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16.660 / 16.853 / ESD.62J Introduction to Lean Six Sigma Methods


January (IAP) 2008

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Lean Supply Chain


Basics

Impact of Supply Chain


Management
Only 7% of companies today are

effectively managing their supply

chain. However, these companies

are 73% more profitable than other

manufacturers.

Deloitte & Touche Study, October 2003


Lean Supply Chain Basics V6.2 - Slide 2
2008 Massachusetts Institute of Technology

Learning Objectives
At the end of the module, you will be able to:
Recognize the importance of suppliers in
the enterprise
Describe key attributes of a lean supply
chain
1. Alignment of supply chain design with product
characteristics
2. Supplier participation in material flow and
logistics
3. Supplier involvement in design and development
4. Seamless information flow

Discuss methods for the improvement of


existing supply chains

Lean Supply Chain Basics V6.2 - Slide 3


2008 Massachusetts Institute of Technology

Suppliers Are Critical In


The Value Chain
Value Specified Customer
Value Delivered

Product
Development
Producible Design Meeting
Value Expectations

Early
Involvement

Production
Value Created
Suppliers as
Partners
Supplier
Network

Typically, 60-80% of Value Added by Suppliers

Lean Supply Chain Basics V6.2 - Slide 4


2008 Massachusetts Institute of Technology

What Does a Supply Chain


Look Like?
End-user
Customer
Prime Mfg./
Supplier

As you move down


the supply chain,
each successive tier
represents a smaller
percentage of the
Primes main
business base than
the previous tiers.

First Tier
Supplier
Second Tier
Supplier
Material
Supplier
Raw Material
Supplier
Lean Supply Chain Basics V6.2 - Slide 5
2008 Massachusetts Institute of Technology

Current State of Many


Supply Chains

Orders
Orders

Orders
Orders
Orders
Orders

Material

Tier Twos

Tier Ones

Prime

Customer

Communications across the supply chain is like


tossing orders over a brick wall!
Lean Supply Chain Basics V6.2 - Slide 6
2008 Massachusetts Institute of Technology

Lean Supply Chain Exercise

Gather your team around easel paper or a chart.

2. Discuss each concept on the list below.


3. On your chart, write a prioritized list of concepts
that would best create a lean supply chain.
1.

Collaboration
Efficient supply chain
with little flexibility
Limited communication
Localized focus on
continuous improvement
Responsive and agile
Based on product
characteristics
Enterprise approach

Long lead times


One supply chain for all
products
Supplier commitment to
long term relationship
Internal corporate focus
Build to order
Visibility of demand
Continuous improvement
activities that include
suppliers & customers
Lean Supply Chain Basics V6.2 - Slide 7
2008 Massachusetts Institute of Technology

Key Attributes of a Lean


Supply Chain
1. Alignment of supply chain design with
product characteristics
2. Supplier participation in material flow
and logistics
3. Supplier involvement in design and
development
4. Seamless information flow

Lean Supply Chain Basics V6.2 - Slide 8


2008 Massachusetts Institute of Technology

1 - Matching Supply Chains


with Products

Push supply chain is focused on efficiency for


meeting predictable demand at lowest cost.

Pull supply chain is focused on responsiveness for


unpredictable demand to avoid inventory & stock outs.

Typically for long product lifecycle and mature or


commodity items

Typically for shorter product life cycle, custom

items

The reality is that a given product may have


components of both the efficient and responsive
supply chain designs. This approach has been labeled
the Hybrid Supply Chain.

Lean Supply Chain Basics V6.2 - Slide 9


2008 Massachusetts Institute of Technology

2 - Supplier Participation in

Material Flow and Logistics

Just-in-time deliveries
Eliminates inventory - but parts must show up on time!

Kitting for point-of-use


Eliminates unpacking, looking for parts - requires
supplier involvement in production system design

Vendor-Managed Inventory
Vendor owns it, keeps track of it, until it is used

Third Party Logistics


Have FedEx handle these?

Different
Differentsupply
supplychain
chaindesigns
designs
require
requiredifferent
differentpractices
practices
Lean Supply Chain Basics V6.2 - Slide 10
2008 Massachusetts Institute of Technology

Atlas V Launcher Supplier

Kitting and Direct Delivery

Vendor-Supplied Tubing (Old Method)

Vendor-Supplied Tubing (New Method)

Conventional Packaging, handling and Inventory

Reusable Container and Shadow Boards

Photographs removed due to copyright restrictions.

Category
Inventory Carrying Cost
Internal Handling Cost
Cycle-Time
Source: Lockheed Martin Missiles and Space Systems

Reduction
$35,000 per ship-set
$12,000 per ship-set
20 weeks to 14 weeks
Lean Supply Chain Basics V6.2 - Slide 11
2008 Massachusetts Institute of Technology

3 - Supplier Involvement in
Design and Development
Wire Harness Cover

Launch Lugs

JDAM Tail Kit

Strakes

Container

Strakes
Mk-84 Warhead
Courtesy of Boeing. Used with permission.
SOURCE: Karen E. Darrow (The Boeing Company), The JDAM Experience: Lean Principles in Action,
Presentation at the SAE Aerospace and Automated Fastening Conference & Exhibition, September 22, 2004.

Lean Supply Chain Basics V6.2 - Slide 12


2008 Massachusetts Institute of Technology

Early Supplier Integration


SUPPLIER VALUE CREATION
M
ajor modification to system
Major
architecture


Courtesy of Boeing. Used with permission.

SUPPLIER INTEGRATION
Part of ppropos
roposa
all team
U
nderstood project goals Understood
GOAL CONGRUENCY
Understood requirement
for low cost, seamless
assembly
Ref: Lean Enterprise Value, pp 138-140, 206-207

Reduced Wiring / Connectors

From partitioned architecture


to integrated architecture
Reduced unit cost
Improved reliability

Re-allocated Wor
k Sharre
e
Work

PRODUCT
PRODUCTVALUE
VALUECREATION
CREATION
Original
Originalcost
costest.
est.--$68+
$68+KK
Final
Finalactual
actualcost
cost-- $15
$15KK
Unit
Unitcosts
costsreduced
reduced>>75%
75%
Total
Totalsavings
savings>>$2.9
$2.9BB
Lean Supply Chain Basics V6.2 - Slide 13
2008 Massachusetts Institute of Technology

4 - Seamless Information Flow

Requires communication on many levels

Customer

Supplier

Enterprise
Management

Strategic & Business

Enterprise
Management

Program
Management

Objectives & Progress

Program
Management

Procurement
& Contracts

Contracts/Deliverables

Procurement
& Contracts

Engineering

Design & Config

Engineering

Manufacturing
Operations

Hardware

Manufacturing
Operations

Integrated Information Technology Environment

Lean Supply Chain Basics V6.2 - Slide 14


2008 Massachusetts Institute of Technology

Exostar Offerings

tar
s
o
Ex

ted
s
Tru

ce
a
sp
k
r
Wo

Courtesy of Boeing. Used with permission.


Copyright 2007 Exostar

Proprietary and Confidential

15

Lean Supply Chain Basics V6.2 - Slide 15

2008 Massachusetts Institute of Technology

EXOSTAR Facilitates Supply


Chain Management Streamlining
At Rolls-Royce the eProcurement implementation has
produced a number of quantitative and qualitative
benefits, including:

Rationalizing the direct supplier base from more than


5,000 to several hundred
Reduction in cost of goods of up to 20%;
Reduction in inventory value levels as much as 80%;
Reduction in errors due to the elimination of manual rekeying of buying data;
Reduced cycle time, in some cases by up to 80%;
Near-elimination of paper and fax processes.
Improved relations with suppliers, who have benefited
from reduced transaction costs and improved efficiency.
Lean Supply Chain Basics V6.2 - Slide 16
2008 Massachusetts Institute of Technology

Improving Supply Chains

Program
Value Stream

Supplier
Selection

Education &
Orientation

Critical Path
Cost
Quality
Cycle Time
Delivery

Lean
Ready?
No

Prime Contractor Owns


The Vision

Yes

Compelling
Interests
Building the
Relationship
Understanding
Context
Commitment to
Go Forward

Lean
Assessment
& Value
Stream
Mapping
Enterprise-Level
Analysis
Product-Level
Analysis
Basis for
Improvement
Plans

Work Outstanding Issues

Supplier Owns
The Vision

Continuous Improvement

Lean Strategy
& Deployment
Plan
Common
Objectives
Common Metrics
Plans of Action
Timelines

Lean
Engagements
Improvement
Workshops
Additional
Training

Lean Supply Chain Basics V6.2 - Slide 17


2008 Massachusetts Institute of Technology

Example: Hicksville Machine


Works Corp.

Supplier worked with prime to implement lean


Prime (Boeing) provided expertise and training for

5S, Statistical Process Control, and Set-up Time

Reduction

Savings shared, plus many additional benefits:

... a good example of what good team work between a vendor and sincere
Boeing personnel, ... can do. ... my Company is much more competitive
than ever before. Following are some of parts we were able to reduce the
unit prices on:
P/N
17P2A5224-1NC
17P2A5821-1
17P2A5829-1NC

Previous Unit Price


$1815.00
$1992.00
$2531.72

New Unit Price


$751.68
$639.33
$1024.00

These types of savings will apply to all parts we manufacture.


-Jack Spezio, President
Courtesy of Boeing. Used with permission.

Lean Supply Chain Basics V6.2 - Slide 18


2008 Massachusetts Institute of Technology

Supply Base Stratification

- Five Levels
Strategic Alliance
Certified
Gold, Silver, Bronze, Probation

Strategically

Important

Core

High Performing, Standard,


Potential, Legacy

Disengaged
Courtesy of Boeing. Used with permission.

Lean Supply Chain Basics V6.2 - Slide 19


2008 Massachusetts Institute of Technology

Future State in Lean


Relationships
Old Approach

Current Lean

Customer

Collaborative
with rigid
Customer
organizational
interfaces
Subcontractor
Prime

Prime

Emerging Lean

Rigid vertical
interfaces and control

Subcontractor
Subcontractor

Customer
Prime

Prime

Virtual Team without


boundaries enabling
continuous innovation

Subcontractor

Lean Supply Chain Basics V6.2 - Slide 20


2008 Massachusetts Institute of Technology

Lean Supply Chain Wrap Up

Suppliers are critical to lean enterprise

success
Supply chains need to be understood and
designed to meet the needs of the product
enterprise needs
Legacy supply chains can be improved
through win-win customer-supplier
teamwork.
Supply
Supply Chain
Chain Management
Management is
is aa lean
lean
enterprise
enterprise core
core competency
competency
Lean Supply Chain Basics V6.2 - Slide 21
2008 Massachusetts Institute of Technology

Exercise

What aspects of a Lean

Supply Chain can you


implement today to
improve your enterprises
performance?

Spend the remaining time


capturing these on an
easel chart for your
teams use.

Lean Supply Chain Basics V6.2 - Slide 22


2008 Massachusetts Institute of Technology

Reading List

Bozdogan, K., Deyst, J., Hoult, D., Lucas, M., Architectural Innovation in Product Development Through

Early Supplier Integration, R&D Management, Vol 28, No 3, 1998, 163-173.

Dyer, Jeffrey H., Collaborative Advantage: Winning through Extended Enterprise Supplier Networks, New

York: Oxford University Press, 2000.

Dyer, Jeffrey and Nobeoka, Kentora, Creating and Managing High-Performance Knowledge-Sharing

Network: The Toyota Case, Strategic Management Journal, 21, 2000, 345-367.
Fine, C., Clockspeed: Winning Industry Control in the Age of Temporary Advantage, Reading, MA: Perseus
Books,1998
Fisher, M.L., What is the Right Supply Chain for your Product, Harvard Business Review, Vol. 75 (2),

Mar/Apr, 1997, 105-116.

Ghemawat, Pankaj, "Distance Still Matters, The Hard Reality of Global Expansion." HBR. Sept, 2001

Kraljic, "Purchasing Must Become Supply Management," HBR, September - October 1983

Liker, J.K. and Yu, Yen-Chun, Japanese Automakers, U.S. Suppliers and Supply-Chain Superiority, MIT

Sloan Management Review, Vol. 42 (1), Fall 2000, 81- 94.

Liker, J.K., Kamath, R. R., Wasti, S.N., and Namagachi, M., Supplier Involvement in Automotive Component

Design: Are There Really Large US/Japan Differences?, Research Policy, 25, 1996, 59-89.

MacDuffie, J.P. and Helper, S., Creating Lean Suppliers: Diffusing Lean Production Through the Supply

Chain, California Management Review, 39, 1997, 118-115.

Sako, Mari, Supplier Development at Honda, Nissan and Toyota: Comparative Case Studies of

Organizational Capability Enhancement, Industrial and Corporate Change, 13 (2), 2004, 281-308.

Simchi-Levy, D., Kaminski, P., Simchi-Levy, E., Designing and Managing Supply Chains, McGraw-Hill, 2002.

Takeishi, Akira, Knowledge Partitioning in the Interfirm Division of Labor: The Case of Automotive Product

Development, Organization Science, Vol. 13 (3), May-June 2002, 321-338.

Venkatesan, "Strategic Sourcing: To Make or Not to Make," HBR, November-December, 1992

Lean Supply Chain Basics V6.2 - Slide 23


2008 Massachusetts Institute of Technology

Acknowledgements

Kirk Bozdogan - MIT LAI


Tom Callarman - ASU
Al Haggerty - MIT, Boeing (ret.)
Greg Harris - Univ. of Alabama in Huntsville (UAH)
Dick Lewis - Rolls-Royce (ret.)
Tim Mead - DAU
Hugh McManus Metis Design
Earll Murman - MIT
Sue Siferd ASU
Kenneth Sullivan -UAH
Stan Weiss - Stanford Univ, Lockheed Martin (ret)

Lean Supply Chain Basics V6.2 - Slide 24


2008 Massachusetts Institute of Technology