Fundamental failings in “Lean” procurement | Supply Chain Digital

A side-loading truck

“The famous Lean approach, adopted by companies all over the world, considers the expenditure of resources on anything that doesn’t create value for the end customer as waste and seeks to eliminate unnecessary processes within this framework.

The concern, however, is that companies are losing out by either not fully understanding the practice or not committing themselves enough to the change in thinking adopting it requires.”


Michel Baudin‘s comments:

The points in the article are valid, and could be summarized by saying that, in procurement/supply chain management/logistics, efficiency should never be pursued at the expense of effectiveness.

The more fundamental mistake, however, is the half-baked notion that “anything that doesn’t create value for the end customer is waste.”  Any business activity involves tasks the customer is never aware of, let alone values, and a narrow-minded focus on what customers are “willing to pay for” blinds managers to the need and the benefits of, for example, supporting suppliers.

Customer willingness to pay is not an actionable criterion to identify waste. An activity is waste if, and only if, your performance does not degrade in any way when you stop doing it. If eliminating it does not degrade your quality, increase your costs, delay your delivery, put your people at risk, or make your employees want to quit, then it is waste. But, even with a proper perspective on waste, eliminating it only improves only efficiency, not effectiveness. It’s about getting things done right, not getting the right things done.In a manufacturing company, procurement/supply chain management/logistics is the pit crew supporting production, and the business benefits of doing this job better dwarf any savings achieved through efficiency.

Reducing order fulfillment lead times, introducing new products, or customizing them helps the business grow. And it may require spending more rather than less on the supply chain, for example by moving trucks that are not 100% full.

Supplier Assessment — It’s The Gut That Counts Says Nobu Morita | Pat Moody

“Beyond Report Cards, Beyond Balance Sheets?  When Evaluating Suppliers, Why It’s Your Gut That Counts.

What’s the best way for supply management and manufacturing pros to evaluate current and potential suppliers? And is there only one “best way?”  There are hundreds of supplier assessment tools, books and checklists, but there is no single standards committee that absolutely dead nuts certifies what’s out there, especially when your supplier is located two continents and three oceans and four hand-offs away!”


Michel Baudin‘s comments:
When assessing a manufacturing organization, I always look for information from three sources:

  1.  Data, and preferably raw rather than cooked into metrics by recipes unknown to me.
  2. Direct observation of production.
  3. What people tell me, which may or may not agree with the data and what I sense on the shop floor.

I don’t see Morita as disagreeing with this, but I think we must be careful about basing decision on a “gut feel,” which may be no more than the expression of prejudices you didn’t even know you had.

Still, when your gut feel tells you that something is not quite right, it often is. I wouldn’t base my decision on it, but I would take it as a signal that further investigation is needed.

Demand/Capacity Curve | John Dyer | IndustryWeek

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“True company growth can be achieved when the maximum capacity is increased by breaking bottlenecks and the sales team makes promises to the customers that the business process can support.”


Michel Baudin‘s insight:

John Dyer presents the capacity of a business as a constraint set by the slowest operation in its process, also known as its bottleneck. In manufacturing, at least, it is more realistics to think of it as fuzzy.

If a solid line exists, we don’t usually know exactly where it is. Even an operations manager who claims to know it won’t share that information with colleagues.  Right after claiming in a meeting that production is running full blast, he or she miraculously finds a way to squeeze 15% more out of it.

If  a perceived bottleneck is a purely human process requiring no unusual skills, it can eliminated by rebalancing the work. Dyer’s discussion is centered on where it is a machine and its capacity can be increased by process improvement.

But does this mean that continuous improvement should be focused exclusively on the bottleneck? In many cases, the bottleneck is the most sophisticated machine on the floor, and increasing its capacity  requires engineering knowledge that is not present in the factory’s work force, and can only be done by bringing in outside experts.

On the other hand, the work force has the skills needed to improve the performance of other operations. This can ensure that the bottleneck has the materials it needs at all times, and free human resources that can be trained to operate and maintain the bottleneck, and eventually to improve it.

This article has a “Part 2” about  why it is so difficult to work with in-house suppliers . Dyer’s term for in-house suppliers is “intercompany suppliers,” which confused me, because I took “intercompany” to mean “between companies,” the way “international” means “between countries.”

His point is that in-house customers may be bad for a supplier because transfer prices calculated on a cost-plus basis can be below market prices. This causes in-house suppliers to give preferential treatment to their external customers.

A remedy that Dyer does not seem to consider is to make transfer prices between divisions match market prices. This works as long as the supplier division has external customers — or the customer division external suppliers —  through which market prices can be known.

In many cases, in-house suppliers make parts based on the company’s unique technology, that have no outside market, and for which there is no market price. Transfer prices then have to be negotiated in a way that is “fair” to both sides. Figuring out what that means is a conflictual process, that is avoided by treating the supplying division as a cost center rather than a profit-and-loss center.

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When Bad Things Happen to Good Supply Chains | Industry Week

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“Any single failure anywhere in the supply chain can bring operations and profits to a standstill. From the 2011 tragedies of the Tōhoku earthquake and tsunami in Japan to last year’s devastating Hurricane Sandy closer to home, Mother Nature has a way of reminding us to reexamine catastrophe preparedness.

These events, and the tragic aftermath that follows, also serve to remind the insurance industry of the challenges in quantifying risk and accounting for exposure in an increasingly complex supply chain environment. As a result, risk managers are being asked new questions as insurance underwriters require them to seek information from a broader range of stakeholders within and outside of their organizations.”


Michel Baudin‘s insight:

The article is limited to a list of questions an insurer might ask about a supply chain, some of which cannot be pratically answered. The supply chain management literature often states the need to know your suppliers’ suppliers and your customers’ customers, but most companies don’t, and practically can’t.

After all, the point of buying from suppliers is to delegate responsibility for the whole upstream supply chain. If you have to worry about it all the way to mining raw materials out of the ground, you might as well make it all in-house from scratch, like at Ford’s River Rouge plant in the 1930s.

Asking the right questions is fine, but providing answers is better. Supply chain disruptions come in many degrees of severity and a variety of frequencies, from trucks delayed by traffic accidents to earthquakes and tsunamis.

You can, and should have preplanned responses to small, frequent disruptions. That may involve building some slack in milk run schedules, keeping small buffers of stocks, or having contingency plans for alternative transportation…

But you cannot practically have preplanned responses to all possible catastrophes. What you need is to monitor operations with vigilance to get early warnings, and develop relationships with your suppliers and customers that are strong enough that they come together and develop an ad-hoc, rapid response when disaster strikes.

This is the lesson I see in Toyota’s response to emergencies, from the Mississippi flood of 1993 to the Aisin Seiki fire of 1997 and the Fukushima earthquake of 2011.

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Enterprise Ireland and Lean | Irish Times

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“The Japanese are renowned worldwide for their car production where the concept of the management philosophy Lean derives from. It all began at Toyota when the car manufacturers discovered a new, more efficient method of producing cars valued by customers all over the world. The principles learned at Toyota became known as Lean which is claimed can be applied to almost any business. The core principle is creating value by reducing waste and unnecessary risk.”

Michel Baudin‘s insight:

While informing us that the Irish government has an agency promoting Lean, this article reflects common misconceptions.

No, it’s not a “Japanese management philosophy.” it is an approach developed by individuals who happened to be Japanese, which is not the same. Most Japanese today do not know or practice it, and quite a few non-Japanese do.

And this emphasis on “creating value” is an American talking point, not the Toyota Production System.

According to the article “Toyota benchmark themselves constantly,” which is news to me. While it is clear that Toyota is on the lookout for new ideas, I had not heard of Toyota doing benchmarking surveys of competitors. My understanding is that Toyota’s management considers such surveys to be a waste of time.

The article equates Lean with Continuous Improvement, giving the impression that it’s all there is to it.

And finally, the article repeats the Business Week claim that the Shingo Prize is “the Nobel Prize for operational excellence.”

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Lean Assembly, Lean Logistics, and Euclides Coimbra’s Changes

My fellow consultant and author Euclides Coimbra has only written two reviews on Amazon, both on July 3, 2006, giving five stars to my books Lean Assembly and Lean Logistics, and commenting as follows:

  1. About Lean Assembly: “Very good book. Full of details. Useful for implementers. Knowledgeable readers can find many info between the lines. A wonderful contribution for Kaizen and Lean knowledge.”
  2. About Lean Logistics: “Following Lean Assembly Lean Logistics is a natural continuation. The style is the same and the information as valuable as Lean Assembly. A must have for any Kaizen and Lean implementer. Lots of details and useful information.”

A few months later, I went to work for him, and grew to appreciate his consulting talents. We parted later on good terms and I considered him a friend.

I just received a copy of his 2013 book, Kaizen in Logistics & Supply Chains, and found much overlap in subject matter with the two books of mine that he previously considered a “wonderful contribution” and a “must have.” I assume he changed his mind because they are not in the bibliography, and I couldn’t find my name anywhere in his book.

Lloyd’s Confuses Lean with Outsourcing | The Strategic Sourcerer

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“Lean manufacturing practices can create efficiency and reduce waste, but smaller inventories put companies at risk for major supply chain disruptions. Many organizations are reconsidering their procurement strategies for emergency preparedness after discovering their operational vulnerability in the aftermath of the 2011 earthquake and tsunami in Japan, as well as the flooding in Thailand, according to Lloyd’s.”

Michel Baudin‘s insight:

Since when is purchasing parts from half-way around the world a “Lean manufacturing practice”? Toyota and Honda do import parts into the US from Japan, but they have been working steadily to increase the domestic content of the cars they build in the US.

In a Lean supply chain, you use as many local suppliers as possible and  only buy from afar if you can’t help it. And local suppliers are subject to the same disasters as you, and inventory in the pipeline is just one more asset that can be destroyed in the earthquake or tsunami.

In the late 1930s, the German aircraft industry organized its supply chain in a system called “ABC,” which involved frequent deliveries from nearby suppliers and almost no inventory at the assembly site. It was in anticipation of a man-made disaster: enemy air raids. Allied bombs could not destroy components that had yet tp be made.

The article just reiterates the old belief that you can protect yourself against shortages by holding inventory. It may work for crude oil, but not for the 30,000 items needed to build a car. To protect against a Fukushima type event, you would have to keep weeks of safety stocks of all the items all the time, which is not a practical idea.

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Lean Survival Strategies in the Textile Industry | Chain Reactions | Industry Week

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“The traditional lean approach […] omits the customer from the scenario—a rather glaring omission. The other approach, though, is extended lean, which goes beyond the plant level to include the customer and other supply chain partners. ‘Traditional lean works on processes within the plant,’ Lail says, ‘whereas extended lean connects the entire supply chain.’”

Michel Baudin‘s insight:

I am sure many others familiar with TPS and Lean will find the notion of a Lean approach that “omits the customer” as objectionable as I do. The gist of the article is that textile manufacturer Valdese Weavers survived by ignoring manufacturing and focusing instead on moving full truckloads.

This puts the Valdese Weavers experience in direct contradiction with that of companies that have seen the pursuit of transportation efficiency degrade ratther than enhance their overall performance, as documented, for example, in the work of Hau Lee.

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