LEAN SUPPLY CHAIN MANAGEMENT

SESSION
Lean Supply Chain Management Principles &
Practices

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT 1

Lean Supply Chain Management

Basics Learning Points

• Lean supply chain management represents a

new way of thinking about supplier networks
Lean principles require cooperative supplier
• relationships while balancing cooperation and
competition
• Cooperation Involves collaborative
relationships & coordination mechanisms

• Supplier partnerships & strategic alliances

represent a key feature of lean supply cha in
management a spectrum of
Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 1

 Theory: Lean Represents a "Hybrid"Approach to
Organizing Interfirm Relationships
• "Markets" (Arm's Length): Lower production costs, higher coordination
• costs
Firm buys (all) inputs from outside specialized suppliers
• Inputs are highly standardized; no transaction-specific assets
• Prices serve as sole coordination mechanism

• "Hierarchies" (Vertical Integration): Higher production costs, lower

coordination costs
• Firm produces required inputs in-house (in the extreme, all inputs)
• Inputs are highly customized, involve high transaction costs or dedicated investments,
and require close coordination

• "Lean" (Hybrid):Lowest production and coordination costs;

economically most efficient choice-- new model
• Firm buys both customized & standardized inputs
• Customized inputs often involve dedicated investments
• Partnerships & strategic alliances provide collaborative advantage

- - - - - - - -

Dominant conventional approach: Vertical integration, arm's length

relationships with suppliers

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Lean Supply Chain Management Differs Sharply from

Conventional Practices
d

ILLUSTRATIVE CONVENTIONAL MODEL LEAN MODEL

CHARACTERISTICS I
I
Number & structure Many; vertical i Fewer; clustered ,
Procurement personnel Large Limited
I

Outsourcing Cost-based Strategic

Nature of interactions Adversarial; zero-sum Cooperative, positive-sum

Relationship focus Transaction-focused Mutually-beneficial

Selection length Lowest price Perfomance

Contract length Short-term I Long-term

I f
. '
Pricing practices Competitive bids Target costing
~ I -
Price changes Upward Downward
Quality Inspection-intensive Designed-in
Delivery Large quantities Smaller quantities (JIT)
Inventory buffers Large Minimized, eliminated
Communication
,, %
'
Limited; task-related Extensive; multi-level
Information flow
' . Directive; one-way '1 ' Collaborative; two-way
- - -
'
Role in development Limited; build-to-print -
Substantial l

Production flexibility Low High

Technology sharing Very limited; nonexistent Extensive
,
Dedicated investments Minimal-to-some Substantial '

'
- r
- I

Mutual commitment Very limited; nonexistent L

High
I I
... -•
Govemance f
Market-driven ' Sell-governing '
Future expectations • No Quarantee
C
Considerable
I
' '
'

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 2

 Lean Supply Chain Management Principles
Derive from Basic Lean Principles

• Focus on the supplier network value stream

• Eliminate waste
• Synchronize flow
• Minimize both transaction and production costs
• Establish collaborative relationships while balancing
cooperation and competit ion
• Ensure visibility and transparency
• Develop quick response capability
• Manage uncertainty and risk
• Align core competencies and complementary
capabilities
• Foster innovation and knowledge-sharing

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

A Set of Mutually-Reinforcing Lean Practices

Translate these Principles into action

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 3

 Synchronized Production and Delivery
Throughout the Supplier Network is a Central lean Concept

• Integrated supplier lead times and delivery schedlules

• Flows from suppliers pulled by customer demand (using
takt time, load leveling, line balancing, single piece
flow)
• Minimized inventory through all tiers of the supply chain
• On-time supplier delivery to point of use
• Minimal source or incoming inspection
• Effective two-way communication links to coordinate
production & delivery schedules
• Striving for zero quality defects essential to success
• Greater efficiency and profitability throughout the
supplier network

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Aerospace Firms Have Faced an Uphill

Challenge in Synchronizing Flow with Suppliers

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 4

 Supplier Certification has been an Important
Early Enabler of Achieving Synchronized
Flow in Aerospace

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Closer Communication Links with Suppliers Paved

the Way for Synchronizing Flow

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 5

 Concrete Example: Engine Parts Casting
Supplier Worked with Customer Company to
Achieve Synchronized Flow

Delivery (%6) Quality ( )

6 75
1 0 0 - - - - - - - - - - - - - - - ~ 100,
VI 90 '
to 80·
70 70 1

6o 60
50 50 I

40 40 l
30 30
20
20
Iu•
o 10
0
92 5 97
92 96

Pr o d u c tiv it y Cycle Time (WIP Days)

45
28
40
24 35
2 10
1.6 25 21.5
1.2 20 17.8
4
0.3 15
0.4 10
5
0
92 96 0
92 97 93 9

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Mastering & Integrating Lean Basics with Prime was Necessary

for Achieving Synchronized Flow

• 6S-- Visual factory 1

• Total productive maintenance

• Quality control
• Process certification
• Mistake proofing
• Setup reduction
• Standard work
• Kaizen

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 6

 Supplier Partnerships & Strategic Alliances Ensure
Substantial Performance Improvements

• Long-term relationships and mutual commitments

• Intensive and regular sharing of techn ical and cost
information
• Mutual assistance and joint problem-solving
• Customized (relationship-specific) investments
• Risk-sharing, cost-sharing, benefit-sharing
arrangements
• Trust-building practices -- "one team" mindset;
collocation of technical staff; "open kimono"
• Progressively increasing mutual dependence -- shared
fate discouraging opportunistic behavior
• Self-enforcing contracting driving continuous
improvement

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Supplier Partnerships & Strategic Alliances

Bring Important Mutual Benefits

• Reduced transaction costs (cost of information

gathering, negotiation, contracting, billing)
• Improved resource planning & investment decisions
• Greater production predictability & efficiency
• Improved deployment of complementary capabilities
• Greater knowledge integration and R&D effectiveness
• Incentives for increased innovation (through cost•
sharing, risk-sharing, knowledge-sharing)
• Increased mutual commitment to improving joint long•
term competitive performance

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 7

 Major Lean Lessons for Aerospace Industry

• Supplly chain design linked to corporate strategic thrust

• Fewer first-tier suppliers
• Greater supplier share of product content
• Strategic supplier partnerships with selected suppliers
• Trust-based relationships; long-term mutual commitment
• Close communications; knowledge-sharing
• Multiple functional interfaces
• Early supplier integration into design
• Early and major supplier role in design
• Up-front design-process integration
• Leveraging supplier technology base for innovative solutions
• Self-enforcing agreements for continuous improvement
• Target costing
• Sharing of cost savings

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Chrysler: Supplier Partnerships

Speed Development

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 8

 Aerospace: Early Supplier Involvement in
IPTs Impacts Producibility and Cost

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Early Supplier Involvement: Key Success Factors

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 9

 Evolution of Early Supplier Integration
in the Aerospace Industry

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Summary: Architectural Innovation Yields

Significant Benefits

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 10

 Summary of Key Practices Enabling
Architectural Innovation
Pre-sourcing; long-term commitment
•
Early supplier integration into IPTs; IPPD; co-location; joint design &
•
configuration control
Leveraging technology base of suppliers (key suppliers; tooling suppliers;
subtiers)
• Workshare arrangements optimizing supplier core competencies

• Retaining fle/xibility in defining system configuration

• Open communications; informal links; knowledge-sharing
• Target costing; design to cost
• Supplier-capabili/ty-enhancing investments
• Incentive mechanisms (not to compete agreements; long-term
•
warranty); maintaining trade secrets
Government part of the team; relief from military standards and
specifications

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Electronic Integration of Supplier

Network: Early Results
Challenge: Electronic integration of supplier networks for technical
data exchange as well as for synchronization of business processes

• Important success factors include:

• Clear business vision & strategy
• Early stakeholder participation (e.g. top management support; internal process owners;
suppliers ; joint configuration control)
• Migration/integration of specific functionality benefits of legacy systems into evolving new
IT/IS infrastructure
• Great care and thought in scaling-up experimental IT/IS projects into fully•
functional operational systems

• Electronic integration of suppliers requires a process of positive

reinforcement -- greater mutual information exchange helps build increased trust,
which in turn enables a closer collaborative relationship and longer• term
strategic partnership
• Close communication links with overseas suppliers pose a serious
security risk and complex policy challenge

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 11

 Fostering Innovation across Supplier Networks Ensures
Continuous Delivery of Value to all Stakeholders

• Research: Case studies on F-22 Raptor avionics subsystems -- what incentives,

practices & tools foster innovation across suppliers?

• Major finding: Innovation by suppliers is hampered by many factors. This seriously

undermines weapon system affordability.
• Excessive performance and testing requirements that do not add value
• One-way communication flows; concern for secrecy; "keyhole" visibility
by suppliers into product system architecture
• Little incentive to invest in process improvements due to program uncertainty;
limited internal supplier resources; often narrow business case
• Major subcontractors switching rather than developing subtier suppliers
• Yearly contract renegotiations wasteful & impede longer-term solutions

• Recommendations:
• Use multiyear incentive contracting & sharing of cost savings
• Improve communications with suppliers; share technology roadmaps
• Make shared investments in selected opportuni t y areas to reduce costs
• Provide government funding for technology transfer to subtiers

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Quick Review of Aerospace Progress

Aerospace industry has made important strides in supplier
• integration, but this is only the beginning of the road
• Production: Supplier certification and long-term supplier
partnerships -- process control & parts synchronization
• Development: Early supplier integratio n into product development
critical
• Strategic supply chain design is a meta core competency
• Implementation efforts have required new approaches
• Re-examination of basic assumptions (e.g., make-buy)
• New roles and responsibilities between primes and suppliers
• Communication and trust fundamental to implementation
• Aerospace community faces new challenges and opportunities
• Imperative to take "value stream" view of supplier networks
• Focus on delivering best lifecycle value to customer Need to evolve
• information-technology-mediated new organizational structures for
managing extended enterprises in a
globalized market environment

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 12

 Lean Suppllier Networks Offer Significant
Competitive Advantages

• Exhibit superior performance system-wide -

greater efficiency, lower cycle time, higher
quality
• Not an accident of history but result of a dynamic
evolutionary process
• Not culture dependent but are transportable
worldwide
• Can be built through a proactive, well-defined,
process of change in supply chain management

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Key Questions for Enterprise Management

• Does the size, structure and composition of the supplier network

reflect your enterprise's strategic vision?
• Has your enterprise created partnerships and strategic alliances
with key suppliers to strengthen its long-term competitive
advantage?
• Are major suppliers as well as lower-tier suppliers integrated into
your enterprise's product, process and business development
efforts?
• Has your enterprise established mutually-beneficial
arrangements with suppliers to ensure flexibility and
responsiveness to unforeseen external shifts?
• Does your enterprise have in place formal processes and metrics
for achieving continuous improvement throughout the extended
enterprise?

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 13

 Emergence of Strategic Supplier Partnerships has been a
Central Feature of Aerospace Industry's Transformation
in the 1990s

• Survey: 85% of firms established production-focused supplier

partnerships involving long-term agreements (LTAs) with key
suppliers
• Major reasons:
• Reduce costs 97%
• Minimize future price uncertainty 85%
• Mutual performance improvement 85%
• Chief characteristics:
• One or more products, 3+ years 97%
• Multi-year design/build 49%
• On-going (evergreen) 24%

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Case Study Results Show Significant Performance

Improvements by Building Integrated Supplier Networks
through Supplier Partnerships

Case study: Major producer of complex airframe structures

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 14

 Lean Supplier Partnerships Driven by Strategic Corporate
Thrust to Develop Integrated Supplier Networks

- - I
le
KEY PRACTICES BEFORE AFTER

Reduced and streamlined supplier base

• Number of direct production suppliers 542 162
l I
]
r
,, 4 l « ,, < 4

Improved p rocurement dffi c iency t

• Procurement personnel as % of total employment (%) 4.9 1.9

• Subcontracting cycle time (days)
'
,4

.
13 .4
7
,,
Improved supplier quality and schedule
'
• Procurement (dollars) from certified suppliers (%) 0 75
·Supplier on-time performance (% of all shipments) 76.4 83.0
Established strategic supplier partnerships
• "Best value" subcontracts as % all awards 0 95
50.0 100.0
- . -

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Focus on Early Supplier Integration

Historic opportunity for achieving BEST LIFECYCLE VALUE in

aerospace weapon system acquisition through early supplier
integration into design and development process
Nearly 80% of life cycle cost committed in early design phase

Design and development of complex aerospace systems calls on core

•
capabilities of numerous suppliers, providing as much as 60%- 70% of
•
end product value

• Supplier network represents an enormous beehive of distributed

• technological knowledge & source of cost savings

• What are better ways of leveraging this capability for more efficient
product development in aerospace sector?
Worldwide auto industry experience provides critical lessons
Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 15

 LeanDifference: Auto Industry

Lean Difference: Significantly lower

development cost and shorter cycle time

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Lean Difference: Auto Industry

Supplier Role in Design
Lean difference starts with significant supplier role in design and
development

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 16

 Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT 33

DISCUSSION POINTS

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT

Instructor: Dr. Nguyen Thi Duc Nguyen 17

 – Interpret Lean demand: How to cope with rising
demand variability

– Interpret Lean supply: How to get a grip on supply

uncertainty and reliability

– Interpret Lean synchronization: How to master

complexity and ambiguity

Instructor: Dr. Nguyen Thi Duc Nguyen, SIM-HCMUT 35

Instructor: Dr. Nguyen Thi Duc Nguyen 18