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Lean Supply Chain Management Principles and Practices1 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Lean Supply Chain Management Basics Learning PointsLean 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 2 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Dominant conventional approach: Vertical integration, arm’s lengthTheory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships “Markets” (Arm’s Length): Lower production costs, higher coordination costs Firm buys (all) inputs from outside specialized suppliers Inputs are highly standardized; no transaction-specific assets Prices serve as sole coordination mechanism “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs 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, arm’s length relationships with suppliers 3 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Lean Supply Chain Management Differs Sharply from Conventional PracticesILLUSTRATIVE CHARACTERISTICS CONVENTIONAL MODEL LEAN MODEL Number & structure Many; vertical Fewer; clustered Procurement personnel Large Limited Outsourcing Cost-based Strategic Nature of interactions Adversarial; zero-sum Cooperative, positive-sum Relationship focus Transaction-focused Mutually-beneficial Selection length Lowest price Perfomance Contract length Short-term Long-term Pricing practices Competitive bids Target costing Price changes Upward Downward Quality Inspection-intensive Designed-in Delivery Large quantities Smaller quantities (JIT) Inventory buffers Minimized, eliminated Communication Limited; task-related Extensive; multi-level Information flow Directive; one-way Collaborative; two-way Role in development Limited; build-to-print Substantial Production flexibility Low High Technology sharing Very limited; nonexistent Extensive Dedicated investments Minimal-to-some Mutual commitment Govemance Market-driven Self-governing Future expectations No Quarantee Considerable 4 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Focus on the supplier network value stream Eliminate waste 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 5 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
A Set of Mutually-Reinforcing Lean Practices Translate these Principles into ActionDesign supplier network architecture Design of supplier network driven by strategic thrust Fewer suppliers; “clustered control” Supplier selection based on performance Develop complementary supplier capabilities Ensured process capability (certification) Targeted supplier development (SPC, Kaizen) Greater responsibilities delegated to suppliers Create flow and pull throughout supplier network Linked business processes, IT/IS infrastructure Two-way information exchange & visibility Synchronized production and delivery (JIT) Establish cooperative relationships & effective coordination mechanisms Joint problem-solving; mutual assistance Partnerships & strategic alliances Open and timely communications Increased interdependence & “shared destiny” Maximize flexibility & responsiveness Seamless information flow Flexible contracting Rapid response capability Optimize product development through early supplier integration Integrate suppliers early into design & development IPTs Collaborative design; architectural innovation Open communications and information sharing Target costing; design-to-cost Integrate knowledge and foster innovation Knowledge-sharing; technology transfer Aligned technology roadmaps This lecture highlights key enablers & practices by focusing on: Synchronized production and delivery Partnerships and strategic alliances Early supplier integration into design and development IPTs 6 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Integrated supplier lead times and delivery schedules 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 7 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Aerospace Firms Have Faced an Uphill Challenge in Synchronizing Flow with SuppliersPERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS Defense/Commercial More than 75% of sales to defer or commercial markets Defense (25) Commercial (9) (Year: 1993; N= Number of responding business units/c 8 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
(N=Number of respondents answering this question for all three years)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) Engines and Other (15) (N=Number of respondents answering this question for all three years) 9 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993Closer 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 1989 (38,14,32,15,16,14) (55,65,69,55,41,54) (N=78:Total number of responding business units) 10 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Concrete Example: Engine Parts Casting Supplier Worked with Customer Company to Achieve Synchronized Flow 11 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Total productive maintenance Quality control Process certification 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 12 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Long-term relationships and mutual commitments Supplier Partnerships & Strategic Alliances Ensure Substantial Performance Improvements 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 13 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Improved resource planning & investment decisions Supplier Partnerships & Strategic Alliances Bring Important Mutual Benefits 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 cost- sharing, risk-sharing, knowledge-sharing) Increased mutual commitment to improving joint long- term competitive performance 14 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Major Lean Lessons for Aerospace IndustrySupply chain design linked to corporate strategic thrust Fewer first-tier suppliers Greater supplier share of product content Strategic supplier partnerships with selected suppliers Trust-based relationships; long-term mutual commitment Close communications; knowledge-sharing Multiple functional interfaces Early supplier integration into design Early and major supplier role in design Up-front design-process integration Leveraging supplier technology base for innovative solutions Self-enforcing agreements for continuous improvement Target costing Sharing of cost savings 15 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Chrysler: Supplier Partnerships Speed Development234 Weeks 232 Weeks 183 Weeks 184 Weeks 180 Weeks Length of Product Development Cycle 160 Weeks* K-Car (81) Minivan (84) Shadow (87) Dakota Truck (87) LH Cars (93) Neon (94) JA; Cirrus/ Stratus (95) LH Cars (98E) Source: Dyer (1998) *Estimated 16 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Aerospace: Early Supplier Involvement in IPTs Impacts Producibility and CostEARLY 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) 17 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Early Supplier Involvement: Key Success FactorsFIRMS 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 Percent of responding business units in each group 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) 18 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Evolution of Early Supplier Integration in the Aerospace Industry“Old” Approach “Current” Lean “Emerging” Lean Arm’s length; interfaces totally defined and controlled Collaborative; but constrained by prior workshare arrangements Collaborative and seamlessly integrated, enabling architectural innovation ARCHITECTURAL INNOVATION: Major modification of how components in a system/product are linked together •Significant improvement in system/product architecture through changes in form/structure, functional interfaces or system configuration •Knowledge integration over the supplier network (value stream perspective ; prime-key suppliers-subtiers; tapping supplier technology base) 19 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Summary: Architectural Innovation Yields Significant BenefitsKey Characteristics Case Study A (SMART MUNITION SYSTEM) Case Study B (ENGINE NOZZLE) MAKE-BUY; DESIGN RESPONSIBILITY Early supplier integration into IPT Teaming with key suppliers to optimize design New joint design and engineering approach based on make-buy Prime retains design control SUPPLIER ROLE Collaborative Suppliers given design responsibility and configuration control Part of joint design team Component design responsibility Joint configuration control SUPPLIER SELECTION; AGREEMENT Competitive pre-sourcing Commercial pricing Long-term commitments Long-term warranty Supplier down select after joint preliminary design period CPFF Not-to- compete agreements PROCESS; RELATIONSHIPS Collocated teams Open communications; knowledge-sharing Worksharing Electronic linkages Gov’t part of team Concurrent engineering Knowledge-sharing Government involvement MAJOR DRIVERS Cost Performance ARCHITECTURAL INNOVATION Guidance control unit redesigned from modular to Integrated system architecture Riveting, rather than welding, resulted in redesign of interfaces and how components are linked together MAJOR BENEFITS Over 60% reduction in unit cost Cycle time: 64 mo. Down to 48 mo. (down by 25%) Win-win for value stream Five-fold reduction in unit cost Cycle time: reduction ont as important Substantial risk reduction Case studies 20 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Summary of Key Practices Enabling Architectural InnovationPre-sourcing; long-term commitment Early supplier integration into IPTs; IPPD; co-location; joint design & configuration control Leveraging technology base of suppliers (key suppliers; tooling suppliers; subtiers) Workshare arrangements optimizing supplier core competencies Retaining flexibility in defining system configuration Open communications; informal links; knowledge-sharing Target costing; design to cost Supplier-capability-enhancing investments Incentive mechanisms (not to compete agreements; long-term warranty); maintaining trade secrets Government part of the team; relief from military standards and specifications 21 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Electronic Integration of Supplier Network: Early ResultsChallenge: Electronic integration of supplier networks for technical data exchange as well as for synchronization of business processes Important success factors include: 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 fully-functional 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 22 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
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 23 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Quick Review of Aerospace ProgressAerospace 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 24 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Lean Supplier Networks Offer Significant Competitive AdvantagesExhibit 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 25 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Key Questions for Aerospace Enterprise ManagementDoes the size, structure and composition of the supplier network reflect your enterprise’s 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 enterprise’s 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? 26 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Minimize future price uncertainty 85% Emergence of Strategic Supplier Partnerships has been a Central Feature of Aerospace Industry’s 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 % Minimize future price uncertainty % Mutual performance improvement % Chief characteristics: One or more products, 3+ years % Multi-year design/build % On-going (evergreen) % 27 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Case study: Major producer of complex airframe structuresCase Study Results Show Significant Performance Improvements by Building Integrated Supplier Networks through Supplier Partnerships Case study: Major producer of complex airframe structures REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) 28 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier NetworksKEY PRACTICES BEFORE AFTER Reduced and streamlined supplier base Number of direct production suppliers 542 162 Improved procurement dfficiency Procurement personnel as % of total employment (%) Subcontracting cycle time (days) 4.9 13 1.9 7 Improved supplier quality and schedule Procurement (dollars) from certified suppliers (%) Supplier on-time performance (% of all shipments) 76.4* 75 83.0 Established strategic supplier partnerships “Best value” subcontracts as % all awards 50.0 95 100.0 BEFORE: 1989 AFTER: 1997 *Refers to 1991 29 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Focus on Early Supplier IntegrationHistoric 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 30 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Lean Difference: Auto IndustryLean Difference: Significantly lower development cost and shorter cycle time Average engineering hours per new car (millions of hours) Average development cycle time per new car (months) Prototype lead time (months to first engineering protoype) Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 31 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
Lean Difference: Auto Industry Supplier Role in DesignLean difference starts with significant supplier role in design and development Assembler Designed Detail-Controlled Parts Supplier Designed “Black Box” Parts Supplier Proprietary Parts Percent of total cost of parts purchased from suppliers Source: Clark, Ellison, Fujimoto and Hyun (1995 32 -Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology
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