- 1. Prepared by, Bharath M 1MS09IM401
2. Lean Supply Chain ManagementBasics Learning Points Lean
supply chain management represents a newway of thinking about
supplier networks Lean principles require cooperative
supplierrelationships while balancing cooperation andcompetition
Cooperation involves collaborative relationships &
coordinationmechanisms Supplier partnerships & strategic
alliancesrepresent a key feature of lean supply chainmanagement a
spectrum of 3. Theory: Lean Represents a Hybrid Approach to
Organizing Interfirm Relationships Markets (Arms 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, lowercoordination costs Firm produces required inputs
in-house (in the extreme, all inputs) Inputs are highly customized,
involve high transaction costs or dedicated investments, andrequire
close coordination Lean (Hybrid):Lowest production and coordination
costs; economicallymost efficient choice-- new model Firm buys both
customized & standardized inputs Customized inputs often
involve dedicated investments Partnerships & strategic
alliances provide collaborative advantageDominant conventional
approach: Vertical integration, arms length relationships with
suppliers 4. Lean Supply Chain Management DiffersSharply from
Conventional Practices ILLUSTRATIVE CONVENTIONAL MODELLEAN MODEL
CHARACTERISTICSNumber & structure Many; verticalFewer;
clusteredProcurement personnelLarge
LimitedOutsourcingCost-basedStrategicNature of interactions
Adversarial; zero-sum Cooperative, positive-sumRelationship focus
Transaction-focused Mutually-beneficialSelection length Lowest
pricePerfomanceContract lengthShort-termLong-termPricing
practicesCompetitive bidsTarget costingPrice
changesUpwardDownwardQualityInspection-intensiveDesigned-inDelivery
Large quantitiesSmaller quantities (JIT)Inventory buffersLarge
Minimized, eliminatedCommunicationLimited; task-related Extensive;
multi-levelInformation flow Directive; one-wayCollaborative;
two-wayRole in developmentLimited; build-to-print
SubstantialProduction flexibility Low HighTechnology sharing Very
limited; nonexistent ExtensiveDedicated investmentsMinimal-to-some
SubstantialMutual commitmentVery limited; nonexistent
HighGovemanceMarket-driven Self-governingFuture expectationsNo
QuaranteeConsiderable 5. 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 balancingcooperation 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
thesePrinciples into ActionDesign supplier network architecture
Design of supplier network driven by strategic thrust Fewer
suppliers; clustered control Supplier selection based on
performanceDevelop complementary supplier capabilities Ensured
process capability (certification) Targeted supplier development
(SPC, Kaizen) Greater responsibilities delegated to suppliersCreate
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 assistancecoordination mechanisms Partnerships &
strategic alliances Open and timely communications Increased
interdependence & shared destinyMaximize flexibility &
responsiveness Seamless information flow Flexible contracting Rapid
response capabilityOptimize product development through early
supplier Integrate suppliers early into design & development
IPTsintegration Collaborative design; architectural innovation Open
communications and information sharing Target costing;
design-to-costIntegrate knowledge and foster innovation
Knowledge-sharing; technology transfer Aligned technology
roadmapsThis 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 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 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 Morethan 75% of sales to defer
or commercial marketsDefense (25) Commercial (9) (Year: 1993; N=
Number of responding business units/c 9. Supplier Certification has
been an ImportantEarly Enabler of Achieving SynchronizedFlow in
AerospacePERCENT 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
forSynchronizing Flow TYPES OF INFORMATION PROVIDED TO RESPONDING
BUSINESS UNITS BY THEIR MOSTIMPORTANT 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 withPrime was Necessary for AchievingSynchronized Flow 6S --
Visual factory Total productive maintenance Quality control Process
certification Mistake proofing Setup reduction Standard work Kaizen
13. Supplier Partnerships & Strategic AlliancesEnsure
Substantial PerformanceImprovements Long-term relationships and
mutual commitments Intensive and regular sharing of technical and
costinformation 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
fatediscouraging opportunistic behavior Self-enforcing contracting
driving continuousimprovement 14. 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 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
Development234 Weeks232 Weeks 183 Weeks 184 Weeks180 WeeksLength
of160 Weeks*ProductDevelopmentCycleK-Car (81) DakotaLH Cars (93)
Neon (94) JA; Cirrus/LH Cars (98E)Minivan (84) Truck (87) Stratus
(95)Shadow (87) *EstimatedSource: Dyer (1998) 17. Aerospace: Early
Supplier Involvement inIPTs Impacts Producibility and CostEARLY
SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT
GDEVELOPMENT PRO RAMS: IMPACTS ON PRODUCIBILITY AND COSTFirms
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 IPTsWITHOUT: Without early supplier
involvement in IPTsEARLY: Before MilestoneGroup 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 SuccessFactors FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN
U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY SUCCESS
FACTORSPercent of responding business units in each groupEARLY
SUPPLIER INVOLVEMENT IN IPTSEstablished co-located IPTsincluding
suppliersUsed 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)NOTESEarly: Before Milestone
1With / Without: Early supplier involvement in IPTs (before
Milestone 1) 19. Evolution of Early Supplier Integrationin the
Aerospace Industry Old ApproachCurrent Emerging Lean LeanArms
length; interfaces totallyCollaborative; but constrained by
Collaborative and seamlesslydefined and controlledprior workshare
arrangementsintegrated, enabling architecturalinnovation
ARCHITECTURAL INNOVATION: Major modification of how components in a
system/product are linked togetherSignificant improvement in
system/product architecture through changes in form/structure,
functionalinterfaces or system configurationKnowledge integration
over the supplier network (value stream perspective ; prime-key
suppliers-subtiers; tapping supplier technology base) 20. Summary:
Architectural Innovation YieldsSignificant Benefits Case
studiesCase Study A Case Study B (SMART MUNITION (ENGINE NOZZLE)Key
Characteristics SYSTEM)MAKE-BUY; DESIGN Early supplier integration
New joint design and RESPONSIBILITYinto 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 controlSUPPLIER Competitive pre-sourcing Supplier
down select after SELECTION; Commercial pricing joint preliminary
designAGREEMENT Long-term commitmentsperiod Long-term warranty CPFF
Not-to- competeagreements Collocated teamsPROCESS; Collocated teams
Concurrent engineering RELATIONSHIPS Open communications;
Knowledge-sharing knowledge-sharing Electronic linkages Worksharing
Government involvement Electronic linkages Govt part of team MAJOR
DRIVERS CostPerformance Guidance control
unitARCHITECTURALredesigned from modular to Riveting, rather than
welding,INNOVATION Integrated systemresulted in redesign of
architecture interfaces and how componentsare linked togetherMAJOR
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 21. Summary of
Key Practices EnablingArchitectural Innovation Pre-sourcing;
long-term commitment Early supplier integration into IPTs; IPPD;
co-location; jointdesign & configuration control Leveraging
technology base of suppliers (key suppliers; toolingsuppliers;
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-termwarranty); maintaining trade secrets Government part of
the team; relief from military standards andspecifications 22.
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 positivereinforcement -- greater mutual
information exchange helps build increasedtrust, which in turn
enables a closer collaborative relationship and
longer-termstrategic partnership Close communication links with
overseas suppliers pose aserious security risk and complex policy
challenge 23. 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
seriouslyundermines weapon system affordability. Excessive
performance and testing requirements that do not add value One-way
communication flows; concern for secrecy; keyhole visibility by
suppliersinto 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
supplierintegration, 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 dynamicevolutionary
process Not culture dependent but are transportableworldwide 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
networkreflect your enterprises strategic vision? Has your
enterprise created partnerships and strategic alliances withkey
suppliers to strengthen its long-term competitive advantage? Are
major suppliers as well as lower-tier suppliers integrated intoyour
enterprises product, process and business development efforts? Has
your enterprise established mutually-beneficial arrangementswith
suppliers to ensure flexibility and responsiveness to
unforeseenexternal shifts? Does your enterprise have in place
formal processes and metrics forachieving continuous improvement
throughout the extendedenterprise? 27. Emergence of Strategic
Supplier Partnerships has been aCentral Feature of Aerospace
Industrys Transformationin the 1990s* Survey: 85% of firms
established production-focused supplierpartnerships involving
long-term agreements (LTAs) with keysuppliers Major reasons: Reduce
costs 97% Minimize future price uncertainty85% 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
PartnershipsCase study: Major producer of complex airframe
structures REDUCED CYCLE TIMEREDUCED CYCLE TIMEREDUCED CYCLE
TIME(Main Product Order-to-Shipment, months) (Main Product (Main
Product Order-to-Shipment, months)Order-to-Shipment, months) 29.
Supplier Partnerships Driven by Strategic Corporate Thrust to
Develop Integrated Supplier NetworksKEY PRACTICES
BEFOREAFTERReduced and streamlined supplier base Number of direct
production suppliers542 162Improved procurement dfficiency
Procurement personnel as % of total employment (%)4.91.9
Subcontracting cycle time (days) 137Improved 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 50.0100.0BEFORE: 1989 AFTER:
1997*Refers to 1991 30. Focus on Early Supplier IntegrationHistoric
opportunity for achieving BEST LIFECYCLE VALUE inaerospace weapon
system acquisition through early supplierintegration 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 corecapabilities of numerous suppliers, providing
as much as 60%-70% of endproduct value Supplier network represents
an enormous beehive of distributedtechnological knowledge &
source of cost savings What are better ways of leveraging this
capability for more efficientproduct development in aerospace
sector? Worldwide auto industry experience provides critical
lessons 31. 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. 32. Lean
difference starts with significant supplier role in design and
developmentLean Difference: Auto IndustrySupplier Role in
DesignAssembler Designed Supplier Designed Supplier Proprietary
PartsDetail-Controlled PartsBlack Box Parts Percent of total cost
of parts purchased from suppliersSource: Clark, Ellison, Fujimoto
and Hyun (1995
