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Lean supply chain management represents a new way of thinking about supplier networks Lean principles require cooperative supplier relationships while balancing cooperation and competition Cooperation involves collaborative relationships & coordination mechanisms Supplier partnerships & strategic alliances represent a key feature of lean supply chain management a spectrum of
Firm buys (all) inputs from outside specialized suppliers Inputs are highly standardized; no transaction-specific assets Prices serve as sole coordination mechanism
Firm produces required inputs in-house (in the extreme, all inputs) Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination
Lean (Hybrid):Lowest production and coordination costs; economically most efficient choice-- new model
Firm buys both customized & standardized inputs Customized inputs often involve dedicated investments Partnerships & strategic alliances provide collaborative advantage
Dominant conventional approach: Vertical integration, arms length relationships with suppliers
ILLUSTRATIVE CHARACTERISTICS
Number & structure Procurement personnel Outsourcing Nature of interactions Relationship focus Selection length Contract length Pricing practices Price changes Quality Delivery Inventory buffers Communication Information flow Role in development Production flexibility Technology sharing Dedicated investments Mutual commitment Govemance Future expectations
LEAN MODEL
Lean Supply Chain Management Principles Derive from Basic Lean Principles
Focus on the supplier network value stream Eliminate waste Synchronize flow Minimize both transaction and production costs Establish collaborative relationships while balancing cooperation and competition Ensure visibility and transparency Develop quick response capability Manage uncertainty and risk Align core competencies and complementary capabilities Foster innovation and knowledge-sharing
Ensured process capability (certification) Targeted supplier development (SPC, Kaizen) Greater responsibilities delegated to suppliers
Linked business processes, IT/IS infrastructure Two-way information exchange & visibility Synchronized production and delivery (JIT)
Establish cooperative relationships & effective coordination Joint problem-solving; mutual assistance mechanisms Partnerships & strategic alliances
Integrate suppliers early into design & development IPTs Collaborative design; architectural innovation Open communications and information sharing Target costing; design-to-cost
Synchronized production and delivery Partnerships and strategic alliances Early supplier integration into design and development IPTs
Synchronized Production and Delivery Throughout the Supplier Network is a Central Lean Concept
Integrated supplier lead times and delivery schedules Flows from suppliers pulled by customer demand (using takt time, load leveling, line balancing, single piece flow) Minimized inventory through all tiers of the supply chain On-time supplier delivery to point of use Minimal source or incoming inspection Effective two-way communication links to coordinate production & delivery schedules Striving for zero quality defects essential to success Greater efficiency and profitability throughout the supplier network
Aerospace Firms Have Faced an Uphill Challenge in Synchronizing Flow with Suppliers
PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS
Defense (25)
Commercial (9)
Supplier Certification has been an Important Early Enabler of Achieving Synchronized Flow in Aerospace
PERCENT OF DIRECT PRODUCTION SUPPLIERS OF A TYPICAL AEROSPACE ENTERPRISE THAT ARE CERTIFIED (1991, 1993, 1995)
Industry (48)
Airframe (13)
Electronics (20)
Communication Links with Suppliers Paved the Way for Synchronizing Flow
TYPES OF INFORMATION PROVIDED TO RESPONDING BUSINESS UNITS BY THEIR MOST IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993
Concrete Example: Engine Parts Casting Supplier Worked with Customer Company to Achieve Synchronized Flow
Mastering & Integrating Lean Basics with Prime was Necessary for Achieving Synchronized Flow
6S -- Visual factory Total productive maintenance Quality control Process certification Mistake proofing Setup reduction Standard work Kaizen
Long-term relationships and mutual commitments Intensive and regular sharing of technical and cost information Mutual assistance and joint problem-solving Customized (relationship-specific) investments Risk-sharing, cost-sharing, benefit-sharing arrangements Trust-building practices -- one team mindset; collocation of technical staff; open kimono Progressively increasing mutual dependence -- shared fate discouraging opportunistic behavior Self-enforcing contracting driving continuous improvement
Reduced transaction costs (cost of information gathering, negotiation, contracting, billing) Improved resource planning & investment decisions Greater production predictability & efficiency Improved deployment of complementary capabilities Greater knowledge integration and R&D effectiveness Incentives for increased innovation (through costsharing, risk-sharing, knowledge-sharing) Increased mutual commitment to improving joint longterm competitive performance
Fewer first-tier suppliers Greater supplier share of product content Trust-based relationships; long-term mutual commitment Close communications; knowledge-sharing Multiple functional interfaces Early and major supplier role in design Up-front design-process integration Leveraging supplier technology base for innovative solutions Target costing Sharing of cost savings
183 Weeks
180 Weeks
LH Cars (93)
Neon (94)
LH Cars (98E)
EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT GDEVELOPMENT PRO RAMS: IMPACTS ON PRODUCIBILITY AND COST
Firms facing producibility and cost problems
% of responding firms in Group A(4/20) % of responding firms in Group B(7/9)
WITH: With early supplier involvement in IPTs WITHOUT: Without early supplier involvement in IPTs EARLY: Before Milestone
Group A (With) Group B (Without)
Numerator(s): N=4,7: Number of affirmative responses to this question (i.e., faced producibility and cost problem) in each group (i.e., Group A and Group B) Denominator(s):R=20,9: Total number of respondents to this question in each group Sample Size: S=29: Maximum possible number of respondents to any question in the survey (Group A:20 ; Group B:9) SOURCE: Lean Aerospace Initiative Product Development Survey (1994)
FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY SUCCESS FACTORS
EARLY SUPPLIER INVOLVEMENT IN IPTS Established co-located IPTsincluding suppliers Used commercial parts
Numerator(s): N=11,8 (Group A) ;1,2 ( Group B): Number of affirmative responses to this question in each group, by category of practice/implementation ( i.e., co-located IPTs, use of commercial parts) Denominator(s): R=20,9: Total number of respondents to this question in each group Sample Size:S=29: Maximum possible mumber of respondents to any question in the survey (Group A:20 ; Group B:9) NOTES Early: Before Milestone 1 With / Without: Early supplier involvement in IPTs (before Milestone 1)
New joint design and engineering approach based on make-buy Prime retains design control
SUPPLIER ROLE
Part of joint design team Component design responsibility Joint configuration control
Supplier down select after joint preliminary design period CPFF Not-to- compete agreements
PROCESS; RELATIONSHIPS
Collocated teams Open communications; knowledge-sharing Worksharing Electronic linkages Govt part of team Cost Guidance control unit redesigned from modular to Integrated system architecture
MAJOR DRIVERS
Performance
ARCHITECTURAL INNOVATION
Riveting, rather than welding, resulted in redesign of interfaces and how components are linked together Five-fold reduction in unit cost Cycle time: reduction ont as important Substantial risk reduction Win-win for value stream
MAJOR BENEFITS
Over 60% reduction in unit cost Cycle time: 64 mo. Down to 48 mo. (down by 25%) Win-win for value stream
Challenge: Electronic integration of supplier networks for technical data exchange as well as for synchronization of business processes
Clear business vision & strategy Early stakeholder participation (e.g., top management support; internal process owners;
suppliers ; joint configuration control)
Migration/integration of specific functionality benefits of legacy systems into evolving new IT/IS infrastructure Great care and thought in scaling-up experimental IT/IS projects into fullyfunctional operational systems
Electronic integration of suppliers requires a process of positive reinforcement -- greater mutual information exchange helps build increased
trust, which in turn enables a closer collaborative relationship and longer-term strategic partnership
Close communication links with overseas suppliers pose a serious security risk and complex policy challenge
Fostering Innovation across Supplier Networks Ensures Continuous Delivery of Value to all Stakeholders
Research: Case studies on F-22 Raptor avionics subsystems -- what incentives, practices & tools foster innovation across suppliers? Major finding: Innovation by suppliers is hampered by many factors. This seriously undermines weapon system affordability. Excessive performance and testing requirements that do not add value One-way communication flows; concern for secrecy; keyhole visibility by suppliers into product system architecture Little incentive to invest in process improvements due to program uncertainty; limited internal supplier resources; often narrow business case Major subcontractors switching rather than developing subtier suppliers Yearly contract renegotiations wasteful & impede longer-term solutions Recommendations: Use multiyear incentive contracting & sharing of cost savings Improve communications with suppliers; share technology roadmaps Make shared investments in selected opportunity areas to reduce costs Provide government funding for technology transfer to subtiers
Aerospace industry has made important strides in supplier integration, but this is only the beginning of the road Production: Supplier certification and long-term supplier partnerships -- process control & parts synchronization Development: Early supplier integration into product development critical Strategic supply chain design is a meta core competency Implementation efforts have required new approaches Re-examination of basic assumptions (e.g., make-buy) New roles and responsibilities between primes and suppliers Communication and trust fundamental to implementation Aerospace community faces new challenges and opportunities Imperative to take value stream view of supplier networks Focus on delivering best lifecycle value to customer Need to evolve information-technology-mediated new organizational structures for managing extended enterprises in a globalized market environment
Exhibit superior performance system-wide -greater efficiency, lower cycle time, higher quality Not an accident of history but result of a dynamic evolutionary process Not culture dependent but are transportable worldwide Can be built through a proactive, well-defined, process of change in supply chain management
Does the size, structure and composition of the supplier network reflect your enterprises strategic vision? Has your enterprise created partnerships and strategic alliances with key suppliers to strengthen its long-term competitive advantage? Are major suppliers as well as lower-tier suppliers integrated into your enterprises product, process and business development efforts? Has your enterprise established mutually-beneficial arrangements with suppliers to ensure flexibility and responsiveness to unforeseen external shifts? Does your enterprise have in place formal processes and metrics for achieving continuous improvement throughout the extended enterprise?
Emergence of Strategic Supplier Partnerships has been a Central Feature of Aerospace Industrys Transformation in the 1990s*
Survey: 85% of firms established production-focused supplier partnerships involving long-term agreements (LTAs) with key suppliers Major reasons: Reduce costs 97% Minimize future price uncertainty 85% Mutual performance improvement 85% Chief characteristics: One or more products, 3+ years 97% Multi-year design/build 49% On-going (evergreen) 24%
Case Study Results Show Significant Performance Improvements by Building Integrated Supplier Networks through Supplier Partnerships
Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks
KEY PRACTICES BEFORE AFTER
Reduced and streamlined supplier base Number of direct production suppliers Improved procurement dfficiency Procurement personnel as % of total employment (%) Subcontracting cycle time (days) Improved supplier quality and schedule Procurement (dollars) from certified suppliers (%) Supplier on-time performance (% of all shipments) Established strategic supplier partnerships Best value subcontracts as % all awards
542
162
BEFORE: 1989
AFTER: 1997
*Refers to 1991
Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier integration into design and development process
Nearly 80% of life cycle cost committed in early design phase Design and development of complex aerospace systems calls on core capabilities of numerous suppliers, providing as much as 60%-70% of end product value Supplier network represents an enormous beehive of distributed technological knowledge & source of cost savings What are better ways of leveraging this capability for more efficient product development in aerospace sector? Worldwide auto industry experience provides critical lessons
Lean difference starts with significant supplier role in design and development