The Principles of Lean Supply Chain Management Dr Andrew Fearne Centre for Food Chain Research, Imperial College London

Page 2 Presentation outline Competitive drivers Core Concepts Key Challenges Conclusions

Page 3 Competitive Drivers Assets & Utilisation Assets & Utilisation Company Competitors Cost Differentials Value - Seeking benefits at acceptable prices Consumer/Customer COMPETITIVE ADVANTAGE (Christopher, 1994) Service Excellence Continuous Innovation Excellence Operational Excellence

Page 4 Competitive Drivers Commoditisation –Relentless pursuit of standardisation and market power Exclusive Focus on cost/price/market share “Commodities are generally perceived as cheap products that have had very little effort put into them” Anna Jenkins, Director of UK Forestry Stewardship Council –Differentiation increasingly difficult Product Life Cycles shrinking Information and technology transfer reducing entry barriers –Innovation increasingly important Reduce costs and add value Sole source of sustainable competitive advantage –Break out of the commodity trap What do my customers\consumers value? What are they willing to pay for? Opportunity for above average margin?

Page 5 Competitive Drivers The Profit Pie Value portion Commodity portion Planning Horizon Long term Short term Trading Relationship Adversarial Partnership

Page 6 Core Concepts Fact No.1 - Cost reduction is the major catalyst for supply chain management Fact No.2 – First move is the (ab)use of power to squeeze costs upstream Fact No.3 – Sooner or later firms ‘discover’ lean manufacturing –Reduction of total cycle time through the elimination of waste –Focus on products and value streams rather than asset management –Systematic review of value and elimination waste within the manufacturing process Fact No.4 – Leaning the (internal) manufacturing process involves major change so leaning the supply chain always left to last Fact No.5 – Leanest manufacturer process is only as good as its supply chain Fact No.6 – Cannot assume supply chain will fall in line –Requires strategic orientation towards the supply chain

Page 7 Tier 2 Supplier Supply Chain Business Processes Lean Supply Chain Management: Integrating and Managing Processes Across the Supply Chain Information Flow Marketing & Sales Logistics Purchasing Production R & D Finance Tier 1 Supplier Customer Consumer/ End-user CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT PRODUCT DEVELOPMENT AND COMMERCIALISATION RETURNS Source: Adapted from Douglas M Lambert, Martha C Cooper and Janus D Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol 9, No 2 (1998) p2 PRODUCTION FLOW

Page 8 Core Concepts Customer Relationship Management –Work with key customers to improve processes, eliminate demand variability and non-value-added activities Customer Service Management –Administration of PSAs Demand Management –Key element in leaning the supply chain as customer demand is biggest source of uncertainty, variability and supply chain inventory Order Fulfillment –Integration of manufacturing, logistics and manufacturing plans Manufacturing Flow Management –Product pulled through the manufacturing process, driven by delivery dates (JIT and flexibility to respond quickly to demand is critical) Supplier Relationship Management –Mirror image of CRM, with key suppliers supporting key accounts Product Development and Commercialisation –Time to market is imperative (joint planning, design and launch) Returns Management –Increasingly important route to sustainable competitive advantage (CSR and productivity improvement opportunities)

Page 9 How Customer Relationship Management Affects Economic Value Added (EVA) Customer Relationship Management’s Impact Retain and strengthen relationships with profitable customers Increase sales volume Sell higher margin products Improve “share of customer” Improve mix (align services and cost to serve) Improve plant productivity Targeted marketing Reduce services provided to less profitable customers Improve trade spending Eliminate or reduce services provided to low-profit customers Optimise physical network/facilities Leverage new and/or alternative distribution channels Reduce general overhead/management/administrative costs Reduce order processing costs Reduce human resources costs/improve effectiveness Improve demand planning Reduce safety stock Make to order, mass customisation of inventories Reduce accounts receivable through faster payment Improve asset utilisation and rationalisation Improve product development and asset investment Improve investment planning and deployment Sales - Cost of Goods Sold Inventory + Other Current Assets Current Assets + Fixed Assets Total Assets Gross Margin - Total Expenses Net Profit + Net Sales Net Profit Margin [Net Profit] [Net Sales] % Cost of Capital x Economic Value Added = -

Page 10 Key Challenges Strategic (Lambert & Pholen, 2001) –Lack of measures that capture performance across the supply chain –Complexity of supply chain performance/management –Goal of encouraging co-operative behaviour across corporate functions and across firms in the supply chain

Page 11 Types of Inter-company Business Process Links Tier 3 to Initial Suppliers Tier 2 Suppliers Tier 1 Suppliers Tier 1 Customers Tier 2 Customers Tier 3 to Consumers/ End-Customers Tier 3 to n suppliers 1 2 n n n 1 n n 2 1 n 1 1 n Initial Suppliers n 1 n 1 2 n Tier 3 to n customers Consumer/End-Customers Managed Process Links Monitor Process Links Not-Managed Process Links Non-Member Process Links Focal Company Members of the Focal Company’s Supply Chain Non-Members of the Focal Company’s Supply Chain Source: Adapted from Douglas M Lambert, Martha C Cooper and Janus D Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol 9, No 2 (1998) p7

Page 12 Key Challenges Strategic (Lambert & Pholen, 2001) –Lack of measures that capture performance across the supply chain –Complexity of supply chain performance/management –Goal of encouraging co-operative behaviour across corporate functions and across firms in the supply chain –Need to: go beyond internal metrics and take a supply chain perspective determine interrelationship between corporate and supply chain performance align activities and share joint performance measurement information to implement supply chain strategy extend the ‘line of sight’ within the supply chain allocate benefits and costs resulting from functional shifts within the supply chain differentiate the supply chain to achieve competitive advantage Operational –(Information) Technology is moving faster than our ability to exploit it: Investment in people is as important as investment in technology

Page 13 Conclusions Economics –Efficient allocation of scarce resources Marketing –Effective allocation of resources Operations Management –Execution of strategic objectives Supply chain management –Effective process integration to secure benefits beyond the firm Reduce costs Reduce time Add value Improve knowledge throughout the supply chain Lean supply chain management –Optimisation of process integration Add more value at lower cost and faster and than the competition Beware the commodity trap!