VENDOR MANAGED INVENTORYVMI moved control of the purchasing process from the participating distributor to the corresponding manufacturer - the “vendor.” VMI principles are simple: distributors send manufacturers data about inventory levels and sales; manufacturers use that data to create forecasts used as the basis for production, and use agreed-upon inventory levels as the triggers to ship.
The manufacturers determine when to ship and the quantity, shipping from the previously produced finished goods inventory - assuming enough was made to satisfy all distributors (participating and not).
Electronic Data Interchange (EDI) is the format used for the daily transmission of inventory and sales data, and for transmitting Advanced Shipping Notices (ASN) and invoices to participating distributors. Although most distributors and manufacturers using EDI are not participating in VMI, SCM is slowly changing that situation.
SUPPLY CHAIN MANAGEMENTSCM is increasing manufacturers' control over the purchasing process by making VMI more accurate and timely, which will attract more distributors to become partners. Distributors who partner in an SCM arrangement transmit sales and inventory data several times each day (or each hour) to manufacturers. Frequent data transmission enables manufacturers to adjust forecasts frequently, and adjust production plans to suit; fill rates should be higher and shipments timelier. SCM also enables customers to be electronically connected to their distributors, and send them forecast and order data. Distributors' systems aggregate customer forecasts and transmit them to manufacturers, who in turn aggregate data from multiple distributors, send forecasts to suppliers and use them for determining production quantities. But SCM involves a much closer relationship than just sending forecast, sales and inventory data. Table 1 lists the various kinds of data flow between trading partners. (To understand the information flow between any two types of partners, read down the FROM column at the left until the first type of partner is found. Then read across that row until the TO column for the second type is found. That “cell” defines the information.)
LEAN MANUFACTURING PRINCIPLES AND PRACTICESLM further increases manufacturers' control over the purchasing process, in a way that is risky to distributors. Manufacturers that use true LM do not create timetables for production runs, and the quantity produced is not based on forecasts. In theory, when data indicates that a customer should be shipped an item, the manufacturer makes the quantity needed, and ships it. In practice, customers still transmit purchase orders, which act as the trigger to make and ship. But LM involves more changes than producing to order. Some people liken LM to a religion because its principles are so pervasive and different.
Table 2 lists some key theoretical principles of LM and their corresponding practices. There are a few interesting points to note. In the row for “No production defects” notice the term “Six Sigma.” Often mentioned in the business press, it's a euphemism for a defect rate of less than 13 in 10,000, or less than .1%. In an LM environment, that low defect rate is expected for administrative processes (e.g., invoices) as well as production processes. It's not uncommon that every piece produced (or invoice generated) is measured for defects. More often, pieces are sampled (which means that one defect in a sample of 100 is too much). (Six Sigma refers to the extreme end of the “normal distribution” of events, sometimes known as the Gaussian or bell curve distribution.)
In addition to the specifics shown in Table 2, there are some important general concepts in LM, starting with a hot way of doing business, “outsourcing.” Outsourcing is used where it reduces costs or defects/errors or lead times, or enhances the flexibility required in an LM plant. Outsourcing can be used for administrative functions (e.g., customer service calls) and indirect production functions like shipping.
“Power to the people” means more than holding people responsible for product quality. It means a flat organization structure with almost no middle managers. The “supervisor” in a manufacturing “cell” is one of the workers, and machine maintenance is often done by one of the workers. All workers are expected to be highly educated and extensively trained in the various jobs they rotate through (to keep their skills current). It's not uncommon for workers to be paid as much as skilled technicians and mechanics.
Most important of the LM principles is “continual improvement.” Employees, individually and in formal groups, constantly look for ways to reduce cost and defects, increase flexibility and quality, etc., in the plant and the office - they are rewarded for doing so. Continual improvement never stops.
(LM principles and practices were developed in the United States in the 1950s by a consultant who was retained by Japanese automakers to help them improve what was then dreadful product quality. Back then it was called Just In Time (JIT), and contained most of the current LM principles, but no electronic data transmission. JIT spread in Japan to many other kinds of manufacturing, especially electronics, but it was ignored in other countries until the mid-'70s, when it was joined with Internet communications and renamed LM).
INDUSTRY USE OF LMThe major reason that some manufacturers in this industry have adopted LM principles is that they have seen the benefits obtained by manufacturers in other industries - small LM improvements have resulted in large dollar savings and improvements in quality. (Toyota is the world leader in LM). Three specific examples follow.
- American Standard, to one degree or another, has implemented all of the principles in Table 2 - in part because the vice president of operations of Bath & Kitchen Americas trained with Toyota in Japan, and in part because the company started using LM more than 10 years ago. Six Sigma has been used in manufacturing processes and administrative functions; flexible manufacturing methods have been implemented; manufacturing is accomplished with less labor; and fast changeover methods are used. American Standard has partly implemented synchronizing material flow between machines, making to order (the goal is 100%), processes that avoid mistakes, and no waiting (for materials, etc.). Raw material inventories have not been reduced much.
“We encourage constant and incremental changes,” says Mo Heshmati, vice president of operations/Bath & Kitchen Americas. “That way we can continue to make improvements even at times when demand and pressure is high. In general, employees understand that improved competitiveness helps us win in the marketplace. We receive good support for our efforts.“
The benefits to American Standard include reduced production cycle times, fewer product defects, reduced raw materials/components inventories, reduced Work In Process (WIP), more flexibility in scheduling production runs and the product mix, fewer administrative errors, reduced manufacturing costs, and reduced finished goods inventories in some areas. American Standard believes its wholesalers and distributors have benefited from LM in terms of improved product quality, lower purchase cost, shorter lead times for commodity items, shorter lead times for special-order items, and less frequent ordering.
- Delta Faucet Co. has implemented, to one degree or another, many LM principles. According to Rick Marshall, vice president/manufacturing, production processes are designed for zero waste; employees are rewarded for quality when they make changes (often on the spot) that improve quality; and manufacturing “cells” are used. Six Sigma is not currently used but should be in the future. Delta Faucet has partly implemented one-piece flow and other methods to reduce WIP, no finished goods inventory on some models, and quick changeovers. So far, LM has enabled Delta to reduce production cycle times, product defects and finished goods inventories, and has given it more flexibility in scheduling production runs and the product mix. Raw materials have not been reduced, but that is a goal for the future - along with further reduction of product defects.
“Delta Faucet Co. has made a commitment to Lean Manufacturing,” Marshall says. “All elements of LM have a 12-month plan associated with them and a champion who oversees progress. We have a very structured approach to implementing LM. Delta Faucet Co. has approximately six to eight “Kaizen” events per month and 30% of all employees have participated in them. The goal is to increase that to about 80%.” (“Kaizen” is a combination of the “power to the people” and “continual improvement” mentioned earlier; people assess and discuss workflow and manufacturing processes and try to make immediate improvements to productivity, cost, quality, flexibility, etc.)
Some of the challenges that Delta faced, and still faces, indicate why LM has not been widely adopted by manufacturers in this and other industries. “We need to learn to see waste in the eyes of the customer and learn to differentiate what is value added to the customer vs. what is value added to us. We also need to move towards a culture that has a bias for action - stop analyzing things and be confident that we'll make the changes and understand that incremental improvements will happen every time. With LM you need to focus on the whole supply chain, not just manufacturing.” (There are other reasons why LM hasn't been widely adopted: fear of depending on suppliers to deliver quality components and materials, and deliver them Just In Time; new and different roles for workers, which unions resist and some workers can't adjust to; the cost of replacing machines, workstations and assembly lines with work cells.)
- Tempress Ltd. is a manufacturer of safety mixer valves and bathroom and kitchen faucets for the plumbing industry. Tempress began applying LM principles three years ago, starting with education, determining where LM could be applied, and estimating the potential benefits; that was followed by pilot projects, measurement of results, adjustments to principles, and “live” use of LM. According to Bill McLean, president, the LM practices applied by Tempress include single piece flow, synchronization of flow between machines/workstations, organizing the workplace for visual monitoring and control of processes, and positioning machines and stations to minimize the amount of labor needed. LM has reduced raw material inventories, work in process, lead times and distances travelled in the factory. Depending on the commodity, raw material inventory went from either months or weeks of inventory to weeks or days, with the added benefit of lowering product cost, improving quality and decreasing lead times. In October 2003, Tempress presented a paper at the Association of Manufacturing Excellence Lean Conference in Toronto.
“LM” IN DISTRIBUTIONFor distributors and wholesalers, there are some LM principles that can be pursued, but not “no finished goods.” No distributor can do business without A and B items in stock. Many distributors try to have “lean inventories,” especially for C and D items, by reducing stocking levels; but this can be a dangerous form of tweaking.
The distribution equivalent of “quality” (no defects and waste) is “no errors” in operations functions (e.g., picking/shipping) and administrative functions (e.g., credits for customer returns). And, like LM manufacturers, many distributors are working on reducing those costs of doing business that they control.
PROS AND CONS OF LM FOR DISTRIBUTORSYes, there are some positives for distributors. Quality increases while cost decreases. There's no such thing as having to wait for the next production run of a commodity item - items are made to order, quickly. Special order items, usually not stocked by manufacturers, are made much faster than before, even items with unusual characteristics or options.
LM probably would not enable distributors to increase turns, especially in the short term, because distributors will tend to stock more during the time when LM manufacturers are getting the bugs out of LM operations - bugs like shipping late and/or less than required. Even when bugs are eliminated, the level of inventory depends more on the target service level and other factors than expected sales and manufacturers' lead times. The short lead times of true LM would allow distributors to order based on lower trigger levels, but the quantity (SOQ) is likely to be unaffected by LM.
The biggest risk is the lack of finished goods inventory at factories. Distributors have to hope that LM manufacturers really can produce commodity items very soon after a purchase order is received. Another drawback is that some manufacturers want to be the exclusive provider to their distributors, in return for on-demand quick production of the quantities ordered.
LM, like SCM, is in its beginning stage, just like the telephone was 100 years ago. Today, voice and data communications connect all significant businesses in the world. That's the direction that LM and SCM are headed. For distributors and wholesalers, there are two ways to “prepare” for LM and SCM. First, have a very modern, sophisticated computer system - one capable of going beyond simple e-commerce, and linking to manufacturers and customers. Second, learn to manage inventory as effectively as possible - from customers' points of view. <<