Just-in-Time and the Pull System

Just-in-time replenishment is a fundamental aspect of Lean implementation. The idea is to replenish only what the customer needs, when the customer needs it. The “customer” may be an internal customer (a work cell on the shop floor or a distribution center within the company’s logistics network) or an external customer. The obvious benefit is the reduction of inventory that comes with reserving commitment of inventory until demand is known. Hence, customers pull the inventory rather than having it pushed on them. We have discussed the many forms of logistics waste that tend to be created when companies speculate on what customers will demand, the quantities they will demand, and the specific location of that demand. Speculation leads to opportunities for error, and in fact, we know that there will be error. The relevant issues become how far off our judgments will be and in which direction. Using a pull system removes speculation of demand from our day-to-day execution. As a result, we not only achieve inventory reductions but also benefit from reductions in the other six forms of logistics waste. For instance, transportation waste is reduced by not sending goods out into the field that may or may not sell, goods that may have to be reclaimed or repositioned in the market for another chance at sales. As for storage and facilities, less is needed because the company is only handling product that is sold or will be sold in the near future. The other wastes are similarly reduced when we act on certainty rather than guesswork.

How is a pull system operationalized in the supply chain? One way is through the use of kanban cards in both their paper and electronic format, which serve as visual cues of demand. The kanban signals when a small quantity of supply is consumed downstream and needs to be replenished. Toyota used the card-based kanban method to introduce North American suppliers to the pull orientation of just-in-time after setting up operations in the United States and Canada. After getting suppliers up to speed, the system has since converted to electronic kanban communications, but the returnable containers in use today throughout the Toyota system continue to serve as visual cues of demand.

While kanbans are typically believed to only find application in the inbound side to manufacturing, the same basic concept is employed in vendor-managed inventory (VMI) systems. In VMI, the vendor company (usually a manufacturer) determines the inventory level that a customer downstream should maintain, either at the distribution center level or perhaps at the point of retail. By having visibility of inventory on a real-time basis, the vendor can determine when to replenish supply and the quantity of the replenishing supply. The supply chain and end customer benefit from better matching demand with ready (and fresh) supply with little or no speculative inventory. In addition, by not committing inventory to customers in advance of demand, the vendor is free to determine where inventory should be deployed in real time based on current needs.

Very few supply chains operate on a pull basis from beginning to end. Even Toyota, the epitome of Lean, only relies on a true “pull” in feeding its manufacturing plants. On the outbound side from the plants, Toyota Motor Sales continues to forecast the supply of finished automobiles that dealers will need to meet the subsequent needs of customers. This essentially reflects a “push” to the market as dealers and Toyota speculate on what consumers will buy on the lot. This is a fact of life for auto manufacturers given that few consumers are willing to wait the several weeks (and for some automakers several months) that it takes to produce and deliver a customer-spec vehicle. Most consumers would prefer to show up on the lot and drive home that same day or soon thereafter in a new vehicle that closely, though not perfectly, matches expectations. In response, automakers flood the market with sedans, coupes, trucks, minivans, SUVs, and hybrid vehicles that they hope will meet the needs of the market.

There is no question that operating on a pull basis is tough. Operations must be synchronized with demand, flexible enough to accommodate whatever might happen in the marketplace, and quick in response. This forces most companies to simply say “It’s not possible.” These are also the companies that will be standing on the sidelines when their competition demonstrates that pull systems are possible. These challengers will certainly understand the economics of operating on a conventional basis, but will develop capabilities (along the lines illustrated in the Logistics Bridge Model) that change the economics — achieving flexible market accommodation at a lower cost than staid competitors stuck in speculate-and-push modes of operation. Anyone with an eye toward the personal computer market, among others, has seen this very dynamic at work in recent years. The next three areas to be reviewed are key ingredients in the transition from push to pull replenishment.

Lead-Time Management, Speed, and Flexibility

If a company is ever to have aspirations of delivering on customer promises at anything close to real time, then lead-time management, speed, and flexibility are critical. In order to reduce lead time, the processes performed in capturing, fulfilling, and delivering an order must be scrutinized and, more fundamentally, questioned. Significant lead-time reductions usually call for dramatic process redesigns. Redesigning logistics-related processes must also take into consideration how the process should interface with other internal functions, suppliers, customers, and service providers given logistics’ boundary-spanning presence in the company and the supply chain.

Recall that logistics is the thread that links the supply chain system. The challenge of lead-time reduction efforts is to make the companies that compose the supply chain collectively recognize process elements that add value given the time consumed and to compress the nonvalue-added elements from the process. In the end, we have a lean, synchronized system that reduces lead time to its absolute minimum but also makes all involved parties more efficient and competitive.

Once unnecessary and nonvalue-added steps in a process have been eliminated, we can focus on performing the remaining steps with speed and accuracy. Like eliminating unnecessary steps in a process, the organization must seek to remove bottlenecks in flow, wherever they might exist. Consistent with Theory of Constraints thinking,* the speed of any flow is going to be regulated by the speed of the constraint. This is as true in process flow as it is in the flow of a dammed river. Lean-ing out internal operations does not necessarily improve flow when the bottleneck exists outside the four walls of the “Leaned out” operation. Yet again, we see why one must take the mission for improvement outside the company in tackling constraints to optimal flow.

Obviously, we cannot look past the accuracy or reliability of the process, for a fast process that only delivers half of its anticipated yield is not worth much. The challenge of building fast yet reliable processes is not enough because they must be flexible as well. Processes must be able to handle whatever comes their way. Too often, this aspect of Lean processes is overlooked. Unfortunately, Lean practitioners often feel that in order to create a fast, reliable process, they must fix it, whereby “fixing” the process makes it rigid. But we cannot afford to have “fixed,” rigid processes, for they must be ready for anything. Even the most finely tuned sports car makes for a poor off-road vehicle. Lean processes must be able to accommodate the bumps and rugged terrain that comprise today’s marketplace.

Processes that reflect desired characteristics of speed, reliability, and flexibility must then be fed by real-time information to leverage the benefits of the system. It is information that conveys not only the market needs but also the operational status of the system that must be captured and consumed by a company to make the vision of Lean Six Sigma Logistics a reality. The goal of these efforts is to create a system with a high level of readiness, one that is ready to respond to whatever challenges and opportunities are presented. Lead-time management, along with the costs incurred in providing quick response, represents the supply chain’s tangible, holistic measure of readiness. Total cost paired with revenue implications should drive a company’s pursuit of fast, reliable, flexible processes.

Leveled Flow

Despite our focus on flexibility and readiness to take on anything, we cannot look past the importance of planning. We must have an ability to look ahead to sense what might be in store for the company and perhaps the entire supply chain. Looking ahead on a strategic basis helps to ensure the company’s leadership position, introducing the right products, and working with the right customers and suppliers, among other endeavors. Looking ahead operationally is important too. Though we should develop processes and capabilities to accommodate “uncontrollable” variation in demand, it does not mean that we should not try to rope in the variation.

Oftentimes, it is the company itself that creates the variation. Most companies stir up demand by engaging in promotions and temporary price reductions that surge demand in the short term, generating artificial peaks in demand. Generally speaking, these peaks are followed by long, deep valleys in demand as the excess inventory must be depleted before customers are ready to buy again. Yet, the company (and, indeed, the supply chain) must be prepared for the peak, having capacity and people on hand to fulfill the heightened volumes when such artificialities are present. In place of these man-made ebbs and flows, the logistics organization should work with internal and external parties to level the flow, minimizing the so-called bullwhip effect that leads to overreactions with changes in demand and the inevitable waste created by these overreactions.

The benefits of leveling flow are fairly obvious. You do not need capacities to cover the peaks, but rather to cover the average demand over the course of the planning horizon. You do not need to have people ready to accommodate the peaks, but only the smoothed demand. You will be less prone to paying premium prices for materials in high demand as well as constrained capacities in warehouses and transportation assets. In sum, by reducing variation in the activity level, the company will only pay for assets and processing necessary to cover the averages rather than the peaks.

The challenge of leveling flow involves more than having the ability to respond to demand as it happens; it involves an ability to foreshadow the near term. The only way to foreshadow with any accuracy is to collaborate — collaborate with the forces creating demand, namely marketing, sales, new product development and commercialization, and customers. We should not limit our focus to next-stage customers, but also focus on tier 2 customers and beyond if we find ourselves separated from end customers by multiple tiers in the supply chain. Only to the extent that we can have some idea of what end customers might have in store for us can we have any hope of foreshadowing the future with any accuracy. The collaboration need not only provide foreshadowing benefits; by sharing capabilities and working through constraints with these outside parties, opportunities can be realized to make greatest use of what Lean Six Sigma Logistics has to offer the company and the entire supply chain. Therefore, leveled flow can serve not only as a way to achieve lowest total logistics cost, but also as a means of collaboration between logistics and other functional areas in the company and between the company and its trading partners in the supply chain.

Frequency and Lot Size

The frequency of delivery and lot size determination are intimately related to pull replenishment, lead-time management, and leveled flow. As discussed in the Logistics Bridge Model, delivery frequency is among the most powerful Lean tools for reducing inventory levels. In one example, we examined how high frequency and small lot sizes supported by milk runs and cross-docks resulted in leveled flow into manufacturing plants, allowing the manufacturing line to synchronize demand with real-time supply.

Despite the attraction and quantifiable benefits, there is inherent resistance to increasing frequency and reducing lot size. Large lots are encouraged and rewarded in purchasing, production, and logistics in many companies given the basis on which these functions are typically measured: cost per unit. Unfortunately, most cost-per-unit measures do not capture the indirect costs attached to buying, making, or shipping more volume than the company needs in the here and now. Costs like inventory carrying costs, increased warehousing costs, and the cost of repositioning unsold inventories may not be taken into account, not to mention the hard-to-measure damage to brand equity that comes with price discounting used commonly to move excess inventory.

While it is true that per-unit purchasing, production, and transportation costs are likely to increase (at least in the short term) with smaller lots delivered more frequently, a company should rely on total cost analysis to determine whether it is a good idea and to determine what the ideal lot size should look like. This calculation should take more into consideration than annual inventory carrying cost and annual ordering cost found in simple economic order quantity logic. It should truly reflect all costs affected by the lot size, such as transportation and warehousing. In turn, measurement and reward systems must be devised such that purchasing, production, and logistics management are not held accountable for functional or per-unit costs, but for contribution to the collective effort captured in total cost. The value of matching supply to demand becomes apparent when total costs are determined.

Standardized Work Plan

Standardization has served as a consistent theme throughout our discussion of Lean Six Sigma Logistics. It was one of the twenty-seven tenets associated with the principle of capability. A standardized operation is one in which we know the input requirements, the procedure of the process, the time for each step in the procedure, and the expected output of the operation. Standards are essential for understanding the current condition of a process, supporting continuous improvement, and measuring improvement. Not only must the work be standardized, but the expected inputs, procedure, and outputs must also be clearly documented. The documentation should be so clear that an outsider should be able to step into the process, understand the process, and soon operate as a fully functioning team member, making appropriate contributions to the process.

The reason that standardized work is so important is that it allows us to understand variance in our processes and to make appropriate corrections. You may recall the example of the novice golfer trying to improve his swing by making one modification at a time to an established method. Without standardization, the source of the variation is uncertain and cannot, therefore, be corrected. For that reason, standardization serves as a fundamental platform for continuous improvement.

The SIMPOC Model

To answer the question “What does a standardized process look like?” we need to break down the process itself. The good news is that all processes are made of the same basic variables. The SIMPOC (Supplier-Inputs-Measurement-Procedure-Outputs-Customers) model* defines the key variables and provides a framework for documenting standardized processes by answering the following questions:

Figure 22.1. Standardized Operations and SIMPOC Analysis.

These questions are addressed in the example illustrated in Figure 22.1. If we can document the SIMPOC for each process in our operation, the result will be a set of documented standard operations. Once this is accomplished, the standard is set. As noted, a standardized, documented process is one that new team members can quickly understand and contribute to immediately. Even though a process becomes standardized, however, we should not become content with it. The vision is to always seek new, better ways to perform the work.

5S Organization and Visual Control

Fundamental to Lean-ing out any operation is to eliminate clutter and complexity. Clutter and complexity in the workplace lead to chaos, and chaos leads to waste. The organized workplace is one in which team members are fully functional, efficient, comfortable, and safe. 5S is a method used to organize the workplace. The terms of 5S are presented in Table 22.1, in both original Japanese

Table 22.1. The 5S Approach to Workplace Organization.

expressions and the English translations. Put simply, 5S suggests that there is “a place for everything and everything is in its place.” This concept applies to operations environments like the shop floor, loading docks, and storage areas, but it also applies to office environments. The idea is that when team members know where to find the physical tools they need to do the job and clutter is minimized, the work will be done safely and efficiently.

Maintaining order is a key cultural element of the Lean Six Sigma organization. An orderly work environment conveys a message of discipline to team members and portrays an image of quality to all outsiders, whether they are customers, Malcolm Baldrige Award reviewers, or health and safety inspectors. The work environment that condones 5S principles is never shy about introducing new or prospective customers to the operations or nervous about the next drop-in inspection because the environment is always under the inspection of the team members. Maintaining a clean, safe working environment is the responsibility of all team members and can serve as a starting point for a broader total productive maintenance (TPM) program, where members not only maintain order in their work are, but also perform basic maintenance (e.g., inspecting, cleaning, tightening, lubricating) of the equipment and assets they use.