Logistics System_Rohit D Shah

Logistics Systems OMGT 2087 1

Rohit Dayal Shah

Logistics System

[email protected]


PART A LEAN THINKING


INTRODUCTION

In the modern times of unpredictable market which has becomes highly competitive

due to globalisation, economic downturn and big leaps in technology (improved

infrastructure, logistics capabilities, IT capabilities, etc.), the organisations are trying

to gain competitive advantage by any means. Organisations are not only looking to

improved sales but also optimizing their production, logistics and inventory

management costs. Some of the supply chain approaches that companies employ

are lean thinking, demand forecasting, quality management, customer relationship,

etc (Gilaninia, 2011).

The study focuses on Lean thinking and discusses the fundamentals of the practice

by citing relevant examples. The source for the study were research journals and

books.

Lean Thinking

The term „Lean‟ was coined by professors of MIT while studying Japanese new production

system. According to Bunkley (2009), Toyota has left behind General Motors to be leading

global automaker since 2008. Wee & Wu (2009) elaborates that it was achieved by initially

following lean principles such as waste elimination leading to reduction in cost and later on

went up to create Toyota manufacturing practice. It evolved and was inspired from various

sources such as a) book by Henry Ford which had concept such as process standardization,

elimination of waste and continuous material flow and b) United States supermarket‟s

practice of Pull system and „flow of one piece‟. According to Abdulmalek and Rajgopal

(2007), the process was further improved by the addition of concepts such as just-in-time

(JIT) and judoka.

Piercy & Morgan (2007) highlighted the key elements of lean thinking are a) Value

identification, b) Value stream identification, c) Waste removal, d) Establishing around flow, e)

Responding to pull and f) Continuous improvement.

MANUFACTURING SECTOR

Wee & Wu (2009) explain lean as process to remove waste by improving value added (VA)

operations and decreasing non-value added (NVA) operations. Toyota Production

System(TPS) recognises eight kinds of wastes as delineated, a) Excess inventory, b) Over

Processing, c) Conveyance , d) Waiting, e) Overproduction, f) Unused employee creativity, g)

Defects and h) Movement (Liker, 2004 & Monden, 1998). These wastes disrupt the flow of

manufacturing process. The tool used by TPS to differentiate between value adding

processes and unimportant non-value adding processes is Value Stream Mapping (VSM).

Initially VSM lists all the operations and then it separates them on the basis of VA and NVA.

VA are termed as activities for which consumers are willing to pay for, it may be tangible or

intangible. VSM also takes into consideration the lead times

Lean initiative comprises of identification and elimination of waste “muda” by continuously

improving the processes. The main principles of lean thinking is elaborated in the Table 1


which Toyota have implemented which focuses on long term initiatives, focusing on right

processes (by applying pull strategy; Heijunka-balancing work load), adding value by

improving people and focusing continuous improvements (Kaizen). These have been further

elaborated in the table.

Table 1 : Toyota Lean principles (Source: Naruo, 2007)

Fujitsu Component Limited (See appendix), improved significantly by implementing TPS as it

reduced its inventory by 50%, reduced work-space by 50% and also reduced its

manufacturing lead time by 48%. It achieved the results by focusing on lean initiatives such

as a) Implementing pull strategy- They only produced which was the needed , b)

Continuously looking for improvement (Kaizen) for reducing muda (waste) and other factors

such as c)educating their workforce.


Retail Sector

Behrouz (2011) shows that application of Toyota Production System (TPS) is not only limited

to production industry but also to hospitals, insurance companies, retails industry, etc.The

concept of lean has been applied in retail sector (IKEA, Wall Mart, Tesco, etc) and is also

known as lean consumption, lean logistics and lean distribution. The lean strategy in retail

industry is needs high efficiency with reduction of wastes such as material, time, effort and

motifs. The use of lean thinking, such as “pull” for driving replenishments, reducing wastage

of material, time, effort and removal of bottlenecks greats improves supply chain in this

sector. According to McKinsey & Company report as shown in Table 2, lean strategies

helped the retail industry by presenting following statistics: Labour costs were reduced by

10-20 %, Stock-outs were reduced by 20-75%, inventory reduction by 10-30 % and sales

increased by 10%.

Table 2: Lean thinking in retail business

Source: Lean Retailing: Achieving Breakthroughs in-store profitability, McKinsey & Company

All these factors lead to increase in customer service which translated to improved store

profitability which improved by 5-10 %. The Figure 1 brings to light the advantages of lean

retail is not only limited to retailers but also to manufacturers. As lean strategy is used in the

sector, the relationship becomes much more integrated and intertwined. It can be observed

that major benefits for retailers are in terms of merchandising (eg- improved shopping

experience), inventory management (optimization of delivery timings, reduce costs of freight)


and improved operation efficiency (better recognition of costs per activity and reduction of

billing errors). These leads to improvement in the supply chain with respect to improved

production, operation improved efficiency and improved inventory replenishment. As a result

of applying these lean approaches, Wal-Mart has now integrated and closer relationship with

its suppliers and is able to offer „daily price reductions‟ model as a result of advantages of

„economies of size & scale‟


Figure 1: Lean Retail benefits (McGuckin, 2005)

The lean concept in retail is applied by reduction of waste such as defective products,

unwanted motion, redundant workers, surplus inventory and time-wastage. The following

process steps are taken to make retail sector lean:

a) Simplification of work-design- So that every activity could be controlled from start

to finish

b) Pull strategy for replenishment- For inventory reductions

c) Eliminating the bottlenecks- To improve the lead-time, reduce transportation costs,

defects and improve operational activities

d) Removing Wastes- Reductions of wastes such as time, effort, movement, material,

etc. to improve the efficiency.

Naruo (2007) showed that manufacturer sector‟s Toyota and retailer sectors Seven-Eleven

(Japan) had similar business philosophy and maintain a very high business performance.

The table 3 describes similar kind of activities in terms of lean thinking.

Table 3: Comparison of Toyota and Seven-Eleven ( Japan) in terms of lean management

(Naruo, 2007)

CONCLUSION

Lean thinking is being used in various sectors across all industries to improve the business

efficiency in terms of improving the value for the consumers & economy which is

accomplished by waste elimination through lead time improvements, cost reductions and

quality improvements. The lean thinking in retail sectors is helped by improved lead times


from suppliers to stores. The usage of RFID, inventory management and lean thinking helps

in creating great value for not only for retailers but also for consumers and producers (Lukic,

2012).

Naruo, 2007 suggests that organizations employing lean strategy can provide products

economically, have better lead time management and are more responsive to the market.

REFERENCES

Abdulmalek, F.A. and Rajgopal, J. (2007), “Analyzing the benefits of lean manufacturing and value stream mapping via simulation: a process sector case study”, International Journal of Production Economics, Vol. 107 No. 1, pp. 223-36.

Behrouz, F. & Wong, K. Y. (2011). Lean performance evaluation of manufacturing systems:

A dynamic and innovative approach. Procedia Computer Science, 3, 388-395.

Bunkley, N. (2009), “Toyota ahead of GM in 2008 sales”, The New York Times, January 21, 2009. Gilaninia, S. Chirani, E. Ramezani, E. & Mousavian, S. (2011), “The Impact of Supply Chain Management Practices on Competitive Advantage”, Interdisciplinary Journal of Contemporary Research in Business, Vol 3, No 6 Liker, J.K. (2004), The Toyota Way, McGraw-Hill, New York, NY, pp. 1-159. Lukic, R. (2012), “The Effects of Application of Lean Concept in Retail”, Economia. Seria Management, Volume 15, Issue 1, 2012

McGuckin, R. H. et al. (2005). The U.S. Advantage in Retail and Wholesale Trade Performance: How Can Europe catch up?, The Conference Board Working Paper 1358,

March, New York Monden, Y. (1998), Toyota Production System, An Integrated Approach to Just-In-Time, 3rd ed., Engineering & Management Press, Norcross, GA, pp. 1-13. Naruo, S & Toma, S (2007), “From Toyota Production System to Lean Retailing. Lessons from Seven-Eleven Japan”, International Federation for Information Processing, Volume 246, Advances in Production Management Systems, eds. Olhager, J., Persson, F., (Boston: Springer), pp. 387-395. Piercy, N. F. & Morgan, N. A. (1997). The Impact of Lean Thinking and the Lean Enterprise on Marketing: Threat or Synergy? Journal of Marketing Management, 13, 679-693. Wee, H. Wu, S. (2009) "Lean supply chain and its effect on product cost and quality: a case study on Ford Motor Company", Supply Chain Management: An International Journal, Vol. 14 Iss: 5, pp.335 - 341


APPENDIX TPS introduction at Fujitsu Component Limited (Source: Naruo, 2007)


PART B Case Study 11: General Motors Brazil— Service Parts Business


General Motors Brazil –- Service Parts Business

1. Why did GM Brazil decide to change the way they were doing business in the spare parts market? Service spare parts business was a profitable business as margins were much larger than the other divisions. However due to globalisation and government initiative of reducing import taxes, competition was on the rise in this sector in Brazil. Therefore to keep pace with the competition, GM Brazil had to improve the level of serviceability during the life cycle of the vehicle which is important consideration from the perspective of new customers. GM suffered in the market as GM dealers were not co-operative in their dealing as one had to lose in the dealing during the business negotiation. Dealers had independent management systems and as a result bullwhip effect was observed by which small variation in demand downstream is reflective of large variation upstream. It causes unstable production plan leading to increased cost of the product causing price increase for end customers. As a result of this, GM products were high priced which offered low margins for dealers. Another issue was, dealers were forced to meet the purchase targets to receive cash bonus which gave rise excess purchases which rendered huge inventories obsolete. These reasons led to inefficient supply chain which was reflective of inefficient inventory management system. GM division successful implementation of automatic replenishment was also encouragement for GM Brazil. To counter these issues, GM Brazil decided to change its business proposition in the spare parts market to improve their forecast system & inventory management and hence their competitiveness. In short, they decided to change their business due the expectations of customers, marginal profitability and competition by focusing on economies and providing better quality of service.

2. What are the advantages and disadvantages of AutoGIRO to the companies involved? The advantages and disadvantages from the point of view of dealers and GM are discussed below:

DEALERS Advantages of AutoGIRO:

a) Dealers did not have to worry about managing inventories and their delivery as GM was taking the responsibility. Dealers would be in advantageous position as it would improve demand forecast accuracy and unnecessary cost associated with safety costs.

b) It gave security and confidence to the dealers that any unsold parts would be returned and even urgent delivery would be responsibility of GM.


c) It had the potential to improve sales by the usage of internet based “parts locater” by which dealers could locate the parts in nearby dealerships. Hence it would improve availability of parts for sales.

d) It would reduce dealers working time on managing inventory and replenishments.

e) As unit cost would decrease, the price would be low translating to better competitiveness leading to more sales, hence improving their ROI.

Disadvantages of AutoGIRO:

a) Loss of control to GM Brazil. It would reduce the control of dealers to make purchases as the products may be bad quality that may affect their reputation

b) GM Brazil may take advantage of the situation by delivering large quantities to improve their cash flow. As, GM might have to take back items, however GM might use this tactic for short term.

c) Since GM will have access of dealer‟s retail data such as assets, sales, etc. It increases the possibility of data going into wrong hands; in short it gives rise to security concerns such as data loss, data manipulation or corporate espionage.

d) There is huge investment associated with implementation of IT and

telecommunication infrastructure.

GENERAL MOTORS Advantages

a) It will lower the bullwhip effect by better management of inventories. GM can control the inventories as the stocks would be visible to them via strong infrastructural development. It would help in excess obsolete or shortage of stocks. Hence all these developments would lead to more sales Hence more profits for GM.

b) GM will manage the inventories and the cost would be passed on to the dealers. This will lower supply chain cost.

c) Implementation of AutoGIRO will dealers management timings spent on management of inventories. As a result, dealers can spend more time on selling the items and providing better operational and customer service.

Disadvantages

a) Considering the previous arrangement, this approach might be bit risky for GM as they would have to take back stocks if it is unsold. Express delivery cost would also be borne by GM. It might be risky proposition if GM does not manage the system well.

b) The success of the system will depend on dealer‟s co-operation. GM does not has control on their data-entry

c) There is huge dependence of information technology and telecommunication, in case of problems it might lead to disruption of supply chain.

d) There is huge investment associated with implementation of IT and

telecommunication infrastructure.


3. What are the things that must happen for AutoGIRO to succeed, and how can GM help these things to happen?

Some of the things that are necessary for AutoGIRO to succeed are:- a) Co-operative culture between the dealers contrary to prevalent individualistic

selfish approach. GM can organise corporate get-togethers and make them realise the co-operation will help reducing supply chain costs and increase sales and hence benefit‟s all parties. GM had also done a great job by educating them via independent technical education providers.

b) Convincing dealers about AutoGIRO‟s benefit‟s and GM could successfully implement it to reap benefits. GM could educate them regarding the benefits by independent body and could also cite the example of Saturn‟s success by implementing AutoGIRO.

c) They should have sufficient data to accurately forecast the future demand. GM should implement AutoGIRO after accurate data gathering and testing. Finally proper simulation should be done, so that there is no possibility of failure.

d) Development of IT and telecommunication infrastructure. GM should share implementation costs and also provide financial assistance to the dealer.

e) The presence of effective and efficient logistics provider so that there could be consistent delivery lead timings. GM should select the best available logistics providers.

f) With respect to top-management of the dealers, their belief, trust and commitment in AutoGIRO was paramount. GM can do same things as described in point a) above.

g) It was found that data accuracy was low and hence improvement in the system was required. They should constantly research and look forward to improve the system to improve data accuracy.

h) It would have been better if all the dealers had similar inventory management system, as it becomes easier for everyone read, transfer, modify the data.

4. How should GM go about convincing dealers to adopt the new inventory system? The first step in the implementation of AutoGIRO is to convince its dealers to adopt it. GM needs to build an atmosphere of trust and co-operation, which dealers do not recognise due to their past experiences and existing business practice. Dealers think that GM thinks only about their profits, e.g.- their previous bonus system was the perfect example of how dealers were coerced to buy the stocks even if they did not want to. So in order to build a positive business atmosphere, they can explain advantages (Please refer to answer 2) of AutoGIRO system to its dealers via independent educating body. They can focus on advantages such as by implementing the system,


they can improve their inventory management and forecasting system. As a result of better replenishment system, they can improve on their sales and hence their profits. They can further say that since they would be taking the full responsibility of managing inventory, they would take back any unsold parts. In case of emergency, they would also have option of getting the parts from their nearest dealers or by express delivery, cost of which borne by GM. Also since they would not have to spend their time on managing inventory or logistics operations, they could concentrate better by focussing on other areas of business. Further they should build an environment of trust and co-operation. They should also advise them on improving dealer‟s processes because ultimately dealers gain is their gain. In brief, GM should convince them on following grounds:

a) It would reduce their management time for managing inventory, forecasting & logistics, so that they could focus on other areas.

b) As supply chain would improve, the cost would reduce which would bring down the price. Hence they would be more competitive in the market.

c) Excess costs (excess inventory, express delivery cost) would be eliminated. They would improve upon lost sales.

d) They could give example of other organisation such as Saturn who are reaping benefits after the implementation of the system.

5. Should GM help to improve the tight cash situations at some of the dealers? Why or why not? GM should help the dealers who are facing hardship financially in the form of financial loan. By strengthening their dealerships they would be able to reach their products to more customers, hence increasing their sales. On the other hand, assisting them might be bit risky if the dealership does not improve its financial situation. Dealership might fail due to a) Less market in the region b) Unskilled manpower in the dealership station and not keen on improving, etc. GM should perform its analysis about its each struggling dealerships and should provide assistance to only those who has the potential to succeed in the coming times. They could do their analysis in terms of market presence, inventory locations, Stock Keeping Unit‟s handled, and type of products. 6. With AutoGIRO automating a great part of a parts manager’s work, what do you think their new role should be at the dealers? After the implementation of AutoGIRO project, the dealers can focus on:


a) Better Customer Service to build good customer relationships. Providing customers better knowledge, service about the available of parts.

b) Better customer retention approaches c) Implementation of better sales and marketing strategies. d) They can specialise in after sales service, could seek feedback from the

customers regarding improvements in the parts, services, etc. to increase customer loyalty and also to improve the products.

e) They could improve and increase their infrastructure to make to make it more attractive for the customers.

f) They could also assist in identifying customer pattern in order to further improve the forecasting system.

g) They could help GM in product development by giving their advices as they are closer to customers and are aware of the trend, dislikes, requirements, etc.

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Logistics System_Rohit D Shah