Executive Summary

In the increasingly competitive world of manufacturing, firms need to find ways to slim down their operations. By implementing lean principles firms can lower inventory levels, carrying costs, risk, and increase their bottom lines. Any firm still practicing the wasteful manufacturing techniques of the past it will be left behind by today’s efficient competitors.

Firms must make detailed plans with vigorous time tables to identify and eliminate waste. Benchmarks and goals need also to be set. The actions required to achieve these goals must be well planned and encompass each specific activity necessary to attain each goal. Additionally, measurements need to be identified, defined, and tracked with a specified level of frequency in order to accurately track progress. With these principles implemented, firms will see a reduction in cost over time. Through vigorous time tables, aggressive actions and well defined procedures a firm can obtain their goals in a reasonable amount of time and reap the benefits of an increasingly lean system far into the future.

Vendor-managed inventory is becoming a common trend among lean firms. By bringing the supplier on board, these firms have increased their cost savings while further decreasing waste. By keeping a watchful eye on inventory levels, vendors can reduce demand uncertainty and respond quickly to change.

Ford Motor Co. has implemented lean manufacturing and vendor-managed inventories in all their assembly plants. With a $250 million, 155-acre “supplier park” around Chicago Assembly, they have brought their suppliers closer than ever before. Quality issues can now be addressed quickly and effectively by competent suppliers representatives who are located less than a mile away. Additionally, they have fully implemented a successful VMI strategy in the pre-treatment and paint processes, managing a carefully balanced supplier mix in each plant.

Table of Contents

Introduction
Implementation Strategy
Vendor Managed Inventories
VMI and Lean at Ford Motor Co.
Cited Resources

Introduction

There are many significant efforts underway in business around the world to tighten up production efficiencies and maximize cost utilization. Lean manufacturing strives to cut inventory levels and implement a just-in-time inventory strategy. It basically means “using less to get more.” One could look at it as simply placing a manufacturing process on a diet, whereas previously firms were feeding more and more money into the process and getting less as a result. Maximizing efficiency is a natural progression in these firms, since the costs of ineffective, gluttonous processes have began cutting into the bottom line.

Lean manufacturing essentially strives to eliminate the wastes of production. Taiichi Ohno, in his book “The Machine That Changed the World,” explained that there are seven common wastes in production: overproduction, idle time, transportation handling time, inventory (both handling time and physical inventory size), motion (movement of equipment/people/materials/etc.), over-processing (unnecessary, non-value-adding activities), and defective units (rework or scrap). Looking at these wastes, it is clear that traditional manufacturing strategies have some, if not all, of these wastes present. Firms that carry large amounts of inventory have many of these problems simply due to the fact that the inventory levels are so large. They suffer from carrying the weight of their inventory, whether they’re moving it, handling it for production, or simply holding it on a shelf. In addition to Taiichi Ohno’s seven wastes, other wastes have been identified to help drive the new strategy, including untapped human potential; inappropriate systems; energy and water; and pollution.

Furthermore, in order to identify how these wastes affect a firm, one must understand the various aspects of each of these wastes and where they lie in the process.

Overproduction is often caused by quality problems. This lends itself to the scrap/rework waste. A firm that produces 100 defective units will either have to fix all of them or produce 100 good units. This is a huge waste of time. All modern quality strategies stress that quality problems need to be fixed from the source to eliminate the time and money wasted doing rework or scrapping units.

Idle Time/Waiting is apparent in many operations. This is the time spent waiting for production to start again. This waste lends itself to the waste of untapped human potential. It is sometimes inevitable that idle time will exist in a process. As a result managers have always tried to use excess human capacity during downtime. The first major step to dealing with downtime is to identify and eliminate the cause of this waste.

Transportation lead times and handling times can sometimes be longer than necessary. In many cases the layout of the shipping/receiving portion of a building can be the cause of this problem. Operations need to be designed in a streamline fashion so as to maximize the back door potential. Shipping and receiving times can be reduced significantly if an organized procedure is written for these activities. Designating floor space for specific materials can also reduce inventory handling times and increase handling efficiency. These strategies also lead to reduced shipping/receiving and inventory handling errors.

Inventory size and handling time are really tied into the transportation wastes. These activities must all become efficient together to achieve positive results. Perhaps despite adopting a lean strategy, a firm is still required to handle a large amount of inventory in a shorter amount of time. This would require greater response to increase efficiency in the movement of inventory to reduce any number of handling errors.

Motion is also tied into the inventory and transportation strategies in that the physical movement of materials wastes time if it is not moved to the correct location. Shipping errors and inventory management errors are essentially the same: the material is not in the right place at the right time. Floor design and control can help reduce motion and decrease placement errors. Motion also entails changeover movement and time: bringing new materials to the line, adjusting machinery, and labor downtime. Motion wastes such as these can easily contribute to idle time.

Over-processing is commonly the result of quality issues. Rework or scrap represents not only wasted time but wasted material. A big part of the lean strategy is to maximize material usage; ideally you’d like to use every last bit of what you purchase. Additionally, there are many activities that add no value to the customer and are therefore unnecessary. However, we would argue that many of these processes are completely necessary to the finished product, even if they don’t add any value to the customer.

Defective units go along with many of these wastes. If successfully eliminated, the above wastes can contribute to the elimination of this waste. Quality issues can be solved before units have to be scrapped.

It is interesting to note that in most firms, non-value adding activities account for almost 99% of all activities, and even in some of the best manufacturing operations they represent up to 96% of all activities. However, it would be impossible to eliminate all of these non-value adding activities and still have a product to sell; some things just need to be done regardless of the amount of value that is added.
These strategies in waste reduction ultimately lead to the reduction of overhead costs as a result of lower inventory levels, carrying costs and lead times. It also increases value to the firm through the maximization of capacity: labor and process capacity among others. It has also been noted that employees typically support these strategies and become more enthusiastic about improvement. Employees have also been known to enthusiastically adopt new technologies mainly because they realize how valuable a tool IT really is, but also because it makes their jobs easier. There is an increasing demand to have “real time visibility” throughout the supply chain, and this is becoming increasingly easier as a result of new technology. Firms must adopt these technologies to remain competitive (Krizner).

Implementation Strategy

Implementing a lean strategy may be difficult for some firms and easier for others. Firms with large inventory levels and long-term demand forecasting may have difficulty grasping a lean strategy right away and may require a larger time frame than a firm with lower inventory levels and the ability to implement just-in-time delivery. Firms with large inventories and the capability to create strategic alliances with key suppliers will have fewer difficulties implementing a just-in-time delivery strategy. JIT delivery is really the backbone of the lean system because without short lead times, production may be halted due to delivery constraints. Without on-time delivery lean strategies are useless. Those are only a few of the constraints involved, however, one has to start somewhere and transportation seems like a logical first step. On the other hand, every firm is different and in effect implementation strategies will vary greatly depending on circumstances and priorities.

The only similar aspect in these strategies is the simultaneous identification of wastes, development of an improvement plan, and development of an inventory and delivery strategy to support the improvement. It is certainly not an overnight procedure that happens all at once; however, the most important thing is that multiple strategies must work in unison under the ultimate umbrella strategy of lean manufacturing. The amount of effort required here cannot be covered by a single plan; it is quite likely necessary that a certain amount of micromanagement will need to occur on all levels of production.

Time frames must also be developed in accordance with each strategy. The umbrella strategy is generally long term, in excess of five years. In all practicality, the process of becoming lean is really about continuous improvement. Although it may be dangerous to be “too lean,” most large firms will be implementing these strategies into perpetuity, even after their specific goals are attained they won’t be satisfied.

Performance metrics must also be defined. The firm must vigorously measure and benchmark. Defining goals for a lean strategy requires defining what to measure and how it is measured. A typical “world class” lean firm would be concerned with metrics like manufacturing lead time, delivered quality, delivery performance, inventory turns, conversion costs, manufacturing space, product development, response times, and changeover times. Ideally manufacturing lead times would be less than one day, delivery performance greater than 99%, a high number of inventory turns, product development in less than six months, and changeover times as short as possible. Other measurements that may be taken into consideration include floor space utilization, work in process levels, and labor utilization. Depending on what type of goal a firm is considering, a plethora of measurements could be taken. It is not so important how many different measurements are taken but how accurate they are and what they really mean.

Benchmarking is commonplace with implementation of lean strategies. Firms can look to similar companies by subscribing to trade publications to get an accurate assessment of the type of results they can expect with their strategy. Not only should a level of performance be defined, but improvement strategies also need to be in place to outline necessary action to attain that level. In most cases when a firm’s only strategy is to copy what works for other firms, it often ends in disappointment. Looking to others can be extremely useful, however there is a unique set of circumstances in every firm. Anyone implementing a lean strategy needs to take into account a variety of strategies used and learn to apply them to their own problem. Following cues from other businesses can often cause one to overlook their own pitfalls.

Introducing vendors into the lean process may require completely different strategies. A firm must decide whether to bring suppliers into their plants early in the planning process or after they get their feet wet experimenting with lean principles. Regardless of their decision, bringing a supplier into a plant is a huge step toward becoming truly lean. Perhaps it can be said that the leanest firms don’t handle any inventory whatsoever, and by bringing suppliers on board a firm can do just that. However, the idea that any large manufacturing firm would have 100% vendor managed activities seems laughable and downright unrealistic.

Vendor Managed Inventory

The idea of vendor managed inventory strives to tighten the belt on lean operations. When a supplier can run a process and handle the inventory involved on the customer’s plant floor, it allows the firm to free up other resources and ultimately add to their bottom line. In the effort to reduce non-value adding activities, bringing supplier on board is a huge step in the right direction. VMI activities actually become value added activities. In general, alliances with suppliers leading to a supplier managed inventory or process can add a tremendous amount of value to the firm and translate into long term cost savings. In a study at Ford Motor Co. vendors were able to pass on an average of 10-15% price decreases simply due to the way materials and services were purchased. This means that if they were to buy the materials and manage the process themselves, costs would be higher and no lean strategy would be able to reduce them the same way VMI can.

Adopting a lean philosophy with VMI is not as difficult as it sounds as long as suppliers are willing. If an alliance can be created then a cohesive strategy can be implemented. It is necessary to adopt lean principles together to not only create a lean process in the plant but also at the supplier’s plants and shipping points. Effort on all sides is required, even if that means pushing these strategies further down the supply chain. In fact, tier two suppliers are often involved in processes, as we will see with the Ford example.

VMI and Lean at Ford Motor Co.

Much like the rest of the auto industry, Ford has been implementing lean principles for years. Considering that Toyota was really the first major firm to develop these specific strategies, it’s no surprise that the rest of the auto industry has quickly followed suit. It has become obvious to the entire manufacturing world that the gluttonous ways of the past are costly and inefficient. The wastes of manufacturing have been overlooked for so long that many firms are in danger if they don’t adopt a different way of thinking.

Ford implements lean thinking in all their activities. A big part of their philosophy is bringing the supplier closer. Some of the vendor managed inventories and processes have been adopted more than 15 years ago with some as soon as six months ago. These strategies have been successful in reducing inventory levels, increasing turnover, reducing waste, lowering material costs and improving quality.

At Chicago Assembly Plant, suppliers are closer than ever before, as close as a half-mile away. Tower Automotive supplies heavy components, such as engine cradles, frame rails, and floor pans for the new Ford Five Hundred. Parts are manufactured and moved next door to the assembly plant. This is a big difference from where they were previously shipped, 450 miles away. Tower is not the only one, they are among a dozen suppliers in Ford’s new $250 million, 155-acre “supplier park.” This is currently the largest operation of its type. The park is seen as creating long-term cost savings and quality improvement, critical to their success. There is an estimated $15 million to be saved solely on transportation costs (Kerwin) . These short lead times translate into smaller inventory batches and less product movement. Think of it as a half-mile conveyor belt from the supplier. This short distance also means that quality problems can quickly be identified and corrected by the supplier engineers waiting next door. Tony Brown, VP of Global Purchasing, says having suppliers “within shouting distance [sic] is a giant step in the quest for cost-effective quality.” (Kerwin).

However, there is a concern on how much leverage this creates for Ford. Kerwin, in her article, refers to “Ford’s new world order” as being a double-edge sword. It is beneficial to the supplier to get a larger amount of Ford’s business, but it requires a high level of cooperation and responsibility. There is also the question of increased accountability on the supplier; quality problems come from right next door rather than 450 miles away where a defect could be caused by transportation trauma. The question of leverage comes up when suppliers put forth a lot of financial investment just to get a little more business. On the other hand, if something goes awry in the relationship, the leverage shifts to the supplier because of their unique location and benefit to the customer.

There is no reason why these strategies cannot result in a win-win situation. If a supplier is willing to make the investment for the sake of the business, a customer should surely be grateful for that level of supplier involvement. Adopting lean strategies together can mean significant cost savings and long-term profitability for both firms. In Ford’s supplier park, all firms benefit specifically from lower transportation costs. These suppliers also benefit from a strategic alliance that will lock in a large amount of business for a long time. From the suppliers in their park, Ford gets many components necessary for the Five Hundred: wiring harnesses, cockpit modules, cooling systems, fuel tank assemblies, lighting, doors, latches, window mechanisms, bumpers, roof modules, body panels, exterior trim, and axel systems, among a slew of others.

These strategies are becoming more common across industries. The benefits reaped by companies that have successfully implemented lean strategies, including vendor-managed inventories, have been clearly noted by gluttonous firms. All industries are aware of the wasteful ways of the past and the reality of a necessary paradigm shift in business practices. Consumption has grown at an exponential rate since the dawn of the industrial revolution and we are now on the cusp of a new tomorrow; a tomorrow in which resources are becoming scarce and waste will become more costly. The positive effect on profits from implementing these strategies translates into positive effects on future resource capacity and continued business stability.

Resources

http://www.swmas.co.uk/Lean_Tools/The_7_Wastes.php
http://www.sme.org/

“Manufacturers adopt a lean philosophy”
Ken Krizner, Frontline Solutions, Jul 2001 Vol. 2 Iss. 8 pp. 22-25

http://www.continental-design.com/lean-manufacturing/

“Ford to Suppliers: let’s Get Cozier”
Kathleen Kerwin. Business Week, Sept 20, 2004. Iss. 3900, p. IM8-IM10


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