ARTICLE IN PRESS. LeanThinking. journalhomepage: Driving Value in The Upstream Chain Management Through Lean Principles

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1 InternationalJournalofLeanThinkingVolume2,Isue2(December2011) LeanThinking journalhomepage: Driving Value in The Upstream Chain Management Through Lean Principles Marc Helmold Director Procurement Bombardier Transportation, Berlin A B S T R A C T Lean principles and methods must be part of the total supplier management approach in any enterprise. Organisations can thus differentiate and create a competitive advantage. Surveys have shown that the lean integration of the supply chain and the elimination of waste within the upstream supply chain management lead to significant cost savings and benefits. K E Y W O R D S Lean principles, Supply chain management. A R T I C L E I N F O Received 8 May 2011 Accepted 10 May 2011 Available online 19 May Introduction Supplier Management has recently raised the interest of experts in industry and academia. Trends like the increasing globalization, the concentration on core competencies and the outsourcing of products and services reduce the own value adding activities significantly. Especially in the USCM, i.e. the value chain towards suppliers, it is crucial that suppliers are managed in such a way that processes and activities are running parallel and lean. In the present situation, several industries are characterized by an increasing number and complexity of launch activities. In this context, quality, cost and delivery aspects throughout the USCM are crucial features to differentiate from its competition with a sophisticated time to market concept. Value adding activities consist in many companies of about 20-30% as Figure 1 shows. Original equipment manufacturers (OEM) are permanently outsourcing activities and services to suppliers as proven by the Mercer Management Consulting and the Fraunehofer Gesellschaft in their survey FAST. The study shows that the trend towards non-core competencies to suppliers will increase from 65% to 77% in As a result the core competencies and value adding activities will decrease to less than 25% on average. Pleasecitethisarticleinpresas:M.HELMOLD InternationalJournalofLeanThinking(2011)

2 80% 70% 60% 50% 40% 30% Supplier OEM 20% 10% 0% Figure 1. Trend towards outsourcing: Percentage of value adding activities 2. Concept and Implementation As a consequence only lean enterprises with a flexible and lean supply chain can survive in this environment. As a matter of fact, many companies have introduced already lean principles, but have not yet applied this concept to their suppliers. This should convince companies to do so. Every crisis means also an opportunity to introduce new concepts and paradigms. In the Japanese language the term crisis also means opportunity or chance as shown in Figure 2. The lean concept was developed by Taichi Ohno, who worked for Toyota Motors. It derived from a bundle of instruments which come from sophisticated production methods or supporting functions like logistics. The ideal interplay and optimal combination of all instruments are essential for success. The vision of lean production is based on the JUST-IN-TIME (JIT) philosophy and the TOYOTA PRODUCTION SYSTEM (TPS) as shown in Figure 3 and focuses on the elimination of waste and the minimization of stock. Crisis = KIKI ( 危 機 ) Catostrophy ( 危 ) + Opportunity ( 機 ) Figure 2. Crisis means also an opportunity to improve In contrast to traditional schools of thought the objectives of lean production are based on a reduction of throughput times and the elimination of non-adding activities. These activities are waste or so called 2

3 MUDA (Japanese). Figure 3 shows the two concepts, the traditional and the lean one. Both concepts are directed towards customers. Nevertheless the lean concept s foundation is based on the optimal reaction capability and not based on inventories. Inventories are increasing the cost of capital and have negative impacts on the shareholder value, whereas short cycle times lead to small inventories. Traditional Approach Large Inventory = High Delivery Capability Customer Orientation Lean Thinking Short Cycle Times = Optimal Reaction Capability Customer Orientation Figure 3. Lean Production approach In the JIT approach, it is important that the right part comes in the right quantity in the right quality at the right time to the right place as shown in the 5R principle. This principle focuses on a zero defect as shown in Figure 4. The right Part In the right Quality Zero Defects At the right Time Now In the right Quantity One Part At right Place Here Figure 4. The 5R concept The TPS has been applied by many OEMs in automotive industry, railway area or other business sectors. Bombardier Transportation is applying the Bombardier Operations System (BOS), Porsche the Porsche Production System and Daimler the Daimler Production System, However, it is not always 3

4 successful, as the activities are only partially introduced and not rolled out in total. Secondly, lean principles are not synchronized with the USCM and may thus not show the desired effects and results. It does not make sense to establish only single lean instruments. It is of the utmost importance and a fundamental aspect of the lean concept that principles are applied in a total approach that involves the suppliers. In this respect, it is the crucial role of procurement and supplier relationship management to transfer this competency to its supply chain. Inefficiencies throughout the supply chain can thus be identified, waste can be eliminated and processes can be harmonized in order to strive for continuous improvements. Continuous improvement (Japanese = Kaizen) means small steps and is part of the lean philosophy. Empirical data by Marc Helmold, who is currently the Director Procurement at Bombardier Transportation in Hennigsdorf/Berlin-Germany, show that the complete transfer of lean principles to the supply chain can lead to significant cost reduction advantages of up to 15 percent. Dr. Dust, Principal of the MB Tech group and from October 2011 Professor of the University of applied Sciences in Heilbronn, comes to similar results in his survey Total Supplier Management. Hendricks and Singhal show in their analysis that supply chain discrepancies can harm the share value of the own company by up to 40 percent. Only flat hierarchies, lean competencies and direct accountability through line responsible people (Japanese=Gemba) lead to an improved communication and concentration on value adding activities and core issues. Due to the importance of the supply chain it is necessary: 1. to apply lean principles throughout the supply chain 2. to integrate suppliers 3. to be customer oriented 4. to have flat hierarchies 5. to establish competency and responsibility to the core functions (Gemba) 6. to concentrate only on essential success factors 7. to reduce waste 8. to continuously improve 9. to apply a PULL system 10. to apply a learning organization There are four pillars for the lean production system. These are the flow, the tact, the pull and the zero defect principles as shown in the next picture 5. 4

5 Lean Production System Just in Time (JIT) Flow- Principle Tact- Principle Pull- Principle Zero Defect Principle Figure 5. The 4 Principles of JIT In the sense of an optimized USCM it is necessary to implement these four principles towards the supply chain. Thus, it is possible to synchronize master production and delivery schedules and to have short lead times of goods and products. Flexibility is important to react quickly on customer demands. Waste has to be eliminated throughout the entire process. The customer is only willing to pay for products and goods, which are beneficial and add value to him. Non adding activities are not to be paid and need to be radically erased. Waste can be categorized in open and hidden waste as shown in picture 6; the opposite is value adding activities. Waste must not be compressed, but replaced by value adding activities. The only method to eliminate waste is transparency and the taking away of the appearing security. By making problems transparent, it is possible to identify the root cause accordingly. 5

6 Value Arbeit adding mit Wertzuwachs Activities (wertschöpfend) Arbeit Openmit verdeckter Waste Verschwendung Arbeit Hidden mit offensichtlicher Waste Verschwendung Figure 6. Open and hidden waste In the TPS philosophy there are seven reasons for waste as shown in picture 7. These reasons are overproduction, inventories, transport, idle times, exceeding space, repairs or rework and moving times. Elimination of Waste Supply Chain and Production Process Production Process Supply Chain Product and Machines 7 Reasons for Waste 1. Overproduction/ Over Supply 2. Inventory 3. Transport 4. Idle Times 5. Space/Layout 6. Repair/Defects 7. Moving Times Figure 7. Seven reasons for waste 6

7 3. Conclusion The main objective of procurement and a strategic supplier management is to apply the JIT principle to the suppliers. Value adding activities have to be rolled out to all suppliers from raw material to module and keiretsu suppliers. The keiretsu supplier is the closest relationship and connection to a supplier (Japanese = 系 列 子 会 社 ) Keiretsu is an integration of suppliers into the own organisation and system, there is in few cases partial ownership involved. Picture 8 shows the seven aspects of waste that must be erased. Supplier activities must have a pro-active or parallel approach, reactive measures should be avoided. The procurement function has to manage suppliers in such way, that flawless launches and synchronized process can be established with suppliers. Procurement has to coordinate these activities as the single point of contact to suppliers, so that interfacing departments are actively involved in such process. Techniques of lean production serve here to establish best in class suppliers in terms of quality, cost and delivery performance as the pyramid shows. High process and product competencies automatically lead to sophisticated suppliers as shown below. This applies to raw material, parts, systems, and module and keiretsu suppliers. As a summary, the 10 principles to be applied by every company are: 1. Lean principles throughout the supply chain 2. Integration of suppliers 3. Customer orientation 4. Flat hierarchies 5. Competency and responsibility (Gemba) 6. Concentration on success factors 7. Reduction of waste 8. Continuous improvement 9. PULL system 10. Learning organization 7

8 High Competence of Product A-Supplier Q C D Criteria Relationship Keiretsu to enterprise Module supplier Sytems supplier Component / Parts supplier High Competence of Process Raw material supplier Figure 8. Supplier pyramid References Hendricks, K.B., Singhal, V.R.: An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm. In_ Production Operations Management. 21/2005. Liker, J. K.: The Toyota Way. Mc Graw-Hill. Madison Ohno, T.: Toyota Production System Beyond Large Scale Production. Productivity Press. New York