Dan Jones reveals the big benefits to be gained by exposing and clearing muddy supply chain thinking
The other day I was with a group of senior executives puzzling over a value stream map for an automotive component, stretching from raw materials to the car assembly line.
Surprisingly this was the first time they had looked at all the flows that make up this forged, machined and assembled component. They were shocked at what it revealed.
It apparently takes between 26 and 97 weeks – yes weeks – to perform a total of 156 production steps in 21 plants spread across four continents. The subcomponents travel tens of thousands of miles and only six assembly steps are performed close to the final customer, in this case in the US.
Calculating the total inventory cost in this long pipeline is a dramatic wake up call. But this is just the tip of the iceberg of unnecessary costs in this supply chain. While these senior executives may have been shocked, this is unfortunately very common. It reveals just how far many automotive suppliers have gone in the wrong direction in recent years, despite starting to introduce lean more than a decade ago.
So, they asked, how did we get into this mess? What does this reveal about the thinking behind the way we manage our supply chains?
Eleven of the 21 plants are owned by this supplier and each of them specialises in a different set of activities, performed on many different parts for different customers across the globe. These are the traditional ‘focused factories’ popular before the rise of lean and still being peddled by some consultants – shame on them.
The net result of this focused factory logic is a more complex product mix in each plant with poorer OEEs and asset utilisation, and lots of additional costs throughout the much longer supply chain.
Like many others this supplier tried to address this problem by buying an SAP ERP scheduling system to plan each production step and each shipment. This not only caused the usual chaos when it was introduced but it did not eradicate short-term plan changes and fire-fighting; indeed, these got worse.
In the face of relentless price pressure from the customer, this supplier moved a lot of its production to low wage locations in Brazil and China. In private, these executives described going to China in retrospect as ‘a disaster’. Cheap direct labour costs were more than offset by a whole host of unforeseen additional costs.
But focused factories, ERP systems and low wage sourcing are only symptoms of the underlying management system. Unless this is challenged these mistakes will be repeated time and time again and lean initiatives will never get off the ground.
Traditional management systems focus on the vertical organisation of work, careers and budgets – no one sees or is responsible for the horizontal processes that create the value customers are paying for.
So the first thing to do is put someone in charge of the end-to-end value streams for each product family. Their job is to articulate the needs of the process, to shout when departments are tempted to act on their own behalf rather than in the interests of the overall process, and to lead the action to streamline these value streams.
Traditional management systems also give department and business unit heads the authority to take whatever actions they need to ‘make their numbers’. Instead, an agreement is needed to use lean methods to streamline the flow and make progress at each point visible to everyone involved.
Traditional management systems allocate resources and make investment decisions based on these numbers. This effectively means they are flying blind about the real situation and have no way to understand the total costs of different locations.
The whole point of a lean value stream is to discover exactly what resources are needed to flow products to customers quickly. This is the right basis on which to build a true cost of location model. This in turn will reveal the huge potential from compressing value streams in time and distance.
The moral of this example is not just to think about better process design but to challenge the mental models of your management system.