Lean Supply Chain ManagementBasics Learning Points Lean supply chain management represents a new way of thinking about supplier networks Lean principles require cooperative supplier relationships while balancing cooperation and competition Cooperation involves collaborative relationships & coordination mechanisms Supplier partnerships & strategic alliances represent a key feature of lean supply chain management a spectrum of
Theory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships “Markets” (Arm’s Length): Lower production costs, higher coordination costs Firm buys (all) inputs from outside specialized suppliers Inputs are highly standardized; no transaction-specific assets Prices serve as sole coordination mechanism “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs Firm produces required inputs in-house (in the extreme, all inputs) Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination “Lean” (Hybrid):Lowest production and coordination costs; economically most efficient choice-- new model Firm buys both customized & standardized inputs Customized inputs often involve dedicated investments Partnerships & strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, arm’s length relationships with suppliers
Lean Supply Chain Management Differs Sharply from Conventional Practices ILLUSTRATIVE CONVENTIONAL MODEL LEAN MODEL CHARACTERISTICSNumber & structure Many; vertical Fewer; clusteredProcurement personnel Large LimitedOutsourcing Cost-based StrategicNature of interactions Adversarial; zero-sum Cooperative, positive-sumRelationship focus Transaction-focused Mutually-beneficialSelection length Lowest price PerfomanceContract length Short-term Long-termPricing practices Competitive bids Target costingPrice changes Upward DownwardQuality Inspection-intensive Designed-inDelivery Large quantities Smaller quantities (JIT)Inventory buffers Large Minimized, eliminatedCommunication Limited; task-related Extensive; multi-levelInformation flow Directive; one-way Collaborative; two-wayRole in development Limited; build-to-print SubstantialProduction flexibility Low HighTechnology sharing Very limited; nonexistent ExtensiveDedicated investments Minimal-to-some SubstantialMutual commitment Very limited; nonexistent HighGovemance Market-driven Self-governingFuture expectations No Quarantee Considerable
Lean Supply Chain Management PrinciplesDerive from Basic Lean Principles Focus on the supplier network value stream Eliminate waste Synchronize flow Minimize both transaction and production costs Establish collaborative relationships while balancing cooperation and competition Ensure visibility and transparency Develop quick response capability Manage uncertainty and risk Align core competencies and complementary capabilities Foster innovation and knowledge-sharing
A Set of Mutually-Reinforcing Lean Practices Translate thesePrinciples into Action Design supplier network architecture Design of supplier network driven by strategic thrust Fewer suppliers; “clustered control” Supplier selection based on performance Develop complementary supplier capabilities Ensured process capability (certification) Targeted supplier development (SPC, Kaizen) Greater responsibilities delegated to suppliers Create flow and pull throughout supplier network Linked business processes, IT/IS infrastructure Two-way information exchange & visibility Synchronized production and delivery (JIT) Establish cooperative relationships & effective Joint problem-solving; mutual assistance coordination mechanisms Partnerships & strategic alliances Open and timely communications Increased interdependence & “shared destiny” Maximize flexibility & responsiveness Seamless information flow Flexible contracting Rapid response capability Optimize product development through early supplier Integrate suppliers early into design & development IPTs integration Collaborative design; architectural innovation Open communications and information sharing Target costing; design-to-cost Integrate knowledge and foster innovation Knowledge-sharing; technology transfer Aligned technology roadmaps This lecture highlights key enablers & practices by focusing on: Synchronized production and delivery Partnerships and strategic alliances Early supplier integration into design and development IPTs
Synchronized Production and DeliveryThroughout the Supplier Network is a CentralLean Concept Integrated supplier lead times and delivery schedules Flows from suppliers pulled by customer demand (using takt time, load leveling, line balancing, single piece flow) Minimized inventory through all tiers of the supply chain On-time supplier delivery to point of use Minimal source or incoming inspection Effective two-way communication links to coordinate production & delivery schedules Striving for zero quality defects essential to success Greater efficiency and profitability throughout the supplier network
Aerospace Firms Have Faced an UphillChallenge in Synchronizing Flow with Suppliers PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS Defense/Commercial More than 75% of sales to defer or commercial markets Defense (25) Commercial (9) (Year: 1993; N= Number of responding business units/c
Supplier Certification has been an ImportantEarly Enabler of Achieving SynchronizedFlow in Aerospace PERCENT OF DIRECT PRODUCTION SUPPLIERS OF A TYPICAL AEROSPACE ENTERPRISE THAT ARE CERTIFIED (1991, 1993, 1995) Industry (48) Airframe (13) Electronics (20) Engines and Other (15) (N=Number of respondents answering this question for all three years)
Closer Communication Links with Suppliers Paved the Way forSynchronizing Flow TYPES OF INFORMATION PROVIDED TO RESPONDING BUSINESS UNITS BY THEIR MOST IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993 1989 (38,14,32,15,16,14) 1993 (55,65,69,55,41,54) (N=78:Total number of responding business units)
Concrete Example: Engine Parts CastingSupplier Worked with Customer Company toAchieve Synchronized Flow
Mastering & Integrating Lean Basics withPrime was Necessary for AchievingSynchronized Flow 6S -- Visual factory Total productive maintenance Quality control Process certification Mistake proofing Setup reduction Standard work Kaizen
Supplier Partnerships & Strategic AlliancesBring Important Mutual Benefits Reduced transaction costs (cost of information gathering, negotiation, contracting, billing) Improved resource planning & investment decisions Greater production predictability & efficiency Improved deployment of complementary capabilities Greater knowledge integration and R&D effectiveness Incentives for increased innovation (through cost- sharing, risk-sharing, knowledge-sharing) Increased mutual commitment to improving joint long- term competitive performance
Major Lean Lessons for Aerospace Industry Supply chain design linked to corporate strategic thrust Fewer first-tier suppliers Greater supplier share of product content Strategic supplier partnerships with selected suppliers Trust-based relationships; long-term mutual commitment Close communications; knowledge-sharing Multiple functional interfaces Early supplier integration into design Early and major supplier role in design Up-front design-process integration Leveraging supplier technology base for innovative solutions Self-enforcing agreements for continuous improvement Target costing Sharing of cost savings
Aerospace: Early Supplier Involvement inIPTs Impacts Producibility and Cost EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT GDEVELOPMENT PRO RAMS: IMPACTS ON PRODUCIBILITY AND COST Firms facing producibility and cost problems % of responding firms in Group A(4/20) % of responding firms in Group B(7/9) WITH: With early supplier involvement in IPTs WITHOUT: Without early supplier involvement in IPTs EARLY: Before Milestone Group A (With) Group B (Without) Numerator(s): N=4,7: Number of affirmative responses to this question (i.e., faced producibility and cost problem) in each group (i.e., Group A and Group B) Denominator(s):R=20,9: Total number of respondents to this question in each group Sample Size: S=29: Maximum possible number of respondents to any question in the survey (Group A:20 ; Group B:9) SOURCE: Lean Aerospace Initiative Product Development Survey (1994)
Early Supplier Involvement: Key SuccessFactors FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY SUCCESS FACTORS Percent of responding business units in each group EARLY SUPPLIER INVOLVEMENT IN IPTS Established co-located IPTsincluding suppliers Used commercial parts Numerator(s): N=11,8 (Group A) ;1,2 ( Group B): Number of affirmative responses to this question in each group, by category of practice/implementation ( i.e., co-located IPTs, use of commercial parts) Denominator(s): R=20,9: Total number of respondents to this question in each group Sample Size:S=29: Maximum possible mumber of respondents to any question in the survey (Group A:20 ; Group B:9) NOTES Early: Before Milestone 1 With / Without: Early supplier involvement in IPTs (before Milestone 1)
Evolution of Early Supplier Integrationin the Aerospace Industry “Old” Approach “Current” “Emerging” Lean LeanArm’s length; interfaces totally Collaborative; but constrained by Collaborative and seamlesslydefined and controlled prior workshare arrangements integrated, enabling architectural innovation ARCHITECTURAL INNOVATION: Major modification of how components in a system/product are linked together •Significant improvement in system/product architecture through changes in form/structure, functional interfaces or system configuration •Knowledge integration over the supplier network (value stream perspective ; prime-key suppliers-subtiers; tapping supplier technology base)
Summary: Architectural Innovation YieldsSignificant Benefits Case studies Case Study A Case Study B (SMART MUNITION (ENGINE NOZZLE) Key Characteristics SYSTEM) MAKE-BUY; DESIGN Early supplier integration New joint design and RESPONSIBILITY into IPT engineering approach Teaming with key based on make-buy suppliers to optimize Prime retains design control design SUPPLIER ROLE Collaborative Part of joint design team Suppliers given design Component design responsibility and responsibility configuration control Joint configuration control SUPPLIER Competitive pre-sourcing Supplier down select after SELECTION; Commercial pricing joint preliminary design AGREEMENT Long-term commitments period Long-term warranty CPFF Not-to- compete agreements Collocated teams PROCESS; Collocated teams Concurrent engineering RELATIONSHIPS Open communications; Knowledge-sharing knowledge-sharing Electronic linkages Worksharing Government involvement Electronic linkages Gov’t part of team MAJOR DRIVERS Cost Performance Guidance control unit ARCHITECTURAL redesigned from modular to Riveting, rather than welding, INNOVATION Integrated system resulted in redesign of architecture interfaces and how components are linked together MAJOR BENEFITS Over 60% reduction in unit cost Five-fold reduction in unit cost Cycle time: 64 mo. Down Cycle time: reduction ont as important to 48 mo. (down by 25%) Substantial risk reduction Win-win for value stream Win-win for value stream
Summary of Key Practices EnablingArchitectural Innovation Pre-sourcing; long-term commitment Early supplier integration into IPTs; IPPD; co-location; joint design & configuration control Leveraging technology base of suppliers (key suppliers; tooling suppliers; subtiers) Work share arrangements optimizing supplier core competencies Retaining flexibility in defining system configuration Open communications; informal links; knowledge-sharing Target costing; design to cost Supplier-capability-enhancing investments Incentive mechanisms (not to compete agreements; long-term warranty); maintaining trade secrets Government part of the team; relief from military standards and specifications
Electronic Integration of Supplier Network: Early ResultsChallenge: Electronic integration of supplier networks for technicaldata exchange as well as for synchronization of business processes Important success factors include: Clear business vision & strategy Early stakeholder participation (e.g., top management support; internal process owners; suppliers ; joint configuration control) Migration/integration of specific functionality benefits of legacy systems into evolving new IT/IS infrastructure Great care and thought in scaling-up experimental IT/IS projects into fully- functional operational systems Electronic integration of suppliers requires a process of positive reinforcement -- greater mutual information exchange helps build increased trust, which in turn enables a closer collaborative relationship and longer-term strategic partnership Close communication links with overseas suppliers pose a serious security risk and complex policy challenge
Fostering Innovation across Supplier Networks EnsuresContinuous Delivery of Value to all Stakeholders Research: Case studies on F-22 Raptor avionics subsystems -- what incentives, practices & tools foster innovation across suppliers? Major finding: Innovation by suppliers is hampered by many factors. This seriously undermines weapon system affordability. Excessive performance and testing requirements that do not add value One-way communication flows; concern for secrecy; “keyhole” visibility by suppliers into product system architecture Little incentive to invest in process improvements due to program uncertainty; limited internal supplier resources; often narrow business case Major subcontractors switching rather than developing subtier suppliers Yearly contract renegotiations wasteful & impede longer-term solutions Recommendations: Use multiyear incentive contracting & sharing of cost savings Improve communications with suppliers; share technology roadmaps Make shared investments in selected opportunity areas to reduce costs Provide government funding for technology transfer to subtiers
Quick Review of Aerospace Progress Aerospace industry has made important strides in supplier integration, but this is only the beginning of the road Production: Supplier certification and long-term supplier partnerships -- process control & parts synchronization Development: Early supplier integration into product development critical Strategic supply chain design is a meta core competency Implementation efforts have required new approaches Re-examination of basic assumptions (e.g., make-buy) New roles and responsibilities between primes and suppliers Communication and trust fundamental to implementation Aerospace community faces new challenges and opportunities Imperative to take “value stream” view of supplier networks Focus on delivering best lifecycle value to customer Need to evolve information-technology-mediated new organizational structures for managing extended enterprises in a globalized market environment
Lean Supplier Networks Offer SignificantCompetitive Advantages Exhibit superior performance system-wide -- greater efficiency, lower cycle time, higher quality Not an accident of history but result of a dynamic evolutionary process Not culture dependent but are transportable worldwide Can be built through a proactive, well-defined, process of change in supply chain management
Key Questions for Aerospace Enterprise Management Does the size, structure and composition of the supplier network reflect your enterprise’s strategic vision? Has your enterprise created partnerships and strategic alliances with key suppliers to strengthen its long-term competitive advantage? Are major suppliers as well as lower-tier suppliers integrated into your enterprise’s product, process and business development efforts? Has your enterprise established mutually-beneficial arrangements with suppliers to ensure flexibility and responsiveness to unforeseen external shifts? Does your enterprise have in place formal processes and metrics for achieving continuous improvement throughout the extended enterprise?
Emergence of Strategic Supplier Partnerships has been aCentral Feature of Aerospace Industry’s Transformationin the 1990s* Survey: 85% of firms established production-focused supplier partnerships involving long-term agreements (LTAs) with key suppliers Major reasons: Reduce costs 97% Minimize future price uncertainty 85% Mutual performance improvement 85% Chief characteristics: One or more products, 3+ years 97% Multi-year design/build 49% On-going (evergreen) 24%
Case Study Results Show Significant PerformanceImprovements by Building Integrated Supplier Networksthrough Supplier Partnerships Case study: Major producer of complex airframe structures REDUCED CYCLE TIME REDUCED CYCLE TIME REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) (Main Product (Main Product Order-to-Shipment, months) Order-to-Shipment, months)
Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks KEY PRACTICES BEFORE AFTERReduced and streamlined supplier base Number of direct production suppliers 542 162Improved procurement dfficiency Procurement personnel as % of total employment (%) 4.9 1.9 Subcontracting cycle time (days) 13 7Improved supplier quality and schedule Procurement (dollars) from certified suppliers (%) 0 75Supplier on-time performance (% of all shipments) 76.4* 83.0Established strategic supplier partnerships “Best value” subcontracts as % all awards 0 95 50.0 100.0BEFORE: 1989 AFTER: 1997 *Refers to 1991
Focus on Early Supplier Integration Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier integration into design and development process Nearly 80% of life cycle cost committed in early design phase Design and development of complex aerospace systems calls on core capabilities of numerous suppliers, providing as much as 60%-70% of end product value Supplier network represents an enormous beehive of distributed technological knowledge & source of cost savings What are better ways of leveraging this capability for more efficient product development in aerospace sector? Worldwide auto industry experience provides critical lessons
Lean Difference: Auto Industry Lean Difference: Significantly lower development cost and shorter cycle timeAverage engineeringhours per new car(millions of hours)Average developmentcycle time per new car (months) Prototype lead time (months to first engineering protoype) Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 1985-89.
Lean difference starts with significant supplier role in design and development Lean Difference: Auto Industry Supplier Role in Design Assembler Designed Supplier Designed Supplier Proprietary Parts Detail-Controlled Parts “Black Box” Parts Percent of total cost of parts purchased from suppliers Source: Clark, Ellison, Fujimoto and Hyun (1995
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