With markets becoming more and more competitive, the price of materials increasing and companies forced to find new solutions to save money and time, making supply chains efficient has never been more important. Alain Vix of Hughenden Consulting looks at what developing a lean supply chain means.

It’s a new year, and many of us have made new fitness resolutions. The Olympics, staged in London in the summer, inspire people not just to lose weight but also to be stronger, fitter and more competitive. Businesses are certainly trying to achieve the same results, but without leaner supply chains they won’t be able to. As with Olympic athletes, getting lean is not just about shedding extra kilos, but about increasing strength and, most importantly, performance.

Supply chain scholar Martin Christopher makes a distinction between lean and agile supply chains, with lean being about doing more with less and agile being about flexibility. Perhaps because in the consulting work we are brought in to advise on complex scenarios, we have yet to find one where the need for lean and agile principles are mutually exclusive. For the purposes of this article, therefore, we refer to lean as a hybrid of the two.

THE PERILS OF ‘SPOT REDUCING’ IN THE ECONOMIC DOWNTURN

With the global economy rebalancing and GDP shifting to emerging economies like the BRIC nations (Brazil, Russia, India and China), lean is no longer a competitive advantage: it’s a matter of survival. Most business leaders are realising that ‘fat’ supply chains are simply no longer viable in this complex and fast-paced world. Despite this, many are reluctant in practice to make the necessary changes, favouring short term interventions like departmental cost cutting. These interventions amount to the supply chain equivalent of ‘spot reducing’ or the misguided notion that an athlete can slim down a specific part of their body by targeting a specific area. In sport, spot reducing can lead to injury and overall weight gain and the same is true for the supply chain. If lean interventions only target one department, the supply chain will invariably suffer in other areas, and this can result in very damaging consequences for the whole business.

HOW FIT ARE COMPANIES TODAY?

A few players are succeeding by rewriting the rule book. Take Zara, the successful clothing retailer whose lean supply chain and thinking are well documented. These are just a few of the processes that Zara implemented, defying conventional supply chain wisdom:

  • Cross-functional teams, comprised of fashion, retail and commercial specialists, ensure the right mix of products are supplied to the retail outlets, taking into account a diverse range of expert information rather than keeping each role in a functional silo.
  • Quick-response factories, established in Spain near the company headquarters, to meet variable demand. Production is more expensive in these factories, but the costs are more than offset by not having excess inventory being shipped from factories located far from the market.
  • Slight undersupply of fast moving items, to ensure that the stock keeps moving. Zara considers this more desirable than holding slow-moving or obsolete stock.

Although there are some notable exceptions, most businesses are still viewing lean at the departmental level, usually in manufacturing or distribution, which eventually proves to be a false economy. We have a long way to go before lean practices are an established way of life.

WHAT STOPS COMPANIES FROM GOING LEAN?

In a word, lean processes are counterintuitive. They also require people across the business to learn new skills and explore completely uncharted territories. Lean is a long-term process, whose benefits accrue over an extended period of time. Therefore, to implement a lean programme involves a leader taking a very large perceived risk and making decisions that will be executed long after his or her tenure. This explains why so few executives and their employees – especially those rewarded on short-term gains – are willing to take the plunge.

Publicly traded companies accountable to outside investors will find it harder to go lean because many of the changes they need to make run counter to conventional market wisdom. Returning to the Zara example, it was investors who were most sceptical of the company’s intention to build a vertically integrated and capital-intensive supply chain. Many did not think it was possible or desirable to attempt this, but Zara stayed the course and managed to steam ahead of its competitors (Mango, H&M and Gap), in terms of net margins and return on average equity. This suggests that CFOs really need to understand the principles behind lean, so they can clearly and convincingly deliver the argument to investors. Short-term investors are not likely to be interested in companies with a lean plan, but those willing to wait are more than likely to be rewarded.

Another major obstacle in the ‘hard to do’ category is establishing companywide KPIs and integrating divisions and departments. Many British plcs are run as ‘portfolio’ businesses that operate more like hedge funds than integrated businesses that benefit from economies of scale and sharing services. These are the hardest businesses to change because their cultures and reward systems are completely aligned with this model. However, with the right leadership and skills they too can change as the global electronics distributor Electrocomponents recently did, transforming its global supply chain and merging its regional operating companies.

VISUALISING THE UTOPIAN LEAN SUPPLY CHAIN

Sports trainers are increasingly introducing creative visualisation into training regimes, the idea being that if you can visualise yourself winning a gold medal you are much more likely to actually win one. One common element I’ve seen during my consulting work is that companies generally don’t know how to visualise the utopian lean supply chain, which has a number of defining characteristics.

  • OPTIMAL INVENTORY.
    It is the dimension most people are familiar with, which is about having just enough inventory – but not more – with all the right buffers in place. We noticed that many companies embarked on so-called lean initiatives at the start of the economic downturn but all they did was cut way back on stock to save money, without integrating with other departments and suppliers. Inevitably, service and profits went into downward spirals. One executive’s remark to me perfectly illustrates the consequences of this: “I cannot believe how much more work we are having to do in order to sell less.”
  • LEAN COMMUNICATION FLOWS.
    This refers to the accuracy and speed at which information about demand, capacity and supply is exchanged among departments and organisations. This means that forecasts must not include numbers that are rounded up, guessed at, intentionally padded to ‘protect’ inventory or under-estimated to create a false impression of success. Correcting this makes lean material flow possible and reduces supply chain noise.
  • THE PEOPLE AND CULTURE.
    People play the most important role in any lean initiative. Without the right leadership, the effort will only results in failure. Ideally, the CEO and CFO should be sponsoring the initiative and be able to explain and evangelise its benefits to financial stakeholders, customers, partners and employees.A lean effort should never be run from a single department like manufacturing because it is a major cultural and process shift that needs to involve everyone in order to succeed. You also need to have the right people in the right jobs. People who are used to working in a siloed supply chain model and are not used to considering the big picture will find lean principles very difficult to grasp.Culture changes may also need to happen. Continuous improvement requires an open culture where people are not afraid to point out mistakes and problems. Lean also involves a degree of calculated risk and trial and error. If these are not yet part of your company’s culture, you need to be realistic as to how quickly you will see results from your lean implementation.
  • AN INTEGRATED BUSINESS AND KPIs.
    People and departments must be rewarded for the right goals, behaviours and outcomes. Setting these KPIs appropriately can be very difficult and counterintuitive because to make lean work properly, they need to be optimised at a company level, not a departmental level like in most businesses. We worked with one pharmaceutical company whose supply chain was very complex with distributors, affiliates and other partners. Lean was implemented in isolation, in manufacturing, but the distributors hadn’t changed their behaviour, continuing to over-forecast so production had to increase to catch up with the backlog. This resulted in excess inventory and a bloated supply chain.

START WITH QUICK WINS AND CELEBRATE SUCCESS

In both sport and supply chain, nothing creates belief more than winning. That is why we always recommend building some quick wins into the start of any lean initiative. For our clients this often involves reducing the inventory of the fast moving, predictable demand. Because this is also a counterintuitive process change, it helps people gain confidence and make a leap of faith to implement these types of actions. It also immediately returns money to the business to fund further implementation.

Another way to reinforce positive change is to celebrate successful outcomes along the way. There are many ways to do this, from recognising people and teams in company meetings to entering awards programmes to communicating financial outcomes on quarterly earnings calls to investors. When outcomes are made visible, they are much more likely to be repeated and sustained.

In the same way that weight loss and strength training helps people live longer and perform better in sports and day-to-day activities, lean companies also benefit from gaining a sustainable competitive edge. What does this really mean? Making the investment in restructuring, implementing lean processes and training people will make a company fitter, enabling it to perform better in all economic conditions.

The benefits we have been able to measure include:

  • 50 percent reduction in fast-moving inventory with predictable demand patterns. Most people overstock their fast selling items because they are terrified of running out of them but when the supply chain is fast and predictable, there is absolutely no reason to hold extra stock;
  • 30 percent overall reduction in inventory costs;
  • Customer service goes up due to better matching supply to demand;
  • Relationships with suppliers improve through more efficient payment and procurement processes;
  • New products can be introduced 20 percent faster because there is always minimal inventory in the chain;
  • Reduction of slow and obsolete (SLOB) products;
  • Employee morale goes up because people feel this is the right, common-sense way of working that is therefore more empowering and less frustrating;
  • A net reduction in CO2 and waste of limited natural resources;
  • Increase in long-term shareholder value.

A LEAN FUTURE

Although the economy will eventually recover, we expect more years of austerity for Europe and the United States. Emerging markets will become more prosperous and grab a larger slice of the global GDP pie. As an approach to supply chain management, lean is nothing new. But with more athletes joining the race, now is the time to step up our training regime and improve our performance or we will not make it to the finishing line.