CONTRIBUTION BY Chuck Intrieri – Charles M. Intrieri Consulting
Cost Reduction Options
Top Management knows that lean can add value, but many still haven’t moved past the initial education stage into full-scale lean supply chain implementation. One reason may be that they haven’t made the paradigm shift as to how to implement lean. The Lean Supply Chain is a system of interconnected and interdependent partners that operate in unison to accomplish supply chain objectives. There should be metrics involved to monitor these objectives to insure success across the supply chain. These metrics should be reviewed frequently to insure supply chain success.
These objectives are accomplished as follows:
- Eliminate all waste in the supply chain so that only value remains: Creating a smooth flow of products downstream in a supply chain requires all departments and functions in the organization to work in collaboration: In the supply chain, the seven wastes translate to:
- System complexity—additional, unnecessary, steps and confusing processes
- Lead time—excessive wait times
- Transport—unnecessary movement of product
- Space—holding places for unnecessary inventory
- Inventory—inactive raw, work-in-process, or finished goods
- Human effort—activity that does not add value
- Packaging—containers that transport air or allow damage
- Energy-(Sometimes called the eighth waste): eliminate wasteful energy in the supply chain: minimize electricity, gas, utilities, etc.
- Consider advancements in technology to improve the supply chain: Workforce Management throughout the Supply Chain, Omni-channel fulfillment, RFID, Supply Chain Management (SCM) systems, Electronic Data Interface (EDI), Trading Partners Interface (TPI-Retail Value Chain Federation), Customer Order Management, Customer Relationship Management (CRM)/Cloud Solutions, Transportation’s Yard Management Systems (YMS) to manage and track freight in the 3PL’s yard outside the warehouse dock doors, GPS for tracking freight and any other technology that streamlines the supply chain and improves communication and value to the customer.
- Make customer usage visible to all members of the supply chain: Flow in the supply chain begins with customer usage. Visibility to customer usage for all supply chain partners is critical. This sets the supply chain pace.
- Reduce lead time: Reducing inbound and outbound logistics gets us closer to customer demand which results in reduced reliance on forecasting, increased flexibility and reduced waste of “overproduction”. When you create your Sales, Inventory, Operations and Production Plan (SIOP) monthly, or more frequently, invite your top Suppliers and Customers to the SIOP meeting. Work in Collaboration to reduce lead times and brainstorm how you can create a Supply Chain that brings value beyond your customers’ expectations.
- Create a level flow/level load: Leveling the flow of material and information results in a supply chain with much less waste at all critical points in the system.
- Use pull systems: Kanban Pull systems reduce wasteful complexity in planning and overproduction that can occur with computer-based software programs such as Enterprise Resource Planning (ERP) which creates a Push system with too much wasteful inventory going into the warehouse. Pull systems permit visual control of material flow in the supply chain. You can also use Ship-to-Use (STU) systems. Quality Assurance goes to your suppliers, qualifies them for their quality systems and enables them to ship to a point of use on the production floor to avoid sitting in a warehouse as wasteful inventory.
- Increase velocity, throughput and reduce variation: Fulfilling customer demand through delivery of smaller shipments, more frequently increases velocity and throughput to your customers… This, in turn, helps to reduce inventories and lead times and allows you to more easily adjust delivery to meet actual customer need consumption.
- Collaborate and use process discipline: When all members of the supply chain can see if they are operating in concert with customer need consumption, they can more easily collaborate to identify problems, determine root causes, and develop appropriate solutions to solve any root cause problems. Lean’s Value Stream Mapping (VSM) helps break down processes and gives you the ability to rebuild your process more effectively. Utilize Six Sigma’s DMAIC: Define, Measure, Analyze, Improve and Control to solve any problems or roadblocks. Lean’s PDCA can also be used: Plan, Do, Check and Act. Any and all members of the supply chain should use these tools to solve problems and reduce costs to increase value to the customer.
- Focus on total cost of fulfillment: Make decisions that will meet customer expectations at the lowest possible total cost, no matter where they occur along the supply chain. This means eliminating decisions that benefit only one part of the stream at the expense of others. This can be achieved when all partners of the supply chain share in operational and financial benefits when waste is eliminated.
Lean Supply Chain Implementation Results
Customers can gain the benefits of:
- Increased customer fill rate and customer satisfaction
- Supply chain visibility and increased performance measurement
- Risk Management
- Inventory velocity and inventory reduction
- Distribution center utilization of 5S, Kaizen/Continuous Improvement, and Lean Six Sigma and transportation cost reduction: example: use your or your Third Party Logistics (3PL) provider partner’s Transportation Management System (TMS) to optimize your freight so you add value and reduce costs by using the most effective lanes and routes.
- Increased supplier performance: reduction in lead times and creating cost reduction as your suppliers are the experts in their respective fields. Have your suppliers implement an occasional Supplier Day Conference to look for cost reduction through Value Analysis.
- Reduction in “Total Cost” of the entire supply chain
The New Role of the 3PL
The new role of the 3PL will not just be to transport and warehouse, but serve as a trusted partner in the lean journey by implementing lean in their operation (5S, Continuous Improvement, Pull Systems and Lean Six Sigma) identifying problems, implementing solutions, and adding value in global and complex supply chains. The relationship with the 3PL needs to move from transactional to one of long term partnership and commitment.
- The creation of a Service Level Agreement (SLA) with Key Performance Indicators (KPIs) helps create value for both the 3PL and the shipper/customer.
- Create a Quarterly Business Review (QBR) in concert with your 3PL partner to manage Transportation. Negotiate the fuel surcharge (FSC) and optimize your freight via their TMS system.
- Use gain-sharing with your 3PL for a win-win in all gains and cost savings.
- Watch the freight bills you receive. At times, 8-10% of freight bills you receive are incorrect. Go back to your freight quote and insure your bills are the same rates as quoted. Watch freight classifications. It is easy to use a wrong freight classification which leads to higher freight bill prices.
- Using a 3PL service provider reduces costs on average:
– Logistics costs are reduced by 9 percent.
– Logistics assets are reduced by 15 percent.
– Order cycle length is reduced from 7.1 days to 3.9 days.
- Order accuracy from 61% to 66%; Inventory is reduced by 5 percent; Order fill rate from 60% to 66%
(Capgemini Consulting: 2015 3PL Study)
**However, cost reduction all depends on your relationship with your 3PL. Collaborate together. Brainstorm. Create a shipper-3PL cross-functional team to solve root cause problems and generate cost savings together. Pounding on the table asking for more cost reduction is not good. Adversarial relationships do not work. Be collaborative and work with your 3pl in the spirit of cooperation and trust.
What about a 4PL?
The 4PL delivers the ability to provide a Supply Chain blanket solution, end to end, from the supplier to the manufacturing operation, to distribution, and to the end customer. The 4PL manages supplier evaluation, through the logistics supply chain cycle, to completion of invoice management, while giving full visibility and measurement of performance (metrics) at each and every stage of the supply chain…
Most 3PL’s are focused on the single logistics element, transportation or warehousing. The 4PL is able to provide added value starting from the planning stages, covering production, and inventory planning which all occur prior to the 3PL’s involvement begins.
With regards to the Supply Chain activity, the 4PL is best placed to provide added value, by its carrier neutral stance, therefore having no conflicts of interest with 3PL’s, so ensuring that the customer gets the best solution to Supply Chain Optimization, will increase the visibility of the full inventory cycle, and help to visualize and optimize cost elements, including inventory flow costs.
Consider Lean Accounting
The Vision for Lean Accounting
Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.
- Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.
- Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.
- Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.
Why is lean accounting needed?
There are positive and negative reasons for using Lean Accounting. The positive reasons include the issues addressed in the “Vision for Lean Accounting” shown above. Lean Accounting provides accurate, timely and understandable information that can be used by managers, sales people, operations leaders, accountants, lean improvement teams and others. The information gives clear insight into the company’s performance; both operational and financial. The Lean Accounting reporting motivates people in the organization to move lean improvement forward. It is often stated that “what you measure is what will be improved.” Lean accounting measures the right things for a company that wants to drive forward with lean transformation.
Lean Accounting is also itself lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. The role of the financial professional moves away from bookkeeper and reporter and towards strategic partnering with the company leaders.
At a deeper level Lean Accounting matches the cultural goals of a lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the lean principle of value stream management. The emphasis on customer value is also derived from the principles of lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean Accounting has an important role to play in developing a lean culture within an organization.