Term II: Supply Chain Management (SCM)

Session 18: Lean Supply Chain

Rohit Gupta
Operations Management Area
IIM Ranchi
Email: rohit.gupta@iimranchi.ac.in
 Toyota Motor Corporation

 Largest vehicle manufacturer in the world with annual sales of over 9 million vehicles
 Success due to two techniques, Just In Time (JIT) and Toyota Production System
(TPS)
 Continual problem solving is central to JIT
 Eliminating excess inventory makes problems immediately evident
 Central to TPS is employee learning and a continuing effort to produce products
under ideal conditions
 Respect for people is fundamental
 Small building but high levels of production
 Subassemblies are transferred to the assembly line on a JIT basis
 High quality and low assembly time per vehicle
JIT/TPS/Lean Operations
Good production systems require that managers address three issues that are pervasive and
fundamental to operations management:
1. Eliminate Waste
2. Remove Variability
3. Improve Throughput
Q: What is Throughput?
A: Throughput is the rate of production or the rate at which something (product/ subassembly etc.)
can be processed.
Points to Remember:
▶JIT focuses on continuous forced problem solving
▶TPS emphasizes continuous improvement, respect for people, and standard work practices in an
assembly-line environment
▶Lean operations emphasize understanding the customer
Q: What is Waste?
A: Waste is anything that does not add value from the customer point of view.
Example: Storage, inspection, delay, waiting in queues, and defective products do not add value.
Taiichi Ohno’s 7 Types of Waste: 1. Overproduction, 2. Queues, 3. Transportation, 4. Inventory, 5.
Motion, 6. Over-processing, 7. Defective products
JIT/TPS/Lean Operations
Other Aspects of Waste Elimination: 1. Other resources such as energy, water, and air are often wasted, 2.
Efficient, sustainable production minimizes inputs, reduces waste, 3. Traditional “housekeeping” has been
expanded to the 5Ss (What is 5S??)
The 5Ss (seiri, seiton, seiso, seiketsu, and shitsuke)
Sort/segregate – when in doubt, throw it out (a. Remove unnecessary items and dispose of them properly, b.
Make work easier by eliminating obstacles, c. Reduce chance of being disturbed with unnecessary items, d.
Prevent accumulation of unnecessary items, e. Evaluate necessary items with regard to cost or other factors, f.
Remove all parts not in use, g. Segregate unwanted material from the workplace.)
Simplify/straighten – methods analysis tools (a. Arrange all necessary items so they can be easily selected for
use, b. Prevent loss and waste of time by arranging work station in such a way that all tooling / equipment is in
close proximity, c. Make it easy to find and pick up necessary items, d. Make workflow smooth and easy)
Shine/sweep – clean daily (a. Clean your workplace completely, b. Use cleaning as inspection, c. Prevent
machinery and equipment deterioration, d. Keep workplace safe and easy to work, e. Keep work place clean and
pleasing to work in)
Standardize – remove variations from processes (a. Standardize the best practices in the work area, b. Maintain
high standards and workplace organization at all times, c. Maintain orderliness, d. Maintain everything in order
and according to its standard)
Sustain/self-discipline – review work and recognize progress (a. To keep in working order, b. Also translates as
"do without being told“, c. Perform regular audits, d. Training and Discipline)
Remove Variability

JIT system requires managers to reduce variability caused by both internal and external factors.
Q: What is Variability?
A: Variability is defined as any deviation from an optimum process
Points to remember:
a. Inventory hides variability
b. Less variability results in less waste
Q: What are the sources of variability?
A: (a) Poor production processes resulting in improper quantities, late, or non-conforming units
(b) Unknown customer demands
(c) Incomplete or inaccurate drawings, specifications, or bills of material
Q: How to identify Variability?
A: Both JIT and inventory reduction are effective tools in identifying causes of variability
Reduce Variability

Inventory level

Process
Scrap downtime

Setup Quality
time problems

Late deliveries
Reduce Variability

(a) Reducing inventory uncovers

the “rocks”
Inventory (b) Problems are exposed
level (c) Ultimately there will be virtually
no inventory and no problems
(d) Shingo says “Inventory is evil”

Process
Scrap downtime

Setup Quality
time problems

Late deliveries
 Reduce Variability

Inventory
level

No scrap Quality
problems
Setup removed
time
reduced Process
No late downtime
deliveries removed
Improve Throughput
Throughput is the rate of production or the rate at which something (product/ subassembly etc.)
can be processed.
The time it takes to move an order from receipt to delivery.
The time between the arrival of raw materials and the shipping of the finished order is called
manufacturing cycle time.
A pull system increases throughput of a system. (How???)
By pulling material in small lots (Lot Size Reduction), inventory cushions are removed, exposing
problems and emphasizing continual improvement
Manufacturing cycle time is reduced
Push systems dump orders on the downstream stations regardless of the need.
Lot Size Reduction
Ideal situation is to have lot sizes of 1. One item should be pulled from one process to the next.
However this not often feasible in reality.
Lot Size Reduction requires two key changes:
(i) Improved material handling
(ii) Setup time reduction
 Lot Size Reduction

Q1 When average order size = 200

average inventory is 100
200 –
Inventory

Q2 When average order size = 100

average inventory is 50
100 –

Time
Lot Size Reduction Problem
A manager in a firm comprising of 2 departments has calculated that a 2-hour production
cycle would be acceptable between the depts. The annual demand of the firm is 400,000
SKUs. The daily production rate of the firm is: 4000 SKUs/ day. Holding Cost is $20/ SKU/
year. Wage rate is $30/ hour. The desired EOQ is 400 units. Calculate the setup time & setup
cost.
D = Annual demand = 400,000 units
d = Daily demand = 400,000/250 = 1,600 per day
p = Daily production rate = 4,000 units
Q = EOQ desired = 400
H = Holding cost = $20 per unit
S = Setup cost (to be determined)
2 DS 2 DS
Q*p  Q2 
H 1  (d / p) H 1  (d / p)

S
Q H 1  d / p   (400) (20)(1  1,600 / 4,000)  $2.40
2 2

2D 2(400,000)
Setup time = $2.40/($30/hour) = 0.08 hr = 4.8 minutes
Points to remember:
(a) High setup costs encourage large lot sizes
(b) Reducing setup costs reduces lot size and reduces average inventory
(c) Setup time can be reduced through preparation prior to shutdown and changeover
Lower Setup Costs

Holding cost
Sum of ordering and
Cost holding costs

T1
Setup cost curve (S2)
T2 Setup cost curve (S1)
S1
S2

Lot size
Just-In-Time (JIT)
a. Powerful strategy for improving operations
b. Materials arrive where they are needed when they are needed
c. Identifying problems and driving out waste reduces costs and variability and
improves throughput
d. Requires a meaningful buyer-supplier relationship
JIT and Competitive Advantage
JIT Advantage 1: Distance Reduction
▶ Large lots and long production lines with single-purpose machinery are being replaced by
smaller flexible cells
▶ Often U-shaped for shorter paths and improved communication
▶ Often using group technology concepts

JIT Advantage 2: Increased Flexibility

▶ Cells designed to be rearranged as volume or designs change

▶ Applicable in office environments as well as production settings
▶ Facilitates both product and process improvement
JIT Advantage 3: Impact on Employees

▶ Employees may be cross trained for flexibility and efficiency

▶ Improved communications facilitate the passing on of important information about the
process
▶ With little or no inventory buffer, getting it right the first time is critical

JIT Advantage 4: Reduced Space and Inventory

▶ With reduced space, inventory must be in very small lots

▶ Units are always moving because there is no storage
 Concerns of Suppliers

▶ Diversification – ties to only one customer increases risk

▶ Scheduling – don’t believe customers can create a smooth schedule
▶ Lead time – short lead times mean engineering or specification changes can create
problems
▶ Quality – limited by capital budgets, processes, or technology
▶ Lot sizes – small lot sizes may transfer costs to suppliers
JIT Scheduling

▶ Schedules must be communicated inside and outside the organization

▶ Level schedules
▶ Process frequent small batches
▶ Freezing the schedule helps stability
▶ Kanban
▶ Signals used in a pull system

Level Schedules
▶ Process frequent small batches rather than a few large batches
▶ Make and move small lots so the level schedule is economical
▶ Freezing the schedule closest to the due dates can improve performance
 Scheduling Small Lots

JIT Level Material-Use Approach

A A B B B C A A B B B C

Large-Lot Approach
A A A A A A B B B B B B B B B C C C

Time
Kanban
 Kanban is the Japanese word for card
 The card is an authorization for the next container of material to be produced
 A sequence of kanbans pulls material through the process
 Many different sorts of signals are used, but the system is still called a kanban

Signal marker hanging on post for

part Z405 shows that production
should start for that part. The post
is located so that workers in
normal locations can easily see it.

Signal marker on stack of boxes

Part numbers mark location of

specific part
Kanban

Material/Parts Final Finished Customer

Supplier assembly goods order

Work
cell

Kanban
Kanban Kanban
Kanban: Points to remember

▶ When the producer and user are not in visual contact, a card can be used; otherwise,
a light or flag or empty spot on the floor may be adequate
▶ Usually each card controls a specific quantity or parts although multiple card systems
may be used if there are several components or if the lot size is different from the
move size
▶ Kanban cards provide a direct control and limit on the amount of work-in-process
between cells
▶ If there is an intermediate storage area, a two-card system can be used with one card
circulating between the user and storage area and the other between the storage area
and the producing area
The Number of Kanban Cards or Containers
▶ Need to know the lead time needed to produce a container of parts
▶ Need to know the amount of safety stock needed
Demand during Safety
Number of kanbans lead time + stock
(containers) = Size of container
Daily demand = 500 cakes
Production lead time = 2 days
(Wait time +
Material handling time +
Processing time)
Safety stock = 1/2 day
Container size = 250 cakes
Demand during lead time = 2 days x 500 cakes = 1,000
Safety stock = ½ x Daily demand = 250
1,000 + 250
Number of kanbans = 250 =5
Advantages of Kanban

▶ Small containers require tight schedules, smooth operations, little variability

▶ Shortages create an immediate impact
▶ Places emphasis on meeting schedules, reducing lead time and setups, and economic
material handling
▶ Standardized containers reduce weight, disposal costs, wasted space, and labor
Toyota Production System
▶ Continuous improvement
▶ Build an organizational culture and value system that stresses improvement of all processes
▶ It is part of everyone’s job
▶ Respect for people
▶ People are treated as knowledge workers
▶ Engage mental and physical capabilities
▶ Empower employees
▶ Standard work practice
▶ Work shall be completely specified as to content, sequence, timing, and outcome
▶ Internal and external customer-supplier connection are direct
▶ Product and service flows must be simple and direct
▶ Any improvement must be made in accordance with the scientific method at the lowest
possible level of the organization
Lean Operations: Points to Remember

▶ Broader than JIT in that it is externally focused on the customer

▶ Starts with understanding what the customer wants
▶ Optimize the entire process from the customer’s perspective
Building a Lean Organization
▶ Transitioning to a lean system can be difficult
▶ Lean systems tend to have the following attributes
(1) Use JIT techniques
(2) Build systems that help employees produce perfect parts
(3) Reduce space requirements
▶ Lean systems tend to have the following attributes
(1) Develop partnerships with suppliers
(2) Educate suppliers
(3) Eliminate all but value-added activities
(4) Develop employees
(5) Make jobs challenging
(6) Build worker flexibility

Lean Sustainability
▶ Two sides of the same coin
▶ Maximize resource use and economic efficiency
▶ Focus on issues outside the immediate firm
▶ Driving out waste is the common ground