Supply Chain Management Lecture 9 – Lean and Agile Alexa Kirkaldy

Lecture 9 - Learning Objectives On completion you will be able to: Distinguish the main principles and differences between lean and agile approaches to SCM Recognise the difference between push and pull strategies Understand what is meant by quick response and vendor managed inventory

Definition of Lean and Agile Dictionary makes the distinction clearly when it defines lean as “containing little fat” whereas agile is defined as “nimble”. A convenient interpretation of both paradigms is due to Naylor et al. (1999) as follows: Agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace. Leanness means developing a value stream to eliminate all waste, including time, and to enable a level schedule.

The Term ‘Lean’ Originated from IMVP (International Motor Vehicle Programme)  initiated by M.I.T.  primary concern was Japanese competitiveness advantages  focussed on Toyota Production System  produced the book ‘The Machine that Changed the World’

What is Lean Lean is  Doing more with less  a philosophy for identifying and removing waste across the whole business activities  About adding, creating and re-inventing value for customer and business  and is customer driven

Lean Thinking: 4 Fundamental Principals Add value and eliminate waste Centre on people who directly adds value Flow value from demand Optimize across organizations

The Seven Wastes Overproduction Unnecessary Inventory Inappropriate Processing Transporting Unnecessary Motion Waiting Defects Waste (Muda) Non value adding to product or service

Push vs. Pull Make or provide stock in anticipation of demand Driven by forecasts Necessary when lead- times are long Replenishment is based on customer demand Each unit places demand on supplier Desirable when lead- times are short

Push vs. Pull Operator 1 Operator 2 Operator 3 Decoupling or buffer inventory Operator 1 Operator 2 Operator 3 Orders Deliveries Orders Deliveries Push system Pull system

Agile - Quick Response Originated in US textile and apparel industry Takes total supply chain view of an industry –Understand overall performance, causes of poor performance, opportunities for improvement e.g. Mapped clothing chain- fibre to retailer: lead times, inventory, WIP 66 weeks total of which 55 weeks was waiting time Umbrella for information and logistics systems that combine to provide ‘the right product in the right place at the right time’ by using pull systems Led the fashion industry to make changes: –Compressed both development and production lead times to improve responsiveness

Case study: Zara’s Agile Approach Design Sourcing & Manufacturing Distribution Retailing

An agile supply chain Shared information on real demand Collaborative planning End-to-end visibility Daily P.O.S. feedback Capture emerging trends Listen to consumers Co-managed inventory Collaborative product design Synchronous supply Leverage partners’ capabilities Focus on core competencies Act as network orchestrator Virtual Network based Process aligned Market sensitive Agile Supply Chain

Creating an Agile Supply Chain Synchronize activities through shared information Work smarter not harder Partner with suppliers to reduce in-bound lead times Reduce complexity Postpone final configuration/assembly/distribution of products Manage processes not just functions Use appropriate performance measures

Agile or Lean? ‘Agility’ is needed in less predictable environments where demand for variety is high ‘Lean’ works best in high volume, low variety, predictable environments Adapted from Christopher M., Logistics & Supply Chain Management, Pearson, 4th edition, 2011, p 100 Volume Low High Agile Lean Lean but limited profit? Agile but hard to meet volume? Variety/Variability Low High

Generic Supply Chain Strategies - Agile or Lean Lean Plan & optimize Agile Quick response Kanban Continuous replenishment (via VMI?) Hybrid De-couple through postponement Demand characteristics Predictable Unpredictable Supply characteristics Short Long lead times Christopher M., Logistics & Supply Chain Management, Pearson, 3 rd edition, 2005, p 119

Comparison of Lean & Agile Supply Chains Characteristic / Attribute LeanAgile Typical productsCommoditiesFashion goods Order winnersPriceAvailability Profit marginLowHigh Dominant costsPhysical costsMarketing costs Purchasing policyBuy materialsBuy capacity Sharing of informationDesirableEssential ForecastingBased on algorithmsBased on collaboration PartnershipsLong-term, stableClusters, fluid membership Based on Harrison & van Hoek (2005) pp citing Mason-Jones et al (1999)

Hybrid of Lean and Agile Strategic inventory Forecast at generic level Economic order quantities Maximise efficiency Demand driven Localized configuration Maximize effectiveness Christopher M., Logistics & Supply Chain Management, Pearson, 3 rd edition, 2005, p 121

Lean/Agile Hybrid Vendor Managed Inventory Started with manual systems in 1970s Customer no longer places orders on the supplier Supplier takes responsibility for management and replenishment of inventory Customer shares Point of Sale (POS) data Supplier tracks sales and inventory levels Inventory replaced by information Customer gets higher reliability and availability Supplier is able to reduce safety stock, improve capacity management

What is JIT? Pull System Agile – short lead-times responding to real demand Lean - Waste has been removed from the process Just in time (JIT) is a production / fulfilment strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs. The business holds little stock and instead relies upon deliveries of raw materials and components to arrive exactly when they are needed. Deliveries are made in response to a signal (kanban).

The Responsive Business Christopher M., Logistics & Supply Chain Management, Pearson, 3 rd edition, 2005, p 138

Agile “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” Charles Darwin

Lecture 9, Key Points Lean seeks perfection by gradually reducing waste in four areas: –Specifying value from the customer’s perspective –Identifying the value stream via time-based process mapping –Making the product flow through the supply chain via JIT principles –Using pull scheduling JIT and Lean have been applied via –Vendor Managed Inventory where suppliers take responsibility for monitoring sales and inventory in the retailer’s process. Information replaces inventory and requires the integration of systems and standard procedures –Quick response logistics takes a total supply chain view and aims to be responsive to market trends, rather than making the product in advance by compressing development and production lead times

Lecture 9, Key Points Agile supply chains align organisational structures, information systems and logistics processes to exploit profitable opportunities in volatile marketplaces. Lean supply chains support cost and quality order winners, whilst agile chains support service and availability. Lean chains place orders for production to move in a regular flow, whereas agile chains assign capacity to make products where demand can not be forecast.

For next Tuesday Read the case studies on lean practices Ford and Toyota – one question Agility in the Smart car supply chain – one question Possible oral presentation questions How are push and pull approaches used in this supply chain or firm? Which approaches are common in this industry, lean agile, both? Is there an opportunity for this firm/chain to become more agile? Is there an opportunity for this firm/chain to become leaner? Is vendor-managed inventory common in this supply chain?