Supply Chain & Transport

Lean Six Sigma in Supply Chain

Why apply Lean Six Sigma in Supply Chain?

In today’s highly competitive environment, finding a competitive edge is a critical success factor in expanding a business and survival. Some companies tend to work on price, others on the quality of service, but in the end, they are all pursuing the same goal; increasing profit by acquiring, converting and retaining their most valuable asset: customers.

Wholesalers, manufacturers, retailers, distributors, suppliers, third-party service providers and every party involved in the supply chain are under pressure to reduce and balance their costs, time and inventories in order to continue to be profitable while still meeting their customers’ demands.

Supply chain management (SCM) is the management of the flow of goods. It includes the movement and storage of raw materials, work-in-process inventory, and finished goods from the point of origin to the point of consumption. Interconnected or interlinked networks, channels and node businesses are involved in the provision of products and services required by end customers in a supply chain. The physical stream is accompanied by the data stream, which controls and coordinates the movement of materials through the complex supply chain network with its many interfaces.

A supply chain consists of suppliers, manufacturers, distributors, retailers and customers. When all the supply chain components work well-coordinated and streamlined manner, it is highly efficient and effective. The components of a global supply chain are in different geographical regions. Global supply chains are very common for enterprises today that take advantage of favourable policies relating to taxation, business, import/export and economic incentives in different countries in order to maximise business performance and satisfy customers. Extending the supply chain over vast distances also brings challenges, e.g. higher risk of disruptions.

The main benefits of using Lean Six Sigma (LSS) in supply chain operations are:

• Higher revenue – producing more with the same or fewer resources
• Lower cost – eliminating unnecessary processes or waste
• Greater efficiency and quality – removing defects and waste to enhance product/service quality and speed up the flow
• More employee engagement – building an organisation where every employee actively contributes to continuous improvement of the work environment and product or service to the customer

With the advent of Industry 4.0 and the Industrial Internet of Things, there are many ways to track, monitor, control and automate using hardware (e.g. sensors) and software (data exchange and storage). It would be a huge waste of resources to automate a system in its inefficient state without first optimising or redesigning it to the ideal state using an approach like Lean Six Sigma. Such a mistake could even amplify existing problems if defective processes run faster in automated mode.

What are the key principles of Lean Six Sigma?

Lean Six Sigma revolves around the customer who ultimately defines value. Any proposed change in process or product is evaluated in terms of value to the customer. In a supply chain, the end user is the external customer. The recipients of the outputs of each operational step along the supply chain are the internal customers.

The Lean Six Sigma methodology aims for an ideal process flow that is optimised and free of defects and wastage. LSS focuses on eliminating waste, and reducing process variation and defects at each supply chain step.

Continuous improvement at the process and organisational level is another principle of LSS. Management’s commitment and staff participation are essential for sustaining improvements over the long term. Employee empowerment and management support are part of the LSS principles.

How is Lean Six Sigma applied in Supply Chain?

The impact of Lean on Supply chain management (SCM) is significant. Its applicability is not limited to manufacturing operations. The goal of Lean is to eliminate waste, decrease work-in-process inventories, and, in turn, decrease process and manufacturing lead times, ultimately increasing supply chain velocity and flow. ‘Lean also has a vital cultural element that is crucial to the logistician, i.e. the concept of “total cost”. The Lean practitioner focuses on the total cost, not on individual costs. Many organisations continue to make poor decisions based on traditionally visible cost drivers like transportation, warehousing, and per-unit purchase prices. With inventory carrying costs representing 15 to 40 percent of total logistics costs for many industries, making decisions based on total cost presents a huge improvement opportunity for the enterprise.

The concept of variation reduction lies at the heart of Six Sigma and is paramount to supply chain management. SCM is about managing inventory, and managing inventory is about managing variance. If we look at the different types of inventory, we see why variation plays such a vital role in how we manage inventories throughout the business and the supply chain.

For example, safety or “buffer” stocks are inventories that we need to hedge against unknowns (i.e. the variations from the norm). We maintain safety stocks because of variations in supplier quality, transportation reliability, manufacturing process capability, and customer demand patterns. If we can understand and control variation in our processes from supplier to customer, then we will be able to reduce our reliance on the buffers dramatically.

In this regard, logisticians need to think of themselves as actuaries, like those who develop rates for automobile insurance. Actuaries look at key variables like drivers’ age, gender, types of vehicles driven, and measures of past behaviour (e.g., speeding tickets and accidents) – and then determine insurance rates that reflect the variability in the data. This is precisely why the sixteen-year-old male who drives a sports car will have the highest insurance rates!

Logisticians are no different from the actuaries in this analogy. The logistician substitutes supplier competence, transportation reliability, and demand fluctuation for demographics and sports cars. Then the logistician determines the “insurance rate,” using inventory as the unit of currency. The problem here, though, is that too many logisticians are treating their companies like teenage drivers when, in fact, the company performance is more like a middle-aged soccer parent who drives a minivan. A down-to-earth example of this is when a manufacturer has levelled demand from a supplier who is an hour down the road from the plant, yet the manufacturer continues to carry twelve days’ worth of that supplier’s parts in inventory! Why? Most likely, the answer is twofold.

The first reason is that the levelled flow (and therefore low variability of demand) is not understood; the second reason is more emotional. The emotional part of the equation is simply that the industry is addicted to inventory. Make no mistake about it – the industry has an addiction to inventory, and as with any addiction, inventory is something that most companies cannot imagine living without.

Lean and Six Sigma dovetail and complement each other. Summarising from the above, recall that:

• A supply chain is about managing inventory.
• Lean is about speed, flow, and the elimination of waste.
• Six Sigma is about understanding and reducing variation.

Therefore, Lean Six Sigma in the supply chain can be defined as:

The elimination of wastes through disciplined efforts to understand and reduce variation while increasing speed and flow in the supply chain.

The principles and tools of Lean Six Sigma (LSS) in the supply chain are all that are necessary to design and sustain a formidable logistics system. This means we can stop looking for what to do and start focusing on how and when we will do it. In reality, many organisations do not have a solid understanding of logistics and the importance of fundamental logistics practices.

Logistics and supply chain issues are the last great frontiers for strategic management. Logistics and supply chain management needs to embrace the science to complement the art form that it has become. This challenging task was begun by recognising the driving forces of Lean, Six Sigma, and the supply chain. This allowed us to discover the obvious and powerful relationship shared among variation, waste, costs and customer value and then to begin a dialogue on the wastes that exist in most logistics systems.

This set up the framework to begin our awareness campaigns, emphasising the brutal fact that wastes exist throughout our logistics systems and supply chain networks. In particular, inventory, transportation, and warehousing provide a raging river of waste that must be addressed, and every attempt made to drive home the point that inventory is the king of waste. Inventory in the form of overproduction and safety stock covers up for variation and is the seed for many other forms of waste. To manage inventory is to manage variation. They are one and the same.

How can CBIS help you?

Please contact us if you need more details on how our expert team can assist you. We are simply experts in both Lean Six Sigma and Supply Chain areas.