Strategic, Tactical and Operational Conflicts in Lean Supply Chain Management

1. Strategic, Tactical and Operational Conflicts in Lean Supply Chain Management Scott R. Swenseth, University of Nebraska David L. Olson, University of Nebraska European DSI 2014 Swenseth & Olson

2. Globalization (and global warming) • SUPPLY CHAINS • Need lean • Need green • Need agile • Need resilient • Continuous improvement the goal • Improvement is never finished • Lean effective at tactical, operational levels • OUR FOCUS: STRATEGICSUPPLY CHAIN IMPLEMENTATION OF LEAN European DSI 2014 Swenseth & Olson

3. Views • Operators don’t have confidence that upper management understands lean • Don’t believe upper management supports lean applications • Upper management continues to demand improvements generated by lean • PREMISE: UPPER MANAGEMENT DOES CARE & SUPPORTS LEAN • But they have many factors to consider • Some of these factors may trump lean • STUDY: one major supply chain player • Interacting upstream European DSI 2014 Swenseth & Olson

4. Our Model: Data assumed as inputs • Average annual (& daily) demand (and standard deviation) • Unit weight • Unit purchasing price • Holding cost as % of unit price • Order cost • Backorder cost per unit • Truckload shipping rate (assume full truckloads) European DSI 2014 Swenseth & Olson

5. AGILE • Lean a good deal • Agile also good in supply chains [Borgstrom & Hertz, 2011; many others] • Agile provides information visibility • Agile has relative advantage in low demand, high variety environments • Extension of lean to supply chains challenging [Liu, et al., 2013] • No decision maker can have all needed knowledge • Internet helps [Hines, et al., 2004] • Can synchronize decisions, share goals [Manuj & Sahin, 2011] • But Bullwhip studies indicate difficulties [Disney, Towill, many times] European DSI 2014 Swenseth & Olson

6. RESILIENT • Lean focus on cost minimization • Zero inventories cause problems [Christopher & Peck, 2004] • Supply chains may have high levels of uncertainty [Nauhria et al., 2009] • On-time delivery critical, as is product quality • Agile refocus on developing capacity • Provide the ability to cope with unexpected disturbances [Carvalho & Machado, 2009; Pettit, et al., 2010] • Highly appropriate if demand rapidly changing European DSI 2014 Swenseth & Olson

7. Environmental Sustainability • Lean can help environment [Sobral, et al., 2013] • Improve efficiency ecologically at a profit [Rao & Holt, 2005] • GREEN SYSTEM consideration of Product Life Cycle [Srivastava, 2007] • Green product design • Material sourcing & selection • Marketing • Consumption • Manufacturing • Delivery European DSI 2014 Swenseth & Olson

8. Environmental Sustainability Redux • Little evidence of greensupply chain practice [Genovese, et al., 2013] • Need holistic approach [Lee, 2010] • Environmental complexity includes many goals • Inventory studies [Borgstrom & Hertz, 2011; Chung, et al., 2012] • Need to consider overall supply chain system [Mollenkopf, et al., 2010] • Efficiency trade-offs with environmental sustainability [Wolters, et al., 1997] • Wal-Mart, Caterpillar, Toyota European DSI 2014 Swenseth & Olson

9. Lean Implementation • [Miller 2011] survey • Mixed findings of Managers knowing what lean really is • But it is critical they be involved • Managers should improve process rather than allocate blame • International Survey of Lean Healthcare Users [2012] • Primary barriers to lean • Resources • Knowledge gaps • Conflicting priorities • [Zhang, et al. 2012] • Need management engagement & commitment • Organizational culture • Reviews & tracking • Communication & assessment • [Fricke, 2010] • The larger the organization, the greater the awareness of lean European DSI 2014 Swenseth & Olson

10. Problem Scenario • Supplier shipping TL quantities to customer • Basic system, lean & agile modifications • PARAMETERS • Purchasing • Ordering • Carrying • Shipping • Risk of stock-out • Risk of defects • Demand variability European DSI 2014 Swenseth & Olson

11. Input Parameters European DSI 2014 Swenseth & Olson

12. Intermediate Factors European DSI 2014 Swenseth & Olson

13. Output Measures European DSI 2014 Swenseth & Olson

14. Assumptions • Lead Time – same as cycle time (supplier producing to customer demand) • Standard deviation of Daily Demand = 1/3 daily demand, normally distributed • Optimal Probability of Stock-out based on backorder unit cost • Not allowed to be > 0.5, as that would yield negative safety stock • Optimal Service Level = 1 – Optimal Probability of Stock-out • Max Safety Stock based on 4 StDev above mean • Expected Stock-out Quantity near optimal probability of stock-out times likely number of units stocked out European DSI 2014 Swenseth & Olson

15. Implementing Lean Alternatives • Unit Price reduction – work with supplier, or design changes • Unit Weight reduction – work with supplier to be greener • Unit Demand increase – lower price increases demand • Order Cost reduction – cost of individual order reduced • Shipping Cost reduction – consolidation improves lean & green • Backorder Cost reduction – impact of stock-out reduced • Lead Time reduction – countered by higher number • Holding Cost reduction – decrease in rate and decrease in unit value • Product Defect Rate reduction • Standard Deviation of Demand During Lead Time reduction European DSI 2014 Swenseth & Olson

16. IMPACT • Previous Lead Time: 14.6 days • Previous Order Quantity: (50,000 lbs/shipment)/(25 lbs/unit) = 2,000 units • Cycle Time = Lead Time (2000/50000)*365 days/year = 14.6 days • Current Lead Time: 11.68 days • Current Order Quantity: (50,000 lbs/shipment)/(18.75 lbs/unit) = 2,667 units • Without Learning Cycle Time: (2667/62500)*365 = 15.58 days • With Learning Cycle Time: 15.58*0.75 = 11.68 days • Because demand increases at same rate that unit weight decreases, shipment size increases at rate causing average DDLT to be constant European DSI 2014 Swenseth & Olson

17. Lean Cycle Comparison European DSI 2014 Swenseth & Olson

18. RESULTS • Columns represent rounds of lean improvement • Greater improvement rates during early stages • Assumes one improvement cycle per year • Compound profit improvement 8.52 % per year European DSI 2014 Swenseth & Olson

19. STRATEGIC ALTERNATIVE TO LEAN & GREEN • Unit Price further reduced - (30% of current price) • Unit Weight same • Unit Demand same • Order Cost increase – new supplier • Shipping Cost per truckload increase – overseas • Backorder Cost per unit increased – multiple suppliers • Lead Time increased – overseas • Holding Cost % same • Product Defect Rate increased – multiple overseas suppliers European DSI 2014 Swenseth & Olson

20. Global Outsourcing European DSI 2014 Swenseth & Olson

21. SIMULATION • 1,000 randomly generated scenarios • Varied stages of learning • Global outsourcing gains pick up after 5 periods • Considered impact of different change factors on results • Correlation between input factor and change in profit • GREATEST IMPACT: • Defective products • Greater initial levels of defective product allows lean to improve more • Can’t transfer this to alternate suppliers • 2nd GREATEST IMPACT • Learning Rate • Greater learning rate, more lean benefits European DSI 2014 Swenseth & Olson

22. CONCLUSIONS • Multiple ways to implement lean, green, agile methods • We focused on decision processes • Operational level gains may seem ignored when changes made at tactical level • Gains at the operational & tactical levels may seem ignored at the strategic level • EACH LEVEL HAS TO UNDERSTAND HIGHER LEVELS HAVE BROADER CONSIDERATIONS • What appears detrimental at lower levels may have a compelling higher-level justification European DSI 2014 Swenseth & Olson

23. Learning/experience curve • Used to emulate progression through lean • Reflect: • Improving product design • Affecting unit weight • Affecting defect levels • Affecting holding inventory • Affecting placing orders • Affecting shipping costs • Improvements from managing demand • Impact safety stock • Impact stock-out costs • WHILE LEAN OFFERED IMPROVEMENT, ALTERNATIVES OFTEN ATTAINED GREATER GAINS European DSI 2014 Swenseth & Olson