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Lean Supply Chain Management Principles and Practices

Lean Supply Chain Management Principles and Practices. Lean Supply Chain Management Basics Learning Points. Lean supply chain management represents a new way of thinking about supplier networks

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Lean Supply Chain Management Principles and Practices

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  1. Lean Supply Chain Management Principles and Practices

  2. Lean Supply Chain Management Basics 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

  3. 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

  4. Lean Supply Chain Management Differs Sharply from Conventional Practices

  5. Lean Supply Chain Management Principles Derive 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

  6. A Set of Mutually-Reinforcing Lean Practices Translate these Principles into Action 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

  7. Synchronized Production and Delivery Throughout the Supplier Network is a Central Lean 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

  8. 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 Commercial (9) Defense (25) (Year: 1993; N= Number of responding business units/c

  9. Supplier Certification has been an Important Early Enabler of Achieving Synchronized Flow 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)

  10. Closer Communication Links with Suppliers Paved the Way for Synchronizing 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)

  11. Concrete Example: Engine Parts CastingSupplier Worked with Customer Company toAchieve Synchronized Flow

  12. Mastering & Integrating Lean Basics with Prime was Necessary for Achieving Synchronized Flow • 6S -- Visual factory • Total productive maintenance • Quality control • Process certification • Mistake proofing • Setup reduction • Standard work • Kaizen

  13. Supplier Partnerships & Strategic Alliances Ensure Substantial Performance Improvements • Long-term relationships and mutual commitments • Intensive and regular sharing of technical and cost information • Mutual assistance and joint problem-solving • Customized (relationship-specific) investments • Risk-sharing, cost-sharing, benefit-sharing arrangements • Trust-building practices -- “one team” mindset; collocation of technical staff; “open kimono” • Progressively increasing mutual dependence -- shared fate discouraging opportunistic behavior • Self-enforcing contracting driving continuous improvement

  14. Supplier Partnerships & Strategic Alliances Bring 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

  15. 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

  16. Chrysler: Supplier PartnershipsSpeed Development 234 Weeks 232 Weeks 184 Weeks 183 Weeks 180 Weeks Length of Product Development Cycle 160 Weeks* JA; Cirrus/ Stratus (95) K-Car (81) Minivan (84) Shadow (87) Neon (94) Dakota Truck (87) LH Cars (93) LH Cars (98E) Source: Dyer (1998) *Estimated

  17. Aerospace: Early Supplier Involvement in IPTs Impacts Producibility and Cost EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACEPRODUCTGDEVELOPMENT PRORAMS: 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)

  18. Early Supplier Involvement: Key Success Factors FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY SUCCESS FACTORS EARLY SUPPLIER INVOLVEMENT IN IPTS Established co-located IPTsincluding suppliers Used commercial parts Percent of responding business units in each group 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)

  19. Evolution of Early Supplier Integrationin the Aerospace Industry “Old” Approach “Current” Lean “Emerging” Lean 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) Collaborative; but constrained by prior workshare arrangements Collaborative and seamlessly integrated, enabling architectural innovation Arm’s length; interfaces totally defined and controlled

  20. Summary: Architectural Innovation YieldsSignificant Benefits Case studies

  21. Summary of Key Practices Enabling Architectural 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) • Workshare 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

  22. Electronic Integration of Supplier Network: Early Results Challenge: Electronic integration of supplier networks for technical data 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

  23. Fostering Innovation across Supplier Networks Ensures Continuous 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

  24. 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

  25. 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

  26. 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?

  27. 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%

  28. Case Study Results Show Significant PerformanceImprovements by Building Integrated Supplier Networksthrough Supplier Partnerships Case study: Major producer of complex airframe structures REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) REDUCED CYCLE TIME (Main Product Order-to-Shipment, months)

  29. Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks BEFORE: 1989 AFTER: 1997 *Refers to 1991

  30. Focus on Early Supplier Integration • 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 Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier integration into design and development process

  31. Lean Difference: Auto Industry Lean Difference: Significantly lower development cost and shorter cycle time Average engineering hours per new car (millions of hours) Average development cycle 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.

  32. Lean Difference: Auto Industry Supplier Role in Design Lean difference starts with significant supplier role in design and development Assembler Designed Detail-Controlled Parts Supplier Designed “Black Box” Parts Supplier Proprietary Parts Percent of total cost of parts purchased from suppliers Source: Clark, Ellison, Fujimoto and Hyun (1995

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