Strategic, Tactical and Operational Conflicts in Lean Supply Chain Management

European DSI 2014 Swenseth & Olson

Strategic, Tactical and Operational Conflicts in Lean Supply Chain Management

Scott R. Swenseth, University of NebraskaDavid L. Olson, University of Nebraska


Globalization (and global warming)

• SUPPLY CHAINS• Need lean• Need green• Need agile• Need resilient

• Continuous improvement the goal• Improvement is never finished

• Lean effective at tactical, operational levels• OUR FOCUS: STRATEGIC SUPPLY CHAIN IMPLEMENTATION OF LEAN


Views

• Operators don’t have confidence that upper management understands lean• Don’t believe upper management supports lean applications• Upper management continues to demand improvements generated

by lean• PREMISE: UPPER MANAGEMENT DOES CARE & SUPPORTS LEAN• But they have many factors to consider• Some of these factors may trump lean

• STUDY: one major supply chain player• Interacting upstream


Our Model: Data assumed as inputs

• Average annual (& daily) demand (and standard deviation)• Unit weight• Unit purchasing price• Holding cost as % of unit price• Order cost• Backorder cost per unit• Truckload shipping rate (assume full truckloads)


AGILE

• Lean a good deal • Agile also good in supply chains [Borgstrom & Hertz, 2011; many others]• Agile provides information visibility• Agile has relative advantage in low demand, high variety environments

• Extension of lean to supply chains challenging [Liu, et al., 2013]• No decision maker can have all needed knowledge

• Internet helps [Hines, et al., 2004]• Can synchronize decisions, share goals [Manuj & Sahin, 2011]• But Bullwhip studies indicate difficulties [Disney, Towill, many times]


RESILIENT

• Lean focus on cost minimization • Zero inventories cause problems [Christopher & Peck, 2004]• Supply chains may have high levels of uncertainty [Nauhria et al., 2009]• On-time delivery critical, as is product quality

• Agile refocus on developing capacity• Provide the ability to cope with unexpected disturbances [Carvalho &

Machado, 2009; Pettit, et al., 2010]• Highly appropriate if demand rapidly changing


Environmental Sustainability

• Lean can help environment [Sobral, et al., 2013]• Improve efficiency ecologically at a profit [Rao & Holt, 2005]

• GREEN SYSTEM consideration of Product Life Cycle [Srivastava, 2007]• Green product design• Material sourcing & selection• Marketing• Consumption• Manufacturing• Delivery


Environmental Sustainability Redux

• Little evidence of green supply chain practice [Genovese, et al., 2013]• Need holistic approach [Lee, 2010]• Environmental complexity includes many goals• Inventory studies [Borgstrom & Hertz, 2011; Chung, et al., 2012]• Need to consider overall supply chain system [Mollenkopf, et al., 2010]• Efficiency trade-offs with environmental sustainability [Wolters, et al., 1997]

• Wal-Mart, Caterpillar, Toyota


Lean Implementation

• [Miller 2011] survey• Mixed findings of Managers knowing what lean really is• But it is critical they be involved• Managers should improve process rather than allocate blame

• International Survey of Lean Healthcare Users [2012]• Primary barriers to lean

• Resources• Knowledge gaps• Conflicting priorities

• [Zhang, et al. 2012]• Need management engagement & commitment• Organizational culture• Reviews & tracking• Communication & assessment

• [Fricke, 2010]• The larger the organization, the greater the awareness of lean


Problem Scenario

• Supplier shipping TL quantities to customer• Basic system, lean & agile modifications• PARAMETERS• Purchasing• Ordering• Carrying• Shipping• Risk of stock-out• Risk of defects• Demand variability


Input ParametersVariables Values

Average Annual Demand (Units) D 50,000Unit Weight (Pounds) w 25Unit Purchase Price ($) P’ $200Unit Selling Price ($) P $300Holding Cost (% of Unit Purchase Price) i 75%Order Cost ($/Order) C $500Backorder Cost ($/Unit) b $200Shipping Rate ($/Shipment) R $750TL Shipping Weight (lbs.) W 50,000Shipping Rate ($/Unit) r $ 0.375Product Defect Rate q 5.00%


Intermediate Factors

Variables Values

Demand per Day (annual demand/365) d 137TL Quantity (50,000 lbs/Unit wgt) Q 2,000Orders/Year 25Cycle time (days) t 14.6Lead time (days) l 14.6Max Safety Stock (units) 697.9Expected defects/order 100


Output MeasuresValues

Cost Term CostAnnual Purchase Cost $10,000,000.00Annual Holding Cost $ 150,000.00Annual Ordering Cost $ 12,500.00Annual Safety Stock Cost $ 49,222.62Annual Stock-out Cost $ 27,731.08Annual Shipping Cost $ 18,750.00Annual Product Defect Cost $ 750,000.00Annual Total Cost $11,008,203.70


Assumptions

• Lead Time – same as cycle time (supplier producing to customer demand)• Standard deviation of Daily Demand = 1/3 daily demand, normally distributed• Optimal Probability of Stock-out based on backorder unit cost

• Not allowed to be > 0.5, as that would yield negative safety stock

• Optimal Service Level = 1 – Optimal Probability of Stock-out• Max Safety Stock based on 4 StDev above mean• Expected Stock-out Quantity near optimal probability of stock-out times likely

number of units stocked out


Implementing Lean Alternatives

• Unit Price reduction – work with supplier, or design changes• Unit Weight reduction – work with supplier to be greener• Unit Demand increase – lower price increases demand• Order Cost reduction – cost of individual order reduced• Shipping Cost reduction – consolidation improves lean & green• Backorder Cost reduction – impact of stock-out reduced• Lead Time reduction – countered by higher number• Holding Cost reduction – decrease in rate and decrease in unit value• Product Defect Rate reduction• Standard Deviation of Demand During Lead Time reduction


IMPACT

• Previous Lead Time: 14.6 days• Previous Order Quantity: (50,000 lbs/shipment)/(25 lbs/unit) = 2,000 units• Cycle Time = Lead Time (2000/50000)*365 days/year = 14.6 days

• Current Lead Time: 11.68 days• Current Order Quantity: (50,000 lbs/shipment)/(18.75 lbs/unit) = 2,667 units• Without Learning Cycle Time: (2667/62500)*365 = 15.58 days• With Learning Cycle Time: 15.58*0.75 = 11.68 days

• Because demand increases at same rate that unit weight decreases, shipment size increases at rate causing average DDLT to be constant


Lean Cycle Comparison

Outputs Original Lean 1 Lean 5 Lean 10 Lean 20Purchase cost $10,000,000 $9,375,000 $7,247,706 $6,026,506 $4,853,907Order cost $12,500 $8,789 $4,307 $2,785 $1,715Cycle stock holding cost

$150,000 $112,500 $71,307 $55,447 $42,395

Safety stock holding cost

$49,223 $32,545 $15,047 $9,533 $5,778

Stock-out cost $27,731 $16,645 $7,081 $4,365 $2,590Shipping cost $18,750 $13,184 $6,460 $4,177 $2,572Defect cost $750,000 $703,125 $543,578 $451,988 $364,043Total Cost $11,008,204 $8,488.212 $14,973.861 $17,900,548 $20,487,439Total PROFIT $3,991,796 $8,488,212 $14,973,861 $17,900,548 $20,487,.440


RESULTS

• Columns represent rounds of lean improvement• Greater improvement rates during early stages• Assumes one improvement cycle per year• Compound profit improvement 8.52 % per year


STRATEGIC ALTERNATIVE TO LEAN & GREEN• Unit Price further reduced - (30% of current price)• Unit Weight same• Unit Demand same• Order Cost increase – new supplier• Shipping Cost per truckload increase – overseas• Backorder Cost per unit increased – multiple suppliers• Lead Time increased – overseas• Holding Cost % same• Product Defect Rate increased – multiple overseas suppliers


Global Outsourcing

Outputs Original Global ChangePurchase cost $10,000,000 $7,000,000 -$3,000,000Order cost $12,500 $12,500 -Cycle stock holding cost $150,000 $315,000 +$165,000Safety stock holding cost $49,223 $111,761 +$62,539Stock-out cost $27,731 $54,038 +$26,307Shipping cost $18,750 $18,750 -Defect cost $750,000 $2,250,000 +$1,500,000Total Cost $11,008,204 $9,762,050 -$1,246,154Total PROFIT $3,991,796 $5,237,950 +$1,246,154


SIMULATION

• 1,000 randomly generated scenarios• Varied stages of learning• Global outsourcing gains pick up after 5 periods• Considered impact of different change factors on results

• Correlation between input factor and change in profit

• GREATEST IMPACT:• Defective products

• Greater initial levels of defective product allows lean to improve more• Can’t transfer this to alternate suppliers

• 2nd GREATEST IMPACT• Learning Rate

• Greater learning rate, more lean benefits


CONCLUSIONS

• Multiple ways to implement lean, green, agile methods• We focused on decision processes• Operational level gains may seem ignored when changes made at

tactical level• Gains at the operational & tactical levels may seem ignored at the

strategic level• EACH LEVEL HAS TO UNDERSTAND HIGHER LEVELS HAVE BROADER

CONSIDERATIONS• What appears detrimental at lower levels may have a compelling higher-level

justification


Learning/experience curve

• Used to emulate progression through lean• Reflect:

• Improving product design• Affecting unit weight• Affecting defect levels• Affecting holding inventory• Affecting placing orders• Affecting shipping costs

• Improvements from managing demand• Impact safety stock• Impact stock-out costs

• WHILE LEAN OFFERED IMPROVEMENT, ALTERNATIVES OFTEN ATTAINED GREATER GAINS

Documents

Strategic, Tactical and Operational Conflicts in Lean Supply Chain Management