Healing Supply Chain Pain

Healing Supply Chain Pain

In Brief
There's no right answer to the question of where to begin to apply lean logistics. Every company is different in where it feel sthe most pain. For Saint-Gobain Abrasives it was gaining visibility and control over distant raw material suppliers. For Carl Zeiss Vision, it was bringing order to the receiving dock at its main distribution center. For Mitsubishi Caterpillar Forklift America Inc. (MCFA), the opportunity was to solve a nagging problem for customers.
In a recent survey, supply chain executives said cost containment and reduction (39 percent), supply chain visibility (35 percent), inventory management and optimization (33 percent), and escalating customer expectations (33 percent) are becoming their greatest challenges.1 Let’s take a look at how a lean approach to logistics can help.

Consider the Total Cost of Fulfillment

The supply chain is often viewed in terms of the costs shown in customary accounting statements. However, many of the costs of delivering an item to the point of use are hidden. Lean logistics practices reveal new metrics and improvement targets that traditional practices miss.

When a company digs into its true costs of delivering a product through its end-to-end total supply chain, it finds that many things are not measured. To get a handle on hidden costs, Robert Martichenko and Kevin von Grabe, Toyota veterans and leaders of the third party logistics (3PL) company LeanCor, recommend that a cross-functional team prepare a detailed financial baseline that includes the cost of:

• People/overhead in customer service and demand planning
• Outbound/inbound transportation, both customer - and intra-company-related, for materials and goods
• Outbound/inbound expedited freight cost
• Distribution operating expense and cost of space
• People/overhead for outbound/inbound logistics management
• People/overhead for material handling in both shipping and receiving
• Material handling equipment costs
• People and equipment in yard operations
• Storage trailers
• People/overhead in material ordering and planning
• People/overhead for supplier collaboration
• Total working capital tied up in inventory, plus carrying costs, including cost of capital, inventory damages, insurance, obsolescence, write-downs, and shrinkage.

These metrics will allow the company to track gains that go beyond freight or unit cost purchase reductions.

Looking at cost cutting alone will not yield lasting results. Attention to factors such as supply chain visibility and inventory will not only result in bettermanaged costs, but can also make the entire supply chain more competitive.

Visibility: Managing Material with Discipline and Data

Supply chain visibility means having real-time data showing what goods are ordered, what the supplier is doing with the order, where the order is at any given time — on a ship, in the port, on a train, on a truck, or in a warehouse — where it should be, where there are problems, and any number of other pieces of information.

Saint-Gobain Abrasives produces grinding wheels, sandpaper, and other abrasive products for retailers like The Home Depot and industrial manufacturers like Ford and Boeing. Tom Molleur, vice president supply chain, North America, says his supply chain team targeted inbound material flow for ontime improvement and cost reductions. He says, “We saw a lot of our raw materials arriving on non-preferred carriers, and not on time, or you’d have a supplier ship 50 lb. of product in three different boxes instead of consolidating them into fewer shipments. They used to ship to us a la carte, and incomplete shipments would trickle in randomly.”

To gain more control, Saint- Gobain Abrasives outsourced inbound flow of materials from purchase order creation through delivery to LeanCor, which stays in contact with suppliers, confirming that they are going to ship each order line on time, in the correct quantity, and meet mode requirements. LeanCor controls the process by creating the bill of lading for the supplier, which determines that a preferred carrier and the correct mode of shipment are used. By creating visibility through flexible IT systems, personal communication with suppliers, and daily discipline, one thing LeanCor can do is to take advantage of opportunities to optimize shipments. As an example, Molleur says, “LeanCor confirms when the supplier intends to ship one product two days early, and another product the next day on time. They can ask the supplier to hold the one and ship it a day later combined with the other.”

Freight costs have decreased, and Saint-Gobain also learned that other operational problems can be relieved by a methodical lean approach to inbound supply management. “A much more significant problem was that our manufacturing was struggling to meet schedules because of problems with raw material availability during the strong 2010 recovery. This could jeopardize service for our end customer,” Molleur says. “Raw material must be available to manufacturing so we can make and ship our products on time and customers can keep their manufacturing running. They’re making cars, engines, and airplanes. You can imagine what it could be like if they had to shut a line down because we were out of stock of a critical abrasive item.”

Molleur cites a typical situation from the past: “If we ordered a thousand pieces of a raw material, we’d hope a thousand pieces would arrive on time. If the supplier was going to short ship us, we didn’t know until it was too late. Many of our suppliers are overseas so some materials have twoor three-month leadtimes. A big surprise could really hurt us.” With early collaboration, LeanCor might find that the supplier could divert material from another customer or Saint-Gobain might determine that it could wait for a later shipment to complete the order.

Everyone involved in the supply chain at Saint-Gobain Abrasives now sees and shares the same data, providing visibility they had never had before. Material availability and inventory turns are improving significantly and freight costs are coming down at the same time.

Customer focus and lean logistics are also important to competitiveness. Other suppliers compete on service and leadtime, saying they are small and nimble, and that Saint-Gobain is too big to be as responsive. Molleur says, “Our stock service actually outperforms almost all of our competitors. It’s really important to us that we leverage this competitive advantage in the marketplace.”

Inventory: Reduce Working Capital Requirements through Standards for Suppliers

Inventory is a waste familiar to all lean practitioners. When supply chain inventory is spread throughout the world, controlled by many organizations, and affected by many uncertainties, it is daunting to contemplate. The process of asking why inventory is found in each place is complicated, but necessary.

Carl Zeiss Vision distributes eyeglass lenses to retail and wholesale chains, to eye doctors, and to its own facilities, domestically and internationally. Products are sourced from all over the world. Five years ago, the company consolidated its two North American distribution centers to a single one in Hebron, KY. They expected to find many duplicated activities and other waste that they could improve. They began by mapping activity flow in the distribution center.

It became obvious that the facility’s receiving area had big problems. It could take an item 10 to 25 days from landing on the dock to being put away on a shelf. Sue Armstrong, vice president of global supply chain at Carl Zeiss Vision, says, “All that inventory sitting on the receiving dock wasn’t on the shelf available to be sold, so it was waste of working capital and inventory, and waste from a service point of view because we were not able to release those lenses from the shelves for customer orders.”

A closer look showed that products were arriving in different configurations, with non-standard labeling, and in different boxes or packaging, requiring people in the distribution center to double handle, unpack and repack items into other boxes, or relabel them — wasted activity.

That time is now down to 24 hours. Not only is velocity greater, but two to three weeks’ worth of inventory is no longer needed. Armstrong says the improvement was accomplished through collaboration with suppliers. “We developed a detailed document which outlined how we wanted the shipment to come in,” she explains. “We went through several intensive months of conference calls with suppliers in China and other locations to reach an agreement on the most effective way of dispatching and receiving goods for the benefit of both the source and receiving location. Clear documentation was key to making sure there was collaboration and tracking.”

Armstrong continues, “It’s a supply chain leader’s responsibility to focus on the balance of working capital and excellent customer service. The more visibility we can get on available inventory, the leaner our processes are, the earlier and more efficiently we can get products to customers, and the lower we can make our working capital commitments.”

Another approach to inventory reduction was taken at Saint-Gobain Abrasives by giving attention to leveling purchasing amounts. If the standard practice is to order a full truckload of an item four times a year, they will examine actual consumption, calculating how much they use weekly or monthly, and consider ordering smaller amounts more frequently. Since average inventory on-hand value is approximately half the order value amount plus safety stock, Molleur explains, working on the order amount for thousands of incoming items has a great potential for savings.

Customers: Healing the Pain

Mitsubishi Caterpillar Forklift America Inc. (MCFA), which builds material handling equipment, uses its dealer network to reach direct customers. Dealers had a problem with freight rates. After the eight to 16 weeks it takes for the equipment to be delivered, the freight bill to the dealer could be markedly different from the firm price the dealer had quoted to its customer. Market conditions, load factors at the time of shipping, and other issues cause rates to fluctuate widely. For example, the dealer might get a 5000-lb. truck one week with a freight charge of $400, and another one the next week for $500. There could be many explanations depending on where the dealer fit on the carrier’s route that day or how many other forklifts were on the load. MCFA’s salespeople and customer service representatives took daily calls from dealers upset about the freight charges. Dealers operate on a small profit margin, which can be completely wiped out by unpredictably higher freight cost.

MCFA decided to offer dealers a flat rate that wouldn’t change between the time of quoting and shipping. They needed a process that would give dealers a consistent and reliable charge to use in its quote that would not change when the forklift shipped, yet would not cause MCFA to lose money. As its 3PL, LeanCor gathered data on the products, the dealers, rates from the past, and future trends.

Once the rate plan was designed, MCFA and LeanCor spent six months checking the plan rates against actual freight rates, shifting and adjusting them where necessary, and actually using the plan without telling dealers. Dealers’ quotes and actual charges now matched and complaints all but went away. When MCFA announced it to its dealer base, they had already demonstrated that they would come through. Because the dealer knows where the forklift is being delivered, how large it is, and what it weighs, it’s easy to figure what freight will cost. Being assured that their quotes would match freight invoices made the dealers’ world easier and MCFA now has an edge over the competition.
 

A Common Thread: Disciplined Performance

The lean logistics approach in all three companies is organized around PDCA (the Plan, Do, Check, Adjust cycle); Toyota-style A3 problem-solving and policy deployment tools; and standardized daily, weekly, and monthly meetings. A PDCA board from Carl Zeiss Vision with A3 problem-solving documents is shown on p. 17.

Bob Martinolli, director, operations planning and logistics at MCFA, describes what happens in a daily meeting focused on catching problems in real time. “We look at what was planned to do, asking, ‘Did we get the work done?’ We look at the key metrics we’re following. We see what’s gone well, what’s gone badly, what did we learn? Then we make adjustments, re-plan, and move on. It’s very structured, using lean tools in a very disciplined way.”

He continues, “Our people have become more disciplined. There’s a great emphasis on problem solving in the meetings. When people get into that mindset, deviating from the process feels odd. One of our big initiatives this year is becoming a more process-driven, problem-solving culture.”

The standardized meeting schedule is also vital at Saint-Gobain. Tom Molleur says his team is on daily conference calls and meetings on improvement. He has monthly meetings with procurement, purchasing, and transportation managers for a higher-level PDCA discussion — half strategic, half tactical. Managers host a call twice a week with the procurement teams, which include the LeanCor lead who works with Saint-Gobain’s data on a daily basis. The disciplined schedule of working meetings means people hold each other accountable, support each other, and gains are sustained.

Wide Open for Improvement

These three companies found that attention to supply chain and logistics was a gold mine of improvement opportunities. Lean leaders in operations functions must join forces with their counterparts in supply chain management in order to level multi-enterprise flow. Turning raw materials into products purchased by the customer is a complex system, but one that is ready for lean thinking.

Karen Wilhelm is a Target contributing editor and publishes the blog Lean Reflections.

Resources
Council of Supply Chain Management Professionals (CSCMP), Lombard, IL; 630-574-0985; www.cscmp.org
Martichenko, Robert and Kevin von Grabe, Building a Lean Fulfillment Stream, Lean Enterprise Institute, 2010.

Footnote
1. Eyefortransport, “Global Chief Supply Chain Officer Strategy Survey,” www.eft.com, April, 2010.