How to Achieve Lean Supply Chain

Executive Summary

• Many people want to know how to achieve a Lean supply chain.
• We cover important background on Lean.

Introduction

When people try to find out how to achieve a Lean supply chain, the first thing they run into is a large quantity of false information about the Lean supply chain. The following quotation is a good example.

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Top management knows that lean can add value, but many still haven’t moved past the initial education stage into full-scale lean supply chain implementation. One reason may be that they haven’t made the paradigm shift as to how to implement lean. The Lean Supply Chain is a system of interconnected and interdependent partners that operate in unison to accomplish supply chain objectives. There should be metrics involved to monitor these objectives to ensure success across the supply chain. These metrics should be reviewed frequently to ensure supply chain success. – Cerasis

Lean proponents have a way of presenting perfect-world scenarios that change things that Lean programs don’t control. I have reviewed companies that follow Lean approaches that don’t match what the Lean consulting firms say that Lean accomplishes.

This article will cover Lean from a realistic perspective instead of presenting a fantasy world about how to implement Lean.

Lean Planning Versus MRP

Procedural versus Lean planning is one of the most enduring debates in the area of supply planning. Lean is both a philosophy and several techniques. Lean adherents propose that the standard mathematics of everything from the usual supply and production planning methods to Economic Order Quantity are incorrect and can be improved upon by reducing order quantities.

Within Lean, there are several techniques, with reorder points being just one of them. This book proposes that the strongest approach leverages both schools of thought. The trick is determining which segments of the product location database should go out on which school of thought.

A significant difference between Lean and MRP or, more accurately, Lean versus procedural-based supply and production planning primarily has to do with the replenishment trigger. Supply and production planning procedures such as MRP, heuristics, allocation, cost optimization, and inventory optimization work off projections, while Lean replenishment works off an immediate need. This is often the case, as there are some reorder points that are calculated based on projections.

Reorder points can be calculated in several ways. For instance, they can be calculated differently based upon whether the demand history is lumpy or stable.

Lean adherents propose that the standard mathematics of everything from the standard supply and production planning methods to Economic Order Quantity are incorrect and can be improved upon by reducing order quantities. Lean proponents make accurate points that MRP and other supply and production planning software are implemented and run in most companies, leaving a significant opportunity for improvement.

It is also true that there is less than meets the eye with some of the most popular and well-known inventory calculations. For instance, EOQ often leaves out some considerations outside of ordering and holding costs. While many varieties of EOQ formulae can be pulled from research papers, there is also considerable complexity involved in using these more advanced formulae. It isn’t easy to find a formula that incorporates all the dimensions of factors that should set the economic order quantity – and of course, only the more basic EOQ formulae tend to be available in enterprise software.

The standard dynamic safety stock formula is also problematic and much less useful than generally proposed – as is covered in the book Safety Stock and Service Levels: A New Approach.

Reorder points are a major method used by proponents of Lean. Reorder point planning is an early approach to supply chain planning; however, while often dismissed as passé, it has applicability to several circumstances. Reorder point planning can be used effectively for products that are both easy and difficult to forecast.

What works well for products with erratic demand history works equally well for products with extremely stable demand history. Reorder points were the primary planning approach used by companies before MRP and DRP were developed and offered in the software.

However, there are now many quite sophisticated reorder point formulae – although it is rare that anything but the basic reorder point formula finds its way into an enterprise software application. A reorder point is simply a quantity of stock or an interval at which a “reorder,” or order is created. In reorder point planning, orders are not triggered by a specific requirement (such as a forecast or dependent requirement) but instead by depleting stock over time, eventually triggering the minimum stock level or reorder point. Reorder points can be used with any of the supply planning methods, or they can be used to exclusively control the supply plan without any of the methods. However, when used solely to control the supply plan, the company is said to be performing reorder point planning, as opposed to forecast-based planning. MRP/DRP and APS (heuristic, allocation, cost optimization, inventory optimization) methods are forecast-based planning.

Conclusion

The article tried to answer the question of how to achieve a Lean supply chain. It is, however, essential to consider when and where Lean should be applied.

A lot of energy is spent on debating between Lean and procedural planning. However, both camps tend to provide too little in the way of evidence for their claims. Coming up from the procedural school of thought, I was guilty of this myself. I believed that the standard inventory formulae were reliable for some time until I tested them in great detail and found flaws in their output, which depended upon the circumstance.

Instead of spending time in either of the camps, I would recommend testing both Lean and procedural planning techniques to see which are most appropriate for different product location combinations and then using whatever works. Without testing, it is too easy to fall back to whatever one’s background is. However, through testing, one can drive to the use of the best technique per circumstance and increases one’s knowledge level. Most supply planning systems have both types of functionality available to them. Therefore it is just a matter of knowing which functionality to apply to which product location combinations.

Intermittent – or “lumpy” – demand is one of the most common features of a product’s demand history that makes a product unforecastable. Unfortunately, as is covered in the book Promotion Forecasting: Techniques of Forecast Adjustment in Software, many factors are combined to reduce product databases’ forecastability. This includes the increase in the number of SKUs carried – called product proliferation, reduced product lifecycles and higher turnover, and increases in promotions. The less forecastable the product database, the less than an MRP or any other supply planning method can provide a good supply plan. With sales and Marketing running strategy at most companies, companies make it increasingly difficult for themselves to have a manageable supply chain. It also means that some maintenance areas must be performed with increased frequency on the MRP system. This is a good segue into our next topic, which is how to improve MRP systems.

One of the best ways to understand how to set reorder points externally we have developed a system called the Brightwork Explorer that is both designed to improve parameters, with reorder points being one of them.

We developed an approach where reorder points are calculated externally, which allows for a higher degree of control. And for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level, and a picture of what is happening to the overall system. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.