lean initiatives, supply chainMany supply chain practitioners are lean experts and fans of The Goal by Eliyahu M. Goldratt. Lean practices require examination of every process in the supply chain and identifying areas that are using unnecessary resources, which can be measured in dollars, time or raw materials. The implementation of lean practices typically reduces inventory and reveals various systematic problems in operations that were covered by holding excess inventory. With a lean strategy, inventories are low and replenishment is done more often thereby reducing waste and making sure that operations are streamlined and efficient.

However, there are risks to this approach – any glitch in replenishment can cause production lines to stop. Unexpected changes or events cannot be easily addressed and the ability to react to supplier or other supply chain problems can be difficult with low inventory levels.

Therefore, it is important to consider strategies and ideas that complement the lean approach. We offer three of them here:

1. Implement supply chain risk management

Lean practices can sometimes make it more difficult to recover from unexpected events in a reasonable amount of time from unexpected events. Toyota has been the most successful implementer of lean strategies and has spawned a whole industry of companies who want to learn the “Toyota Way.” The tsunami that hit Japan in March 2011 caused havoc in Toyota’s supply chain and caused it to severely pull back production levels and lose its position as the world’s top automaker in 2011.

What is Toyota doing to do to improve its ability to sustain the shock of new unexpected events? As recounted here the company says that is close to the end of a massive effort that will lead to a dramatic reduction in its supply chain risk from future disasters, with the effort in large part focused on reducing its Time-to-Recovery from the six months experienced after the tsunami to two weeks. Read more about supply chain risk management on our expertise page or watch one of Dr. Simchi-Levi’s webinars on risk here.

2. Match your supply chain strategy to customer value through supply chain segmentation

A successful supply chain strategy always starts with the customer value in mind and that should motivate the design and process decisions. In Operations Rules, there are quite a few examples of matching strategy to customer value. The basic forms are described around push, pull or push-pull. In reality, companies have many different types of products and channels and each one of them may have different characteristics that each requires its own approach.

A good example is Dell, known for its innovative configure to order manufacturing that matched its direct business model. Dell was known as a leader in high inventory turns, short response time and negative cash conversion cycle. When it entered the retail channel at the beginning of 2008, using the same strategy became a challenge in a competitive push driven environment. Dell tackled this challenge through understanding its customer segmentation, reducing complexity and creating a new logistics strategy to address the new environment. To read about Dell, take a look at an article our Chairman wrote for MIT Sloan Management Review. To learn more about supply chain segmentation, read our supply chain segmentation white paper.

3. Understand your inventory drivers

Finally, inventory has a role in the supply chain but nobody wants too much of it as it adds cost to operations and too little may be risky. Understanding the drivers behind the need for inventory can enable new strategies such as faster and more reliable delivery from suppliers, shorter cycle time and, better positioning of inventory in the supply chain. In an upcoming webinar we will show how Pepsico was able to quantify inventory opportunities, the drivers of these opportunities and create a common platform for management to try out new strategies that improve the supply chain.

Written by Edith Simchi-Levi, VP of Operations at OPS Rules Management Consultants

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