《Integrating The Lean Enterprise》Lean Supply Chain Management Principles and Practices

ean Enterprise Value Lean Supply Chain Management Principles and Practices 1-Bozdogan -Lean Supplier Networks, September 2002 @2002 Massachusetts Institute of Technology

1 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Lean Supply Chain Management Principles and Practices

ean Enterprise Lean Supply Chain Management Value Basics Learning Points Lea a new Lea rela nd com Coc colla mec sup repr mar e- Bozdogan -Lean Supplier Networks. September 2002 2002 Massachusetts Institute of Technology

2 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Lean Supply Chain Management Basics Learning Points ƒ Lean supply chain management represents a new way of thinking about supplier networks ƒ Lean principles require cooperative supplier relationships while balancing cooperation and competition ƒ Cooperation involves collaborative relationships & coordination mechanisms ƒ Supplier partnerships & strategic alliances represent a key feature of lean supply chain management a spectrum of

ean Enterprise Theory: Lean Represents a"Hybrid Approach to Value Organizing Interfirm Relationships “ Market Firm Input Pric∈ a"Hierari coordina Firm Input and」 Lean efficient 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

3 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Theory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships ƒ “Markets” (Arm’s Length): Lower production costs, higher coordination costs ƒ Firm buys (all) inputs from outside specialized suppliers ƒ Inputs are highly standardized; no transaction-specific assets ƒ Prices serve as sole coordination mechanism ƒ “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs ƒ Firm produces required inputs in-house (in the extreme, all inputs) ƒ Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination ƒ “Lean” (Hybrid): Lowest production and coordination costs; economically most efficient choice-- new model ƒ Firm buys both customized & standardized inputs ƒ Customized inputs often involve dedicated investments ƒ Partnerships & strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, arm’s length relationships with suppliers

ean Enterprise Lean Supply Chain Management Differs Value Sharply from Conventional Practices ILLUSTRATIVE CONVENTIONAL MODEL LEAN MODEL CHARACTERISTICS Number&structure I Many, vertical Fewer: clustered I Procurement personnel Large Outsourcing I Cost-based I Strategic Nature of interactions Adversarial: zero-sum Cooperative positive-sum Relationship focus Transaction-focused I Mutually-beneficial Selection criteria I Lowest price Performance I Contract length Short-term Long-term I Pricing practices I Competitive bids LTarget costing L Price changes Downward Quality Inspection-intensive Delivery Large quantities Smaller quantities JIT Inventory buffers Large I Minimized; eliminated Communication Limited: task-related Extensive;multi-level Information flow I Directive; one-wa Collaborative;two-way Role in development I Limited: build-to-print Substantial I Production flexibilit Low very limited; nonexistent Exte I Dedicated investments Minimal-to-some Mutual commitment very limited; nonexistent I High Governance I Market-driven Self-governing Future expectations No guarantee I Considerable 4-Bozdogan -Lean Supplier Networks, September 2002 @2002 Massachusetts Institute of Technology

4 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Lean Supply Chain Management Differs Sharply from Conventional Practices ILLUSTRATIVE 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 criteria Lowest price Performance 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 Large 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 Substantial Mutual commitment Very limited; nonexistent High Governance Market-driven Self-governing Future expectations No guarantee Considerable

ean Enterprise Lean Supply Chain Management Principles Value Derive from Basic Lean Principles FoCu Elim Synd Minir Esta coop Enst Deve Man Aliar capa Fost 5.Bozdogan -Lean Supplier Networks, September 2002 2002 Massachusetts Institute of Technology

5 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Lean Supply Chain Management Principles Derive from Basic Lean Principles ƒ Focus on the supplier network value stream ƒ Eliminate waste ƒ Synchronize flow ƒ Minimize both transaction and production costs ƒ Establish collaborative relationships while balancing cooperation and competition ƒ Ensure visibility and transparency ƒ Develop quick response capability ƒ Manage uncertainty and risk ƒ Align core competencies and complementary capabilities ƒ Foster innovation and knowledge-sharing

ean Enterprise A Set of Mutually-Reinforcing Lean Practices Value Translate these Principles into Action Design supplier network architecture Design of supplier network driven by strategic Fewer suppliers; clustered control pplier selection based on performance Develop complementary supplier Ensured process capability(certification) ltes evelopment (SPC, Greater responsibilities delegated to suppliers Create flow and pull throughout Linked business processes, IT/s infrastructure upplier network cnro nd delivery(JIn effective coordination mechanisms Partnerships strategic alliances Open and timely communications Maximize flexibility responsiveness Increased interdependence &"shared destiny" 小 Flexible contracting Rapid response capability Optimize product development Integrate suppliers early into design a through early supplier integration development IPTs Collaborative design; architectural innovation Open communications and information sharing Target costing: design-to-cost Integrate knowledge and foster Knowledge-sharing; technology transfer Aligned technology roadmaps This lecture highlights key enablers practices by focusing on 是· 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

6 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value A Set of Mutually-Reinforcing Lean Practices Translate these Principles into Action Design 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 ng on: • Synchronized production and delivery • Partnerships and strategic alliances • Early supplier integration into design and development IPTs focusi

ean Synchronized Production and Delivery Enterprise Throughout the Supplier Network is a Central Value Lean Concept ■|nte les ■F|OW usIng takt flow n chain On -t Mini Effer e prod Striv Grea supp 7-Bozdogan -Lean Supplier Networks, September 2002 2002 Massachusetts Institute of Technology

7 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Synchronized Production and Delivery Throughout the Supplier Network is a Central Lean Concept ƒ Integrated supplier lead times and delivery schedules ƒ Flows from suppliers pulled by customer demand (using takt time, load leveling, line balancing, single piece flow) ƒ Minimized inventory through all tiers of the supply chain ƒ On-time supplier delivery to point of use ƒ Minimal source or incoming inspection ƒ Effective two-way communication links to coordinate production & delivery schedules ƒ Striving for zero quality defects essential to success ƒ Greater efficiency and profitability throughout the supplier network

ean Enterprise Aerospace Firms Have Faced an Uphill Value Challenge in Synchronizing Flow with Suppliers PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS 45.00 42.4 35.00 3000 25.00 Defense/commercimlore than 75% of sales to defer 20.00 or commercial markets 1500 10.7 10 5.00 0.00 Defense(25) Commercial 9) (Year: 1993: N= Number of responding business units/c Bozdogan -Lean Supplier Networks, September 2002 @2002 Massachusetts Institute of Technology

8 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Aerospace Firms Have Faced an Uphill Challenge in Synchronizing Flow with Suppliers PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS 10.7 42.2 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 Defense (25) Commercial (9) (Year: 1993; N= Number of responding business units/c Defense/Commercial : than 75% of sales to defen or commercial markets More

ean Supplier Certification has been an Important Enterprise Early Enabler of Achieving Synchronized Value Elow-in Aerospace OF ERS OF A TYPICAL AEROSPACE ENTERPRISE 39 : 1038 N=Number of respondents answering this question for all three ye 9-Bozdogan -Lean Supplier Networks, September 2002 2002 Massachusetts Institute of Technology

9 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value 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) 7.40 6.86 2.55 15.28 10.86 10.38 5.63 19.62 23.19 20.11 15.63 36.33 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 Industry (48) Airframe (13) Electronics (20) Engines and Other (15) (N=Number of respondents answering this question for all three years) 1991 1993 1995

ean Enterprise Closer Communication Links with Suppliers Value 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 90.00 口 Production Cost data 8333 口 SPC Data 80.00 70.51 Actions 70.00 6923 a Financial Information not Publicly 60.00 Available a Feedback on Purc/Supplier 85000 72 40.00 a3000 20.00 10.00 1989(381432,1516.14) 1993(56569554154) (N=78: Total number of responding business units) 10-Bozdogan-Lean Supplier Networks, September 2002 @2002 Massachusetts Institute of Technology

10 - Bozdogan -Lean Supplier Networks, September 2002 © 2002 Massachusetts Institute of Technology Lean Enterprise Enterprise Value Closer 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 48.72 70.51 17.95 83.33 41.03 88.46 19.23 70.51 20.51 52.56 17.95 69.23 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 1989 (38,14,32,15,16,14) 1993 (55,65,69,55,41,54) (N=78: Production Cost Data SPC Data Performance Improvement Actions Longer-term Business Strategies & Plans Financial Information not Publicly Available Feedback on Purc/Supplier Mgmts Operations Total number of responding business units)