Want a lean supply chain? Think logistics

Moving to Lean manufacturing allows companies to significantly reduce waste along the entire supply chain, resulting in lowered costs.  But have you really thought about the implications of a Lean supply chain?  Have you architected your supply chain and developed robust logistics solutions to make sure your revenue isn’t jeopardized if you have little to no fat in the system?

With the flooding in Thailand in late 2011—and Thailand being the second largest producing country of hard drives—product availability was down almost 30%, severely impacting the availability of computing products.  In early 2011, the earthquake, tsunami, and nuclear crisis in Japan virtually stopped the production of automobiles but also affected many parts used in the electronics industry.  In early 2010, it was the volcano eruption in Iceland that blocked nearly 100,000 flights, disrupting travel and the shipment of high-value material to and from Europe.  The reality is that in a global supply chain, your company is significantly more exposed to geopolitical crises and natural disasters.

All of these events pose unpredictable logistics risk and Lean manufacturing provides very little wiggle-room to free up material and get it moving.

So what should you do?

Step 1: Quantify the risk

The first step is to quantify the risk. Risks can include catastrophic scenarios such as “fire burns down the factory” to delays in shipment because the carrier is “slow steaming” to save on fuel costs.  What happens if your products don’t arrive on time?  Is your demand perishable such that delays could lead to loss of orders or customers?  If so, then a more aggressive risk mitigation plan needs to be developed where you may have to pay a slight premium to ensure your products flow.  On the other hand, if you have some cushion in your supply chain, be it in the form of safety stock or the ability to push-out your customer deliveries, then you may elect to save on logistics and transportation costs and mitigate your risks in a different way.

Step 2: Negotiate contracts that mitigate logistics risks

If you want to mitigate your risks effectively, you need to do it before the risk materializes, not after.  The best place to include risk mitigation and recovery planning is in your contracts.  While some believe that contracts do not serve much of a purpose, we have seen live examples of suppliers and service providers paying more attention to those customers where a contractual obligation exists.  All high likelihood and high impact logistics risk factors should have a contingency plan baked into the contract so that when a disaster strikes, a prescriptive recovery plan is followed.

For example, if flooding is a reasonably likely event in a particular location, the contract could stipulate that, with a specific trigger point, the buyer/supplier shift from ocean to air or move product off-site before the transportation lanes start shutting down.

Step 3: Learn how to shift the risks

There are many techniques for reducing the impact of risks, but what is not often discussed is the financial costs of various risks and where they reside in a Lean supply chain.  Logistics risks are often assumed to be residing with air, ocean, or trucking carriers or third-party logistics providers.  However, what if you could shift that risk away from these providers?

For example, you could build into your agreement with a Contract Manufacturer that they (or you) buy ahead air capacity out of Asia to Europe so that if something like the volcano eruption in Iceland happens, you would get your goods shipped before anyone else, since you took the financial risk.  A great example of this is when Apple bought out all the air capacity one holiday season to ensure that its products would be on the shelves at the expense of others.  It’s the proverbial “putting your money where your mouth is.”

In conclusion, Lean manufacturing is here to stay and it’s time to understand the underlying risks associated with Lean.  Our experience has been that the manufacturing supply chain and the logistics supply chain are often decoupled in most companies. When you think Lean, you need to think about your end-to-end supply chain, including inbound and outbound logistics.