Optimizing Your Supply Chain
This chapter discusses techniques to optimize your supply chain to ensure you're creating the most value, in the most sustainable way, for you and your customers — and how to implement improvements through cross-functional projects.
In This Chapter
What you will learn
- Mapping your supply network
- Driving process improvements
- Managing supply chain projects
Designing Your Network
Nodes, links, value-stream mapping, and network optimization
It's often useful to think about your supply chain as a network. Networks are made up of nodes and links. Every stop that a product makes between raw materials and a customer is a node of the network. A factory is a node; so is a warehouse, a distribution center, and a retail store. Nodes are connected by links. Generally speaking, links are forms of transportation, such as a ship, a railroad, a truck, or a drone. Products move through a supply chain, flowing through links and stopping at nodes.
Your goal for any supply chain is to deliver maximum value at the lowest cost. One way to achieve this goal is to change the nodes and the links. Perhaps you can lower the costs of your raw materials by sourcing them from a different supplier, which means you'd be changing one of your nodes. Changing a node also means changing the links that connect that node to the rest of your supply chain.
● = Node — = Link Animated dots show product flow direction
One approach to network optimization is called value-stream mapping (VSM). The more of your supply chain that you're trying to optimize, the larger — and more complex — your VSM becomes.
Supplier
1 hr
5 hrs
2 min
1 hr
2 hrs
Customer
The gap between production time (14 days) and processing time (9h 2m) reveals waste — time where no value is being added.
Value stream mapping is an important part of a Lean professional's tool kit. However, network optimization can be done on a larger scale using sophisticated mathematical analysis. Several supply chain software platforms are available to help with analyzing supply chain flows, starting with spreadsheets and moving up to complex supply chain modeling tools. In addition to factoring in the costs for buying materials and transporting them between nodes, some network optimization tools can factor in variables such as supplier performance and the effects of tariffs and taxes.
Think of your supply chain as a network of nodes and links. Optimizing that network — through value-stream mapping or sophisticated modeling tools — is how you deliver maximum value at the lowest cost.
Lean & Process Improvement
The Toyota Production System, Muda, and the eight wastes
Supply chains are made up of people, processes, and technologies. All three components need to improve over time for a supply chain to remain competitive. People get better through education, training, and experience. Technology gets better through improvements in hardware and software. Processes get better through innovation and process improvement.
Three approaches to process improvement are particularly useful in supply chain management: Lean, Theory of Constraints, and Six Sigma. These approaches share a goal — process improvement — but achieve it by focusing on different aspects of a process.
Lean
Focus: Reducing waste. Originated with Toyota (Toyota Production System). Uses the least amount of time, effort, and resources by maintaining smooth and balanced flow.
Six Sigma
Focus: Reducing variability. Built on statistics. Aims to reduce process variability so that defects occur only 3.4 times per million opportunities (6σ).
Theory of Constraints
Focus: Relieving bottlenecks. Every process is limited by its slowest step. TOC helps you focus improvement efforts where they have the greatest effect on the whole system.
Lean is an approach to supply chain management that originated with Toyota, which is why you may hear it referred to as the Toyota Production System (TPS). The idea behind Lean is that you use the least amount of time, effort, and resources by maintaining smooth and balanced flow in a supply chain. The best way to accomplish this is by having logical, disciplined processes and excellent communications.
Many people make the mistake of thinking about Lean as a training program or a set of tools that a company can buy. However, Lean is really a philosophy — a different way of looking at how businesses create value. In order for Lean to work properly, everyone in the company needs to be working together to eliminate three things that cause inefficiency:
When someone identifies a need to innovate or improve a process, the key stakeholders are brought together for a kaizen event. (Kaizen is pronounced to rhyme with "Hi Ben.") During a kaizen, the stakeholders form a team and look at how the process is working, come up with ideas for how to make it better, and then implement changes. That sounds simple, and it should be. Because business cultures often make it hard for people to speak up or be heard, a formal approach like Lean helps to get everyone involved.
A core value of TPS is that people must be treated with respect because all of the workers have ideas to contribute that could benefit the company.
In the Lean approach there are eight kinds of Muda, or waste, that companies should be constantly driving out of their processes and their supply chains:
- Transportation: Any time that you ship something from one place to another, you are consuming time and money. The less you need to ship a product, the better.
- Inventory: Any time that you have products sitting around in inventory, you are wasting money by tying up space and working capital.
- Motion: Any time that you move something when it isn't necessary, or when it isn't somehow making your product more valuable to a customer, you are wasting time and money.
- Waiting: Any time that you have to wait for one thing to happen before you can do something else, you are wasting time and money.
- Overproduction: Any time that you make too much of a product, or make a product before you can sell it or use it, you've wasted time and money.
- Overprocessing: Any time that you do something that doesn't add value — that a customer won't pay for — you are wasting time and money.
- Defects: Any time that you make a product that you can't use or sell, you've wasted time and money. This also includes wastes such as scrap and rework.
- Untapped skills and employee creativity: Any time that you fail to engage and inspire your employees to offer ideas, implement improvements, or identify waste, you are wasting an asset that you are already paying for — their brains.
An easy way to remember the eight wastes is with the acronym "TIM WOODS." (The S at the end comes from skills in the last item.)
Toyota originally identified seven kinds of waste, but as Lean has been adopted in other companies, most of the experts have come to agree that untapped human creativity is so important that it needs to be included as an eighth form of waste.
TPS originated in the manufacturing world, so it is often called Lean manufacturing, but the principles have gradually been adopted in retail, distribution, and even service-based organizations. These days, you can find Lean initiatives in virtually every industry.
Lean is not a toolkit — it's a philosophy. Its power comes from everyone in the organisation working together to eliminate Muda, Mura, and Muri. Remember TIM WOODS to recall all eight wastes and drive them out continuously.
Six Sigma
DMAIC, variation reduction, and belt certifications
Six Sigma is a process improvement method that's built on statistics. The basic idea is that variation is bad. When you're running a manufacturing process or a supply chain, you need consistency and predictability. If you don't have consistency, some percentage of the things that you make probably isn't useful for your customers. If you do have consistency — that is, if you have a process under control — there's a much better chance that the products you make are useful. Consistent processes lead to a high quality level for products.
Statisticians describe the variation of a process in terms of the amount of deviation from an average value. The symbol used to represent deviation is the Greek letter sigma (σ). The statistical basis for Six Sigma is to reduce process variability so much that defects occur only at the sixth sigma (6σ), or 3.4 times per million.
You follow five steps to apply Six Sigma as a process improvement methodology. These steps create the acronym DMAIC (pronounced "duh-may-ick").
Step 1 — Define
Clearly define the process that you're trying to improve and why you want to improve it. During this phase, you need to build a business case for why the project is important and what resources you need to complete it. An important part of building the business case is to get feedback from the people who deal with the outputs of a process: the customers. This feedback is called the Voice of Customer (VOC). The overview of the project, including the VOC, should be summarized in a Six Sigma project charter.
Writing up the project charter can be harder than people expect. Don't get hung up worrying about making the charter perfect. Instead, just create a rough draft that explains what you are trying to do. The charter is just your starting point. It is okay to make changes and improve it as the project moves forward.
Step 2 — Measure
The second step is measuring the process that you're trying to improve. Because Six Sigma is a mathematical approach, you need to collect data so that you can measure how the process is working and calculate the amount of variation. Taking good measurements is critical so that you can calculate benefits during the next steps in a project. If your measurements aren't accurate then your improvement efforts are probably going to be misguided.
Step 3 — Analyze
After you collect data about the process, you analyze the data. In the world of Six Sigma, this analysis often requires a solid understanding of statistics and the use of some statistical analysis software. Generally speaking, the data helps you identify variations in a process and shows how those variations affect the quality of your products. Data analysis can help you understand what things are causing the variability — the root causes — so that you can look for ways to improve the process.
Step 4 — Improve
The next step is putting the knowledge you gained from data analysis into action by making changes to improve the process. These changes can happen at the same time, or they can be phased in over time. Commonly, this phase includes some pilot studies to provide confirmation that the changes provide the expected benefits before you implement them throughout a process.
If you decide that there are several improvements that will need to be brought online over time, you can sequence them in a Multi-Generational Project Plan (MGPP). An MGPP is like a roadmap that shows the order in which you will implement improvements.
Step 5 — Control
The funny thing about improving a process is that sometimes, when you stop paying attention to it, the process goes right back to working the way it did before you improved it. In Six Sigma, the final step is establishing a system to ensure that the improvements you made become permanent. Control often involves performing ongoing measurements and reporting to show that the improvements remain in place and continue to provide consistency over time.
The DMAIC approach is used for improving an existing process. Another Six Sigma approach called DMEDI (Define, Measure, Explore, Develop, Implement) is used to design new processes.
There are lots of educational programs available to help people learn about Six Sigma. Generally, there are four levels for Six Sigma training and certification:
Yellow Belt
Understands the basic concepts and terminology of Six Sigma and can contribute as a member of a process improvement project.
Green Belt
Has a solid understanding of Six Sigma and can lead process improvement projects on their own.
Black Belt
Has mastered Six Sigma and can teach other people how to manage process improvement projects.
Master Black Belt
Has such a high level of mastery that they can train and supervise Black Belts.
There is so much overlap between Lean and Six Sigma that some people combine them into a single discipline called Lean Six Sigma.
Six Sigma is about eliminating variation through data. Follow DMAIC to improve existing processes, DMEDI to design new ones. The goal: defects so rare they occur only 3.4 times per million — consistent, predictable, high-quality output every time.
Theory of Constraints
Finding your Herbie and tuning the whole system
The Theory of Constraints (TOC) is one of the simplest, most powerful supply chain concepts. The basic idea is that every process is limited by some kind of constraint (think of the saying, "A chain is only as strong as its weakest link").
TOC is really about tuning an entire supply chain to run at the same pace as the slowest step in the process. There are many examples of how constraints actually control all of the processes around us. In the world of auto racing, there are times when you need to limit the speed at which cars travel around the track, so you send out a pace car that no one is allowed to pass. When you're draining a bathtub, the rate at which water flows out is constrained by the size of your drain. In other words, the most restrictive step in a process is the one that constrains the entire system. TOC helps you focus improvement efforts on the constraints because that is where you can have the greatest effect on the supply chain.
Capacity: 1000
Capacity: 900
Capacity: 750
Capacity: 950
Capacity: 1000
= 750 only
No matter how fast every other step runs, the entire supply chain can only output 750 units — the speed of the constraint.
After you find the constraint, you have two choices:
- Slow all the other steps down so that they run at the same speed as the constraining step. This will prevent the buildup of inventory between the steps in your process.
- Improve the constraint so that the entire system moves faster. As you continue to improve the constraint, eventually it reaches the point where it's no longer the slowest step. Some other step becomes the constraint, and the cycle starts again.
The Theory of Constraints was made popular with a novel called The Goal by Eliyahu M. Goldratt (North River Press, 2014). Herbie was one of the fictional characters in the book, and his name has since been adopted into the jargon of TOC as a way of describing the constraining step in any process. When a constraint occurs in the middle of a process, it can cause chaos — a machine in the middle of an assembly line that breaks down might be a Herbie. But until you look at it from the perspective of TOC, people might not see how the starts and stops of that one machine actually cause inefficiencies throughout the whole supply chain.
Let's say that you have a supply chain that involves several steps. Your customers want to buy 1,000 widgets each month. But you can only manage to deliver 750. Because of TOC, you know that the entire process is limited by a single constraint — the slowest step. So instead of trying to fix everything, you start by figuring out which step is slowing down the rest of the system. After you have found the constraint, you have two choices. First, you can slow down all of the other steps so that the entire system runs at 750 widgets per month — preventing inventory buildup, but not meeting all customer needs. Second, you improve the constraint, which allows the entire supply chain to move faster. As you continue to make improvements, eventually the constraint will reach a point where it is no longer limiting the process. At that point, some other step has become the new constraint, and you shift your focus accordingly.
Every system has a constraint — one step that limits the entire chain. TOC tells you to find that constraint, fix it, and repeat. Improving anything other than the constraint is waste. Focus where it matters most.
Structuring Supply Chain Projects
WBS, RACI, scorecards, and the DIRECT leadership model
Projects are the way that companies make changes. Because supply chains need to adapt to changes all the time, project management has become an important part of supply chain management. One common characteristic of supply chain projects is that they tend to be cross-functional. You may need to have logisticians and operations managers, human-resources professionals, information technology experts, and accountants working together.
Bringing people with diverse skill sets together as a project team can be a great way to stimulate innovation and accelerate change. Three of the most common challenges for cross-functional project managers are authority, communication, and prioritization.
Authority
Authority means that you have the ability to hire, fire, reward, and correct someone. Often, key team members report to managers in another division and are only loaned to the project, so it can be difficult for the supply chain project manager to address performance issues directly because they do not have the authority to do so. If the project manager doesn't have the authority to manage the team members, she will need to rely on influence to keep all the team members pulling in the same direction.
Communication
Experts in any field have their own tools, rules, and language. In supply chain management, the same word can mean different things depending on the context. For example, transportation companies refer to their customer as the shipper, whereas their customers often use the term shipper to describe the transportation company. The project manager needs to be able to provide translation among functions and encourage people to explain what they're trying to say without using jargon.
Priorities
When someone is asked to work on a project, that person may not get to stop working on other things. If one of the other projects requires more time and attention, you must make sure that your project gets enough support to avoid getting into trouble. Anticipate potential problems so that you can make formal arrangements — for example, by making an agreement with the team member's boss to ensure your project has priority.
One of the best ways to deal with the challenge of leading a cross-functional project is to have a solid project plan. Building the plan gives everyone a chance to provide input and catch interdependencies. An integrated, cross-functional project plan makes it easy to see these connections and provides a clearer picture of the time required to complete a project.
You can use many approaches to build an integrated project plan. A structured list of tasks is called a work breakdown structure (WBS). Relationships among tasks are called dependencies. The task that needs to happen first is called a predecessor. The task that has to wait is called a successor. Dependencies often mean that it takes longer to complete a project than anyone expected. The process of looking for logical ways to shorten the timeline is called crashing the project plan. The longest series of tasks is called the critical path — the only way to shorten a project is to change the tasks on the critical path.
To tell whether a deliverable is a good one, use the Done/Not Done test. You should be able to ask whether a deliverable is done or not. The answer shouldn't be "Almost" or "It's 64.67 percent done." The answer should be "Yes, it's done" or "No, it's not done."
When there are lots of people working on a project, they often have different opinions about their roles and responsibilities. For any task in a project, there are really only five different roles that a team member can have: No role, Inform, Consult, Responsible, and Accountable. Assigning people to these five different roles makes it easier to communicate what each team member has to do. You can document the roles with a RACI Matrix (pronounced like "race see" and short for Responsible — Accountable — Consult — Inform).
It can sometimes be hard to convince team members that only one person should be accountable for every task. However, when more than one person is accountable it is more difficult to manage the project. If two people insist that they are both accountable for a task, consider breaking that task into two smaller tasks and making each person accountable for one.
Tracking the progress of a project is the key to figuring out what's working, what's not working, and where you need to focus resources. One of the most effective ways to track a project is to use a scorecard and update it on a regular basis. The project scorecard should make it easy for anyone to tell at a glance how a project is doing. The scorecard should include: status of major deliverables; recent accomplishments; upcoming tasks; and risks and concerns.
Over the years, the author developed an approach to leading cross-functional teams called the DIRECT project leadership model. The idea came from the realization that every movie — no matter how great the actors are — needs a director who can keep everyone working on the right things at the right time.
Define the Objective
Every project should start with a charter that clearly describes the scope, schedule, and budget of the project; identifies the project sponsor; and explains why the project is important. The charter helps ensure that everyone has similar expectations and can prevent scope creep (new work added to the project later).
Investigate the Options
Before running down the path of a particular solution, it's usually a good idea to consider other ways to accomplish your goal. Investigating your options early reduces the chances that you'll suffer buyer's remorse and ensures that you take into account the many points of view that can affect decisions in the supply chain.
Resolve to a Course of Action
When the options are clear, the team needs to make a decision and move forward. Supply chain projects can be stalled by analysis paralysis when teams get bogged down trying to collect data rather than making decisions and taking action. Resolving to a course of action is a leadership art that involves probing and listening to ensure that you truly understand the priorities and concerns of your team members.
Execute the Plan
When the plan is in place, the team needs to focus on executing the plan. Moving projects forward, keeping them on schedule, and keeping them on budget require special skills. Surprises will always occur, and surprises take time and money to address, but the credibility of the team and the value of the project depend on getting the work done on time. Executing the plan takes focus, a sense of urgency, and good communication among team members.
Change the System
Projects are about changing the way that the supply chain — the system — works. You must understand the current state before you change it. You also need to know how you expect the system to perform when the change is complete — the future state. The change from the current state to the future state doesn't happen instantly. If you're starting a new distribution center on Monday, for example, consider whether you should shut down the old one the Friday before or run both centers in parallel for six months to make sure that the new one is working properly.
Transition the People
You need to think about the people who operate the system and how your changes will affect the routines of your customers, your employees, and your other stakeholders. Organizational behavior expert Dr. William Bridges studied the process that people go through when responding to a change in their environment, and he called this process transitioning. The key point is that managing the transition is just as important as managing the change. Whereas the change is about the system, the transition is about the people.
Supply chain improvement happens through projects. Master the WBS, RACI matrix, and project scorecard for structure — and use the DIRECT model for leadership. Remember: changing the system is only half the job. Transitioning the people is the other half.
Chapter 1 Quiz
Test your understanding before moving on to Chapter 2
Answer all 10 questions drawn from the chapter content. You need at least 7 correct answers (70%) to pass. Review the sections above before starting if you need to.