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Lean Logistics Essentials -- What, Why, and How

Lean supply chain management (SCM) is for many companies. It is for manufacturers, wholesalers, distributors, retailers and others. 3PLs and other logistics service providers should practice it also, both for their customers who are lean practitioners and for their own businesses.

Supply chain management and lean logistics have much in common. SCM is designed to take waste out of supply chains-waste as to excess inventory, time and cost. Supply chains are meant to pull, not push, inventory through the supply chain. This is exactly what lean logistics is also about, removing waste and variation from supply chains; it is about the pull.

Lean and supply chain management have much in common as to recognizing the customer, being based on pull, requiring flow, assessing the waste of inventory, and creating value with growth, not just reducing costs. Companies with a lean supply chain, the inbound from suppliers and the outbound to stores or to customers, have identified the value of the supply chain and the waste that exists and are removing the waste.

The What. The purpose of a lean supply chain is to meet the 5R's, namely, inventory that is:

Activities that support the 5Rs add value. This applies both to the movement of product and to the movement of information. Conversely, any activities that do not add value, do not further these 5R's, are waste.

Lean is how a properly designed and operated supply chain should function. A lean supply chain process has been streamlined to reduce and eliminate waste or non-value added activities to the total supply chain flow and to the products moving within the supply chain. Waste can be measured in time, inventory and unnecessary costs. Value added activities are those that contribute to efficiently placing the final product at the customer. The supply chain and the inventory contained in the chain should flow. Any activity that stops the flow should create value. Any activity that touches inventory should create value.

Three points must be recognized. First, lean requires a strategy. It is not just a supply chain program or just a manufacturing program. It is a paradigm that requires a change throughout the organization if it is to be truly successful in removing waste and adding value. Organizations must look at everything differently.

Second, lean logistics go beyond the four walls of the warehouse or factory. It goes beyond the organizational boundaries of the company and extends to suppliers and to customers. This breadth of scope is why it requires strategy for success.

Third, there are lean principles that must be the basis of the lean supply chain. Namely:

Lean is becoming a strategy method for gaining competitive advantage and even for survival, not just for manufacturers, but also for retailers and wholesalers. Adding value and removing waste are no longer options for companies. Non-lean practicing companies face competition from foreign made goods, competition that can have significant impacts on their business and industry.

Drawing on the types of waste in manufacturing, there are seven types of waste in supply chain management:

  1. Over supply. This is supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories-and revenues and profits.
  2. Transportation. Unnecessary or slow movement of product adds no value. This can include movement of inventory between company facilities.
  3. Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.
  4. Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventories sitting at warehouses and trucks sitting at docks are examples of waiting.
  5. Movement. Any unnecessary movement of people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.
  6. Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.
  7. Over processing. This is doing more than is necessary.

These waste activities occur in different ways for both Make-To-Order and Make-To-Stock companies. Compressing cycle time and increasing inventory velocity are the preferred results for lean supply chain management.

The Why.Supply chains gain waste and non-value added activities for many reasons, both internal to the company and external. Regaining the lean supply chain may mean addressing many of the same issues that created the problems of extra and unneeded time, inventory and costs.

A supply chain, with the pull, flows back from deliveries to the store or to the customer warehouse back through to purchase orders placed on suppliers. Anything that delays or impedes this flow must be analyzed as a potential non-value added activity.

By being lean, companies are efficient at lower volumes / lower size lots, have greater flexibility; gain higher productivity, increase product mix diversity, improve rapidity of product development cycle, and have higher quality of performance.

The impact of lean logistics are significant, as the goal of lean is to eliminate waste (inventory), which will decrease work in process inventories, which in turn will decrease the process. Lean also has a vital cultural element to it that is crucial to supply chains. This is the concept of "Total Cost ". The lean practitioner does not focus on individual cost factors such as transportation or warehousing, but rather focuses on "total cost of ownership". With inventory carrying costs representing 15-40% of total logistics costs for many industries, making decisions based on total cost has dramatic implications for the logistician. Unfortunately though, many organizations never fully embrace total cost concepts, as decisions are continually made based on traditionally visible cost drivers like transportation, warehousing and purchasing / sourcing practices.

A lean supply chain can take reduce time by 10 to 40%, inventories by 10% to 30% and costs by 10% to 25%. Continuous improvements can take payback to the upper range-and beyond. This is a significant benefit to ROI and to the bottom line and cycle times, ultimately increasing supply chain velocity and flow.

The How--Basics. Getting started with lean and sustaining it with continuous improvement is not easy. Lean takes time, years, to accomplish. There is no quick fix to being lean. Often the waste has become incorporated into the daily operation company-wide and is accepted as part of doing business. In some instances, there may be too much instability in a supply chain to begin lean. The first step is then to increase stability before beginning lean.

To develop a lean supply chain, firms should:

The How--Tools. The ideal approach is to design the perfect supply chain and fit your company's operation onto it. Supply chain management is meant to reduce excess inventory in the supply chain. A supply chain should be demand driven. It is built on the pull approach of customers pulling inventory, not with manufacturing or suppliers pushing inventory. Excess inventory reflects the additional time with the supply chain operation. So the perfect supply chain would be lean with removing wasteful time and inventory.

Waste can be difficult to recognize; it is seen and accepted of how the business of the company is conducted. It is deemed as part of the ongoing "process" and is built into whatever is done.

The first requirement to becoming lean is to be able to identify waste. If you are not able to see waste, you cannot begin to remove it and become lean. Waste impacts time required, inventory investment and turns, capital tied up and not earning an adequate return. Lean is about removing waste, not just reducing it.

Being able to understanding and identify waste then requires removing that waste. The initial question then is where and how to begin implementing lean SCM.

The initial step to implementing lean is to evaluate and to measure the present supply chain. You have to know where you are to begin the long journey of continuous improvement. Value stream mapping (VSM) is a visual tool to define the current state of a company's supply chain, to identify waste and to lay the foundation in determining the future state flow of the supply chain.

Value stream mapping identifies waste in supply chains, especially with regards to time and inventory. Initial VSM efforts include defining the present value stream for product families, those that share common operations or have large volume impact, either units or dollars, or other delineator as determined.

With mapping the current supply chain state, you can then draw on the various lean tools to design the future supply chain flow. This future state should include the infrastructure to support it: training, culture, quality methods, accounting systems, and investment policies.

There are tools to becoming lean. Each have differences as to ease of use, time to implement, benefits and risk.

There is no "one" tool for lean SCM. Various tools can be used in different areas and in different sequences to add value and reduce waste.

Challenges. Supply chain management, especially developing and implementing lean, has challenges that must be acknowledged. These are in addition to the "usual" company issues with lean, such as lack of implementation know-how, resistance to change, lack of a crisis to create urgency, gaining resources and commitment, and back-sliding.

Sometimes these challenges are not addressed or appreciated with lean SCM. These include:

Conclusion. Lean supply chain management is not about 'fixing' what someone else is doing wrong. It is about identifying and eliminating waste as measured in time, inventory and cost across the complete supply chain. This requires continuous effort and improvement.

Smaller lot sizes, increased flexibility, more rapid deliveries have been ratcheted up even more as a requirement and way of doing business. Companies are assessing expanding from lean logistics---where tools of lean are used in segments of the company, such as warehousing-and becoming lean across their entire supply chain.

But the benefits can be significant from gaining market share, reducing capital tied up in inventory, increasing profitability, improving customer service, increasing capacity and taking time out of the entire company's way of doing things.

Often, there are complementary or supporting processes with lean supply chain management. The additional processes may include sourcing to manage supplier performance for critical and important items; strategic customer to gain the needed viewpoint of key customers; and Sales and Operations Planning to blend the strategic sourcing and customer with the tactical day-to-day supply chain management.