Lean Six Sigma in Supply Chain

In today’s highly competitive environment, finding a competitive edge is a critical success factor not only to expand a business but also to survive. 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.

WHAT IS Supply chain management (SCM)?

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. Supply chain management has been defined as the “design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring pe

Lean and the Supply chain management (SCM)

The impact of Lean on Supply chain management (SCM) is significant. A common misconception of the Lean philosophy is that it only finds application in manufacturing settings.

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 to it that is crucial to the logistician, i.e. the concept of “total cost.” The Lean practitioner does not focus on individual cost factors such as transportation or warehousing, but rather focuses on the total cost. With inventory carrying costs representing 15 to 40 percent of total logistics costs for many industries, making decisions based on total cost has dramatic implications for the logistician.

Unfortunately, though, many organisations never embrace the total cost concept fully, as poor decisions are made continually based on traditionally visible cost drivers like transportation, warehousing, and per-unit purchase prices.

Six Sigma and the Supply chain management (SCM)

The concept of variation reduction is paramount to Supply chain management (SCM). As stated above, 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 will plainly 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). That is, we maintain safety stocks because of variation in supplier quality, transportation reliability, manufacturing process capability, and customer demand patterns. In other words, 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 the age of drivers, the gender of the drivers, types of vehicle driven, measures of past behaviour (e.g., speeding tickets and accidents) — and then they 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. For demographics and sports cars, the logistician substitutes supplier competence, transportation reliability, and demand fluctuation. 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.

WHAT IS Lean Six Sigma in the supply chain?

We need to put them together to appreciate fully how they dovetail and complement each other. Summarising from the above, recall that:

  • 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 is 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. The reality is that many of our 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 realise the obvious and powerful relationship shared among variation, waste, costs, and customer value then began 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 made every attempt 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 CBIS can 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.

01 Jul 2021
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