Designing Lean Supply Chains

First Global Lean Healthcare Summit 25-26 June 2007
Designing Lean Supply Chains
Daniel T Jones
Chairman
Lean Enterprise Academy

What is the Problem?
• In the hospital:-
– Stock everywhere, duplicated in many locations, out-
of-date stock, erratic ordering, weekly replenishment,
etc.
– Probably also too much stock and lots of fire fighting
and lots of stock-outs in the central stores
– One off savings from returning £10K stock from every
ward, much lower buffer stocks from frequent
replenishment and consolidation
• Could you save 30% of the purchase budget?

What is the Problem?
• In the typical healthcare supply chain:-
– Batch production of the inputs
– Batch production of the product
– Multiple warehouses
– Erratic orders from customers
– Poor OTIF delivery
• Why does it take 2 years to perform a few hours
of work to make and distribute a pill?
• What if you could compress this to 2 months?

The Examples
• The best supply chain in the world is the Toyota
Parts Distribution System – from repairing a
car in the dealer back to making the part
• Another very good example is the Tesco supply
chain – from store back to production
• We can learn a lot about the thinking necessary
to create the building blocks of a lean supply
chain from them – and then what it takes to join
them together - before focusing on the tools

Lessons from Toyota
• Toyota spent 30 years developing lean in house and
spreading it up and down its supply chain
• The most impressive example is aftermarket parts
distribution – supplying 500,000 SKUs to dealers
• It operates as a series of tight replenishment loops
– Dealers call off parts from Distribution Centres every day
– These shipments trigger daily orders to be picked up from
suppliers the next day
– Most of whom can also make every part that is required in a
day every day
• The result is the highest availability, lowest stock
levels and the smoothest order signals

Traditional Auto Parts System
Monthly Forecast
SupplierSupplier PRCPRC RDCRDC
50,000
6 weeks 1 day 6 months 3 months 11 months11 months
60% RFT60% RFT
DealerDealer
4,000
3,000 suppliers3,000 suppliers
20 parts each20 parts each
Weekly Order
Weekly Order Overnight

Toyota Auto Parts System
SupplierSupplier PRCPRC RDCRDC DealerDealerLDCLDC
60,000
Daily Order
15,000 40
Overnight Order
Multiple Daily Order
Diagnose
Monthly Forecast
9 days2 days 1 day 18 days 3 days 33 days33 days
95% RFT95% RFT
300 suppliers300 suppliers
250 parts each250 parts each
Every ProductEvery Product
Every DayEvery Day
Cross Docks &Cross Docks &
One stockingOne stocking
point per partpoint per part
Daily orderDaily order
rhythmrhythm
ManualManual
warehouseswarehouses

First Global Lean Healthcare Summit 25-26 June 2007First Global Lean Healthcare Summit 25-26 June 2007

Dialogue to level demand
Pre-diagnosis to order parts
Separation of types of work
Standardise the work flows
Saves technician time
Increases throughput
Grows customer business

Traditional PDC
Office Shipping Receiving

Transitional PDC
Small Parts Medium Large Reserve Bins
Slow
Moving
Medium
Moving
Fast
Moving
5 parts15 parts30 parts
Reduce Bin SizeReduce Bin Size
Separate by SizeSeparate by Size
and Movementand Movement
Remove SurplusRemove Surplus
Right SizedRight Sized
CartsCarts

Progress Control Board
9:00 10:00 11:00 12:00 14:00 15:00 16:00 17:00 Problems

9:00 10:00 11:00 12:00 14:00 15:00 16:00 17:00 Problems
Binning Picking

9:00 10:00 11:00 12:00 14:00 15:00 16:00 17:00 Problems
Binning Picking
Fell out
Bin Full

Synchronised Logistics
Binning Picking
Milk Runs
Flowthrough
Orders
To Dealers
From PRC

Lean PDC
Small Parts Medium Large
Slow
Moving
Medium
Moving
Fast
Moving
5 parts15 parts30 parts
Common TaktCommon Takt
Standard WorkStandard Work
Visual ControlVisual Control
Root CauseRoot Cause
Daily OrdersDaily Orders
Daily DeliveriesDaily Deliveries
Work LevellingWork Levelling
SynchronisedSynchronised

The Results
• At the PDC:-
– Highest System Fill – close to 98%
– Half the stock level at 3 months
– Double the labour productivity
• At the Dealer:-
– Half the parts stock and no parts chasing
– Extra service bays and higher technician productivity
– Cuts cost of repeat visits and loan cars
– Higher Customer Fulfilment and loyalty

Lessons from Car Parts
• A common rhythm is key to flow through warehouses and
beyond
• Better to pull products from suppliers using milk rounds
rather than wait for full load deliveries
• Distinguish between replenishment pull and build to order
pull
• Move buffer stocks back to local distribution centres – with
frequent replenishment
• Distinguish between actual and created demand – pre-
diagnosing parts, kitting etc
• Part of doubling workshop productivity and completing
every job RFTOT

Tesco Progress
1983 1996
POS scanning % 0 100
Centralised ordering % 0 100
Automated w/h control % 0 100
EDI with suppliers % 0 96
Centralised distribution % 30 98
Store lead time - days 7-14 2
Supplier lead time - days 12-18 3
Total stock holding - weeks 4.4 2.5
Range - food 5,000 40,000
Service level % 92 98.5

MAKE
FORECASTS
SHIP
SALES
What does the Grocery Value Stream look like?
INFORMATION FLOWS
PHYSICAL FLOWS
CUSTOMER
PICK
ORDERS
HOME
SHOPPER
SHIP
SHIP
STOCK
MAKE
SHIP
MAKE
MAKE
SHIP
SHIP
WHOLEWHOLE--
SALESALE
CASH &CASH &
CARRYCARRY
CATECATE--
RINGRING
FOOD SERVICE PATHWAY
HARVEST
WAREWARE--
HOUSEHOUSE
INGRE-
DIENTS
FARMFARM
INGREDIENTS
PATHW
AY
PACK-
AGING
MATE-
RIALS
MINEMINE
PACKAG
ING
PATHW
AY
MANUF-
ACTURE
MANUFMANUF
NDCNDC
SUPERSUPER
STORESTORE
HIGHHIGH
STREETSTREET
RETAILRETAIL
RDCRDC
CONV.CONV.
STORESTORE

MAKE
FORECASTS
SHIP
SALES
What does the Grocery Value Stream look like?
INFORMATION FLOWS
PHYSICAL FLOWS
CUSTOMER
PICK
ORDERS
HOME
SHOPPER
SHIP
SHIP
STOCK
MAKE
SHIP
MAKE
MAKE
SHIP
SHIP
WHOLEWHOLE--
SALESALE
CASH &CASH &
CARRYCARRY
CATECATE--
RINGRING
FOOD SERVICE PATHWAY
HARVEST
WAREWARE--
HOUSEHOUSE
INGRE-
DIENTS
FARMFARM
INGREDIENTS
PATHW
AY
PACK-
AGING
MATE-
RIALS
MINEMINE
PACKAG
ING
PATHW
AY
MANUF-
ACTURE
MANUFMANUF
NDCNDC
SUPERSUPER
STORESTORE
HIGHHIGH
STREETSTREET
RETAILRETAIL
RDCRDC
CONV.CONV.
STORESTORE
Lots ofLots of
Stock &Stock &
Lots ofLots of
HandlingHandling
EverythingEverything
Put AwayPut Away
Lots ofLots of
Handling &Handling &
DelaysDelays
LotsLots
moremore
StockStock
PoorPoor
AvailabilityAvailability
Big BatchesBig Batches
More StockMore Stock
Batch Order ProcessingBatch Order Processing
by Multiple Systemsby Multiple SystemsSteady Sales butSteady Sales but
Highly VariableHighly Variable
OrdersOrders
PoorPoor
TruckTruck
UtilisationUtilisation
Poor LevelsPoor Levels
of Basketof Basket
FulfilmentFulfilment

Soft Drink Value Stream
Traditional
Touches 170
Throughput time – days 20-60
Stocking points 7
Machine effectiveness % 30-50
Transport effectiveness % 30-50
Transport trips (incl. customer) 5
Decision points 8
Order amplification 4:1
Service level % 98.5
Basket fulfilment % (40 items) 55

0
50
100
150
200
250
39
42
45
48
51
1
4
7
10
13
16
19
22
25
28
31
34
37
Week No.
Total RDC Stock EPOS Supplier Shipment
MARKET
DEMAND
DEMAND
AMPLIF-
ICATION
SUPPLIER
ORDERS
Uncovering Amplification

Causes of Amplification
• Promotions
• Advertising
• Weather
• Investment buys
• Strategic stock build
• Store intervention
• Product availability
• 5/6/7 day ordering
• Long lead times
• Full pallet ordering
• Full vehicle ordering
• Forecast errors
• Reorder triggers
• System algorithms

Measuring Fulfilment
• Line availability is only half the story – the
customer is buying a basket of goods
• Theoretically even 98.5% line availability only
delivers 55% right first time in a basket of 40
items
• This is not so easy to see in store – but is clearly
visible in home shopping
• Increasing basket availability means aiming for
Toyota levels of availability

MAKE
ORDERS
SALES
What does the Flow Value Stream look like?
CUSTOMER
PICK
ORDERS
HOME
SHOPPER
STOCK
MAKE
MAKE
MAKE
HARVEST
WAREWARE--
HOUSEHOUSE
INGRE-
DIENTS
FARMFARM
INGREDIENTS
PATHW
AY
PACK-
AGING
MATE-
RIALS
MINEMINE
PACKAG
ING
PATHW
AY
MANUF-
ACTURE
SUPERSUPER
STORESTORE
HIGHHIGH
STREETSTREET
RETAILRETAIL
RDCRDC
CONV.CONV.
STORESTORE
INFORMATION FLOWS CROSS DOCK
PHYSICAL FLOWS MILK ROUNDS
Stores Pull StockStores Pull Stock
from RDCsfrom RDCs
ProductiveProductive
MaintenanceMaintenance
& Every& Every
Product EveryProduct Every
CycleCycle
Pick upPick up
using Milkusing Milk
RoundsRounds
Flow throughFlow through
RDCs and coRDCs and co--
managedmanaged
Offline BuffersOffline Buffers
Dollies FlowDollies Flow
to Storeto Store
FixtureFixture
Right StockRight Stock
in the Rightin the Right
PlacePlace
Continuous SmoothedContinuous Smoothed
Orders ReplenishingOrders Replenishing
Trends within LimitsTrends within Limits

Traditional Flow
Touches 170 70
Throughput time – days 20-60 5-15
Stocking points 7 2
Machine effectiveness % 30-50 70-80
Transport effectiveness % 30-50 50-70
Transport trips (incl. customer) 5 4
Decision points 8 2
Order amplification 4:1 2:1
Service level % 98.5 99.5
Basket fulfilment % (40 items) 55 82

Where might this Lead?
• Beyond the life of your current assets?
• Is there an Ideal we might look towards?
• If customers were to place orders rather than
pick products - and if the system could respond
in time?
• Instead of Bigger, Centralised and Distant – the
headline might become -
Fresher, Simpler and Closer

RETAIL
RDC
LOCAL
STORE
MAKE
ORDERS
SALES
Where might this Lead?
PACK-
AGING
MATE-
RIALS
MINE
PACKAG
ING
PATHW
AY
WARE-
HOUSE
INGRE-
DIENTS
FARM
HARVEST
INGREDIENTS
PATHW
AY
CUSTOMER
PICK
ORDERS
MAKEMAKE
MANUF-
ACTURE
INFORMATION FLOWS CROSS DOCK
PHYSICAL FLOWS MILK ROUNDS
Distributed, ContractDistributed, Contract
Manufacturing withManufacturing with
Right Sized Tools,Right Sized Tools,
CoCo--located Packaging,located Packaging,
Printing after FillingPrinting after Filling
20 Touches20 Touches
11--6 days Throughput6 days Throughput
98% Basket98% Basket
FulfilmentFulfilment
1:1 Order1:1 Order
AmplificationAmplification
Customised Local Store andCustomised Local Store and
PickPick--Up Point offeringUp Point offering
proactive Advice, Meals andproactive Advice, Meals and
Fresh Produce with accessFresh Produce with access
to Full Range of Products toto Full Range of Products to
Order from the RDCOrder from the RDC

Traditional Flow Compressed
Touches 170 70 20
Throughput time – days 20-60 5-15 1-3
Stocking points 7 2 1
Machine effectiveness % 30-50 70-80 80-90
Transport effectiveness % 30-50 50-70 70-85
Transport trips (incl. customer) 5 4 2
Decision points 8 2 1
Order amplification 4:1 2:1 1:1
Service level % 98.5 99.5 99.95
Basket fulfilment % (40 items) 55 82 98

Wheels of Waste
Daily plan changes
Fire-fighting
10% out of
stocks
30%
substitutes
Obscures
real demand
Expensive
planning
systems
13 week
forecasts
6 + weeks
stock
25% lost
capacity
30 day
batches
Costly
promotions

Lessons from Tesco
SupplierSupplier RDCRDC StoreStoreNDCNDC
ContinuousContinuous
ReplenishmentReplenishment
FlowFlow
ThroughThrough
StoreStore
FlowFlow
ThroughThrough
ProductionProduction
LeanLean
SchedulingScheduling
CustomCustom
StoreStore
RangingRanging
LoyaltyLoyalty
CardCard
DataData
HomeHome
ShoppingShopping
MultiMulti--
FormatFormat
ConvenienceConvenience
FlowFlow
ThroughThrough
WarehouseWarehouse
PrimaryPrimary
DistributionDistribution
ContinuousContinuous
ReorderingReordering
ConsolidationConsolidation
WarehousesWarehouses

Six Questions
• Why does a few minutes to make and few days to
transport products take several months?
• How can you close the gap between use and ordering?
• How can you increase the frequency of production and
delivery?
• How can you synchronise production with the pattern of
demand?
• What are the win-win gains around which you can build
cooperation?
• Who will be the architect of value stream redesign?

Books to Read

Ian Glenday
Breaking through
to
FLOW

Conventional wisdom
is often shown to be wrong
– Low cost airlines won’t take off
– Diesel engines are slow
– Millennium bug will cause chaos

Is there another example of
existing systems where
conventional thinking
could be wrong?

Current Supply Chain
Logic Issues
Batches (EOQ’s) cause
peaks & troughs
= bull whip effect

Retailer’s orders to manufacturer
7209 VSPN 24x200g
-orders in cases
0
1000
2000
3000
4000
5000
1
6
11
16
21
26
31
36
41
46
51
3
Actual sales

EPOS data for same item
- actual consumer demand
7209 VSPN 200G
- sales in units
0
50000
100000
150000
1
6
11
16
21
26
31
36
41
46
51
UNITS

Logic Issues

Logic Issues
Result:
• A different plan every time

Logic Issues
Consequences:
• Increased fixed costs
• Increased communication
• Increased risk

Logic Issues
Consequences:
• Increased fixed costs
• Increased communication
• Increased risk
High chance something
will go wrong resulting in:

Supply Chain Logic Issue
Do your business ever
make short term plan changes?

Current supply chain logic of EOQ:
• Creates peaks & troughs
But also responsible for creating:
• Different plans
• Short term plan changes
Yet still the fundamental supply chain
logic used by most retailers and
manufacturers

Alternative logic
• Continuously produce all products
• Not see level in buffer tank
Implications?
Clearly RIDICULOUS !

PARADIGM SHIFT
What today seems impossible to do
but
if it could be done
would fundamentally change what you do.

Source: JIT Implementation Manual
Productivity press 1990
Levelled Production
- Heijunka
mixed sequence
one piece flow
matched to
market pull
through
TAKT time

Levelled Production
- Heijunka
mixed sequence
one piece flow
matched to
market pull
through
TAKT time
= perfect flow

mixed sequence
one piece flow
matched to
market pull
through
TAKT time
• Final step in the process, not how Toyota started
• What you see is different to how it was achieved
• Need to know the “secret” of how it was done

• Understanding levelled production
– Steps of levelling

Steps for implementing levelling
- starting point
batch Production
• One batch per
month per product
• Min. change overs
• Max. batch sizes

- step 1 Twice Monthly Production
• Halve batch sizes
• Identical sequence
• Two cycles
Every Product Every Cycle

- step 2 Weekly Production
• Halve batch sizes
• Same ratios
• Patterned
production
Every Product Every week

- step 3 Daily Production
• One batch per day
• Same ratios
Every Product Every day

Steps for implementing Heijunka
- step 3 Daily Production
• One batch per day
• Every product
every day
Continuous production of all products

Remaining
steps of levelling

- step 4 Fixed Volume Production
• Daily multiple
batches of same
product at a fixed
size
• Fixed sequence
broken
Every product every cycle =
means to reach the real goal

- step 5 Synchronised Production
• Batch sizes of one =
One piece flow
• Mixed stream
• Synchronised to
market pull through
takt time
Final result
not how it was achieved

Flow Logic
- false bridge steps
• Objective is a fixed “drumbeat” leading to
stability & standardised work
• Counter-intuitive as demand seen as variable
• A rigid disciplined PUSH process
• Opposite of the final objective = flexible
responsive PULL process

ECONOMIES
OF
REPETITION
Making the apparently impossible
POSSIBLE !

Economies of Repetition
• Learning Curve
– Recognised phenomenon
– Natural continuous improvement
– Can’t be turned off

• Learning Curve
• Routines
– Different to learning curve
– Provides security
– Less supervision
– More responsible & empowered

• Learning Curve
• Routines
• Stability
– Foundation for continuous improvement
– Helps root cause identification & resolution
– Encourages standardisation

fine in theory, but………
can’t do Every Product Every Cycle
with current systems & equipment,
therefore…….
won’t get Economies of Repetition !

Flow Logic
and
Every Product Every Cycle
How to start

The Glenday Sieve
• A tool to help
– Implement Every Product Every Cycle
– Get stability in the process

The Glenday Sieve
First Analysis
BLUES
95%
50%
% Product
Range
% Cumulative
Sales
99%

The Glenday Sieve
First Analysis
BLUES
95%
6%50%
% Product
Range
% Cumulative
Sales
99%

The Glenday Sieve
First Analysis
BLUES
50%95%
6%50%
% Product
Range
% Cumulative
Sales
99%

The Glenday Sieve
First Analysis
BLUES
50%95%
6%50%
% Product
Range
% Cumulative
Sales
70%99%

The Glenday Sieve
Second Analysis

% Cumulative Sales % Product Range
50% 6%
95%
99%
The Glenday
Sieve
Green SKU’s
“No problem”

The Glenday Sieve
and
Value Stream Mapping
What do you map first?
The Greens

The Glenday Sieve
and
To make the “greens” flow

The Glenday Sieve
and
which will
as a consequence
reduce non-value added waste

50% 6%
95% 50%
99%
The Glenday
Sieve
Yellow SKU’s
Align with similar
green sku’s
or
Target for capability
improvement to move
into the green stream

Green stream
• Start with 6% range in fixed cycles
• Increase capacity (white space) through EOR

Green stream
• Work on yellows
• Reduce barriers to being in green stream
• Move yellows into white space

Green stream
• Work on yellows
• Reduce barriers to being in green stream
• Move yellows into white space
• 50% product range BUT 95% volume in green
stream

50% 6%
95% 50%
99%
The Glenday
Sieve
Blue SKU’s
Look for harmonization
opportunities to eliminate
non-value added
complexity

Blue SKU’s
- removing non-value adding complexity
– Back labels

50% 6%
95% 50%
99% 70%
The Glenday
Sieve
Red SKU’s
= 30% of range

Greater the aggregate, less the variability
= central limit theory

Impact of central limit theory
On
Sales predictability

Sales example
FORECASTS PER WEEK
Code 28200 Code 28201 Code 28100 Code 28112 Code 32905
200 Ct Case 184 Assorted 100 Ct Case AV 112 Ct Case Walgreens 100 Ct
16,133 9320 5949 2038 120
Actual Demand Actual Demand Actual Demand Actual Demand Actual Demand
Wk of 5/30 15,386 8936 8743 4218 15
6-Jun 14,355 8413 4548 1874 15
13-Jun 17,695 9564 6572 3153 233
20-Jun 14,536 9242 5337 1011 66
27-Jun 14,513 8048 5363 1065 87
4-Jul 14,668 8246 5581 2002 117
11-Jul 16,931 8948 6043 1280 260
18-Jul 16,632 9699 5367 1781 66
25-Jul 17,777 10294 5200 1327 277
Average 15,833 9043 5862 1968 126
Green
Code
Red
Code

Sales Forecast Accuracy at Weekly Level
WEEKLY FORECAST ACCURACY DATA
Week 1 2 3 4 5 6 7 8 9 Forecast
28200 Sales 15,386 14,355 17,695 14,536 14,513 14,668 16,931 16,632 17,777 16,133
F/C Acc. 95% 89% 110% 90% 90% 91% 105% 103% 110%
28201 Sales 8936 8413 9564 9242 8048 8246 8949 9699 10294 9320
F/C Acc. 96% 90% 103% 99% 86% 88% 96% 104% 110%
28100 Sales 8743 4548 6572 5337 5363 5581 6043 5367 5200 5949
F/C Acc. 147% 76% 110% 90% 90% 94% 102% 90% 87%
28112 Sales 4218 1874 3153 1011 1065 2002 1280 1781 1327 2038
F/C Acc. 207% 92% 155% 50% 52% 98% 63% 87% 65%
32905 Sales 15 15 233 66 87 117 260 66 277 120
F/C Acc. 13% 13% 194% 55% 73% 98% 217% 55% 231%
Actual Sales

Sales Forecast Accuracy
at a Weekly Level
Lowest % Highest %
28200 89% to 110%
28201 86% to 110%
28100 76% to 147%
28112 50% to 207%
32905 13% to 231%
Relatively low variability for the Greens
High variability for the Reds

Forecast Accuracy
Greens are much more stable than reds
0%
50%
100%
150%
200%
250%
1 2 3 4 5 6 7 8 9
28200
28201
28100
28112
32905

sales forecast accuracy at weekly level
Generally bigger sellers have less
variability
therefore greater predictability
Treat reds differently than greens

Every product Every Cycle
• A rigid disciplined PUSH process
• Leads to stability and standardisation
as a consequence
• Invest improvements in faster cycles

Toyota Production System
Jidoka
-Andon
-Poka-Yoke
-Visual control
-5S, etc.
Just-in-time
-continuous Flow
-Takt time
-Pull system
Customer service
Continuous
Improvement
And
Elimination of
MUDA (waste)
Lead TimeCostQuality
Stability & Standardized Work
Levelled production (heijunka)

Production Levelling or
Heijunka
= Foundation of Lean
Therefore essential to being
a truly Lean Enterprise

Progression over time
Establish an EPEC pattern,
leverage Economies of
Repetition (EOR) & create
stability. A push flow
Fixed sequence, fixed volume
Fixed sequence, unfixed volume
Unfixed sequence, unfixed volume
Respond closer to demand,
continue to rely on EOR.
Sustain flow with some pull
Produce to demand.
True flow and pull
At this point, you will have a true Consumer Driven Supply Network
Increasingcapability,responsiveness,lowercostandcash
Faster fixed sequence, fixed volume
Maximise impact of EOR &
stability. Increase rate of flow.
Unfixed sequence, fixed volume
Break reliance on EPEC &
EOR. Pull using small fixed
volumes.

Designing Lean Supply Chains

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