfer of information
from a variable to a variable in a given process.
Enterprise Resource Planning (ERP): Enterprise resource
planning systems integrate internal and external management of
information across an entire organization—embracing
finance/accounting, manufacturing, sales and service, customer
relationship management, etc.

Questions for Discussion


1. What is the definition of e-commerce?
(c

2. What are the types of e-commerce transactions?


3. Explain the multi-stage e-commerce model with diagram.
4. What are the critical success factors in implementing an
e-commerce system?
Lean Supply Chain Management

278
5. Why is there a need for change management for the
Notes
implementation of e-commerce system?

S
___________________

___________________ Further Readings


___________________
Books
___________________
Wincel, J. P., (2004), Lean Supply Chain Management: A
___________________
Handbook for Strategic Procurement, Productivity Press.

PE
___________________
Kerber, Bill, Dreckshage, Brian J., (2011), Lean Supply Chain
___________________ Management Essentials: A Framework for Materials Managers,
___________________ CRC Press.

___________________ Plenert, Gerhard, (2010), Reinventing Lean: Introducing Lean


Management into the Supply Chain, Butterworth-Heinemann.
___________________

Web Readings
http://link.springer.com/chapter/10.1007%2F978-3-642-29637-
6_87#
http://www.kellogg.northwestern.edu/faculty/vanmieghem/htm/e-
business-scmr-april26.pdf
)U
(c
UNIT 24: Integrating E-commerce and Supply Chains

Unit 24
279
Notes

S
Integrating E-commerce and
___________________

___________________

Supply Chains ___________________

___________________

Objectives ___________________

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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Internet-based EDI and Supply Chains
\ E-trust and Supply Chains ___________________
\ Integration of Supply Chain and E-commerce Function ___________________

___________________
Introduction
E-commerce is sales and marketing driven, and supply chain
management is the most important critical success factor helping
e-commerce operations to be successful. However, supply chains
often are neglected or poorly managed in e-commerce practices.
Many dot-com firms, during the early 2000s, lost customers or
)U
went out of the business due to the misperformance of their supply
chains. Industrial experts attributed the downfalls of many
dot-com firms to supply chain failures caused by the lack of a rapid
communication structure to identify emerging inventory stock
shortfalls, order-processing systems to manage needed repeat
orders, and supply chain customer relationship management
programmes to ensure minimal response to customer complaints
and returns. In order to be successful an e-commerce firm needs to
have an integral business model with an emphasis on supply chain
management, rather than a model solely based upon sales and
marketing.
According to Nissen (2000), an evolution has been in progress for
some years that is leading toward increased integration of supply
chain management and e-commerce. E-commerce is an application
(c

of inter-organizational systems that support the electronic trading


of physical goods and of intangible service products. It has a major
positive impact on supply chain management in several ways.
E-commerce represents a means of leveraging the trend toward
increased product customization and personalization for the
benefit of buyers and sellers in supply chains. Information
Lean Supply Chain Management

280 technology (IT) allows for the large-scale tracking of customer


Notes preferences, including those associated with transportation and

S
Activity
___________________
distribution processes in customer ordering and delivery. Also Lee
Write a magazine style article
about Internet-based EDI and et al. (1997a) pinpoint the relevance of information exchange in
___________________
Supply Chains. alleviating the supply chain bullwhip effect. They argue IT can
___________________ help firms create transparency of orders and operations in
___________________ providing visibility of demand throughout the supply chain.

___________________

PE
___________________
Internet-based EDI and Supply Chains
___________________ An early integration technology used in supply chains (and a factor
in their rise to prominence in strategic planning) is electronic data
___________________
processing (EDI) and its newer version, Internet-based EDI (IEDI).
___________________
Developed in the late 1960s, EDI enabled buyers to extract
___________________
purchase orders from a purchasing software application and send
it to suppliers where it would automatically feed into a sales
order-entry application. The EDI data is then translated by special
software from EDI standard data formats and converted into the
supplier’s database formats for ease of understand and direct
action. Its intent is to speed information delivery and processing
via a paperless environment, thereby achieving tremendous cost
)U
and time saving efficiencies that carry over into improved levels of
customer service.
Internet-based EDI (IEDI) is EDI, but with Internet access portals.
The use of IEDI systems further increases the supply chain
partner’s access to data via entry portals by positioning the portals
using the Internet as a connector throughout the entire supply
chain system. In terms of lean principles, it should be noted that
Steggell (1998) claimed years ago that an IEDI system is much less
expensive than EDI. Barber (1997) declared an IEDI system could
be as much as eighty percent less expensive.
The benefits that IEDI can bring to supply chain management
include:
z Timely communication via IEDI permits a more demand
(c

pulled production cycle time, which in turn can reduce finished


goods inventory by not producing products not yet demanded
by customers;
UNIT 24: Integrating E-commerce and Supply Chains

281
z It can enhance communications between the supplier and the
Notes

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buyer by virtue of easier to use Internet technology (i.e., the
Internet is a convenient form of communication in everyday ___________________
life that users are comfortable using); ___________________

z IEDI, when linked with other ERP systems, permits easier use ___________________
of other communication technologies (e.g., a firm might
___________________
implement a Radio Frequency Identification (RFID) inventory
___________________

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monitoring system to track inventory levels and automatically
generate and transmit IEDI purchase orders to suppliers); ___________________

z At a strategic level, IEDI can serve as a competitive priority or ___________________

order winner for some firms (i.e., the firm that uses this ___________________
technology will get contracts with other firms that want supply
___________________
chain partners to use this technology for purposes of
___________________
information system integration).
Another integration issue of e-commerce and supply chains is
related to global supply chains. In order to successfully compete in
global markets (and e-commerce opens global markets to all firms),
organizations must meet or exceed the pace of rapidly changing
technology, while also lowering costs, increasing quality, and
improving customer service at all stages of the value-chain. A
)U
rapidly emerging global market drives businesses to reorganize
manufacturing and supply chain partners to be more closely
integrated in order to improve operating efficiency.
Effective management of these global supply chains presents
challenging strategic, tactical, and operational problems. It
involves the integration of all value-creating elements in the
supply chain processes, from raw material extraction to end-user
consumption. Global Supply Chain Management (GSCM) activities
are motivated by the ideals of customer service, lead-time
compression, and inventory reduction. GSCM is facilitated greatly
by communication technologies, such as IEDI, and inspired by the
lean supply chain management principles of close supplier
relationships, reduced supplier bases, and frequent on-time
(c

deliveries by suppliers, who are synchronized with a customer’s


requirements.
GSCM fosters involvement of members of the supply chain in new
product development, production planning, and quality efforts.
When e-commerce data on market demand and production
Lean Supply Chain Management

282 scheduling requirements are shared, it enhances global supply


Notes chain information system networks and helps to implement global

S
Activity
___________________
supply chain operations.
Create a digital essay with
images and text on the topic
___________________
of e-trust and supply chains. Check Your Progress
___________________
Fill in the blanks:
___________________
1. Effective management of global supply chains presents
___________________ challenging strategic, tactical, and operational

PE
___________________ ………………..

___________________ 2. A rapidly emerging global market drives businesses to


…………….. manufacturing and supply chain partners.
___________________

___________________
E-trust and Supply Chains
___________________
The Internet and other e-commerce technologies have created
opportunities for seamless business collaboration between all
partners that comprise a traditional supply chain. The B2B and
B2C models break down traditional boundaries between business
partners. In essence, they make all participants in a business
transaction part of an expansive extranet. Theoretically, these
business partners will easily and securely communicate, and
)U
complete end-to-end transactions from within their respective
firms, streamlining communications, increasing the precision of
forecasts, and reducing operational costs. What the supply chain
management in e-commerce has failed to do is replace or improve
the one fundamental attribute required to conduct business i.e.
trust.
Ratnasingham (1999) defines trust in e-commerce or e-trust as
promises, assurances and a demand for high quality products and
services. Credibility is a measure of honesty and ethical behaviour.
Higher levels of credibility create higher levels of trust
(Schniederjans and Schniederjans, 2008). Sheppard and Sherman
(1998) identify factors likely to influence the development and
maintenance of trust in the domain of a B2C supply chain.
(c

Understanding the major influences and components of trust in e-


commerce transactions, listed in Table 24.1, can aid in establishing
a trusting relationship with supply chain partners.
UNIT 24: Integrating E-commerce and Supply Chains

Table 24.1: Major Components of Trust in E-commerce 283


Component Explanation Notes

S
Activity
Pre- This involves knowing that individuals differ in their general ___________________
Working with one or two
Interactional propensity to trust. Foreknowledge and expectations with partners, after researching the
Filters respect to a certain industry or firm is important in case ___________________
topic of integration of supply
damage control is needed. The reputation (i.e., the strength of chain and e-commerce
a company’s brand name), previous interactions on- and/or ___________________
function, prepare an
off-line, or reports from trusted third parties (hence, informative interactive digital
transference of trust), can all be factors in building e- ___________________
poster. Then briefly present
commerce trust, because they precede the initial meeting of the poster to the class,
___________________

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potential supply chain partners. highlighting your main findings
and points of interest.
Interface The development of trust is strongly affected by first ___________________
Properties impressions of a business system. Thus, graphic design and
layout are important appeal components. The extent to which ___________________
a firm’s Web sites and other Internet commercial offerings
and resources are made explicit by organizing content in a ___________________
manner relevant to the end user can help build trust.
___________________
Enhancing usability by making the e-commerce system
reliable, ease-to-use, and familiar in terms of the business
___________________
model, classification schemes, and terminology also enhances
trust by eliminating confusion of purpose.
Informational Information about products and services should be complete,
Content relevant and structured in a way that reduces user costs. The
trust component here reflects the need to communicate the
firm’s history, values, and commitment. Issues of security
(i.e., the completeness and the understandability of
information about financial risks and guarantees), and
privacy (i.e., the supplier’s openness with respect to its
)U
privacy policy) are both important trust building factors.
Relationship Supply chain partners have to gain enough trust to engage in
Management a commercial relationship with an e-commerce business.
Whether the trust will be honoured in the long-term will
depend upon follow-up to initial transactions (e.g., post-
purchase communication and customer service).
Communication trust reflects the facilitating effect of
frequent and personalized supplier interactions with
customers on trust maintenance.

Check Your Progress


Fill in the blanks:
1. The B2B and B2C models break down traditional
………………… between business partners.
2. The development of ……………… is strongly affected by
(c

first impressions of a business system.

Integration of Supply Chain and E-commerce


Function
E-commerce issues are topically covered to focus as aids in
supporting the lean supply chain management principles.
Lean Supply Chain Management

284
Notes Using E-commerce as a Means to Enhance Supply Chain

S
Responsiveness
___________________
Gunasekaran et al. (2008) examined the comparative differences
___________________
between three types of supply chains (i.e., lean supply chains,
___________________ agility supply chains, and responsive supply chains). As shown in
___________________ Table 24.2, they found there were differences between each of
these types of supply chains as related to the objectives, strategic
___________________

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planning focus, and organizational structure considerations.
___________________
Table 24.2: Comparison of Three Types of Supply Chains in E-commerce
___________________
Characteristics Lean Supply Agility Supply Responsive
___________________ Chain Chain Supply Chain

___________________ Objectives Seek reduced Cost minimization Seek reduced


costs, moderate less important, seek costs, increased
___________________ speed and increased speed and speed and
flexibility flexibility flexibility
Strategic Operate with Focus effort on core Focus effort on
Planning Focus fewer suppliers, competencies, global supply
utilize outsourcing, virtual management,
outsourcing, IT enterprises strategic alliances,
virtual
enterprises, global
outsourcing, and
IT
)U
Organizational Supplier Virtual enterprise, Virtual enterprise,
Structure development alliance partnerships supply chain
Considerations network system based upon core integration, and
competencies IT

Their research found an agile supply chain can be developed with


an investment in advanced IT, and that agile supply chains rely
upon the development of global suppliers/partnerships and ERP
systems. They went on to develop a framework to achieve what
others have also termed as responsive supply chain, whose
objectives are to achieve supply chain speed, flexibility, and cost
reduction. They suggested that in order to achieve a truly
responsive supply chain, a suitable information system integrating
ERP, EDI, and the Internet is important for improving
communication and ensuring a smooth flow of materials along the
(c

value chain of an organization.


They concluded that an effective implementation of IT is highly
desirable if a supply chain is to be responsive and flexible. They
also suggested that appropriate benchmarking, performance
measures, and metrics are required to encourage agility in the
supply chain. A flexible information architecture that supports
UNIT 24: Integrating E-commerce and Supply Chains

decentralize, collaborative processes is also essential. Visibility and 285


collaboration are additional keys to advances in the development of Notes

S
a responsive supply chain. ___________________
It was believed that a lean supply chain can become more agile and ___________________
more responsive to the needs of its supply chain partners. It will do
___________________
so by focusing effort and establishing a strategic goal to become a
more responsive supplier. The focus and reallocation of resources ___________________

can permit the development of a specialized supply chain that is ___________________

PE
less concerned with many of the broader lean and supply chain ___________________
goals, and more interested in achieving a responsive goal. If this is
___________________
the direction that a supply chain wishes to take, e-commerce IT
technology and concepts can help make this a reality. ___________________

___________________
E-business Software Support Lean Supply Chain Principles
___________________
Ferguson (2004) reports on the Oracle Corporation’s e-business
software suite of applications that combines supply chain
management with lean principles and globalization support
features. The e-business suite enables firms to collaborate more
effectively with partners and suppliers along a global network by
including international drop shipping (i.e., enables users to
manage the required paperwork for cross-border shipments),
)U
multi-organization drop shipping (i.e., enables users to allow
shipment transfers from one area in an organization to another
and across different geographies), and global forecasting
capabilities. The global forecasting capability allows users to look
at their international supply network and create a global supply
plan. This functionality feature helps coordinate demand planning
forecasts across the supply chain using demand feeds from
networked ERP systems.
Embedding all of these capabilities will enable lean manufacturing
to work toward NPD, supplier management, and service
management applications. Capabilities include combining
inventory allocation planning with customer demand planning to
allow users to fulfil orders for maximize profitability. Lean
(c

features that help managers reduce waste include, control features


enabling smaller lot sizes in production batching to control costs,
compliance with government mandates to control costs, RFID
systems to control auditing costs in warehousing, and integrating
other inventory and customer order tracking measures.
Lean Supply Chain Management

286
Notes Integrating Supply Chain Management in E-commerce

S
Environment
___________________
Chuang and Shaw (2005) suggested the integration of software
___________________
systems supporting e-commerce, supply chain management, and
___________________ ERP systems. This study also identified critical factors for success
___________________ with e-commerce supply chain operations, including an online
product catalogue, a secure electronic payment system, customer
___________________

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satisfaction, tight integration between ERP and SCM systems, a
___________________ reduction in costs, and online customer service.
___________________
Note the last four factors are recommended lean supply chain
___________________ management principles. Chuang and Shaw (2005) also found
___________________ several required activities performed cross-functionally within
organizations aid in the successful integration of e-commerce with
___________________
supply chains. Those activities included concurrent engineering
analysis, reliable budgeting, planning system implementation
time, reliable scheduling, supplier’s having extensive business
process knowledge, and having an accurate level of expectation
regarding supply chain performance. The aforementioned were the
most significant factors that contributed to implementation
success.
)U

Figure 24.1: Integration of Supply Chain and E-commerce Functions

Maximizing B2C Supply Chains


(c

In a literature review by Agatz et al. (2008), an examination of


supply chain practices and issues were undertaken for two types of
B2C e-commerce operations. One type was an e-commerce business
(i.e., referred to as an e-fulfilment model, because their only means
of business and selling was through the Internet), and the other
type was a version of a click-and-mortar operation (i.e., referred to
UNIT 24: Integrating E-commerce and Supply Chains

as a multi-channel model because they used a variety of channels 287


to reach customers, including the Internet, retail stores, etc.). Notes

S
From a supply chain management perspective, click-and-mortar ___________________
operations provide opportunities for serving different customer ___________________
segments, creating synergies, and exploiting economies of scale.
___________________
However, in order to successfully exploit these opportunities, firms
need to design a multi-channel distribution system to reach ___________________

broader groups and segments of customers. This design and ___________________

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development effort requires a constant trade-off between process ___________________
integration and separation across multiple channels.
___________________
That is, allocating resources between an e-commerce department
___________________
and the brick-and-mortar retail outlets requires a continuous effort
of gauging each channel’s needs. In addition, sales and operations ___________________

decisions are ever more tightly intertwined, since delivery and ___________________
after-sales service are important, key components of product
offerings. The Agatz et al. (2008) review of the literature revealed a
number of critical success factors in designing and developing
either type of business. These supply chain design factors are
presented in Table 24.3. The value of these factors to supply chain
managers is that they represent key starting places in which to
)U
focus resource allocations in order to maximize the particular type
of e-commerce B2C operation.

Table 24.3: Supply Chain Critical Success Factor Comparison:


E-commerce Business and click-and-mortar Business

Factor E-commerce business Click-and-mortar

Design of Distribution Inventory location, drop Inventory aggregation,


Network shipping shared facilities,
assortment planning

Design of Warehouse Degree of automation, Different transaction


warehouse layout, sizes
return handling

Inventory and Capacity Safety stocks, Aggregate stock levels,


Management integration with service differentiation
demand management,
inventory rationing,
(c

integration of returns,
staffing levels
Lean Supply Chain Management

288 Check Your Progress


Notes Fill in the blanks:

S
___________________ 1. Click-and-mortar operations provide opportunities for
___________________ serving different ………….. segments, creating
synergies, and exploiting economies of scale.
___________________
2. Allocating resources between an e-commerce
___________________
department and the brick-and-mortar retail outlets
___________________ requires a continuous effort of gauging each channel’s

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___________________ ……………..

___________________ Summary
___________________
One development in the evolution of e-commerce and supply chains
___________________ has been the creation of an e-supply chain. An e-supply chain is an
___________________ organizational regrouping of supply chain efforts to more closely
focus on the supply chain as a strategic force useful in achieving
organizational goals. There are several major differences between
a traditional e-commerce use of supply chains and an e-supply
chain. E-supply chains render improvements in supply chain
management in an e-commerce setting.
Firstly, the many portals (i.e., computer-integrated system with
)U
laptop computers using a wireless Internet system) required for an
e-supply chain implement a supply chain-wide information
infrastructure to disseminate relevant market information quickly
and directly. Secondly, an e-supply chain uses a strategic approach
to information (i.e., rather than using information for ordering and
transactional purposes, an e-supply chain uses information for
innovation, enhanced consumer relationships, and service
activities). E-supply chain is an evolving concept by e-commerce
firms. To a greater or lesser degree, most e-commerce firms that
view their supply chain as a competitive advantage will continue to
evolve into an e-supply chain firm.

Lesson End Activity


(c

Discuss within your group the use of e-commerce software in


supply chains.

Keywords
Electronic Data Interchange (EDI): EDI is the structured
transmission of data between organizations by electronic means.
UNIT 24: Integrating E-commerce and Supply Chains

289
Customer Relationship Management (CRM): CRM is a widely
Notes

S
implemented model for managing a company’s interactions with
customers, clients, and sales prospects. It involves using ___________________
technology to organize, automate, and synchronize business ___________________
processes—principally sales activities, but also those for
___________________
marketing, customer service, and technical support.
___________________
Radio-frequency Identification (RFID): RFID is the use of a
wireless non-contact system that uses radio-frequency ___________________

PE
electromagnetic fields to transfer data from a tag attached to an ___________________
object, for the purposes of automatic identification and tracking.
___________________

___________________
Questions for Discussion
___________________
1. What is the difference between a click-and-mortar and a brick-
___________________
and-mortar e-business?
2. How are intranets and internets different, and how do they
impact supply chains?
3. How is the bullwhip effect related to e-commerce technology
usage?
4. How does EDI and IEDI support supply chain activities?
)U
5. What are the major components of e-commerce trust, and how
can they be used to build trust?

Further Readings

Books
Wincel. J. P. (2004), Lean supply chain management: a handbook
for strategic procurement. Productivity Press.
Kerber.Bill,Dreckshage.Brian J. (2011), Lean Supply Chain
Management Essentials: A Framework for Materials Managers,
CRC Press.
Plenert. Gerhard. (2010), Reinventing Lean: Introducing Lean
(c

Management into the Supply Chain, Butterworth-Heinemann

Web Readings
http://www.industryweek.com/articles/the_goal_of_the_lean_supply
_chain_14935.aspx
www.epa.gov/oppt/library/pubs/archive/acct-archive/pubs/lean.pdf
(c
)U
PE
S
UNIT 20: Case Study

Unit 25
291
Notes

S
Case Study
___________________

___________________

___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________

PE
___________________
Case Study: B2C in the Computer Industry: Dell Computer
Online ___________________

___________________
The success story of how Michael Dell started selling computers
directly to the consumer in 1984 has become a classic introduction ___________________
to the direct business model, as it is called. Recently, the Internet
___________________
has become a logical extension of Dell's direct model.

On the revenue side, the e-business channel continues Dell’s


direct sales model with increased margins compared to a
traditional computer manufacturer with resellers. The ability to
change prices and delivery times on the fly has been used
effectively by Dell to manage demand based on component
availability. Related, the faster time to market for new product
)U
introductions is a considerable benefit when product lifecycles are
measured in months. Having direct customer contact allows Dell
to provide customization and large selection on their customer-
specific Premier web pages. It may allow customer-dependent
service, such as pre-installed software images and priority
routing, with accompanied customer-negotiated pricing.
Moreover, through continuously updated "recommended
configurations," Dell can steer customers towards products that
are in ample supply.

Similarly, by sharing dynamic inventory information with


suppliers, Dell can work both on the input and output ends of the
supply chain to match demand with supply. Customers have the
convenience of ordering anytime and anywhere, while Dell may
track all corporate-wide purchases. As such, it becomes a virtual
IT department in addition to just being a corporation's PC vendor.
(c

Finally, by tracking and managing cash flow very tightly, a


negative cash conversion cycle of a few weeks is gained: Dell gets
paid before it pays its supplier, exploiting direct payment with
postponed delivery. Increased response time is perhaps the only
negative revenue potential that Dell has compared to traditional
brick-and-mortar retailers.
Contd…
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On the cost side, the direct model eliminates intermediaries. In
Notes addition, long-term relationship with high-reliability suppliers

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___________________ such as Sony allow Dell to ship monitors directly from the
supplier to the customer, eliminating costly warehousing costs
___________________
and the delays in additional inventories. Not only are
___________________ warehousing decreased, ordering personnel costs are transferred
onto the customer!
___________________
Question:
___________________

PE
Do a SWOT analysis of Dell’s online transformation.
___________________
Source:http://www.kellogg.northwestern.edu/faculty/vanmieghem/htm/e-business-scmr-
___________________ april26.pdf

___________________

___________________

___________________
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Glossary

Glossary
293
Notes

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___________________
Attitude: A position of the body or manner of carrying oneself. ___________________
Business Value: Business value is the primary consideration to the user ___________________
of the solution.
___________________
Change Agent: A change agent is an event, organisation, material thing
___________________

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or, more usually, a person that acts as a catalyst for change.
___________________
Coaching: When referring to getting coached by a professional coach,
coaching is a teaching or training process in which an individual gets ___________________
support while learning to achieve a specific personal or professional result
___________________
or goal.
___________________
Collaboration: Collaboration is a mutually beneficial and well-defined
relationship entered into by two or more organizations to achieve results ___________________
they are more likely to achieve together than alone.

Continuous Improvement (CI): It is an incremental conceptual


approach for improving products and processes.

Co-sourcing: Co-sourcing is a business practice where a service is


performed by staff from inside an organization and also by an external
service provider.
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Critical Success Factor (CSF): Critical success factor is the term for an
element that is necessary for an organization or project to achieve its
mission.

Culture: Culture is a powerful human tool for survival, but it is a fragile


phenomenon. It is constantly changing and easily lost because it exists
only in our minds. Our written languages, governments, buildings, and
other man-made things are merely the products of culture.

Customer Relationship Management (CRM): CRM is a widely


implemented model for managing a company’s interactions with
customers, clients, and sales prospects. It involves using technology to
organize, automate, and synchronize business processes—principally
sales activities, but also those for marketing, customer service, and
technical support.

Data Management: The concept of "Data Management" arose in the


(c

1980s as technology moved from sequential processing (first cards, then


tape) to random access processing.

Decision-making: Decision-making can be regarded as the mental


processes resulting in the selection of a course of action among several
alternative scenarios.
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Defect: The lack of something necessary or desirable for completion or
Notes
perfection.

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___________________
Demand Chain: The Demand chain is that part of the value chain which
___________________ drives demand.
___________________ Die: A die is a stamp used to form or press sheet metal into parts, like the
___________________
hood of a car.

___________________
Digital Waste: Digital waste is defined as information that is not related

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to or supporting of defined goals and metrics.
___________________
E-commerce: E-commerce refers to the buying and selling of products or
___________________ services over electronic systems such as the Internet and other computer
___________________ networks.

___________________ Electronic Data Interchange (EDI): EDI is the structured


transmission of data between organizations by electronic means.
___________________
Enterprise Resource Planning (ERP): Enterprise resource planning
systems integrate internal and external management of information
across an entire organization—embracing finance/accounting,
manufacturing, sales and service, customer relationship management,
etc.

Fourth Party Logistics (4PL): The concept of a fourth party logistics


(4PL) provider is defined as an integrator that assembles the resources,
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capabilities, and technology of its own organization and other
organizations to design, build, and run comprehensive supply chain
solutions.

Fund Flow: The ability to convert purchased components into products


and then cash.

Globalization: Globalization refers to the process or processes of


international integration.

Green Supply Chain: A Green Sustainable Supply Chain can be defined


as "the process of using environmentally friendly inputs and transforming
these inputs through change agents - whose by-products can improve or
be recycled within the existing environment”.

Information flow: Information flow is the transfer of information from a


variable to a variable in a given process.
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Information System (IS): Information system is the study of


complementary networks of hardware and software that people and
organizations use to collect, filter, process, create, and distribute data.

Information Technology: Information Technology is a principle driver


of business productivity and profitability, and an enabler of
organizational process improvement and innovation.
Glossary

295
Inter-organizational Information System (IOIS): These are the
systems which are based on information technologies that cross Notes

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organization boundaries. ___________________

Inventory: The raw materials, work-in-process goods and completely ___________________


finished goods that are considered to be the portion of a business's assets
___________________
that are ready or will be ready for sale.
___________________
Inventory Management: Inventory management is the process of
efficiently overseeing the constant flow of units into and out of an existing ___________________

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inventory.
___________________
ISO: ISO is a network of the national standards institutes of 164
___________________
countries, one member per country, with a Central Secretariat in Geneva,
Switzerland, that coordinates the system. ___________________

Just-in-Time: Just-in-time (JIT) is a production strategy that strives to ___________________


improve a business return on investment by reducing in-process ___________________
inventory and associated carrying costs.

Kanban: Kanban is a scheduling system for lean and just-in-time (JIT)


production.

Key Performance Indicators (KPI): A set of quantifiable measures


that a company or industry uses to gauge or compare performance in
terms of meeting their strategic and operational goals.
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Leadership: Leadership is a process of social influence in which one
person can enlist the aid and support of others in the accomplishment of a
common task.

Lean Product Development: Lean Product Development can mean


many different things. In some companies, lean product development
simply stands for “doing more with less.”

Lean: Lean is a production practice that considers the expenditure of


resources for any goal other than the creation of value for the end
customer to be wasteful, and thus a target for elimination.

Lean Supply: Lean has evolved from just in time manufacturing to lean
manufacturing and to a lean enterprise.

Liberalization: Liberalization refers to a relaxation of previous


government restrictions, usually in areas of social or economic policy.
(c

Manufacturing: Manufacturing is the production of goods for use or sale


using labour and machines, tools, chemical and biological processing, or
formulation.

Map: A map is a visual representation of an area – a symbolic depiction


highlighting relationships between elements of that space such as objects,
regions, and themes.
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Modular Supply Chain Management: Modular supply chain
Notes
management is a method of working with suppliers to deliver products in

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___________________ a shorter time frame.
___________________ Motion: Change in the relative position of the parts of anything; action of
a machine with respect to the relative movement of its parts.
___________________

___________________
New Product Development (NPD): New product development is the
term used to describe the complete process of bringing a new product to
___________________ market.

PE
___________________ Operational Excellence: Operational Excellence is a philosophy of
___________________ leadership, teamwork and problem solving resulting in continuous
improvement throughout the organization.
___________________
Operational Plan: The operational plan coordinates the overall scope of
___________________
the implementation.
___________________
Outsourcing: Outsourcing is a practice used by different companies to
reduce costs by transferring portions of work to outside suppliers rather
than completing it internally.

Overproduction: It refers to produce in excess of need or demand.

Physical Distribution: Handling, movement, and storage of goods from


the point of origin to the point of consumption or use, via various
channels of distribution. See also business logistics.
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Process Mapping: Process mapping is a graphic aid that is used to
describe the sequence of all process activities and tasks necessary to
create and deliver a desired product.

Procurement: Procurement is the acquisition of goods or services. It is


favourable that the goods/services are appropriate and that they are
procured at the best possible cost to meet the needs of the purchaser in
terms of quality and quantity, time, and location.

Product: The product is defined as a "thing produced by labour or effort"


or the "result of an act or a process".

Purchasing: Purchasing refers to a business or organization attempting


for acquiring goods or services to accomplish the goals of the enterprise.

Quality: Quality in business, engineering and manufacturing has a


pragmatic interpretation as the non-inferiority or superiority of
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something.

Quality Assurance: Quality assurance refers to the systematic activities


implemented in a quality system so that quality requirements for a
product or service will be fulfilled.

Quality at the Source: It refers to employees maintaining quality and


doing their work right the first time.
Glossary

297
Radio Frequency Identification (RFID): RFID is the use of a wireless
non-contact system that uses radio-frequency electromagnetic fields to Notes

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transfer data from a tag attached to an object, for the purposes of ___________________
automatic identification and tracking.
___________________
Satisfaction: Satisfaction is a state of mind that occurs when the
___________________
customer feels that his expected requirement is fulfilled by what is
offered by the organisation. ___________________

Single Minute Exchange of Dies (SMED): It refers to the desire to ___________________

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reduce setup times (ideally to a minute) in changeovers during
___________________
alternations in production processes.
___________________
Six Sigma: It is a quality improvement approach that seeks to remove
causes of defects in manufacturing and service processes. Six sigma is an ___________________
effective and important management approach particularly used by ___________________
multinational companies with manufacturing bases in the Asian and
Pacific rim. ___________________

Standardization: A framework of agreements to which all relevant


parties in an industry or organization must adhere to ensure that all
processes associated with the creation of a good or performance of a
service are performed within set guidelines.

Strategic Planning: Strategic planning is an organization's process of


defining its strategy, or direction, and making decisions on allocating its
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resources to pursue this strategy.

Strategic Value: Strategic value includes synergies and special features,


usually hidden, that give the buyer a quicker, less costly and lower risk
way to achieve goals.
Strategy: A strategy is a plan of action designed to achieve a vision.
Strategy is all about gaining (or being prepared to gain) a position of
advantage over adversaries or best exploiting emerging possibilities.

Supplier: Someone whose business is to supply a particular service or


commodity.

Supply Chain Management (SCM): Supply chain management is the


management of a network of interconnected businesses involved in the
provision of product and service packages required by the end customers
in a supply chain.
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Supply Chain: A supply chain is a system of organizations, people,


technology, activities, information and resources involved in moving a
product or service from supplier to customer.

Tactical Planning: Tactical planning is the process of taking the


strategic plan and breaking it down into specific, short term actions and
plans.
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Third Party Logistics (3PL): A third party logistics provider is a firm
Notes
that provides service to its customers of outsourced logistics services for

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___________________ part, or all of their supply chain management functions.
___________________ Traits: The term ‘trait’ refers to a variety of individual attributes,
including aspects of personality, temperament, needs, motives, and
___________________
values.
___________________
Trust: Trust means being able to predict what other people will do and
___________________ what situations will occur. If we can surround ourselves with people we

PE
___________________ trust, then we can create a safe present and an even better future.

___________________ Value Stream: A value stream map (VSM) is identical to a process map
in that it shows the activities and tasks, which make up a process.
___________________
Value: Value is defined as something that the customer is willing to pay
___________________
for.
___________________
Value-added: The enhancement a company gives its product or service
before offering the product to customers.

Values: Values are internalized attitudes about what is right and wrong,
ethical and unethical, moral and immoral.

Variability: The term variability, "the state or characteristic of being


variable", describes how spread out or closely clustered a set of data is.
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Warehouse: A warehouse is a commercial building for storage of goods.

Waste: An act or instance of using or expending something carelessly,


extravagantly, or to no purpose.
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