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In summary, both Ford and Ohno followed four concepts (from now on we’ll refer to them as the concepts of flow): Improving flow (or equivalently lead time) is a primary objective of operations. This primary objective should be translated into a practical mechanism that guides the operation when not to produce (preventsoverproduction). Ford used space; Ohno used inventory. Local efficiencies must be abolished. A focusing process to balance flow must be in place. Ford used direct observation. Ohno used the gradual reduction of the number of containers and then gradual reduction of parts per container. The

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So what? This produces a onetime cash windfall from inventory reduction and speeds return on investment, but is it really a revolutionary achievement? In fact, it is because the ability to design, schedule, and make exactly what the customer wants just when the customer wants it means you can throw away the sales forecast and simply make what customers actually tell you they need.

You’ll often hear supply chain professionals talk about the amount of money lost due to shrinkage. This jargon term describes products that are stolen, damaged, or wasted. They’re called shrinkage because they lead to a reduction of inventory.

Total Cost Analysis When the purchasing staff considers switching to a new supplier or consolidating its purchases with an existing one, it cannot evaluate the supplier based solely on its quoted price. Instead, it must also consider the total acquisition cost, which can in some cases exceed a product’s initial price. The total acquisition cost includes these items: • Material. The list price of the item being bought, less any rebates or discounts. • Freight. The cost of shipping from the supplier to the company. • Packaging. The company may specify special packaging, such as for quantities that differ from the supplier’s standards and for which the supplier charges an extra fee. • Tooling. If the supplier had to acquire special tooling in order to manufacture parts for the company, such as an injection mold, then it will charge through this cost, either as a lump sum or amortized over some predetermined unit volume. • Setup. If the setup for a production run is unusually lengthy or involves scrap, then the supplier may charge through the cost of the setup. • Warranty. If the product being purchased is to be retained by the company for a lengthy period of time, it may have to buy a warranty extension from the supplier. • Inventory. If there are long delays between when a company orders goods and when it receives them, then it must maintain a safety stock on hand to guard against stock-out conditions and support the cost of funds needed to maintain this stock. • Payment terms. If the supplier insists on rapid payment terms and the company’s own customers have longer payment terms, then the company must support the cost of funds for the period between when it pays the supplier and it is paid by its customers. • Currency used. If supplier payments are to be made in a different currency from the company’s home currency, then it must pay for a foreign exchange transaction and may also need to pay for a hedge, to guard against any unfavorable changes in the exchange rate prior to the scheduled payment date. These costs are only the ones directly associated with a product. In addition, there may be overhead costs related to dealing with a specific supplier (see “Sourcing Distance” later in the chapter), which can be allocated to all products purchased from that supplier.

The rocks and water analogy of Lean is useful for understanding how this is done. The water level corresponds to the inventory level, while the rocks are the problems disturbing the flow. There are many rocks at the bottom of the river and it takes time and effort to remove them. The question is which rocks are important to remove. The answer is given by reducing the water level; those rocks which emerge above the water are the ones that should be removed. At the initiation of the Kanban system, to achieve reasonable throughput, Ohno had to start with many containers each holding a non-negligible quantity of a particular part. Gradually, Ohno reduced the number of containers and then the quantities in each container. If the flow was not noticeably disturbed, then the reduction of the number of containers and quantities per container continued. When the flow was disturbed the Five Why’s method was used to pinpoint the root cause. It had to be fixed before the quantities could be further reduced. It took time but the end result was a remarkable improvement in productivity.

suppliers (ii) JIT layout: Employees arranged in work cells. (iii) Inventory reduction (iv) Scheduling: with a level schedule (small batches of constantly changing items so that production meets daily demand) and Kanban system. (v) Continuous job improvement b) Six Sigma: A methodology that furnished tools for the improvement of business processes. The intent is to decrease process variation and improve product quality. The objective is get as close as possible to “zero defects” with an outer limit of 3.4 defects per million. i) Elements of six sigma: (1) Customer: The definition of quality – the acceptable rate of defects – is in the mind of customer. (2) Process: When assessing a process, the company has to adopt the customer ’mindset. (3) Employee: Training 6 sigma tools (green belt, black belt and master black belt). ii) 6 sigma process and tools: (1) Phase 1: Define the nature of the problem. (2) Phase 2: Measure existing performance and start recording data and facts that provide information on the underlying causes of the problem (3) Phase 3: Analyze the information to determine the root cause to the problem (4) Phase 4: Improve the process by effecting solutions to the problem. (5) Phase 5: Control the process until the solutions become ingrained.

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