(Mt) – MGT 322 SEU The Growing Competition in The Business World

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‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية‬ ‫اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 3 Deadline: 30/04/2022 @ 23:59 Course Name: Logistics Management Student’s Name: Course Code:MGT322 Student’s ID Number: Semester: II CRN: Academic Year: 1443/1444 H For Instructor’s Use only Instructor’s Name: Students’ Grade: Level of Marks: Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted. Logistics Management ASSIGNMENT -3 Submission Date by students: Before the end of Week- 13th Place of Submission: Students Grade Centre Weight: 10 Marks Learning Outcome: 1. Illustrate the concepts of logistic system operations used in logistic systems, time-based management, and lean thinking. 2. Interpret the use advanced theory and methods to identify inefficiencies in supply chains 3. Demonstrate ability to work with others effectively as a team member in logistic management projects, related to case studies or new themes Assignment Workload: This assignment is an individual assignment. Critical Thinking The purpose of this assignment is to identify and apply Logistics and Supply Chain Management concepts/tools to suggest logistics performance priorities. To this purpose, you should review chapter 7 of textbook as well as secondary available information on internet. The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, which comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. The system is a major precursor of the more generic “Lean Manufacturing”. Originally called “just-in-time production”, it builds on the approach created by the founder of Toyota. Using this concept of Lean Thinking and JIT you should answer the following questions by taking any Saudi Manufacturing company. Question: 1. Why Companies adopted Lean Thinking and JIT model? (3 Marks) 2. Discuss major types of Waste, companies must keep in mind during production. (3 Marks) 3. Assess the reasons for using lean thinking. What are the benefits from Suppliers to end users? (3 Marks) 4. References (1 Marks) The Answer must follow the outline points below: • Lean Thinking and JIT Concept • Their Main functions • Any local example • Reasons with suitable Examples • Reference • Every Answer should be 400 to 500 range of words in length. Answer 1: Answer 2: Answer 3: CHAPTER 7 Just-in-time and the agile supply chain Objectives The intended objectives of this chapter are to: ● explain how just-in-time can be used to avoid the build-up of waste within and between supply chain processes; ● introduce the concept of the agile supply chain as a broad-based approach to developing responsiveness advantages; ● explore the challenges of coping with volatile demand situations; ● explain how capabilities can be developed and specifically targeted at thriving in conditions of market turbulence. By the end of this chapter you should be able to: ● understand how lean thinking can be used to improve performance of the supply chain in meeting end-customer demand by cutting out waste; ● recognise enemies of flow in the supply chain; ● understand the distinctions between lean and agile strategies, and how the two can work together; ● identify the type of market conditions under which agile strategies are appropriate, and how they can be operationalised. In Chapter 9 we consider another key aspect of the agile supply chain – the virtual organisation. Introduction In Chapter 5, we reviewed the importance of time in supply chain thinking. Time is one of the ‘hard objectives’ (section 1.3.1), and some supply chains compete on time by delivering products to the end-customer faster than competition. Here, the focus is on reducing the time taken for each process. But time can also be used to alter the trade-offs between competitive priorities – for example, costs do not have to rise proportionately as lead times are reduced (section 5.1.1). This can be achieved by squeezing non-value-adding activities (delays, transport, storage and inspection) from the supply chain by time-based process mapping (section 5.3). Such activities are referred to generically as waste, the Japanese word for which is 222 Chapter 7 • Just-in-time and the agile supply chain muda (the concept of waste was introduced in Chapter 5 and is explored further in section 7.1.2). Such thinking has been developed into a philosophy and accompanying tools and techniques under the banner of ‘just-in-time’ (JIT). The aim of JIT (Harrison, 1992) is: To meet demand instantaneously with perfect quality and no waste. All three targets (demand – quality – waste) are ideals which can never be fully achieved. But we can get closer to them over time through continuous improvement. The elimination of waste has been promoted under the banner of ‘lean thinking’ (Womack and Jones, 2003), who advise: To hell with your competitors; compete against perfection by identifying all activities that are muda and eliminating them. This is an absolute rather than a relative standard which can provide the essential North Star for any organization. JIT and lean thinking share the same roots, and originate from competitive strategies developed by the Japanese. Toyota Motor Company is held up as the role model and, although the Toyota brand has been severely damaged in recent years by widespread quality problems (section 1.3.1), this focal firm’s operational excellence has had a major influence on logistics thinking today. A common view is that lean thinking works best where demand is relatively stable – and hence predictable – and where variety is low. But in situations where demand is volatile and customer requirement for variety is high, the elimination of waste in itself becomes a lower priority than the need to respond rapidly to a turbulent marketplace. So the second part of this chapter reviews developments under the banner of the ‘agile supply chain’. In Chapter 6, we reviewed quick response and other time-based approaches to developing the capabilities needed to support the speed advantage. While such logistics capabilities are important enablers to lean and responsive supply chains, the ‘agile supply chain’ takes the argument a significant step further. Marketplaces of the 21st century are often characterised by proliferation of products and services, shorter product lifecycles and increased rates of product innovation. Simply responding quickly and at the right time are not enough to meet the needs of such marketplaces. The mission of modern logistics is to ensure that it is the right product – to meet exact end customer needs – that gets delivered in the right place at the right time. Such a mission means that the end-customer comes first. This chapter proposes the agile supply chain as an approach that elevates speed capabilities in a given supply chain to much higher levels than would be possible using the tools and techniques discussed so far. Key issues This chapter addresses two key issues: 1 Just-in-time and lean thinking: the impact of just-in-time on supply chain thinking. Cutting out waste in business processes. Simple, paperless systems v central control. Use and misuse in planning and control. 2 The agile supply chain: the dimensions of the agile supply chain, and the environments that favour agility. Agile practices: addressing the challenges of market turbulence, rapid response logistics and managing low volume products. Just-in-time and lean thinking 223 7.1 Just-in-time and lean thinking Key issue: What are the implications of just-in-time and lean thinking for logistics? How can just-in-time principles be applied to other forms of material control such as material requirements planning? Just-in-time is actually a broad philosophy of management that seeks to eliminate waste and improve quality in all business processes. JIT is put into practice by means of a set of tools and techniques that provide the cutting edge in the ‘war on waste’. In this chapter, we focus on the application of JIT to logistics. This partial view of JIT has been called little JIT (Chase et al., 2005): there is far more to this wide-ranging approach to management than we present here (see, for example, Harrison, 1992). Nevertheless, little JIT has enormous implications for logistics, and has spawned several logistics versions of JIT concepts. The partial view of JIT is an approach to material control based on the view that a process should operate only when a customer signals a need for more parts from that process. When a process is operated in the JIT way, goods are produced and delivered just-in-time to be sold. This principle cascades upstream through the supply network, with subassemblies produced and delivered just-in-time to be assembled, parts fabricated and delivered just-in-time to be built into subassemblies, and materials bought and delivered just-in-time to be made into fabricated parts. Throughout the supply network, the trigger to start work is governed by demand from the customer – the next process (Schonberger, 1991). A supply network can be conceived of as a chain of customers, with each link coordinated with its neighbours by JIT signals. The whole network is triggered by demand from the end-customer. Only the end-customer is free to place demand whenever he or she wants; after that the system takes over. The above description of the flow of goods in a supply chain is characteristic of a pull system. Parts are pulled through the chain in response to demand from the end-customer. This contrasts with a push system, in which products are made whenever resources (people, material and machines) become available in response to a central plan or schedule. The two systems of controlling materials can be distinguished as follows: ● Pull scheduling: a system of controlling materials whereby the user signals to the maker or provider that more material is needed. Material is sent only in response to such a signal. ● Push scheduling: a system of controlling materials whereby makers and providers make or send material in response to a pre-set schedule, regardless of whether the next process needs them at the time. The push approach is a common way for processes to be managed, and often seems a sensible option. If some of the people in a factory or an office are idle, it seems a good idea to give them work to do. The assumption is that those products can be sold at some point in the future. A similar assumption is that building up a stock of finished goods will quickly help to satisfy the customer. This argument seems particularly attractive where manufacturing lead times are long, if quality is a problem or if machines often break down. It is better and safer to 224 Chapter 7 • Just-in-time and the agile supply chain make product, just in case there’s a problem in the future. Unfortunately, this argument has severe limitations. Push scheduling and its associated inventories do not always help companies to be more responsive. All too often, the very products the organisation wants to sell are unavailable, while there is too much stock of products that are not selling. And building up stock certainly does not help to make more productive use of spare capacity. Instead it can easily lead to excess costs, and hide opportunities to improve processes. 7.1.1 The just-in-time system Companies achieve the ability to produce and deliver just-in-time to satisfy actual demand because they develop a production system that is capable of working in this way. Such a system can be envisaged as a number of ‘factors’ that interact with each other, as shown in Figure 7.1. This shows JIT capability as founded on layers of factors that interact together to form a system that is designed for flow. Excellence in each of the six factors determines the effectiveness with which JIT capability can be achieved: that is, how easy it is to get to the top of the pyramid. Level 1 Just-in-time 1 Level 2 Minimum delay 2 4 3 Level 3 Minimum inventory Minimum defects Minimum down time 6 5 Simplicity and visibility Figure 7.1 The pyramid of key factors that underpin JIT Factor 1 The top of the pyramid is full capability for just-in-time supply. This is the level at which a focal firm can produce and deliver according to the demand that is placed on it. The relationships operating within and between levels 2 and 3 form the system that ultimately underpins the achievement of JIT. They are complex, and in some cases there is a long time delay between taking actions and seeing the effects. Factor 2 The two factors delay and inventory interact with each other in a system of positive amplification; that is, they go up together and they go down together. This Just-in-time and lean thinking 225 interrelationship results in either a virtuous cycle, where things keep getting better, or a vicious cycle, where they keep getting worse. For example, extra delay in a process will result in extra inventory being held to compensate for the delay. Adding more inventory causes further delays as products take longer to flow through the process, which leads to the need for more inventory. Conversely if delays are reduced then less inventory is needed, which results in fewer delays, meaning that inventory can be further reduced. Making sure this relationship operates as a virtuous cycle of reducing delay and inventory instead of a vicious one where they increase depends on the underpinning factors in level 3. Factor 3 Defects lead to delays, either through requiring rework or necessitating increased production to compensate for scrap. The likelihood of defects leads to safety stocks being held as a buffer against potential problems. This thinking amplifies quality problems by increasing the time between a defect occurring and its discovery. Not only is the cause harder to identify, but more production will be affected. The attitude that holding inventory can mitigate the effect of quality problems is fundamentally flawed. It stands in opposition to the only successful approach to defect minimisation, where problems are quickly identified, their causes are traced, and permanent solutions are devised and applied. Factor 4 Machine downtime relates to a number of issues: ● unplanned downtime – that is, breakdowns; ● planned maintenance; ● changeover times. Downtime, and particularly the risk of unplanned downtime, is a key cause of the need for safety stocks in a process. Other JIT tools and techniques can help to minimise the problems here. For example, total productive maintenance (TPM; Nakajima, 1989) seeks to answer the question ‘What can everyone do to help prevent breakdowns?’ Regular planned preventive maintenance, closer cooperation between production and maintenance personnel, and equipment sourcing for ease of maintenance are some of the actions that can be taken in response. In other words, increasing planned maintenance costs often results in reduced overall costs of machine downtime. Minimising changeover time is a JIT tool that can be used not only to reduce lost production time but also improve production flexibility. Inflexible facilities delay the rapid production of customer orders. Factor 5 Where the flow through a process is easily seen, people in the process will have a better understanding of their colleagues’ work and how they themselves affect others. A simple process results from having first focused operations around a family of compatible products. Layout is then organised to bring together all the 226 Chapter 7 • Just-in-time and the agile supply chain people and equipment needed to undertake the process. These are arranged so that there is a logical flow between the process steps. Arranging the process so that the stations for undertaking the steps are close together not only helps to reduce inventory but also will itself be made easier when inventory is low. A simple process will be more visible, allowing it to be better maintained. Not only should there be fewer things to go wrong, they will be more obvious when they do, and will be easier to fix. This attribute helps to minimise both machine downtime and product defects. Maintenance of the process is underpinned by housekeeping and cleanliness. This starts with designing processes and facilities to create order. There is a place for everything, and everything has its place. Orderliness depends on a thinking workforce that has accepted ownership and responsibility for organising the work place. Attention to detail in terms of ‘respect for human’ issues is an essential part of JIT philosophy (Harrison and Storey, 2000). Factor 6 The levels of work in progress and other types of inventory have a significant impact upon the visibility of a process. It becomes increasingly difficult to see the flow of a process as inventory increases. This may be literally true on a shop floor or in a warehouse, where piles and stacks of goods can isolate workers. The same is true in offices when the process flow becomes lost in assorted piles of work on people’s desks. In order to highlight the limitations of push production we next consider the case of how a focal firm took a rather traditional approach to responding to new demands being placed on the production process. CASE STUDY 7.1 Smog Co. The Smog Co. production system This is the case of Smog Co., a small supplier of well-engineered components. Smog produces a range of products grouped into families. Production of one of the highervolume product families has been organised into a flow process made up of four steps, which follow one after the other in sequence. Changeover from one product to another is relatively simple, but takes around ten minutes per machine. To minimise delays caused by changeovers, products tend to be made in batches. These batches move from one step to the next, where they queue on a first in, first out basis to be worked on, after which they move to the next step. This process is shown in Figure 7.2. Step 1 Step 2 Figure 7.2 The Smog production process Step 3 Step 4 Just-in-time and lean thinking 227 Key measures of the performance of this process are the utilisation of people and of machines. The objective is to keep utilisation of both as high as possible. In this situation, if people or machines are idle – and material is available – they are used to make something. Naturally it wouldn’t make sense to make anything. Instead the production manager has a feel for what is needed, and uses a forecast from the sales department to make an early start on products that it is considered will be required in the near future. Fred Hollis, the Smog production manager, felt pleased with performance as he looked out across the factory. He was pleased because his machines and people were busy, there were plenty of finished goods on hand, which the sales team could use to supply customers, and there was stock to call upon if product demand increased. Everything seemed to be under control. Changes to customer requirements The motivation to change from the current system has been low in the past, as the process at Smog Co. is a reliable one, which has worked well for the company. The ‘big three’ customers, who take three-quarters of sales, tend to order the same things in similar quantities one week in advance of delivery. With a production lead time of three weeks, Smog Co. uses a forecast to schedule production and make sure that finished goods stocks will be available to meet predicted demand. Consistent demand means that forecasts are often close to real demand, so stockouts are rare. In fact the only time this occurred was an incident a couple of years ago, when a key machine went down and a spare part took a long time to source. Current inventory levels now include safety stock to provide cover against a similar problem in the future. When the company found that certain finished goods were selling slowly, the sales team was particularly good at finding a way to move them. Sometimes prices were cut; at other times sales used special promotions. If production was too high, or the forecast was a bit optimistic, then there were ways of selling surplus stock, and the sales team seemed to enjoy the challenge. Recently, however, this well-understood position has begun to change. The main customers have started to use a number of new strategies to compete with each other. First one and now a second of them has announced that it will be reducing the call-off time for its products from one week to two working days. At the same time they are all looking for a 5 per cent cost reduction, and are demanding quality improvements. A ‘traditional’ reaction to customer demands for better service The combination of demands for better services caused Smog management some concern. The obvious response to the changes in ordering patterns was to increase stock levels to cater for unexpected variations in demand. This approach had worked before, when it was used to justify the safety stocks that covered production problems. It seemed worth trying again, so stocks were increased. Things went well over the first few months, during which time delivery performance remained good, while the customers went ahead with their plan to reduce the order lead time. Keeping up with these orders provided the production manager with a few headaches. Preventing stockouts led to an increase in the number of batches being expedited through the factory. This disrupted the production plan, increased the number of machine changeovers and lowered productivity. As a result, overtime increased in order to maintain output. 228 Chapter 7 • Just-in-time and the agile supply chain The higher level of inventory meant that quality problems were harder to detect. In one case a new operator missed a drilling operation. By the time the first customer discovered the error, nearly two weeks’ worth of production had to be recalled and reworked. The higher inventory levels were also taking up more space. Fred Hollis had submitted a requisition to the finance director to pay for more storage racking. The extra racks were necessary because existing ones were full, and parts stored on the floor were suffering occasional damage in an increasingly cramped factory. Some parts were recently returned by a customer, who felt that damaged packaging indicated damaged products. Naturally, Fred was concerned when his request for more storage space was turned down owing to spending reductions imposed in response to price cuts imposed by customers. Reflecting on what had happened at Smog, the increase in stock levels had badly affected competitiveness. Smog Co. was experiencing the consequences of trying to forecast demand and using the forecast to determine what to make. Their ‘make to stock’ approach was responsible for: ● ● ● removing the company’s ability to be responsive to changes in either quantities or product mix; increasing costs and making quality problems worse; burying underlying production problems under inventory, and thereby preventing efforts to uncover and resolve them. In conclusion, while the company had been motivated to change by its customers, the direction it took seemed to have caused many problems. (Source: After an original by Paul Chapman) Questions 1 List the actions that Smog Co. took to respond to the new demands being placed on it by customers. Group your responses under the headings of stock levels, level of expediting and storage space. Briefly describe the effects that these actions had on production performance. 2 Use the ‘pyramid of key factors that underpin JIT’ to describe the factors that caused these actions to affect the company’s ability to respond to the demands being placed on it by customers. 7.1.2 The seven wastes In Chapter 5 we saw how any activity that does not add value is a form of waste. By mapping processes through the supply chain, it is possible to sort value-adding and non-value-adding activities (transport, store, inspect and delay). JIT goes further by adding three more types of ‘waste’ to make seven in all. They are as follows: ● The waste of overproduction: making or delivering too much, too early or ‘just in case’. Instead, the aim should be to make ‘just-in-time’ – neither too early nor too late. Overproduction creates unevenness or lumpiness of material flow, which is bad for quality and productivity. It is often the biggest source of waste. Just-in-time and lean thinking 229 ● The waste of waiting: takes place whenever time is not being used effectively. It shows up as waiting by operators, by parts or by customers. ● The waste of transporting: moving parts around from one process to the next adds no value. Double handling, conveyors and movements by fork-lift truck are all examples of this waste. Placing processes as close as possible to each other not only minimises the waste of transport but also improves communications between them. ● The waste of inappropriate processing: using a large, central process that is shared between several lines (e.g. a heat treatment plant) is an example of this type of waste. Another example is a process that is incapable of meeting quality standards demanded by the customer – so it cannot help making defects. ● The waste of unnecessary inventory: inventory is a sign that flow has been disrupted, and that there are inherent problems in the process. Inventory not only hides problems, it also increases lead times and increases space requirements. ● The waste of unnecessary motions: if operators have to bend, stretch or extend themselves unduly, then these are unnecessary motions. Other examples are walking between processes, taking a stores requisition for signature, and decanting parts from one container into another. ● The waste of defects: producing defects costs time and money. The longer a defect remains undetected (e.g. if it gets into the hands of the end-customer), the more cost is added. Defects are counteracted by the concepts of ‘quality at source’ and ‘prevention, not detection’. JIT invites us to analyse business processes systematically to establish the baseline of value-adding processes and identify the incidence of these seven wastes. The aim is to get parts and data to flow through business processes evenly and synchronously. The more detailed analysis prompted by the concept of seven wastes encourages a greater analysis and understanding of processes and their relationships than is made by supply chain mapping. This analysis should first start with key business processes such as the supply pipeline. 7.1.3 JIT and material requirements planning As we saw in section 6.1, material requirements planning (MRP) was conceived in order to answer the questions how many? and when? in ordering parts that are directly used to manufacture end products. MRP is a logical and systematic way of planning materials. It links downstream demand with manufacture and with upstream supply. It can handle detailed parts requirements, even for products that are made infrequently and in low volumes. On the other hand, MRP is based on a centrally controlled, bureaucratic approach to material planning. Although it is based on a pull scheduling logic, it instructs processes to make more parts whether or not the customer (the next process) is capable of accepting them. Typically, MRP adopts push scheduling characteristics. It remains insensitive to day-to-day issues at shop floor level, and continues to assume that its plans are being carried out to the letter. In other words, MRP is good at planning but weak at control. 230 Chapter 7 • Just-in-time and the agile supply chain Meanwhile, JIT pull scheduling is good at handling relatively stable demand for parts that are made regularly. It is sensitive to problems at shop floor level, and is designed not to flood the next process with parts that it cannot work on. On the other hand, JIT pull scheduling is not good at predicting requirements for the future, especially for parts and products that are in irregular or sporadic demand. JIT is good at control but weak at planning. There are clear opportunities for putting together the strengths of both systems, so that the weaknesses of one are covered by the strengths of the other. For example, even in systems with great variety, many of the parts are common. So JIT can be used to control those parts, while a much downsized MRP plans what is left. JIT has become associated with the Japanese way of cutting out waste, doing the simple things well and getting better every day. The foundations of Toyota Production System (TPS) are JIT and jidoka. Jidoka means humanising the manmachine interface so that it is the man who runs the machine, not vice versa. MRP has become associated with the Western way of automating our way out of trouble, and by investing in bigger and better systems that competitors cannot afford to match. Let us next review how these two different approaches apply in motor manufacture by comparing Ford (which has developed its own version of TPS called Ford Production System, FPS) and Toyota. CASE STUDY 7.2 Ford and Toyota A car assembly plant is built around a simple sequence of tasks that starts in the press shop and ends as a car rolls off the final assembly line. Figure 7.3 shows these basic tasks in summary form: Body in white assembly Paint Painted body store Trim and final assembly Pressed parts Parts supply Press shop Parts ordering Figure 7.3 Basic tasks in a car assembly plant While these basic tasks are the same for both Ford and Toyota, the way they are managed by the two firms is quite different. We compare policies and practices in relation to small cars such as the Ford Fiesta and the Toyota Yaris: ● Ford is driven by a long-term strategy in Europe. It has invested heavily in fixed assets, and does not seek an early return on them. Currently, it is struggling with a capacity that was designed for a 15 per cent market share when current loading is Just-in-time and lean thinking 231 ● only 9 per cent. It seeks to make a step change in the production process through high capital investment. Its investment policy has therefore been technically oriented, seeking the ‘best’ technical solution for each task. For example, Ford’s body shop is almost fully automated with robots that are flexible across different parts. When production is changed between one part and another, the robots must be re-programmed. This places high emphasis on technical support for the software, and makes Ford dependent on given equipment suppiers. The layout is designed around the robots and for fixed volumes. Toyota has expanded cautiously in Europe. Its investment policy has been step-bystep, and it has sought to make early returns. Key to the Toyota Production System (TPS) are process and quality disciplines through JIT and jidoka. Toyota’s philosophy is more people-oriented: shop floor people are heavily involved in improvement activities as well as in production work. Toyota’s body shop has maybe one third the number of press shop robots as Ford, and tends to use simple multi-welders at low initial cost. It is relatively easy to swap suppliers. Tooling must be changed when production is changed between one batch and another, but people are trained to go for fast set-ups and to improve the process. The layout is designed around people and volume flexibility. Having learned much from its stake in Mazda, Ford launched its own version of justin-time called Ford Production System (FPS) a few years ago. Ford has done much to reduce product complexity. This is basically measured by the number of different body styles that are possible. Both Ford and Toyota have three basic body styles, but Ford limits variation to left-hand/right-hand drive and sunroof/no sunroof options. Since these are multiplicative, 12 body shells are possible. Toyota in addition has variations to allow for different engine types and air conditioner types, together with spoiler/no spoiler versions. In total, this means that Toyota has over 70 body shell variations. When multiplied again by the number of painted body colours (say ten for both firms), Toyota ends up with hundreds more painted body options than Ford. This contributes to a surprising difference when it comes to building the car: ● ● Ford treats the painted body as a commodity. Once they have been painted, bodies are kept in the painted body store, which is a buffer between the body shop and final assembly. The Ford system calculates the number of each painted body type that should be in the store to meet forecast final assembly requirements. Trouble is that the store can be full of the wrong bodies, which means that it is impossible to build the current orders. Up to this point in the sequence, the emphasis is on numbers, not on the end-customer. Bodies are not given a vehicle identification number (VIN) – which allocates the body to a particular customer order – until the painted body is removed from the store and dropped onto the trim and final assembly line. Toyota treats the body shell as a customer’s car from the start. The VIN is added as the first process at body in white assembly, when panels are welded together to make the shell. In turn, this drives discipline and focus in the paint shop, and helps to improve first time through (FTT) in the paint process. The sequence of bodies through trim and final processes is thereby more predictable, allowing more precise material control downstream. The parts ordering process for auto assembly is particularly challenging, because some 2,000 individual parts are needed for each vehicle. Most of these parts are added 232 Chapter 7 • Just-in-time and the agile supply chain at the trim and final assembly stage. TPS already has a number of advantages when it comes to this task. First, the more predictable sequence of painted bodies into trim and final means that there are few last-minute schedule changes. Second, TPS sets stable lead times that are fixed at certain times for each part. Third, supplier lead times are allowed for. Ford on the other hand leaves schedules uncommitted until parts are collected. The Ford call-off quantities are set on the day of collection, and don’t allow for supplier lead times. Figures 1.8 and 1.9 compare what happens from a supplier point of view – there are huge differences between scheduled and actual demand. Question 1 What changes would you propose to both TPS and to FPS in order to cope with customer demands for increasing product variety and more rapid model changes? 7.1.4 Lean thinking Lean thinking (Krafcik and MacDuffie, 1989) developed as a term used to contrast the just-in-time production methods used by Japanese automotive manufacturers with the mass production methods used by most Western manufacturers. Suffering shortages and lack of resources, Japanese car manufacturers responded by developing production processes that operated with minimum waste. Gradually the principle of minimising waste spread from the shopfloor to all manufacturing areas, and from manufacturing to new product development and supply chain management. The term lean thinking refers to the elimination of waste in all aspects of a business. Lean thinking is a cyclical route to seeking perfection by eliminating waste (the Japanese word is muda) and thereby enriching value from the customer perspective. The end-customer should not pay for the cost, time and quality penalties of wasteful processes in the supply network. Four principles are involved in achieving the fifth, seeking perfection (see Figure 7.4): ● specifying value; ● identifying the value stream; ● making value flow; ● pull scheduling. Specify value Value is specified from the customer perspective. In Chapter 3 we discussed value from the shareholder perspective. From the end-customer perspective, value is added along the supply network as raw materials from primary manufacture are progressively converted into finished product bought by the end-customer, such as the aluminium ore being converted into one of the constituents of a can of coke (see Chapter 1, section 1.1). From a marketing and sales perspective Just-in-time and lean thinking 233 1 Specify value muda muda 4 Let customer pull 5 Perfection muda 2 Identify value stream muda 3 Create product flow Figure 7.4 Lean thinking principles (Source: After Womack and Jones, 2003) the can of coke should be ‘always within reach of your thirst’. That is an attempt to define value from the end-customer perspective. Another is Porter’s concept of the value chain (Porter, 1985), which sees two types of activity that are of value to the customer. The first is the primary value activities of transforming raw materials into finished products, then distributing, marketing and servicing them. The second is support activities, such as designing the products, and the manufacturing and distribution processes needed to underpin primary activities. Identify the value stream Following on from the concept of value, the next principle is to identify the whole sequence of processes along the supply network. The principles of timebased mapping are discussed in sections 5.4 and 5.5 of Chapter 5. Make value flow In essence, this means applying the pyramid of key factors that we outlined in section 7.1. Minimising delays, inventories, defects and downtime supports the flow of value in the supply network. Simplicity and visibility are the foundations to achieving these key factors. Pull scheduling Enforce the rules in section 6.1: make only in response to a signal from the customer (the next process) that more is needed. This implies that demand information is made available across the supply chain. Where possible, supply from manufacturing, not from stock. Where possible, use customer orders not forecasts. While some of these concepts may be distant from current practice, lean thinking shares the philosophy of ‘big JIT’: seek perfection. This is the fifth principle, and is achieved by gradually getting better at everything we do, squeezing waste out at every step. We continue this section by considering the sources of waste, 234 Chapter 7 • Just-in-time and the agile supply chain and the way in which lean thinking can be applied to enriching value in business processes. 7.1.5 Application of lean thinking to business processes Working back from the customer, a focal firm should consider the following processes: ● order to replenishment; ● order to production; ● product development. In each of these processes, the application of lean thinking involves examining the process, quantifying waste within it, identifying root causes of the waste, and developing and implementing of solutions. Examining the process involves mapping it using a variety of techniques such as flow charting, depending on the nature of the process. Performance is quantified by taking measures of the different kinds of waste. For a first attempt, using the time-based measures of lead time and value-adding time often reveal the main incidences of waste. Having identified waste, lean thinking applies the problem solving tools associated with total quality control (TQC) to identify root causes and develop solutions. The application of lean thinking is the means by which many companies bring their processes under control. Following a systematic approach to tackling waste, they seek to minimise defects, to minimise downtime and to maximise simplicity and visibility. Order to replenishment The order replenishment cycle concerns the time taken to replenish what has been sold. Lean thinking seeks to manage the order replenishment cycle by replacing only what has been sold within rapid replenishment lead times. These points are taken up in the next two sections of this chapter, on vendor-managed inventory and on quick response. Order to production The order to production cycle is the series of steps that are followed to respond to an order, organise and undertake production, and deliver the product to the customer. This ‘make to order’ process may be contained within a company or can extend down the supply chain. Product development Product development delivers new products or services that can be sold. This process is essential if an organisation is to have future success. Lean thinking can be applied to this process to make it more effective by supporting the Just-in-time and lean thinking 235 development of products with desirable attributes and features, and achieving this on time. It can also make the process more efficient and ensure that products are developed to cost. 7.1.6 Role of lean practices Lean thinking is associated with a number of operational practices that help to deliver the aim of waste minimisation. Two of the most significant are: ● small-batch production; ● rapid changeover. These two practices are closely associated with each other, but are considered separately here to aid clarity. The target in small-batch production is a batch size of 1. The traditional logic behind large batches is to take advantage of reduced costs through economies of scale. This approach is often flawed, as batch size decisions generally consider only production costs, and overlook the costs of inventory and lack of flexibility that is caused by large batches. Lack of flexibility is a major contributor to poor quality of service to the end customer. The rationale behind small batches is that they can reduce total cost across a supply chain, such as removing the waste of overproduction. They help to deliver products that the end customer wants within the expected lead time (D-time – Chapter 5, section 5.2). The contribution of rapid changeover was graphically shown by the changeover of press tools used to make car body panels. These cumbersome pieces of equipment can weigh up to 10 tonnes, and historically took up to eight hours to change within the large presses. The consequence of these long changeover times was that component production runs were long, often going on for days before the press tools were changed so that another component could be made. Extensive work, again pioneered by Toyota, was undertaken on press design, tooling design and component design over a number of years to help reduce changeover times. The effect has been to reduce changeover times for tools for large pressed parts to around five minutes. Consequently, practices that reduce changeover times are often known as single minute exchange of dies (SMED; Shingo, 1988). The ability to undertake rapid changeovers allows a batch of each different body panel to be produced each day in line with current demand instead of having to produce to forecast. The lesson from the automotive industry is that even very large pieces of equipment can be developed to allow rapid changeovers. This effort may take a number of years, and is reliant upon developments in machinery and product design. The effect is to provide the flexibility to make possible small-batch production that responds to customer needs. Small-batch production associated with rapid changeover allows productivity to be maintained by taking advantage of economies of scope. Instead of economies of scale, where quantities of the same thing are made, economies of scope lower costs when quantities of similar things that use the same production resources are made. 236 Chapter 7 • Just-in-time and the agile supply chain 7.2 The concept of agility The ‘agile supply chain’ is an essentially practical approach to organising logistics capabilities around end-customer demand. It is about moving from supply chains that are structured around a focal company and its operating guidelines (for example, ‘Ford Production System’) towards supply chains that are focused on endcustomers. Enabling the agile supply chain requires many significant changes: as an example, consider the position of Li and Fung, the largest export trader in Hong Kong. The organisation coordinates manufacturers in the Far East to supply major customers such as the Limited, mostly in the US. Chairman Victor Fung says that one of the key features of his approach is to organise for the customer, not on country units that end up competing against each other. So customer-focused divisions are the building blocks of our organisation, and we keep them small and entrepreneurial. They do anywhere from $20 million to $50 million of business. Each is run by a lead entrepreneur. (Magretta, 1998) And capabilities of the supply networks are ‘all about flexibility, response time, small production runs, small minimum order quantities, and the ability to shift direction as the trends move’. While some of these ideas reflect JIT approaches, the key is to organise logistics from the customer order back – or ‘outside in’ – as opposed to pushing product-service offerings into the market – or ‘inside out’. Important requirements for that change in mindset include: ● A relentless focus on drivers of customer value in all logistics processes. ● Developing capabilities for responsiveness and flexibility in advance. ● Using those capabilities to align supply chains operations in a dynamic manner. Mason-Jones et al. (1999) developed a helpful comparison between agile and lean supply, shown in Table 7.1. We have extended this table into our comparison of further characteristics of lean and agile supply, shown in Table 7.2. There is no reason why there should be an ‘either-or’ approach to logistics strategy. Thus, many supply chains can adopt a ‘lean’ capability up to a given downstream process, and then adopt an ‘agile’ capability thereafter. This enables high productivity, low cost processes to start with, followed by responsive processes to allow high levels of customisation thereafter. Such a strategic choice has been referred to as ‘leagility’ because it combines the benefits of both supply capabilities. The concept of leagility is close to that of postponement, which we discuss later in this chapter. The comparisons in Tables 7.1 and 7.2 help us to place ‘agile’ in relation to ‘lean’, and thus to complement our earlier concept of logistics performance objectives. In Table 1.1 (page 27 in Chapter 1), we considered the issue of competing through logistics. The relative importance of the four ways of competing through logistics (quality, time, cost and dependability) can be assessed with the help of order winners and order qualifiers (see section 1.3.4). Order qualifiers comprise the factors that are needed to gain entry into a given market. To actually win orders The concept of agility 237 Table 7.1 Comparison of lean supply with agile supply: the distinguishing attributes Distinguishing attributes Lean supply Agile supply Typical products Commodities Fashion goods Marketplace demand Predictable Volatile Product variety Low High Product lifecycle Long Short Customer drivers Cost Availability Profit margin Low High Dominant costs Physical costs Marketability costs Stockout penalties Long-term contractual Immediate and volatile Purchasing policy Buy materials Assign capacity Information enrichment Highly desirable Obligatory Forecasting mechanism Algorithmic Consultative Table 7.2 Further characteristics of lean and agile supply Characteristic Lean Agile Logistics focus Eliminate waste Customers and markets Partnerships Long term, stable Fluid clusters Key measures Output measures like productivity and cost Measure capabilities, and focus on customer satisfaction Process focus Work standardisation, conformance to standards Focus on operator self-management to maximise autonomy Logistics planning Stable, fixed periods Instantaneous response demands that performance of the focal firm on one or more factors must be superior, so that products win orders in the marketplace because the performance of competitors on these factors is not as good. These are called order winners. The specification of order qualifiers and order winners helps in the development of logistics strategy. Order winners and qualifiers can change over time (Johansson et al., 1993), for example as a result of changes in the product lifecycle. Thus it is essential to re-visit the specification of order winners and qualifiers regularly to ensure that they reflect current market characteristics (Aitken et al., 2005). The agile mindset aims to align supply capabilities with end-customer demand, so we can view demand characteristics as placing the challenges that supply capabilities must meet. We explored demand characteristics in section 2.3: next we consider how these can be matched by supply capabilities. 238 Chapter 7 • Just-in-time and the agile supply chain Supply capabilities Allocation of finished goods to given customer orders is a familiar way of responding quickly to demand – for example, selling cars from a dealer forecourt. But this approach to supply means that inventories of finished goods must first be built up. The problem is that they must be built up in anticipation of unknown demand. If stocks pushed by a manufacturer onto its dealer network are too high, they will have to be discounted. If they are too low, sales are lost to competitors. Delaying the exact specification of the car until the customer order is known, and then delivering it within an acceptable D-time, is called form postponement. The concept of ‘postponement’ is now increasingly widely employed by organisations in a range of industries (van Hoek, 2001). Postponement is widely used to improve responsiveness, and is defined (Skipworth and Harrison, 2004) as: The delay, until end-customer orders are received, of the final part of the transformation processes, through which the number of skus proliferates, and for which only a short time period is available. poned transformation processes may be manufacturing processes, assembly processes, configuration processes, packaging or labeling processes. For example, the aim of the ‘three-day car’ project is to complete paint, trim, final assembly and delivery of a car to dealer within three days (Holweg and Miemczyck, 2003). Many less ambitious form postponement applications delay packaging, labelling, adding documentation or product peripherals until an order is received. If the decision is limited to peripherals such as type of power supply to a printer, or to whether the number of cans in a pack is 6 or 12, we call this logistical postponement. The appearance of wide customer choice can be created while keeping source, make and deliver processes as simple as possible. This is the thinking behind the principle of design for logistics. Creating an agile supply chain requires more than revising logistics and distribution management: it goes all the way to product design. A favourite trick of computer manufacturers such as Dell is to make common electronic boards, and to package them in many ways to create different options. While parts of a board are redundant on many of the finished products, this is more than offset by savings in inbound and manufacturing logistics. Individual companies in an agile supply chain need to align their operations by redesigning the flow of goods, information and management practices. The aim is the virtual organisation, where groups of supply chain partners agree common terms for working together. There are several possible stages in the evolution of a virtual organisation. Traditional sourcing and contract logistics imply an interface between trading partners that is limited to buy–sell transactions. JIT sourcing is an example of a broader interface with sharing of demand data and alignment of logistics processes. Integrated contract manufacturing – in which a third party controls most of the make processes – attempts the integration of demand with supply in the way suggested by Figure 1.6. ‘Fourth party logistics’ is close to this model in that a third party takes over organisation and coordination of the entire flow of goods, information and management of the entire logistics operation including material planning and control. These supply capabilities which can be deployed to support the agile supply chain are summarised in Figure 7.5. The concept of agility Postponement Comprehensive Limited Packaging 239 Sourcing Assembly/test Design for logistics Limited Components Extensive Modules Virtual organisation Extensive Limited 3PL Subassemblies Contract manufacturing 4PL Figure 7.5 Supply capabilities supporting the agile supply chain We explore these approaches further in section 7.2. Meanwhile, Case study 7.3 shows how Xerox developed a ‘next generation’ logistics strategy by injecting fresh thinking into the position outlined in Case study 1.2. CASE STUDY 7.3 Segmenting the supply chain at Xerox (Graham Sweet) By the middle of the 1990s Xerox had integrated its European manufacturing and logistics processes and organisations, developing an end-to-end approach to its supply chain. This had delivered massive financials benefits to the company both in terms of inventory reduction and operating cost. At the time it was to launch a new range of products and to extend its market coverage, and it was recognised that the predominantly ‘one size fits all’ approach to customer fulfillment was not competitive. The company embarked on a programme of asking customers about their requirements for overall fulfillment and understanding supply chain competitive performance. Based on market/customer expectations the company segmented its supply chain into four different streams across the total source–plan–make–deliver process. The segmentation of the market/customer expectations is shown in Figure 7.6 and the supply chain response in Figure 7.7. Volume represents the number of orders/shipments; variety reflects the combination of product variation and day-to-day demand variability. The organisation and the processes of the supply chain needed to operate differently since the priorities of the market and customers were different. Different performance measures and targets were established for each segment and cultures and incentives put in place to drive the change. In all cases the company operated with outsourced partners as part of the supply chain operations but the balance between outsourced and in-house varied depending on the skills and flexibility required. As ‘adding 240 Chapter 7 • Just-in-time and the agile supply chain Volume High • Customer buys through retail store • Price competitive • High on shelf availability • Store needs quick replenishment • New technology/products • Customers’ buying habits and demand uncertain • Customers will want to configure and receive within 5 days • Customers from secondary markets • Standardisation at low cost • Bulk deals • Customers require customised service • High value added integrated into business • Lead times less important than dependability Low Low High Variety Figure 7.6 Segmenting the market Volume High • European echelon • Integrated order, delivery, cash collection • Far East build: minor postponement in Europe • Neutral build • Configure to customer order at volume • Agile supply chain throughout • Lean manufacturing • Efficient/functional supply chain • Maximise asset recovery/recycle • Build to order products • Additional value added services for installation • Unique hardware/software configurations Low Low Variety High Figure 7.7 Supply chain response customer uniqueness as late as possible’ was a key element in the process design, collaboration with the product design teams and suppliers became essential to engineer supply chain-friendly products. In particular in the high volume/high variety segment the customer order is directed to the integration centre at the end of the line, which has less than five days to finalise the product and deliver to the end-consumer. This could only be achieved by engineering the product to a modular design with final configuration from stock of ‘neutral’ modules and adding customer-unique options. This capability required flexibility and agility in all areas of the supply chain and investment in the people and skills of demand and supply planning developing key competencies to ensure capacity and inventory to meet the different variations in demand. At the time the segmentation approach allowed the company to fulfil the majority of its European customer orders from a European supply, with the exception of the high volume/low variety segment which supplied customers through distributors and retailers. This approach not only improved measures of customer responsiveness but also improved inventory turns, reducing the need for stocks below the European level and The concept of agility 241 overall supply chain costs. Inherent in the design was not only the flexibility in operation but the ability to create and restructure the segments depending on changes to market and customer needs. This configuration of the Xerox supply chain segmentation had a life of approximately four years. Question 1 Map the Xerox segments and market response (Figures 7.6 and 7.7) onto demand characteristics in Figure 2.11 and supply capabilities in Figure 7.5 as far as you can, making assumptions where necessary. How closely does the ‘actual’ match ‘theoretical’? 7.2.1 Classifying operating environments Figure 7.8 offers a classification of operating environments based on demand characteristics shown in Figure 2.9 and supply capabilities shown in Figure 7.5. This classification places agility in the context of alternative logistics strategies. First, A, B and C products are positioned. This is based on a Pareto analysis of an organisation’s product range (for an example, see Figure 2.1). Typically, class ‘A’ products comprise 80 per cent of sales value taken on just 20 per cent of orders. They tend to be the more standardised, have lower forecast errors and lower volume variation. Lean logistics methods are therefore often appropriate. Class ‘B’ products on the other hand are often subject to higher forecast errors, and have higher volume variations. They are often better served by agile approaches. E E H L H L L H D times Forecast accuracy Volume uncertainty E C Product B Product Innovation/ projects Lean Mass customisation ECR/QR A Product L L L t en m ne po st Po r fo n s ig ic es st D ogi l al on rtu ti Vi nisa ga or Figure 7.8 Classifying operating environments H = high L = low, limited E = extensive 242 Chapter 7 • Just-in-time and the agile supply chain 7.2.2 Preconditions for successful agile practice In addition to the above supply capabilities within the supply chain, there is another set of factors that need to be in place for the agile principles and practices described in section 7.2.4 to pay off or work at all. These are crossfunctional alignment and enterprise level focus on the contribution of logistics management and strategy. If revenue-generating functions in particular do not adopt at least a base-level understanding of agile principles, all efforts within logistics may be wasted. And if there is not an enterprise-wide focus on the value potential of logistics, agile efforts are not going to be recognised for what they are worth – and might not provide a compelling enough case for possible investment in them to be made. We propose an enterprise-level reality check and a cost of complexity sanity check before investing in agile capabilities. We also argue that complexity should be controlled, and that agility will not take away the need for forecasting accuracy. Enterprise-level reality check Starting with the enterprise-wide context, most senior managers know that turning to logistics and the supply chain is a ‘good call’ when times get tough. Logistics probably gets most mentioned in earnings reports when cost cutting is a response offered to poor performance. In spite of its potential to contribute to cost saving programmes, the value of logistics should not be seen as a first port of call when the bottom line needs to be improved. Agility is centred around the notion of winning in the marketplace based upon service and responsiveness. While such a strategy can be aimed at doing more for less, it may actually – and more importantly – be doing less to earn more. Top line improvement can flow from outperforming competitors through responsiveness to customer needs. Delivery speed and reliability can be such important sources of productivity to customers that we can earn more of their business. An enterprise-level recognition of the contribution of logistics is a precondition for any business case on agile practices. Cost of complexity sanity check The value potential of logistics can only be capitalised on if other functions comply with another key precondition: lowering the cost of complexity where differentiation has no competitive value. As much as agility principles are based on the notion that differentiation is good and ‘doable’, it does not mean that revenue groups should be given a ‘carte blanche’ to create proliferating service, product assortments and promotions. There are limits to how much value that variety creates, and the extent to which these demands can be met without the cost of complexity spiralling out of control, even for the most agile supply chain. The key point is not to exceed the capability of the supply chain to deliver the marketing promise. The concept of agility 243 While differentiation of logistics service can generate short-term gain, the question that revenue-enhancing proposals need to answer is ‘will it do so profitably?’ Adding a product feature, offering special delivery service and timetables, and engaging in a special promotion might help close a deal in the market in the short term. But such deals can also create added logistics and supply chain costs that are not compensated for by the added revenue. One executive from a manufacturing company put it well: When we showed the financial impact of certain deals our sales teams had closed, it made them realise there were certain deals we should have walked away from. Even though it may be hard to assess economic gain or pain from product/ service differentiation, reality can be checked by asking questions such as: ● Do customers really want fast delivery, or is reliable delivery more important even when slower? ● Do customers really want delivery whenever they ask for it, or could a shared forecasting effort resolve fire-drill situations? ● Do we need product proliferation for short-term gain, or because we add sustainable revenue to the business? ● Is there a limit to the number of product variations that the market can recognise and absorb? ● Did we offset added warehousing and distribution costs – even when just directionally right – against added revenue potential? Heineken, the brewer, offers a powerful example of the last point. During a recent Christmas season it introduced a special product for promotion in the market – the magnum bottle. This seasonal promotion and product won several marketing prizes, and created a lot of buzz (or fizz, even!) in the marketplace. It was also a product that suffered from substantial added shipment, packaging and production costs because different production line setups, bottles, labels and boxes were needed for a very limited demand window. Was it worth the effort and focus of the responsive capabilities that were needed? Another powerful illustration of the issue is a tactic that one executive calls the ‘warehouse dust test’: We take our sales people through our warehouse when they come to us asking for new products and promotions and show them the dust levels on other promotional products and product variations that we stock. We ask them ‘which products can be discontinued when we introduce a new product?’ or ‘do we need the new product to begin with?’ Lowering the cost of complexity: avoiding overly expensive agility The purpose of responding to customer demand is fundamental to the role of logistics. In this sense, agility is a natural goal. A key qualification is: not at any cost, nor to compensate for mismanagement elsewhere in the organisation. 244 Chapter 7 • Just-in-time and the agile supply chain Many organisations face challenges related to the risk of driving responsiveness over the top in the wrong areas of focus. Three examples illustrate the cost of complexity (see section 5.1.2): ● Product, packaging and stock keeping unit proliferation leading to extremes of 80 per cent or more of products not even generating 1 per cent of revenue ● Delivery speed is too high, resulting in increased costs for the customer because products arrive too early. This increases handling, storage and related costs. ● Promotions and special events that cause upswings in demand based on sales efforts, not on true customer demand. This leads in turn to downswings shortly thereafter. In general, complexity in the supply chain is made worse at an organisational level because of aggressive global and international sourcing of materials and products. This reduces the cost of goods sold. However, complexity adds substantial distance, time and dependence on the international logistics pipeline. These increase the as risk of supply chain failures. There are two key issues at stake here. First, agile capabilities are not the excuse for other functions (such as sales) to ignore supply capabilities in running the business. Second, agility should not be driven by the need for supply chains to compensate for mismanagement in other parts of the business. Cost of complexity is the term that captures the negative consequences of agility in poor organisational contexts. It refers to the costs resulting from unnecessary complexity in the supply chain that agility can reduce. But the key questions are: ● Where is the value in this complexity to begin with? ● What customer need does it address to have warehouses with products and materials from old promotions collecting dust? ● Does every shipment really need to be a rush shipment or can some shipments be allowed a bit more time and consolidation with other shipments in cheaper modes of transportation? ● Are promotions and resulting short-term peaks in demand a way to boost short-term revenue, or a way to raise long-term sustainable revenue growth? The following are some examples of actions to help reduce non-value-added costs of complexity: ● Has the organisation conducted an analysis of revenue contribution by sku? ● ● Does the organisation have a process for reviewing the product portfolio at least annually? ● ● Consider using a revenue threshold for maintaining a given sku. One-off sku reductions do not address the ongoing tendency to proliferate skus over time. Are there hard revenue forecasts related to promotion request that can be evaluated? ● Revenue upside potential is most often used to justify adding events and skus reviewing real impact after some time or after the event helps force discipline. The concept of agility ● 245 Are people ordering shipments aware of the cost of rush orders and are they asked to organise shipment around real and explicit customer request? ● Ticking the ‘ASAP’ (‘as soon as possible’) box on a shipment form may become standard behaviour, irrespective of customer need. In addition to such actions, driving forecast accuracy will assist in avoiding inventories of unsaleable product and panic shipments. Forecasting; reducing the need for last-minute crises As important as fast response may be, organisations cannot make all of their operational decisions in real time and in response to events already taking place. Some advanced preparation and planning is required. Hence, even in the most agile supply chains, forecasting is needed and can be used to avoid expensive panic shipments against orders that could have been anticipated. Based upon assessment of market potential of new and existing products, promotions and services a demand forecast can be developed. This can be used to prepare and offer input to several internal forecasts. The financial forecast (communicated to financial markets) is impacted by the operational demand forecast and the plan for capacity and asset utilisation. The capacity plan is used in both the mid (example: which warehouse will hold which products from the assortment?) and short term (example: how many products can we make tomorrow?). Asset footprint/forecast is the mid- to long-term plan for capacity needed in the supply chain to cope with volume of demand and nature of demand for services (example: how many warehouse spaces do we need in Europe?). The more accurate the demand forecast, the better a company can prepare in advance of demand occurring, avoiding the need for last minute response to unexpected demand as well as the cost of preparing for demand that might never occur. However, it is probably impossible to fully and correctly anticipate demand at all time horizons and in all markets, for all products and services, even if revenue groups fully tried and technology (forecasting tools, enterprise resource planning software etc.) were perfect. There are several management approaches to forecasting that will enhance its accuracy and relevance. These include: ● A ‘one forecast’ approach: aggregating product/market specific forecasts to a single global forecast allows the ‘big picture’ to be developed. It also forces differences in local forecasts to be discussed and resolved. Further, it ensures that the firm executes against a single number, not against several. ● Ensure forecast accountability: most often, revenue groups will be asked to develop or crucially impact the demand forecast. These groups have limited incentives to drive forecast accuracy. They don’t have to live with the consequences, so under-forecasting makes it easier to hit sales targets. So a focal firm should consider adding a review of quality and accuracy of forecasting input to performance evaluation as one mechanism to drive accountability. ● Make forecasting business relevant: in addition to the above, linking demand and operational forecasts to financial forecasts and effort to drive business improvement (such as long-term cost savings) adds relevance to the forecasting process. 246 Chapter 7 • Just-in-time and the agile supply chain ● Use one process: establishing a single forecasting process for the global supply chain (allowing for minor local variations if need be) allows for consistency in approach, interpretation and measurement. So far, we have considered ‘when’ and ‘where’ agile capabilities should be considered. Some supply chains will be better positioned to support the markets they serve by focusing more on lean approaches – for example, in many low variety, high volume situations. An increasing number of markets will be better served by agile strategies that require responsiveness – for example, because variety is increasing and volumes are decreasing. So next, we consider what capabilities are needed to support the responsiveness objective in more detail. 7.2.3 Developing measures that put the end-customer first to improve market sensitivity All companies include customer service in some form in their performance measurement system. However, almost all operationalise this measurement internally, leading to responsiveness that is misguided and focused wrongly, i.e. not directly and fully on customers, thereby limiting network integration across the supply chain. In particular, most companies measure delivery service in one or multiple ways based upon their internal definition of success. Typically the measures focus on how reliably and fast the company delivered against the timetable it put forward. This misses the point as this timetable might not be aligned with endcustomers needs at all. So companies are not tracking responsiveness to these needs. It is much better to ask customers for their desired delivery window and measure execution against that customer-defined measure of success. General Electric realised this when it presented high delivery reliability scores from its own measurement to customers and received a negative reaction. Customers said performance was not as high at all by their measurement, against when they needed deliveries to take place. GE changed its measurement set towards what it calls Span measurement. Span stands for the range of delivery around customer requested due dates. Essentially, the company now measures, across all deliveries globally, how close it was to the delivery date the customer requested when ordering. In its plastics business the company brought Span down from 30 days to just a few days within a matter of months. This means that every customer can depend upon GE delivering any product, anywhere in the globe, when they ask for it with a maximum variation of just a few days. The experience of GE suggests the value of several actions to improve measurement for agility: ● Share measurement dashboards with customers. ● Do not measure against your own measures of success, ask the customer what defines success for them. ● Hold all parts of the supply chain accountable against the customer-defined measure of success so that there is no escape from market sensitivity. The concept of agility 247 7.2.4 Shared goals to improve virtual integration Agility requires the ability to be able to respond to local market requirements and opportunities. However companies should still aim to leverage skills and capabilities across the regions in which they operate. This means they need to establish and strive for shared goals across their business units as a form of virtual integration, with local operations remaining in place and the focus remaining on local customer service (van Hoek et al., 2001). Most often however, companies trend either towards local responsiveness or strong global standardisation and organisation. Hewlett Packard used to be in the former camp. At one point for example they found that there were dozens of similar B2B exchange efforts underway across the company with informal coordination between teams at best. Rightfully, HP did not respond with, what would have been intuitive to many, a centralisation of efforts and control. Instead, they developed a distributed governance approach that allows for local responsiveness but leverages lessons learned for the company and avoids duplication of efforts. In order to find a way to balance proliferation of businesses and divisions with high divisional autonomy and complexity in organisation, HP launched a supply chain governance council. The charter that its executive committee set was to implement pan-company efficiency initiatives and uncover supply chain-based revenue opportunities. Specific goals include establishing and driving a coordinated approach to investments pertaining to opportunities that have a panenterprise scope and impact and supporting executive awareness of key initiatives to avoid reinventing the wheel. This means that the HP governance council explicitly does not get involved with initiatives that are specific to an individual business or region; it does not centrally control supply chain governance but it does support larger initiatives from which many parts of the organisation can and should benefit. It also provides senior management with a method for supporting and steering direction on most important opportunities and directions. Four key operating rules at the council are: 1 mandated senior participation; 2 focus on enterprise-wide initiatives; 3 driving initiative development through divisional sponsorship; 4 fund initiatives from divisional budgets. The last two are particularly interesting as they help avoid creating a corporate centre approach that can dictate without the businesses caring or paying for it. Keys to success in a governance approach like this include the need to avoid layering a governance council on top of existing structures. If it generates more governance this can only conflict with existing structures and might enhance bureaucracy rather than agility. Further to that it is important to keep the structure simple and crisp; the governance council serves the purpose of being more agile as a company as opposed to just being agile locally. In order to accomplish that there should be minimal procedure and rules. And finally, what is purely local should remain local; if there is no benefit to leveraging a particular initiative to the global/corporate level then keep it local. 248 Chapter 7 • Just-in-time and the agile supply chain 7.2.5 Boundary spanning S&OP process to improve process integration The purpose of the sales and operations planning (SOP, section 6.1.1) module is to set sales forecasts and to translate them into operations plans for sourcing, making, storing and delivering to demand. It requires internal integration, at least between sales and operations, to make the process work. Additionally, forecasting is not just a numbers game, it is a key business process that supports supply chain readiness for market demand. Alcoa has made some great strides across very diverse business that are very autonomous in their markets to develop a boundary spanning S&OP process to support process and internal integration. Three aspects are particularly noteworthy: ● Forecast by market, not by business unit. Alcoa realised that a lot of its businesses were supplying the same markets with all of them developing their own forecast, often hugely varying, based upon a view limited to one business. So what they did was form so-called market sector lead teams that operate across businesses, by market, to come up with one forecast for where that market is going based upon a much more comprehensive view of the market. ● Coordinate between source-make-deliver. Alcoa not only translates the forecast into production runs for the factory; in a true process integration fashion they also translate the forecast to what needs to be sourced and what can be expected of the customer’s business, hence driving integration along the process, not just at points. ● Link forecasts to improvement goals. Forecasting is never going to be fun but it can become more relevant; in that spirit Alcoa links the forecast to 18 months’ business improvement goals and have the forecast roll towards that goal. The forecast does disaggregate to six months, four weeks and one week plans but it also maps to the longer-term improvement goal. At Alcoa people are very excited for the new rolling forecast to come out because it tells them whether they are on track to hitting targets. That is much better than the common approach where the sales team just does a forecast for the sake of colleagues in manufacturing while trying not to spend too much time at it because it distracts from selling. Additionally, the sales and operations planning process is seen as a great way to begin to drive cross-functional integration. One company just setting out on its journey to develop supply chain management started with S&OP because it found it an easy start (calling a meeting) that links to a key activity for many functions (ensuring we forecast what needs to be made so we can serve customers). Hence buy-in is easily gained and joint ownership is quickly established. The company also found that the S&OP table is an effective way to get people across functional silos to start talking and working together. A few ground rules for effective S&OP tables include: ● all key functions need to attend mandatory (sales, finance, production, logistics, procurement) and additional function can be invited if needed (R&D, engineering); ● all attendees need to come with real decision-making authority and mandate for the table to become effective; Summary 249 ● the discussion needs to focus not just on generating a forecast but also on diagnosing forecast errors from the past to learn from them and discuss trade-offs; ● there needs to be a structured (standing) agenda and set of measures used (most typically including forecast error, forecasted volumes and sales amounts, capacity utilisation, new products and upcoming events, sku review). The vision of creating an agile supply chain is a valuable starting point but until recently it was mostly just vision. The experiences and cases presented in this section show how the vision can be supplemented and how the implementation of agility can be approached practically. Summary What is JIT, and how does it apply to logistics? ● JIT is a broad-based philosophy of doing the simple things right and gradually doing them better. As applied to logistics, JIT can be conceived of as a pyramid of key factors that centre on minimum delay and minimum inventory. ● ‘How many’ and ‘when’ to order replenishment quantities are key questions that impact on throughput times and inventories. JIT addresses these questions by attacking the sources and causes of waste. Examples are reduction of changeover times and simple, paperless systems of material control based on the principle of pull scheduling. ● Longstanding approaches to material control, such as reorder point stock control, economic order and batch quantities (EOQ, EBQ) and material requirements planning (MRP) can be made to be far more responsive by application of JIT techniques. Examples include reduction of batch sizes, reorder quantities and lead times. All of these help to reduce logistics P-times. Synergies can be delivered too: JIT pull scheduling works best for control, MRP for planning. What is lean thinking, and how does it apply to logistics? ● Lean thinking is a philosophy that has been derived from JIT principles. It seeks perfection by gradually reducing waste from each of four areas: specifying value from the end-customer perspective; identifying the value stream through time-based mapping; making the product flow through the supply network by applying JIT principles; and letting the customer pull through application of pull scheduling. What is agility, and how does it contribute to competitiveness of the supply network? ● Agility is a supply-chain-wide capability that aligns organisational structures, information systems, logistics processes and, in particular, mindsets. It means using market knowledge and a responsive supply chain to exploit profitable opportunities in a volatile marketplace. Agile supply is concerned with developing capabilities proactively to position a supply chain to benefit from 250 Chapter 7 • Just-in-time and the agile supply chain marketplaces in which product lifecycles are shrinking, product variety is increasing, and the ability to forecast demand is reducing. ● Lean thinking is concerned primarily with the elimination of waste. The order winners that are supported by this mindset are cost and quality. Agility is concerned primarily with supporting order winners of speed and flexible response. Time compression is a fundamental requirement for leanness, but only one of the enablers of agility. ● A key difference in supply strategy is that lean thinking is concerned with placing orders upstream for products that move in a regular flow. Agile strategy is concerned with assigning capacity so that products can be made rapidly to meet demand that is difficult to forecast. What are the agile practices that help to underpin the agile supply chain? ● Start by understanding the sources and causes of uncertainty in demand, and take steps to position the supply chain to benefit from this uncertainty. The easy option is high-volume, low variety, low demand uncertainty. The tough option is the opposite of all three of these material flow characteristics. Agility seeks to increase responsiveness to volatility and to end-customer demand uncertainty. ● Then, develop capabilities for dealing with shrinking time windows for customer demand fulfillment. Speed of replenishment is usually much better downstream than upstream. Developing upstream time sensitivity is therefore a major enabler. And information dissemination and alignment bring capabilities of dealing with rapid and accurate response using supply-chain-wide dissemination and exchange. ● Third, facilitate servicing the ‘market segment of one’ by investing in flexible processes, modularity of both product and process, and capabilities to support the information and knowledge content of products and services. Specific practices outlined in this chapter include aligning metrics with true end-customer needs, establishing supply chain governance that allows for decentralised action with central support and coordination, and developing boundary spanning SOP systems. Discussion questions 1 Suggest order winning and order qualifying criteria for the following product environments: a reprocessing nuclear fuel b upstream petroleum refining c downstream manufacture of petroleum products d high-value automotive products such as Range Rover or BMW 5 series. To what extent would lean and agile mindsets contribute to the support of such products in the marketplace? References 251 2 Dealers have criticised the way auto assemblers use JIT as an excuse for buying parts from the inbound supply network ‘so that their costs are kept down’. They then dump finished vehicles onto the dealer by matching ‘their perceptions of a marketplace demand with their constraints as a manufacturer, i.e. what they’ve produced’ (adapted from Delbridge and Oliver, 1991). Referring to the Ford/Toyota case study in section 7.1.3, comment on the trade-offs implied in these comments from disgruntled dealers. 3 What matters more: value to the customer or value to the shareholder? Refer to section 3.4 of Chapter 3 in formulating your response. How does this question impact on the philosophy of lean thinking? 4 What is meant by the term overproduction? Why do you think this has been described as the biggest waste of all? 5 Explain the difference between pull scheduling and push scheduling. In what circumstances might push scheduling be appropriate? 6 Explain the difference between surge and base demands. Multi Electronique SA (ME) produces a range of electrical connectors for the automotive industry. Currently, the six production lines at its factory in Toulouse are fully loaded, operating a three-shift system for 5 days per week. One of ME’s major customers wants to place an order that would add loading equivalent to a seventh production line, but only for the summer months (May to September). Sales are keen to accept the new order, but it would need to be taken at prices that are no higher than for current business. Suggest options for how ME might manage this order if they accepted it. 7 Refer back to Figure 2.1 in Chapter 2: it shows a Pareto curve for the sales per sku of a book stockist. A small number of ‘hot sellers’ constitute most of the sales, while there is a lengthy tail of slow-selling lines and new introductions. The operations people are pressing for the ’tail’ to be chopped in half, arguing that it adds cost, not value, to the business. They argue that each order is taken at fixed cost, regardless of size. Sales order processing and pick and dispatch from the warehouse are examples of such fixed costs. ‘Instead, we should focus on the core of the business: 90 per cent of our business comes from just 10 per cent of the titles,’ the operations director argues. ‘We could chop our costs in half and only lose 5–7 per cent of the business. Think of the effect on margin!’ Sales, on the other hand, are reluctant to give up any of the titles, arguing that it is customer choice that drives the business. ‘We have built up this business on the strength of our product range’, the sales director argues. ‘Retailers come to us because we are a one-stop shop. If we haven’t got it in stock, we get it.’ Explain the above in terms of a lean versus agile debate, using the concepts of market winners and qualifiers and benefiting from small volumes. References Aitken, J., Childerhouse, P., Christopher, M. and Towill, D. (2005) ’Designing and Managing Multiple Pipelines’, Journal of Business Logistics, Vol. 26, No. 2, pp. 73–96. Chase, R.B., Jacobs, R. and Aquilano, N.J. (2005) Operations Management for competitive advantage, 10th edn. London: McGraw-Hill. 252 Chapter 7 • Just-in-time and the agile supply chain Delbridge, R. and Oliver, N. (1991) ‘Just-in-time or just the same? Developments in the auto industry: the retailer’s views’, International Journal of Retail and Distribution Management, Vol. 19, No. 2, pp. 20–60. Harrison, A. (1992) Just-in-Time Manufacturing in Perspective. Hemel Hempstead: Prentice Hall. Harrison, A. and Storey, J. (2000) ‘Coping with world class manufacturing’, New Technology, Work and Employment, Vol. 13, No. 3, pp. 643–64. Holweg, M. and Miemczyk, J. (2003) ‘Delivering the “3-day car” – the strategic implications for automotive logistics operations’, Journal of Purchasing and Supply Management, Vol. 9, No. 2, pp. 63–7. Johansson, H.J., McHugh, P., Pendlebury, A.J. and Wheeler, W.A. (1993) Business Process Reengineering: Breakpoint Strategies for Market Dominance, Chichester: John Wiley & Sons. Krafcik, J.F. and MacDuffie, J.P. (1989) Explaining High Performance Manufacturing: The International Automotive Assembly Plant Study. MIT: International Motor Vehicle Program. Magretta, J. (1998) ‘Fast, global and entrepreneurial: supply chain management Hong Kong style’, Harvard Business Review, Issue Sept/Oct, pp. 102–14. Mason-Jones, R., Naylor, R. and Towill, D.R. (1999) ‘Lean, agile or leagile: matching your supply chain to the market place’, International Journal of Production Research, Vol. 38, No. 17, pp. 4061–70. Nakajima, S. (ed.) (1989) TPM Development Program: Implementing total productive maintenance. Cambridge, MA: Productivity Press. Porter, M.E. (1985) Competitive Advantage: Creating and sustaining superior performance. New York: Free Press. Schonberger, R.J. (1991) Building a Chain of Customers: Linking business functions to build the world class company. New York: Free Press. Shingo, S. (1988) Non-Stock Production. Cambridge: Productivity Press. Skipworth, H. and Harrison, A. (2004) ‘Implications of form postponement to manufacturing: a case study’, International Journal of Production Research, Vol. 42, No. 1, pp. 2063–81. van Hoek, R. (2001) ‘The rediscovery of postponement: a literature review and directions for research’, Journal of Operations Management, Vol. 19, No. 2, pp. 161–84. Womack, J. and Jones, D. (2003) Lean Thinking. 2nd edn. New York: Simon and Schuster. Suggested further reading Goldman, S., Nagel, R. and Preiss, K. (1995) Agile Competitors and Virtual Organizations, New York: Van Nostrand Reinhard. Harrison, A.S. (1992) Just in Time Manufacturing in Perspective. Hemel Hempstead: Prentice Hall. Lee, H.L. (2004) ‘The Triple A supply chain’, Harvard Business Review, Issue No. 10, Oct., pp. 1–11. Womack, J. and Jones, D. (2003) Lean Thinking, 2nd edn. New York: Simon and Schuster. Part Three WORKING TOGETHER Information flow Time End-customer Upstream Downstream Material flow (supply) End-customer Raw material Raw material In a supply network, no firm is an island that stands on its own. Nor does it compete on its own. A focal firm depends on its network partners for components to assemble, for products to sell, for the movement of goods and so on. While Part Two focused on the central logistics task of achieving responsiveness to customer demand, most firms cannot achieve this without the support of their network partners. Complete vertical integration of an industry is unusual today – although ‘vertical retailers’ have developed a similar strategy, as we saw in Case study 4.4. Functional specialisation of suppliers on those parts of the value proposition in which they excel, coupled with integration into the supply network, is more common. This is becoming especially relevant today. Some manufacturing firms, for example in the electronics and automotive industries, add only 10–20 per cent of total added value internally. The rest is created in the supply base – by commodity suppliers, by co-designers and co-manufacturers, by main suppliers and by their supply partners. Chapter 8 offers approaches to integration and collaboration in the supply chain, and Chapter 9 offers insights into sourcing and supply management.

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