Lean and mean
There’s an old saying that "less is more" and decades-old assembly line thinking is proving the point. In fact, it may well be the supply chain solution that finally tames the excesses and expenses of global, regional and even local sourcing and distribution.
Elsevier Food International, Vol. 11, Number 1, February 2008
Len Lewis
The key, according to proponents, is ‘lean production’, a concept pioneered by Toyota Motors in the mid-1970s, which enabled the Japanese upstart to carve out a huge chunk of the US automotive market at the expense of industry giants like Ford and General Motors. It also resulted in a flood of executives making the pilgrimage to the Land of the Rising Sun to learn more about a process that promised to transform the supply chain from one end to the other.
However, the question remains: Can a process designed for manufacturing apply to a retail environment? By and large, the jury is still out. But a number of global companies are involved in ‘lean’ pilot projects. This includes Tesco which has torn a page directly from Toyota’s playbook and made lean production the underpinning of its global expansion programme and a key element in the recent launch of the Fresh & Easy convenience concept in the US.
Total quality management
The Toyota Production System was based, in part, on the writings of Henry Ford and the assembly line concept he created as well as the work of W. Edwards Deming, an American engineer and statistician who, in the 1950s, trained Japanese companies in total quality management as a way to reduce costs. TPS, or variations of it, can be hard to explain and even more difficult to implement, according to industry sources familiar with the concept. However, it combines ECR, Six Sigma, inventory management, automated replenishment and quality control circles to produce an ultra-efficient end-to-end supply chain. Its credo, if there is one, boils down to three words: don’t waste time!
The need to reduce waste throughout the supply chain is not a new subject for the food industry but the need to restructure it has never been greater. "There is still a lot of lead time in production and we must focus on how a company can redesign its value chain," said Edward Versteijnen, a principal in EyeOn, Netherlands-based business planning consultancy.
The need for a more flexible and demand-driven supply chain was underscored in a recent report entitled Stop Supersizing the Supply Chain, found that only 27 per cent of respondents said their supply chain is designed for volume flexibility and only 19 per cent said it is designed for flexibility in the mix. As such, the report concluded that much of the flexibility in the current supply chain comes about through the use of buffer stock. However, excess inventory only exacerbates inefficiencies in the supply chain and represents the antithesis of lean production, industry observers noted.
"Basically, lean is about delivering more customer value with less effort, cost and materials. It’s a new competitive dynamic," said Dan Jones, chairman and co-founder of the Lean Enterprise Academy in Herefordshire, England, and one of the architects of Tesco’s system. "It also keeps stores from becoming warehouses for slow moving products."
Dutch-based consultant Hans Eysink Smeets, believes that retail interest in lean production has been sparked by increased demand for private label products, a trend that has shifted power from manufacturers to retailers. This resulted in more companies focusing on category and supply chain management. "Tesco, Marks & Spencer, Delhaize, all have far more knowledge than manufacturers. Tesco, for example, may have 400 to 600 people engaged in category management whereas a manufacturer may have 40," he said. "Retailers are now in charge and looking for just-in-time manufacturing."
Lean production was adopted or at least attempted by a number of manufacturers in the US and Europe during the 1980s. But it largely stayed in the background until the dotcom implosion of the 1990s when inventory reduction became the battle cry for companies like Dell Computers.
Outsourcing woes
More recently, the trend toward outsourcing manufacturing to places like China and Korea has exacerbated the need for lean production. At the same time, distance remains the enemy of an efficient supply chain. "Oceans and lean are incompatible," said Jones. "The longer the supply chain, the more delays there are in the order flow. As such, there is some question about the impact of imports on a company like Wal-Mart. "But the real challenge facing lean providers is the inability of remote production facilities to respond instantly to changing consumer demand," Jones and James Womack, president of the Lean Enterprise Institute, said in an article in the Harvard Business Review.
"This means developing an end-to-end process that starts with raw materials and ends with products on the shelf. If we can compress time and take all wasteful steps out of the process we can dramatically improve availability, reduce costs and improve overall value to customers," he said.
As noted, Tesco is one of the most aggressive lean thinkers in retail today. Jones began working with the chain to adapt lean ideas for supermarkets in 1997. "The initial focus was taking waste out of the supply chain and eliminating unnecessary delays in inventory handling, packaging and shelf distribution."
Jones noted that the entire supply chain process might involve touching a product as many as 170 times throughout the system. If that can be reduced to 20 or 30, then the amount of time it takes to produce a product and have it available for sale can be cut from as much as 60 days to five days or less, he said. "This means you don’t have to store a lot of product. It enables high-volume product (from manufacturers) to flow into cross docking facilities where it is put into the right configuration and in shelf-ready packaging," he said.
Tesco began doing this with core suppliers that can produce purchased items in just hours. To further reduce time, Tesco picks the product up from the supplier’s shipping docks at specific times and takes the merchandise to distribution centres where fast movers and fresh products are cross-docked for delivery to stores.
Demand-driven ordering
"Suddenly, the chain found it had a more efficient supply chain for its core movers and seasonal products than its competitors. There was better availability of product because they were responding more closely to customer demand," he said. "When Tesco realised they could use the lean supply chain for smaller stores as well as the big ones at no additional cost, it was the beginning of a retail revolution in the UK and the complete redesign of convenience retailing. They are doing the same thing for Fresh & Easy in the US."
Online shopping also benefits from lean thinking. "Tesco realised it could be more effective to pick from big stores during slack periods rather than build a separate warehouse. This is also based on a rapid replenishment supply chain which made their home shopping network one of the largest and most successful in the world," according to Jones.
Asked if the system surpasses Wal-Mart, which is generally recognised as having one of the best supply chains in the industry, Jones replied: "Up to this point, Wal-Mart was thought to be the most efficient. But Wal-Mart’s ordering system is based on pallet quantities and by a lot of merchandise being store delivered rather than through central distribution centres. "And although Wal-Mart is not focused on fresh products, they have hired quite a few Tesco guys in an effort to figure out how to compete in this arena," Jones noted.
Retail backrooms, often seen as massively inefficient, may be one of the greatest beneficiaries of lean production. "It means moving away from batch ordering to an automated process with POS systems triggering continuous replenishment from the distribution centre. It’s also about how to fill the roll cages in the right order. If you can get the majority of fast moving items on shelf-ready fixtures and wheeled dollies you can simplify store handling," said Jones. At present, Tesco is pushing hard to implement this same tactic for non foods. "They aren’t perfect and the backrooms are still clogged. But if they were managing products traditionally, their backrooms would have to be three or four times the size they are now," he said.
Just-in-time production
Meanwhile, the impact of lean has proven to be just as dramatic among branded manufacturers, said Jones. "At one time, manufacturers were focused on centralising production in very large facilities with very complicated production schedules. But the economics didn’t look good because the supply chain was always full of inventory. Lean doesn’t necessarily mean cutting back on product, just manufacturing more closely in line with demand rather than driving production by forecast," he said. When orders are generated by the cash register, a retailer does not have to wait three or four days for suppliers to deliver an entire truckload of product – they get what they need when they need it rather than being forced into storing excess inventory, he added.
"The big hurdle is getting suppliers to move away from making big batches to making more products in line with demand. We’ve worked with some that have been able to increase business in high volume products by 30 per cent in six weeks," he said, citing Kimberly-Clark as one of the more aggressive in applying lean methods to their distribution and production operations in Europe and the US.
Six Principles of Lean Consumption
1. Solve the customer’s problem completely by insuring that all goods and services work, and work together
2. Don’t waste the customer’s time
3. Provide exactly what the customer wants
4. Provide what’s wanted exactly where it’s wanted
5. Provide what’s wanted, where it’s wanted and exactly when it’s wanted
6. Continually aggregate solutions to reduce the customer’s time and hassle.
Source: James P. Womack and Daniel T. Jones, Lean Consumption, Harvard Business Review, March 2005.
Ten Rules for Lean Production
1. Eliminate waste by analyzing the value of everything in the production stream
2. Minimize inventory to reduce costs
3. Maximize flow of products through the manufacturing and distribution system
4. Pull from demand with a just-in-time production and delivery system which holds down inventory
5. Empower Workers by creating quality control teams
6. Meet customer requirements by gathering all the details before production and distribution
7. Do it right the first time by closely monitoring every step in the supply chain
8. Design production systems for rapid changeovers in products
9. Partner with suppliers to reduce costly and inefficient paperwork and create an environment of trust
10. Create a culture of continuous improvement in order to adapt quickly to rapidly changing market demands
