Lean SCM – The Essentials

    May 26, 2006

A major mass merchandiser has decided to go leaner with its inventories.

This decision has significant implications and impact for its supply chain and for the supply chains (and manufacturing) of its suppliers. Lean logistics has just taken a new meaning for everyone. Smaller lot sizes, increased flexibility, more rapid deliveries have been ratcheted up even more as a requirement and way of doing business. Companies are assessing expanding from lean logistics—where tools of lean are used in segments of the company, such as warehousing-and becoming lean across their entire supply chain.

Lean is becoming a strategy method for gaining competitive advantage and even for survival, not just for manufacturers, but also for retailers and wholesalers. Adding value and removing waste are no longer options for companies. Non-lean practicing companies face competition from foreign made goods-competition which can have significant impacts on their business and industry. Even lean practitioners understand that the effort to be lean is ongoing.

Manufacturers have recognized the value of lean for their production area. However lean has not been recognized by retailers, wholesalers, manufacturers and logistics service providers, including 3PLs, as part of a strategy for growth. The value and waste of supply chains has not been given sufficient attention. Some of the lack of attention reflects recognizing the intricacies, complexities and differences of supply chain management, especially where international sourcing and manufacturing is involved.

Surprisingly, retailers and wholesalers have often not recognized the need for lean in their businesses. Their business approach often uses a batch and queue inventory approach. Their common attempt at being competitive has been to push suppliers to reduce prices. After years of this approach, that fruit is no longer low-hanging and may not even be on the tree. So what are they to do to stay competitive? One sound option is to develop and implement lean supply chain management.


Lean and supply chain management have much in common as to recognizing the customer, being based on pull, requiring flow, assessing the waste of inventory, and creating value with growth, not just reducing costs. Companies with a lean supply chain, the inbound from suppliers and the outbound to stores or to customers, have identified the value of the supply chain and the waste that exists and are removing the waste.

The purpose of a lean supply chain is to meet the 5R’s of logistics, namely, inventory that is:

– the RIGHT product

– in the RIGHT quantity

– in the RIGHT condition

– at the RIGHT place

– at the RIGHT time

Activities that support the 5Rs add value. This applies both to the movement of product and to the movement of information. Conversely, any activities that do not add value, do not further these 5R’s, are waste.

By being lean, companies are efficient at lower volumes / lower size lots, have greater flexibility; gain higher productivity, increase product mix diversity, improve rapidity of product development cycle, and have higher quality of performance

Waste can be difficult to recognize; it is seen and accepted of how the business of the company is conducted. It is deemed as part of the ongoing “process” and is built into whatever is done.

Drawing on the types of waste in manufacturing, there are seven types of waste in supply chain management:

1) Over supply. This is supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories-and revenues and profits.

2) Transportation. Unnecessary or slow movement of product adds no value. This can include movement of inventory between company facilities.

3) Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.

4) Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.

5) Movement. Any unnecessary movement of people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.

6) Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.

7) Over processing. This is doing more than is necessary

These waste activities occur in different ways for both Make To Order and Make to Stock companies. Compressing cycle time and increasing inventory velocity are the preferred results for lean supply chain management.

The first requirement to becoming lean is to be able to identify waste. If you are not able to see waste, you cannot begin to remove it and become lean. Waste impacts time required, inventory investment and turns, capital tied up and not earning an adequate return. Lean is about removing waste, not just reducing it.

Part 2 will discuss implementing lean, challenges and obstacles to lean, lean tools, and the benefits.

Add to Del.icio.us | DiggThis | Yahoo! My Web | Furl

LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.