‘Lean’ Isn’t Enough: 3 Steps to a Smart Supply Chain

"We must not seek to optimize every resource in the system. A system of local optimums is not an optimum system at all."  That’s what Jonah, the cigar-puffing sage of the famous Lean Manufacturing how-to novel, The Goal, tells Alex Rogo, a plant manager trying to reduce inventory.

Knowing where in the supply chain to run Lean, and where to build up redundancy, became the logistical challenge of the ensuing decades. It’s one that is just now being solved. 

The book, published in 1984, described the transformation of a US factory using the Lean Manufacturing philosophy developed at Toyota. During the 1980s, a wave of enthusiasm for Lean swept through US manufacturing, with successful implementers simultaneously cutting inventory and increasing throughput. But what’s really interesting is what happened next.

To learn more, read our white paper, Beyond Visibility: How to Build a Supply Chain That Thinks.

Weak Links in a Lean Chain

The mania for reducing “waste,” or “muda,” swept from the factory floor through entire supply chains. Companies opened their books to one another, looking to slim down operations and make products just-in-time for demand. Safety stock went down and so did inventory costs. “It's as if a fleet of trucks had come and hauled everything away,” Rogo marvels in the book.

Fast forward a few decades: Supply chains are longer and leaner than ever before. But in 2012, over-extended supply chains got hit by a tsunami--literally. Manufacturers found themselves cut off from supply as earthquake, tsunami, and flood damaged facilities in Japan and Thailand. Some reacted by adding cushion to their safety stock, to hedge against future supply chain disasters.

That cushioned companies from disaster and helped them respond quickly to demand surges. But it’s far from ideal. For example, electronics manufacturers now worry about adding too much inventory that might be rendered obsolete while sitting in their warehouses.

A Return to Lean Principles

In response, some have found a compromise by returning to the Lean Manufacturing principles that started the enthusiasm for inventory-slashing, but with more  visibility into their supply chains. This visibility has given companies better insight into the ups and downs in production and transportation that take place at every link of the chain--the normal deviations in time and inventory.

In some cases, that insight leads to surgically targeted increases in safety stock at critical vulnerability  points. In others, it means relying on the ability to respond with agility, rerouting and calling on backup suppliers when disasters and demand surges occur. For these companies, end-to-end supply chain visibility is no longer a dream, it’s a must-have.

But there are still several obstacles, both technical and practical, facing end-to-end visibility. Specifically, the successful implementation of a smart supply chain requires that manufactures make three key improvements.

Three Steps to a Smart Supply Chain

Improved Modelling

The first area that needs to improve is our modeling of supply chain risk exposure: What are the weak points in the chain? A 2015 explosion in the major Chinese port of Tianjin was a shattering reminder of how important this can be, as global shipping companies were slammed with recriminations for their poor understanding of how exposed they were to risks.  

Greater Agility

The second necessary improvement is greater agility in the supply chain--a concept that Stanford professor Hau Lee outlined thoroughly in this 2004 Harvard Business Review article. He describes how clothing retailers H&M, Mango, and Zara pioneered some of these techniques in the early 2000s in a quest for quicker response to changing consumer trends. They invested in sorting and material-handling technologies to expedite newly designed products through distribution. Meanwhile, companies like Dell and Nokia gained an advantage in crises by working on contingency plans and relationships with backup vendors in advance of floods and fires hitting their supply chains.

Real-Time Data

The third and most important piece is what enables the other two: more real-time data. Since the growing use of RFID in the 1990s, end-to-end supply chain visibility has remained a pipe dream because of data limitations. Even in 2017, there remain holes in the supply chain that are big enough to--well--to drive a container ship through. For large stretches, supply chain managers can see goods go in one end and out the other, but have no visibility into what’s happening in between.

But today, companies are starting to put technological eyes and ears onto their shipments, beginning with the highest-value, most sensitive items. For example, real-time sensor data enables managers to keep tabs on pharmaceutical shipments and intervene if products are exceeding prescribed temperature ranges. Some companies have gone further:  According to a recent Boston Consulting Group report, machine learning technology has enabled companies that collect massive amounts of sensor data from across their complex supply chains to analyze the information and produce actionable insights.

We’re closer than ever to being able to achieve a truly lean supply chain operation that both maintains agility and develops contingency plans to identify and mitigate risk. Soon, problems in the flow of inventory will be just as apparent as piles of inventory on the factory floor.

Related: Read our white paper, Beyond Visibility: How to Build a Supply Chain That Thinks.