George Michael L. - Lean Six Sigma: combining Six Sigma quality with lean speed. Chapter 14, Lean Six Sigma logistics

The following is a sample chapter from Lean Six Sigma, which explains how to impact your companys performance in each, by combining the strength of todays two most important initiatives--Lean Production and Six Sigma--into one integrated program. The first book to provide a step-by-step roadmap for profiting from the best elements of Lean and Six Sigma, this breakthrough volume will show you how to achieve major cost and lead time reductions this year; compress order-to-delivery cycle times; and battle process variation and waste throughout your organization.

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By Robert Martichenko of Transfreight

The previous chapter described how you could bring both suppliers and distributors/dealers into your extended supply chain and make even further gains in process speed and quality of information and performance. Given faster lead times and lower inventories, you now have an opportunity to reduce the cost and improve the quality of performance of your logistics network. What capabilities do you think Lean Six Sigma offers to the logistics network? Do you think Lean Six Sigma

1. Is a strategy to bring raw materials into a manufacturing facility exactly as the facility is running out of that particular part?

2. Is actually a distribution function, producing only what has been ordered and replenishing inventory levels to replace only what has been sold?

3. Could help you level out the demand on your resources and reduce inventories at all stages of the supply chain?

Well, if you answered all of the above, then we are off to a great start! However, I wonder today how many companies believe they are practicing Lean techniques when in fact all they are doing is postponing the ordering of raw materials? You might recall the example given in Chapter 3 (p. 34) from a visit I made to a company that thought it was great how the suppliers truck would appear just as the manufacturing line ran out of supplies. Unfortunately, that truck was bringing two months worth of supplies!

Such practices are what many people thought was the beginning and end of just-in-time (JIT). The adoption of the word Lean to replace JIT was in part an attempt to use a more descriptive term so that people would understand that JIT should be broadly construed. Thats why we have used the word Lean throughout this book.

The first thing we need to recognize is that Lean, JIT, Efficient Consumer Response, and Quick Response inventory strategies go a lot farther than simply receiving raw materials just as you are running out. Similarly, its not fair to say you are practicing these techniques just because your finished product arrives at the retailer just as the last item is purchased from the shelf.

How do you actually implement a Lean logistics program? Like a lot of Lean thinking, much of the answer is logical though counter-intuitive. The answer to these questions lies in the analysis of inventory and how a firm uses inventory to meet strategic goals.

Several times in this book weve discussed the impact of ROIC on shareholder value (see p. 12, for example). Since ROIC is the ratio of profit to invested capital, it is obvious that reducing inventory will reduce invested capital and improve ROIC. Less obvious is the fact that lower inventories will reduce cost and improve profit. Through an analysis such as what well follow in this chapter, a company will be able to demonstrate how its inventory strategies have direct implications for the companys revenue, cost of production, and ultimately profitability.

Over the years, many opinions have surfaced over how to calculate inventory carrying costs, in particular how the cost of capital should be calculated in order to recognize the opportunity costs of holding inventories. In the automotive industry, for example, which at times is plagued with inventories of raw materials, these inventories can result in high costs of production and hence can undermine an automotive manufacturers position in the market. Consequently, to remain competitive in todays markets, manufacturers need to understand the implications that inventory and related inventory costs have in terms of the firms revenue, cost of production, and ultimately profitability. Previous chapters have discussed the costs of inventory internal to factories; in concert with the process view of a business, we will now integrate that discussion throughout the extended supply chain.