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Follow-up Q&A to the Webinar “Lean Logistics and Supply Chain Networks: 8 Guiding Principles”

Martichenko, Robert; von Grabe, Kevin
11/16/2010

Follow-up Q&A to the Webinar "Lean Logistics & Supply Chain Networks: 8 Guiding Principles"

The Lean Enterprise Institute's webinar "Lean Logistics & Supply Chain Networks: 8 Guiding Principles" drew hundreds of questions from Lean Thinkers around the world who heard Robert Martichenko, CEO, LeanCor, and Kevin von Grabe, vice president, discuss a practical approach to extending lean concepts to supply chains. What follows are their answers to the most-asked questions that we couldn't get to during the webinar.

Q. Is measuring the total cost of fulfillment the same thing as activity-based costing? What's the difference?

A. I think total cost of fulfillment and activity-based costing are similar in that both models are trying to capture all costs in procuring, shipping, converting, storing, and processing goods in their operation. The difference would primarily be the detail of the supply chain costs in the total cost of fulfillment model. We are focused solely on direct and indirect supply chain costs and the impact to those costs as we make decisions.

Q. How should we go about developing a good total cost of fulfillment model? Are there good ones out there, or should we build it from scratch and update it over time?

A. We provided a model for ABE in the workbook as an introduction to the total cost of fulfillment concept. Our recommendation would be to use it as a starting point but to customize it as your business requires. As for any good model, it will need to be properly maintained as your business changes over time.

Q. Please define "horizontal thinking?"

A. Horizontal thinking can also be referred to "systems thinking." When we refer to "horizontal thinking" we are referring to thinking that appreciates that the decisions that we make in our departments have significant impact across our organizations. We need to recognize that basing our decisions solely on what is good for our departments risks a suboptimal solution for our organizations.

Q. How do you deal with businesses that have very strong seasonal demands from their customers?

A. It's very hard to use level loading in this situation. Seasonality is a reality for almost all supply chains. First we must confirm that the seasonal demand is real and that we are not creating it by promotions, sales activities, or historical behavior. Once we confirm that there is seasonal demand we recommend developing an inventory strategy for peak season and a different strategy for non-peak season. Remember that inventory strategy then drives the supporting strategies … transportation strategy, warehousing strategy and packaging strategy.

Q. How do you forecast for slow moving "C" class items to ensure you do not stock out?

A. We recommend classifying SKUs based not only on volume but also stability of demand. In fact, if a slow moving SKU has very stable demand, we may not need to forecast at all. Regardless, we prevent stock outs based on a standard inventory calculation.

  • Cycle Stock = average demand x replenishment interval
  • Buffer Stock = service level x standard deviation of demand x replenishment interval
  • Safety Stock = covers special cause variation. This number should be derived based on history, lead time considerations, and weather.

Q. Milk runs will work only for local suppliers, right?

A. Proximity of suppliers to your factory should not determine whether milk runs will work. However, the proximity of suppliers to each other is definitely a considering factor when developing milk runs. If suppliers are located more closely together, transportation costs will be easier to manage.

Q. How can we solve demand uncertainty problem?

A. See the answer above for forecasting slow-moving "C" items

Q. How do you change a customer's ordering pattern?

A. Instead of using the word change, we want to answer this question using two different words. The first word is "incent." We must make sure that we are not incenting our customers to order the way they do. Often we hear of discounting our products at the end of the month or the end of the quarter to hit our sales targets. This incents our customers to delaying their orders until they are offered a discount. The second word is "enable." Remember the principles of a lean fulfillment stream: Ship to the cadence of customer demand, move small batches more frequently and focus on lead time reduction. In order to support these principles we must enable our customers to order when they have consumed our products. We can do this by reducing or eliminating minimum order quantities, minimum order values, lot sizes and other parameters that are often found in purchasing agreements.

Q. How would using lean manage a bullwhip effect in a supply chain?

A. The first lean concept that helps manage the bullwhip effect is Pull. If we only produce and ship based on triggers from our downstream customer, we will eliminate overproduction and minimize demand variation. Some other Lean principles that can help manage the bullwhip effect are lot size reduction and lead time reduction. Traditionally as we move upstream in a supply chain lot sizes get larger (inventory is cheaper as we move back in the supply chain) and lead times get longer (customers are unwillingly to hold inventory). By reducing lot sizes we are enabling our customers' signals to be closer to the rate of demand. By reducing lead time, we are compressing total supply chain lead time and are better able to react to variation in demand.

Q. Have most of your examples of success included using value stream managers?

A. We have seen companies succeed by reorganizing based on their value streams and creating value stream managers. We have also seen companies succeed with traditional organizational structures. A few keys to success are the concept of systems or horizontal thinking and creating a problem solving culture. If we recognize that we must understand how our decisions support the system and we come to work every day with a commitment to make tomorrow better, we will be successful.

Q. Is there a point where high fuel costs will force us to abandon smaller transportation batches?

A. Possibly. This is where a good total cost of fulfillment model will help us understand the balance between transportation strategy and inventory strategy. As fuel costs go up, the benefit of moving smaller batches more frequently is reduced. As our businesses evolve and external factors change so should or strategies to keep our supply chains waste free.

Q. Is applying lean to logistics any different than applying it to other functions in an organization?

A. Some of the tools and tactics are different but the lean principles remain the same. We need standard work, a stable work environment, quality at the source to reduce defects and the need for rework, to flow material and information through the supply chain/value stream, visibility to that material and information and the pace setting process should be actual consumption of product by the end customer.

Q. Meaning no disrespect, but we have been hearing about lean for a lots of years. What's preventing organizations for moving forward? What seems to be the problem?

A. We think one of the issues that Lean faces is the failed directions that organizations have tried in the past. Lean often follows other philosophies that were not well understood, were not well supported, or were not right for the organization. In order to try and combat this, we are trying to emphasize that lean is not a project that starts and ends yet a different way of running your business and a different way of thinking. A real life analogy is how radical diets that may produce some immediate results but are not sustainable. If the goal is to live a healthier lifestyle, then we need an entire new approach to things not a short term diet.

Q. What's new in this book that isn't in other LEI workbook books?

A. There are a lot of similarities in Building a Lean Fulfillment Stream to other LEI workbooks but one distinction is the focus on the supply chain. You'll notice that our fulfillment stream map resembles a traditional value stream map but lends itself to more traditional logistical functions. Also, we introduce the concept of total cost of fulfillment which quantifies all costs that need to be taken into consideration when making decisions.

For more information:

Training in Lean Logistics and Distribution

Take a deep dive into lean logistics and distriution at the next Lean Supply Chain and Lean Warehousing and Distribution workshops, held on-site at LeanCor to let you see lean concepts at work in logistics and distribution. The workshops highlight the critical elements and "must know" concepts of lean as they apply to the supply chain, logistics, and warehouses.

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Go and See the Lean Supply Chain: Gemba-Based Workshop
Derek Browning; Robert Martichenko
Building a Lean Fulfillment Stream
Robert Martichenko and Kevin von Grabe