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Leaning into the Supply Chain

Sept. 5, 2014
Manufacturing is just one component of the supply chain, so there is a huge opportunity for lean within supply chains.

When it comes to driving continuous improvement at the plant level, lean has a long and well publicized history, thanks to its laser focus on eliminating waste from all aspects of the production process. However, in a world that increasingly looks at the global marketplace through a wide-angle supply chain lens, the advantages possible from lean initiatives are now being sought throughout the extended enterprise, not just the shop floor. Clearly, lean is not just for production anymore.

"Lean supply chain touches all aspects of supply chain and logistics as defined by the SCOR model: plan, source, make, deliver and return," explains Paul Myerson, a professor of practice in supply chain management at Lehigh University and author of two books on lean supply chain, including "Lean Retail & Wholesale" (McGraw-Hill, 2014). "When you look at it that way, manufacturing is just one piece of the supply chain, so there is a huge opportunity for lean within supply chains. In manufacturing, lean is typically thought of as a pencil-and-paper process, but when you consider the broader realm of supply chain and logistics, technology not only enables lean but it can help identify and eliminate waste by substituting information for inventory."

Rita Peralta, Pratt

Consider the supply chain of Pratt & Whitney, an East Hartford, Conn.-based manufacturer of aircraft engines and a division of United Technologies Corp. (IW US 500/23). Pratt & Whitney is in the midst of a ramp-up to triple production of jet engines by 2020, an effort that will rely on suppliers to produce roughly 80% of the components and parts. As part of that initiative, the company has invested more than $10 billion in long-term agreements with 90 key suppliers.

To manage and coordinate that kind of activity, Pratt & Whitney recently opened an Operations Command Center, which focuses on lean continuous improvement between the company and its supply chain of roughly 400 suppliers worldwide, explains Rita Peralta, general manager of the Command Center. "Our goal is to identify supply chain issues early and collaborate with the suppliers early before a potential constraint or impediment occurs." Using data collection and analytics technology, the Command Center's quality and delivery assurance team gathers and shares information related to each supplier's on-time delivery status.

"We track what we call proactivity charting, and we give positive reinforcements to suppliers who provide early-warning indicators that they might not hit their promise dates," Peralta says. "There are contractual requirements that every week the suppliers will update our portal on their promise dates, so we don't penalize them for notifying us early because that's what we want. When we are notified early we can all take action."

Replication is the Key

Pete Savu, United States Gypsum Co.

Lean Six Sigma is central to the global supply chain efforts of USG Corp. (IW US 500/261), a producer and distributor of gypsum wallboard, joint compound and related products for the construction and remodeling industries. Through various initiatives, USG achieved close to $10 million in savings last year while significantly improving operating efficiencies. One of the keys to the company's recent success is its workforce; every employee in the supply chain organization -- about 100 people -- has been trained in lean Six Sigma.

"The key to our lean Six Sigma efforts is replication," explains Pete Savu, senior vice president, manufacturing and global supply chain with Chicago-based United States Gypsum Co., a subsidiary of USG Corp. "When we successfully complete a project at one of our plants, we apply that process at another 10 or 15 plants, wherever appropriate. You don't want to have to reinvent the wheel." Lean Six Sigma, in fact, is embedded in all of USG's manufacturing plants in North America.

Lean Six Sigma within USG's supply chain is relatively new, Savu notes, but it's becoming much more widespread as the company's training programs take root. "We do a lot of cross-functional work within our supply chain," he says, "so if we have a warehouse in one region with stock-out problems, we'll involve production, transportation, logistics, etc., to solve that problem. We'll use enterprise value stream mapping from several locations throughout the entire process." Lean Six Sigma is even spreading into other corporate offices at USG, including sales and finance. "Nothing here is done in a silo," Savu says.

Treating an Epidemic of Waste

Brent Johnson, Intermountain Healthcare
Ric Schreihofer, Duramatic Products

One industry that has been quick to embrace lean but relatively slow in its adoption of supply chain technology has been healthcare. "Healthcare is the only industry in the world that has not converted to a data synchronization-common format that would use bar coding to track products through the system," observes Brent Johnson, vice president of supply chain and support services with Intermountain Healthcare, a nonprofit system of 22 hospitals throughout Utah and southern Idaho. "We say we're focused on the patient, but we not only can't track products through the system, we don't even know who's walking around with a bad product in them because it's electronically not feasible."

In 2010, Intermountain and four other large healthcare systems formed the Healthcare Transformation Group, with one of the goals being to drive the adoption of GS1 product identification standards. It's been a slow process, but today about 70% of the manufacturers who supply the healthcare industry are now using GS1 bar codes or labels on their products.

One of the hurdles that's slowed the progression of supply chain management in healthcare is a lack of trust between the hospitals and the suppliers, Johnson says. "We'd like to be able to break down the barriers between us and the suppliers, and through increased trust and collaboration continue to not only reduce costs but improve outcomes and quality."

Another hurdle, he says, is that the healthcare supply chain "is full of a lot of waste. People enter the healthcare field to give care, not to run a business. It's almost blasphemous sometimes to say, 'We need to run things like a business.' "

But that's exactly what Johnson was asked to do when he was hired from outside the healthcare arena to address Intermountain's supply chain inefficiencies. Since 2005, the healthcare system has driven out $250 million from its cost structure by tackling the issue of waste head-on.

"We started by simplifying our supply chain," Johnson explains, "which meant we had to take over the contracts from third parties and distributors. We went to about 150 suppliers and said, 'You used to send your products to a distributor. You're now going to send them directly to us.'  Then we had to hire supply chain talent, specifically inventory control experts from outside the industry who were skilled at managing inventory from the suppliers into our warehouse."

Many doctors and nurses tended to order and use products based on their personal preferences, believing those products were absolutely essential to keeping patients alive. The fact of the matter is, though, many of those products are commodities, so nursing product committees were formed to whittle down the number of SKUs from 13,000 to less than half that, roughly 5,500 products.

Two years ago, Intermountain opened its Supply Chain Center, a 327,000-square-foot complex that includes a distribution center, materials management, logistics and administration. Armed with the latest warehousing technology, such as a new warehouse management system, a cubing and dimensioning system, and an automated conveyor system, the Supply Chain Center had an initial goal of reducing $80 million in costs within five years; the Center ended up achieving that goal in just two years.

Only as Good as Your Forecast

Adam Wood, MTU Americas

Like Intermountain's Brent Johnson, Ric Schreihofer was brought in from another industry sector when he was hired as continuous improvement and lean manufacturing manager of Duramatic Products, the manufacturing division of Rotary Corp., a producer of lawn mower parts and accessories. Schreihofer's previous experience with lean was at a specialty chemical company, but as he points out, "Lean skills are completely transferable. There might be some idiosyncrasies depending on where you learned it, but the theories and the concepts are the same, and they all apply."

In support of the company's breakthrough objective of one-piece flow, Duramatic has reduced multiple production lines down to one line, which now handles 60% of the production of its larger-gauge products. That transition freed up 75% of the company's workforce in those processes, with those employees redeployed internally. "We're now doing 60% of a product line with a quarter of the resources," Schreihofer says.

Duramatic tracks demand and forecasts very tightly, and has a just-in-time mentality when ordering raw materials, with the goal of not having to maintain additional inventory. "We get what we need when we need it, where we need it, and our vendors are in tune with what we do," Schreihofer says.

Another manufacturer transitioning to one-piece flow is MTU America, a wholly-owned subsidiary of Rolls-Royce Power Systems and Daimler. Based in Novi, Mich., MTU America manufactures engines for ships, land and rail-mounted vehicles and industrial applications, as well as distributed energy systems, and though its production volume is fairly low, product complexity is very high. As a result, the company's lead times can be fairly long, particularly on the larger systems, where lead times of nine months are not uncommon.

"As with any supply chain, you're only as good as your forecast," notes Adam Wood, director of service business, Americas. "We have a monthly rolling forecast, where we'll meet with our sales team to go over what's been forecast, what actual orders we have, and discuss if we need to make adjustments. We break that sales forecast down to a model-based forecast, which then drives demand down to the components."

MTU America's biggest supplier is its parent company in Germany, and the two have a very close collaborative relationship when it comes to forecasts and delivery. For external suppliers, MTU uses commodity teams, which consist of staff from purchasing, material planning and supplier quality. The commodity team works with the suppliers on any changes that might be needed.

In 2011, the company opened an aftermarket logistics center, a 400,000-square-foot facility that uses an automated storage and retrieval system for outbound distribution of thousands of spare parts in support of its customers.

"At the end of the day, the biggest accomplishment from our lean supply chain initiative has been improved customer satisfaction, and on-time delivery and productivity are the two areas we've seen huge gains in," Wood says. "It's very difficult to get started in lean because it's hard work. But once you start seeing the gains, it becomes infectious."

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