What lean supply chain management is – and why it matters
Defining the best supply chain strategy for each company is not an easy task. Although the objectives are known (more efficiency and lower costs), it is necessary to be careful when determining the best way to achieve these objectives effectively.
But before that: why does this subject matter? “Lean Supply Chain Management: a handbook for strategic procurement” author Jeffrey P. Wincel says the answer is simple: costs and margins. He cites as an example the fact that, in a manufacturing company, supply costs represent approximately 50% of the cost of goods sold.
In addition, he says that there are a lot of misunderstandings regarding the subject, mainly because many companies focus essentially on the lean manufacturing process and do not pay enough attention to the topic in the supply chain.
In order to bring more light to the theme, Soluparts gathered some information about lean supply chain management and clarified the main differences between this model and the traditional one.
What is Lean Supply Chain Management, and why implement it?
To determine the best strategy for your day to day, it is necessary to understand more about each of the approaches used in the market.
The Lean Production System is derived from the operations model called “The Toyota Way” that was born in Toyota’s plants in Japan, in the 1930s, as an alternative to Fordism. Its objective is to reduce costs on the production line, establishing minimum stocks and performing tasks in order to minimize waste and eliminate unnecessary processes. It seeks to map the tasks and allocate them in such a way that the whole process is optimized, whether through the specialization of labor in a specific phase, or the union of more phases in the same workstation.
Forgotten for some years, the theory was recently appropriated by the most modern project management philosophies, and today, it is adapted for different areas. The term “Lean” was coined by John Krafcik in 1988, and eight years later, it was defined by James Womack and Daniel Jones to consist of five key principles. They are the following:
- Generate value for companies and their customers. Although it seems like a simple task, most organizations fail to “guess” what customers need and how they want it.
- Value flow: from a clear study, you should map which steps add value to the product being developed. That way, you can avoid waste and make the entire workflow more efficient.
- Continuous flow: production itself, without interruptions. Serving the customer at their maximum demand leads to lower inventory levels
- Targeted production: based on improvement and the customer experience, the company starts to produce only what customers need, reducing inventory to the maximum.
- Continuous improvement: search for constant improvement of processes, always seeking the state of “perfection” in terms of added value delivered to the customer and reduction of waste.
In the same vein, lean supply chain management is an approach that aims to extract maximum productivity from all agents involved in the supply chain. It stands out mainly in terms of costs and margins, bringing greater efficiency within this environment and providing the ability to transfer supply chain funds to other areas within the company.
According to McKinsey, in a recent study, operations that focus on this type of approach have gains on two fronts: they can control excess costs and can improve customer service and customer satisfaction throughout the process – as they acquire extensive control of the supply chain. Improving points such as services, delivery times and frequency of services are some examples of this.
The North American consultancy cites the example of a pharmaceutical company, which reduced total transport costs by 25% to 30% by taking this approach in different countries.
Agile supply chain and COVID-19
The issue gains fundamental importance in the face of the new digital age that we are living in and, more specifically, in a pandemic context, in which different companies are studying the best way to transport inputs such as vaccines and medicines in the most efficient way possible.
In an article published on the Forbes magazine portal, Michael Mandel, an economic strategist at the Progressive Policy Institute, argues that supply chains should be made shorter, contributing to an increasingly sustainable production and making the most of available resources.
Points such as the digitalization of scenarios (with the forecast of increasingly aggressive cost cuts for different sectors), the adoption of a strong digital presence and clearly examining the risks that each business must suffer over time are essential points to maintain a strong and effective supply chain – and lean supply chain management can help with that.
Despite bringing numerous benefits, lean supply chain management also brings challenges. For companies that do not have full knowledge of their supply chain – or do not have the possibility to clearly standardize all processes that are followed for a long period of time – the methodology is not recommended being applied, since, as soon as there is minimal interference within the chain, productivity and efficiency gains will be lost.
In addition, if the volume of items transported increases dramatically from one day to the next, the approach will need to be carefully reviewed, since the physical location of the transport must be overloaded. If there are no previous studies on this, the “urgency cost” can result in increased expenses with transportation and overtime for employees.
Therefore, it is necessary to make a complete and effective study before implementing the methodology within any company. In a Harvard book on the subject, there is the quote: “before developing the supply chain, consider the nature of the demand that your product requires”.
How to implement it?
According to McKinsey, there are six pillars that must be observed to implement this type of strategy within the company. Most of them are pragmatic and require little financial investment from companies. See below:
According to the North American consultancy, they can result in:
– Better processes: Although resistance to changes and decreased efficiency is common, it is possible to obtain significant changes in logistics when re-evaluating each stage of production. For example, on many orders, product separation and packaging processes can be combined, reducing steps and optimizing transportation and space.
– Train people: By having trained people and a better organization of workspaces – avoiding excess people in periods of low demand – it is possible to increase efficiency by 15%. Some companies have achieved even better results with the extra help of temporary employees, usually students.
– Interaction with third parties: deposits are not islands. To operate efficiently, a distribution center must effectively interact with three main groups: suppliers, internal and external customers, and with other sectors within the organization itself. Understanding demand, again, is an essential step in coordinating this process.
– Flexibility: Many locations choose a unique approach to warehouses, rather than segmenting them according to the types of products required by the customer. But it is worth paying attention to that. A warehouse from a pharmaceutical company was able to reduce order processing time by 20% simply by eliminating very high shelves.
– Sense of ownership: Outsourcing is a common strategy for companies that do not have distribution as an essential competence. However, many of these businesses tend to have a less personalized and more general approach, which can create collaboration gaps between suppliers and customers. Therefore, by closely analyzing these processes and creating a sense of ownership, optimization will be easier to visualize and achieve.
And, if you are interested in getting deeper into the topic, the Massachusetts Institute of Technology (MIT) provides an online course on the subject. Find out more here.
In addition to bringing more cost efficiency to companies, lean supply chain management can make the supply chain even more resilient. In an article recently developed by Soluparts, we identified seven ways to make the supply chain even more resilient over time.
In the article, points such as adopting a centralized flow of processes and attention to data appear in a fundamental way, contributing so that more and more companies can adapt to the challenges of the new digital age and have maximum efficiency within their daily lives.
Check out our content about the five main trends that are revolutionizing supply chains.