Guide to Supply Chain Management Read online

  The cost of quality. This concept, pioneered by Joseph Juran, who worked at Western Electric’s Hawthorne (Illinois) plant and helped Japanese companies improve quality, as Deming did, attributes the cost of managing poor quality to direct (internal failure and external failure) and indirect (prevention and appraisal) causes. A proper accounting of the costs of quality often yields a shockingly large value, and this motivates an organisation to deploy resources to eliminate quality problems.

  Poka-yoke, the Japanese term for foolproof, is a process by which things are designed to prevent misuse (for example, an item numbering system would randomise digits to prevent inadvertent inversions). Poka-yoke saves cost by preventing costly failures before they occur.

  Six Sigma originated at Motorola in 1986. It is a process improvement methodology designed to ensure that a process will reliably deliver output within a prescribed range of tolerance. Sigma (σ) is the mathematical symbol for standard deviation, which is a measure of the spread of a distribution. When output of a process is normally distributed, 99.73% of the output will lie at ±3 standard deviations of the distribution’s mean. Traditionally, a process was considered to be capable of meeting customer specifications if those specifications were at least 3 standard deviations from the process mean. The idea of Six Sigma quality is to have the variation of the process so narrow that the customers’ specifications are at ±6 standard deviations. When the output of the process is so tightly distributed within the customers’ requirements, a defect will rarely occur. But processes have a tendency to shift from their target mean. Some studies have demonstrated that a shift of 1.5 standard deviations is not uncommon. Six Sigma capable processes produce only 3.4 defects per million opportunities even if the process has shifted away from its mean by 1.5 standard deviations. Although the criteria for process capability at six sigma sound strict, operations that run at high volumes need to be capable at this level. The compounding of errors in a multi-stage production process amounts to a far greater chance of error than any one individual operation. For example, if a television set requires 500 parts and each part has an industry-leading six sigma defect rate of 3.4 parts per million, the process will still generate up to 1,700 faulty television sets for each 1m that are produced (assuming that each part has an independent chance of being faulty and that there is only one defective part per unit). In mission-critical operations such as surgery, airline flights and military supply lines, process reliability can be a matter of life and death.

  Six Sigma is about teamwork and problem-solving, using lean diagnostic tools such the PDCA cycle (see page 80), the DMAIC cycle (define, measure, analyse, improve and control), a systematic quality process improvement process that includes a variety of tools including Pareto charts, root cause and statistical process control.

  A well-known camera-maker implemented statistical process control quality in its manufacturing plant in the mid-1980s to root out the causes of quality problems in production. It gathered data on the process and the defects by production area. Through statistical process control, it was able to determine relatively quickly that the errors stemmed from two causes. However, the process of measuring quality feedback and working towards process consistency shed light on much larger issues, such as how the organisation perceived quality (customers found certain aspects of the packaging unacceptable, but quality control staff did not include those aspects in their scope of work), how much value quality control inspectors actually added compared with what the line operators could have done, and the behavioural tendency for the staff to drive numbers to where they wanted them.

  General Electric and FedEx, to name just two, have had extensive Six Sigma programmes, and have sponsored and developed hundreds of individuals who have earned the title of “black belt” in Six Sigma. One company has involved tens of thousands of employees in Six Sigma projects in the last several years.

  Zero defects is a concept related to Six Sigma, but much simpler. The idea is that the ultimate goal of Six Sigma and related quality improvement programmes should be an absolute intolerance of any error.

  Total productive maintenance (TPM) combines the principles of preventive maintenance with the concepts of TQM and kaizen to achieve continuously improving reliability.

  Jidoka, the process of making mistakes immediately apparent, is a Japanese concept that empowers anybody working in a process the right and the responsibility to stop the process immediately upon sign of a defect. It is an ingrained part of the Toyota production system, but western automakers found it difficult to change their plant cultures to accept jidoka.

  Cellular manufacturing, the efficient layout of production operations whereby workers are located near each other in a u-shaped production area, was originally designed to eliminate wasted motion in production environments. Today it applies to service environments as well, for example the layout of production activities in the kitchen of a restaurant.

  Process analysis tools

  Several process analysis tools that have roots in operations management (OM) are routinely applied and are effective problem-solving tools in SCM. The relevant tools include the “5 whys”, the PDCA cycle, value stream mapping, work sampling, root cause analysis and throughput analysis.

  Root cause analysis: the “5 whys” and fishbone diagrams. To identify the root cause of waste and make rationalisation measures stick, managers often ask “why” the problem exists. A “fishbone” diagram (also called the Ishikawa diagram after Kaoru Ishikawa who invented it) can identify both the apparent cause (the symptom) and the root causes. For example, in Figure 6.2 stock-outs can be traced back to product unavailability, which in turn can be traced back to a capacity shortage. This represents two “whys”. Completing the “5 whys” involves a similar investigation, using a fishbone diagram or not, and going three more levels back. For example, “why is capacity short?” If the answer is that a machine is down, then “why is the machine down?” And if the answer is that a critical spare part was not in stock, then the answer that will prevent the problem from recurring would be to make sure the critical spare part is always in stock or available. Figure 6.2 Sample fishbone diagram

  Source: Author

  The PDCA cycle (also called the Deming cycle or Shewhart cycle after the theorists who invented it) puts in place a systematic process for identifying and acting upon potentially faulty processes that would lead to quality problems in the final product or service. The cycle uses brainstorming and analysis frameworks (“plan”), logic flow diagrams (“do”), charts, checklists and prioritisation graphs (“check”), and problem-solving tools (“act”) to avert and mitigate the effects of quality problems.

  Value stream mapping. Process mapping, or value stream mapping, is a way of documenting current process flows and identifying opportunities for improvement. Improvement opportunities are typically measured in reduced cost, reduced cycle time or improved quality. A world-renowned luxury automaker conducted a process improvement programme, in which it used value stream mapping to document processes such as new product development and order fulfilment. Cross-functional teams mapped processes and noted the lead times, frequencies, volumes and the parties responsible for all the steps in each process. The improvement initiative led to a 35% reduction in order fulfilment lead time.

  Work sampling. Observation, coupled with industrial engineering methods such as work sampling or time study, is another way of identifying opportunities, especially efficiency opportunities. Work sampling is a quick way of determining how time is spent. If enough observations are taken, the data can be statistically significant, but often it is useful to make fewer observations and spend more time asking questions based on the sample.

  Time study and elemental time study are ways to set standards. Both are useful techniques for making quick assessments of operational efficiency in the supply chain. For example, when operations consultants tour distribution centres, they often observe the number of trucks that load and unload in a shift (this would be a
form of work sampling). And when Iron Mountain, a US-based records management company, sends people to ride with its couriers, it uses time study methods to ensure that each courier has an appropriate number of delivery stops.

  Standardisation and simplification of specifications

  Standardisation of items and services, the reduction of the number of items, can increase the purchased unit volume per item, thereby lowering the average purchase price. For example, Southwest Airlines is often credited with standardising its aircraft fleet on the Boeing 737. Not only does this reduce the average purchase cost of the aircraft, but it also reduces the life-cycle cost of spare parts, maintenance, repair and training.

  Three methods help to standardise and simply specifications: stock-keeping units (SKU) rationalisation, simplification of specifications and value engineering.

  SKU rationalisation

  Gillette used SKU simplification as the core link in its 2004 supply chain turnaround. Aimed at reversing a major inability to fulfil orders reliably, it embarked on four improvement initiatives: minimising complexity, improving demand-supply planning processes, improving supply planning processes and establishing optimal support systems. SKU rationalisation was central to the first objective, minimising complexity.

  SKUs had been allowed to proliferate wildly, explains Mike Duffy, vice-president of North American Value Chain at Gillette. “For example, there were too many customer-specific SKUS”, constituting what Duffy called “a disaster waiting to happen”. Gillette launched a programme to eliminate thousands of SKUs. That involved using its enterprise resource planning (ERP) system to flag SKUs with usage patterns that would classify them as redundant and eliminate them. As a result Gillette eliminated about 30% of its SKUs, a good deal of that through harmonisation of SKUs for sale in different countries.

  The results at Gillette were astonishing. Customer service levels rose by 10%. Inventories decreased by 25%. Overall costs decreased by 3%. Demand planning was simpler, less resource-intensive and more accurate. Production processes became more flexible because there were fewer constraints. Inventory turns increased through the elimination of redundant, slow-moving and sometimes dead SKUs.13

  Mitsubishi Heavy Industries also rationalised its SKUs, but on much more complex products: steam turbines used in power plants. It standardised its replacement parts so that the rotating and stationary blades fitted within the existing cylinders of many different types of steam turbines. By standardising along an advanced design for stationary components and sealing technologies, Mitsubishi was able to improve efficiency, increase electrical output, lower fuel costs and keep emissions constant with no change in operating steam flows. This amounted to a retrofit and upgrade at the same time, thanks to standardisation.

  Simplification of specifications

  Simplification of specifications – reduction in the complexity of items – is akin to value engineering, but relates specifically to items with many components. For example, Saudi Aramco, an international petroleum company, buys custom-designed gas compressors to keep its oil rigs functioning reliably. Through discussions with its suppliers, it found that it could reduce the lead time as well as the cost of installation maintenance and repair by simplifying its specifications.

  Value engineering

  Value engineering, the reduction of design specifications to conform to the value needed, saves money by eliminating wasteful extra, and helps to simplify planning and forecasting, thereby making forecasts more accurate. A US electric and gas utility reduced the specifications on its underground polyethylene pipe when it discovered that its pipe specifications were designed such that the pipe would last more than twice the average maintenance interval at which the ground would be dug up and the pipe exposed.

  Optimising transportation

  Transportation routing and scheduling can be a way to reduce operating costs, especially if routing is currently done manually or in several different ways within the same geographic area. Examples of variations on the routing opportunities include the following:

  Mode selection, in which expedited (often air) shipments are shifted to another mode that optimises cost and service (often ground).

  Cross-docking, in which shipments are unloaded and reloaded at an intermediary point without being stored, as part of a rapid-delivery hub-and-spoke network.

  Distribution centre (DC) bypass, in which freight moves direct to store, or if not retail, directly to its end destination without being stored at a distribution or even a mixing centre.

  Equipment pooling, in which fleets’ assets are shared or borrowed among users, as happens frequently with railcars and intermodal chassis.

  Mode selection

  Shifting from a more costly mode such as air to a less costly mode such as rail can be one way to save money. SinaWest, a Chinese metals company, shifted from truck to barge and saved money. James Joyce, general manager, explains:

  Our company needed to ship many hundreds of tons of steel from China to Europe. Trucking to port was taking too much time and becoming cost prohibitive. Our manufacturer was situated near a river, so we employed local barges to carry our steel down river to port. This saved more time and money than we originally estimated. As a result we were able to pass those savings on to our customers. This resulted in some very happy, loyal clients and additional business.

  A salesman has to call on customers in disparate locations, and needs to decide the most efficient way to sequence the stops so as to avoid backtracking and to minimise the total mileage. This is the travelling salesman problem. Routing and scheduling can save companies 20–40% on the cost of fleet operations. This is especially true if previous methods had been manual, as was the case at Iron Mountain. The company’s rapid growth through acquisitions left it with many competing routing methods and overlapping routes within the same region. To optimise the routes, it implemented an advanced routing and scheduling software system on its fleet of 2,900 vehicles across North America. By using the vehicle routing and scheduling software, Iron Mountain found it could reduce route miles and resources by 34% and improve its on-time delivery rate from 96% to 99%.

  Although switches like that may sound easy, they involve complications. For example, the order quantities, delivery lead times and variability of arrival times change depending on the mode, which changes safety stock requirements.

  Cross-docking and DC bypass

  Cross-docking, the relaying of products directly across a warehouse floor to an outbound vehicle instead of stocking it and retrieving it, and flow-through warehouses where goods are passed from vehicle to vehicle without being put into stock, can save warehouse put-away and pick-pack time by transferring goods directly from one truck to another.

  Instead of operating point-to-point traffic flows from everywhere to everywhere else, a US trucking company, Yellow-Roadway, set up nine regional hubs that form a hub-and-spoke network through which it can serve both long-haul and short-haul freight, reducing its average transit time to under three days, thereby allowing it to compete with regional trucking companies.14 The hubs also allow the carrier to reduce costs and therefore be more price-competitive.

  A US paper products company, Georgia Pacific, operates multiple cross-docks across its network of distribution centres. To identify which SKUs were candidates for cross-docking, it commissioned the development of a software application that identified inbound shipments that were scheduled to arrive within 24 hours of customer requirements, and assigned them to an outbound truck so they could be cross-docked instead of put away in the warehouse. The pilot program clearly identified about half of the SKUs studied as candidates for cross-docking.

  Even better than cross-docking is never touching the distribution centre at all. Historically, wholesalers operated distribution centres, and so did retailers, resulting in at least two stocking points between the source and the retail outlet. This made for redundant stock in each location, and a time-consuming journey, both of which lowered inventory turn
s.

  UPS operates a service (called Trade Direct) for major retailers like Wal-Mart where the product is transferred at the port of entry in the destination country to small-package trucks that deliver it directly to stores. The product never touches a distribution centre (DC) in the destination country. Note that the ideal way to run this type of DC bypass operation is to pre-sort and pre-package the product for final delivery before the product leaves the manufacturing plant in the source country, or at least before it is loaded on to the ship. This means that more advanced planning is needed, which can work well for seasonal goods and promotions.

  Equipment pooling

  When transportation equipment is expensive, pooling can provide economical access to it. The cost savings from pooling are particularly attractive when peak demand varies by carrier or location (different lanes peak at different times), and shared equipment can be deployed more in each period than individually owned equipment would be.

  A European ground support equipment pooling company provides a clear example.15 Airport ground handling is often performed by only one provider, so airports like to, and in some cases are required to, introduce a second company to compete against the first. However, each company’s investment in equipment is costly, especially for the more expensive equipment needed to service large aircraft. For example, a push-back tractor for wide-body aircraft or freighters costs about $250,000. While the incumbent ground handling company with the majority share of the volume can keep its equipment busy, a new provider cannot gain enough additional business to justify the capital investment required to buy a second push-back tractor.

  With pooling, and by charging marginal costs for a piece of equipment whose costs are already covered by the incumbent handler, the airport can lower its equipment costs for both the incumbent and the new provider. The incumbent’s costs drop from $63,000 to $49,000 per year, and the new provider’s costs drop from $63,000 to $35,000 per year, says the company’s CEO.