A supply chain is a network of facilities, functions and activities that are involved in fulfilling customer demand. Supply chain is the network of organisations that are involved through the upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hand of the ultimate customer. The coordination within the entire chain is therefore very important. The supply chain covers activities on the business process, procurement, production, inventory carrying, storage, handling and distribution within an organisation. Supply Chain Management is therefore, the integration of key business processes across the supply chain for the purpose of adding value for customers and stakeholders. The size of the business determines the extent of Supply Chain Management it will get itself involved in. Companies invest heavily in Supply Chain Management to give their customers value for their money since supply chain management is essential to maximizing return on investment in a company.
To improve a company’s competitiveness and overall profitability, modern day businesses have embarked on a new supply chain concept of Lean Supply Chain. Lean supply chain occurs when inventory moves so fast that firms basically holds zero inventory on hand. Supply Chain Management is expensive to operate and Companies are determined to cut costs to maximize their profits. Fierce competitive market conditions are driving companies to adopt Lean strategies to improve corporate financial performance, thus they practice Lean Supply Chain Management. Lean Supply Chain Management is one that makes the company produce just what is needed, when it is needed and where it is needed. This means the company will avoid wastage such as defective products, unwanted inventory and waiting time. The system also enhances value to the end user. Lean production with the appropriate product development phases, ensure readiness at product launch eliminating waste and reducing product development cycle times.
Core consideration questions for companies applying in Lean principles implementation include:
- What are the design requirements essential to Customer Value?
- Will a new product slot into an existing Product Family or will it constitute an entirely new Product Family?
- Will materials, components, parts, and assemblies be sourced from preferred’ suppliers qualified for pull-based Kanban fulfillment?
The right combination of core considerations depends on the company’s specific competitive practices.
The Lean Supply Chain Concept
It is believed almost worldwide, that Lean thinking originated from Japan (Toyota, specifically), but Henry Ford (Ford Automobiles, U.S.A) had been using parts of Lean thinking as early as the 1920’s, as evidenced by his quote: “One of the most noteworthy accomplishments in keeping the price of Ford products low is the gradual shortening of the production cycle. The longer an article is in the process of manufacture and the more it is moved about, the greater is its ultimate cost.”
Lean is defined by many organisations as a systematic approach to identifying and eliminating waste through continuous improvement, flowing the product at the pull of the customer in pursuit of perfection. Lean principle application requires that managers convince employees (and other supply chain stakeholders) that lean is not just a short-term campaign, but a long-term strategic proposition aimed at achieving a competitive advantage. This requires daily efforts to continually remind, educate, and enforce lean policies.
The principle for applying lean supply chain management is to maximize value for customers and profit for corporations by eliminating waste, “Muda”, through each stage of commerce and implementing business strategies that enable continuous and sustainable improvement throughout the supply chain. The main aim of a lean supply chain is to meet each customer’s demand the first time, at the lowest cost, at every time. This enables “flowing” the product through the chain in response to the pull of the customer in pursuit of perfection. This flow process is also known as “Kanban”. “Kanban”, a Japanese term, means card signalling. It is the information signal used to indicate the need for material replenishment in a pull production process. An effectively designed Lean supply chain delivers true value to the end customer at a reduced cost to the organisation.
Benefits and Limitations of Lean Supply Chain Implementation
The advantages of Lean Supply Chain Management cut across every kind of company. The biggest advantage is the reduction in cost to the company. The traditional way of reducing cost is through mass production. Although this requires an investment in very expensive equipment, through Lean Supply Chain Management, the company enjoys reduced cost by mass production. Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product.
A second advantage is reduced volume of transaction. This can be equated to speed and responsiveness to client demands. This means that supply chain is now faster and more efficient. The customer’s needs are met rapidly. Lean supply chain management makes the company action biased. Once a customer is delighted there is room to serve the next hence increase company revenue.
Lean Supply Chain Management relies heavily on outsourcing. Outsourcing is the contracting of certain essential components of the business to another organisation. The role of outsourcing in lean supply chain management reduces risk to the company as it hands over certain ill-performed tasks previously performed by the organisation to third party experts. The company is therefore in a better position to focus on its strengths in the supply chain, thus increasing value for the customer.
Yet another advantage of Lean Supply Chain is Customer Satisfaction. Lean supply chain management means that customer needs are satisfied in the shortest possible time. Lean supply chain management also makes it possible to incorporate current requirements into the production process bringing out newer versions of a particular well performing product on the market which makes the company look fresh (case of many electronic and automobile industries). The company gets more revenue and loyalty will increase as customers tend to purchase their needs from companies they can trust.
Lean thinking brings about many Operational benefits including:-
- Lead Time (Cycle Time) reduction
- Increase in Productivity
- Reduction in Work-In-Process Inventory
- Quality improvement
- Reduction in space Utilization
Administrative benefits in organisations are noticed. Reduction in order processing errors and elimination of “putting customers on hold” by streamlining of customer service, improved product quality as well as product delivery function are brought about through lean management. Higher staff profiling standards and staffing and recruitment demands are reduced. This is achieved when the same number of staff is equipped with multi skills to handle larger numbers of orders that would have previously needed more staff. Documentation and streamlining of processing steps enables the out-sourcing of non-critical functions, allowing the company to focus their efforts core competencies and on customers’ needs.
The main aim of every organisation is to meet or achieve its strategic goal, that is ultimately Customer satisfaction the lowest possible cost to the organisation. Lean supply chain management with a step-wise advantage through the operation and tactical levels help organisations to meet their strategic aspirations.
Most organizations implement Lean principles based on the operational improvements, primarily because of the perception that Lean only applies to the operations side however benefits cut across the main decision making processes or departments of every organisation.
Even though Lean supply chain has many advantages, there are also limitations to apply its principles to each and every organisation. Thought lean principles are good theoretically, it has not worked well for most companies. Lean supply chain management is very expensive in the sense that the expertise needed at every level (since all staff are need to be multi skilled) come at a high investment premium.
Also, it relies heavily on outsourcing which has many disadvantages. Outsourcing comes at a cost because the third party is a business entity and will have to make profit on its operation. It also means that the organisation will have to stomach some initial costs. Some of which are redundancy costs and the costs in selling equipment. During outsourcing, when a fault slips through the checks in lean supply chain management, the company will have to bear the costs of production as products will have to be recalled. This has been evident recently with the pioneers of Lean Thinking, Toyota motor company facing multiple recalls.
Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product. To recover the enormous initial capital costs sunk into the product before it was produced, mass producers forecast and run long production cycles for each SKU(stock keeping unit). Consumer preferences and variety suffer in this scenario. Costs is minimized using lean theories but at the expense of what more sophisticated consumers now demand. Customer demands in recent times are focused on variety of products and this cannot be achieved on a solely “lean” platform.
One can therefore conclude that Lean thinking is not dynamic or aggressively change-embracing. Strictly using Lean principles may cause organizations to fail under the recently thriving environment of unpredictable and rapid change. This is not largely friendly toward the needs of the customer as new innovations based on customer needs are not implemented. Lean supply thinking is known to be quite inflexible to changing patterns and insensitive to the market. Customization demands in current markets by the consumers have been the main downfall of strict lean thinking. It is therefore being revisited to help improve its practicality in today’s organisations.