Lean excellence as a first tier supplier

Previous development trends in the supplier industry are characterized by an intensified modularization strategy on part of the original equipment manufacturers (OEM). This strategy promotes a reduction of production depth through outsourcing, a decrease in the number of direct suppliers (first tier suppliers) and the establishment of suppliers in close proximity in conjunction with just-in-time or even just-in-sequence deliveries (JIT / JIS). In this context, the delivery of complex modules or systems is specifically transferred to the first tier supplier, who for instance produces in close proximity to the OEM’s final assembly line.

Along with the actual production output, additional functions such as responsibility for all logistical processes, purchases and, where applicable, development are increasingly transferred to the first-tier supplier. Therefore, when choosing a first-tier supplier, emphasis is put on an ideal production setup in terms of shorter processing times, faster processing of customer requests and sustained reduction of faulty products. Furthermore, an excellent logistic positioning is regarded as a guarantor of supply reliability of the OEM’s production.

This combination presents particular challenges for the first tier suppliers. They may have to compete with the internal cost structure of the OEM, who may, based on a make-or-buy decision depending on the product, also favor partial or full insourcing. In the special case of an ‘on site’ scenario the first tier suppliers have to consider the particular transparency of their internal business processes. Additionally, the complete integration into lean production processes of the OEM leaves little leeway. In on and off site scenarios the first-tier suppliers have to ensure a full integration in the logistic processes of the OEM whilst achieving maximum efficiency. This raises the question: which is the optimum approach?

Lean excellence can be defined as the ability to implement lean concepts effectively and sustainably. The involved companies need to have an extensive and comprehensive understanding of lean initiatives. Lean excellence can only be achieved if the integration mentioned above, in terms of accounting, controlling, logistics and production and shared functions; can be solved “lean”. Generally, this is only given when a lean approach is implemented as a whole and the business model is core process oriented.

The following aspects of lean excellence should be highlighted:
• Process stability as a prerequisite
• Focus on core processes
• Lean collaboration – collaborative organization or the supply chain
• Consistent orientation of corporate culture on customers and customer demands
• Maintenance of a consistent and continuous improvement culture
• Boundary condition: Supply reliability of OEM
• Just-in-time / Just-in-sequence supply

Process stability

Taiichi Ohno, founder of the Toyota production system (TPS), regards process stability as a substantial requirement for the implementation of a lean approach. To achieve lean excellence the stability of individual business processes is of vital importance. Hence, the reliability of a single machine in a production scenario increases with the help of the TPS principle “autonomation” – intelligent automation for early fault detection.

The OEM’s just-in-time requests can be used as an example: According to fixed delivery agreements and purchase conditions the OEM request components or modules of the first tier supplier. The latter then deduct the components from their inventory as soon as they are installed. In terms of a “lean” process organization it might not always be possible to manually check all extracted components – with short cycle times and large numbers of components creating a disproportionately high “not very lean” expense; instead the individual parts of the customer request are checked.

Generally, this process functions when the OEM provides consistent stock lists. Difficulties can be experienced in cases of new attempts, when parts are changed, new versions are tried out, etc. The modification management that has to be coordinated between several participants in such cases often causes unreliable requests by the OEM. The processes that are described above can result in stock differences on part of the first tier supplier, who, if necessary, focuses on providing parts for the assembly, but does not update the inventory management system. In case requests also automatically involve individual production work stations, incorrect requests can even lead to production stops. This example demonstrates that a seemingly “lean” process can lead to chaos in cases of process instability or disruptions.

A lean excellence approach needs to take such dependencies into consideration. However, targeted measures can be “lean” even if they initially seem “unlean”, if they ensure process stability, which is a substantial prerequisite for “lean”. To achieve this, all involved parties need to have a fundamental and pervasive understanding of lean initiatives – lean excellence!

Focus on core processes

Core processes for the service provision of first tier suppliers can be derived directly from the performance agreement with the OEM. Initially, the customers decide which processes they will compensate. The first tier suppliers are required to be transparent about the process landscape that is necessary for the desired performance.

A classic lean approach offers a distinction between value adding and non-value adding processes and offers possibilities to eliminate the latter as far as possible. Lean excellence goes one step further.

Since the business model is consistently oriented on core processes, supportive processes are preventable where appropriate. The business model also largely determines the process landscape. A process analysis can only optimize areas within the limits that are determined by the business model and the corresponding remuneration model. The strategic restructuring of the business model based on lean principles has priority. However, competitive and industry environments also need to be taken into account.

In a second step, crucial supportive processes for the support of core processes need to be defined to achieve a detailed design of a “lean” business model. This needs to be communicated accordingly to the customers. Core processes need to be organized “lean”, costs for crucial supportive processes need to be minimized and their process stability ensured.

In practice, supportive processes are often not clearly defined according to the expected scope, which can later lead to unexpectedly high administrative overheads. These may then have to be compensated by the generated margin. Typical examples are processes that are disrupted by the OEM due to attempts to introduce new components or products. Renegotiations with the OEM at this late point are often difficult; the “burden of proof” often rests primarily with the first tier supplier.

In order to fulfill a lean excellence approach the first tier supplier should conduct a precise analysis of the necessary overall process landscape and include a risk assessment for any possible administrative efforts into the calculation of the business model.

The aim should be to provide the OEMs with full transparency in terms of all efforts concerning their demands – to “hold a mirror up to them”, in order to ensure that additional activities to the core process are remunerated if necessary.

To sum up, lean excellence not only focuses on “lean” core processes and the prevention of “non-value adding” processes, it also implies the consistent orientation of business models on core processes and the integration and marketing of necessary supportive processes into business and remuneration models.

Lean collaboration – collaborative organization of supply chains

From the first tier suppliers’ perspective, in addition to the establishment of excellent customer relations, optimization potentials in the procurement sector need to be developed through a collaborative organization of the supply chains.

Principally, decisions of first tier suppliers in relation to stock keeping are determined by component, supplier and customer related parameters. Stock keeping can be organized through safety stocks, conventional stocks or assembly buffers. Thereby, the guaranteed supply reliability of the OEM has particular priority. The tier supplier needs to be able to justify all stocks towards the OEM if necessary. Inventory levels are one of eight waste factors (Japanese ‘muda’) and the OEM can potentially question their necessity in a logistics audit.

Whereas a classic, potentially misunderstood “lean” approach affects the reduction of such inventories, in practice many aspects are crucial: the first tier supplier has to honor customer agreements, which may include safety stocks for compensation of transport and supply failures. Long access routes or imports from countries with unstable customs processing complicate inbound logistics processes and need to be compensated by stock keeping. Moreover, erratic demands of rare variants tend to increase necessary stocking. Therefore, the basic “lean” concept cannot always be implemented consistently.

Thus, a lean excellence approach should focus on an overall cost-effective supply chain. If all involved parties are transparent in regards to processes and stocks this can be achieved through a collaborative organization of logistics activities in which various local requirements and interests in relation to certain stages of the supply chain are negotiated.

At this point credit procedures can be used as an example. In many cases OEMs already apply these. In these cases, the OEM “count” the number of products that they have already completed and compensate the first tier suppliers for a respective number of corresponding components. Differing quantities, for instant caused by quality shortcomings, are charged via an exception process.

In a manufacturing network that comprises of the OEM, first and second tier suppliers, the flow of materials needs to be as consistent as possible. Simultaneously, a stable flow of values and an automated processing of the material flow minimize efforts for supporting administrative processes. If this principle, which generally starts with the product passing a particular reporting point, is pursued consistently with the help of self billing, expenditure in all supply tiers can be decreased.

Since only exceptional cases can be analyzed in detail the individual parties of the supply chain need to trust each other and recognize that a “lean” organization of collaborative processes is of mutual interest. The collaborative organization of supply chains and corresponding support processes can be developed in collaborative teams. In these teams, rules and guidelines can be discussed for instance, the question of how to deal with lower value differences in credit items without unnecessarily increasing controlling costs.

The optimum organization in terms of costs and effort is in practice often only possible if there is an established relationship of trust and transparency about internal processes between both parties. This ideal situation is called “lean collaboration”.

The organization of stock in supply chains needs to be regarded similarly. Inventories should only be created in case of circumstances that need to be countered, which are not represented by either party of the supply chain.

Connected with this is the question of transfer of ownership. If this transfer takes place in case of any physical crossing of factory borders by products or intermediate products (the typical case), then there needs to be evaluations of stock in every “tier”. In a particular case the business model of one first tier supplier could rather be regarded as a service model: The OEM directly negotiated prices and delivery conditions with the second tier. The first tier supplier only retrieved central contracts. These were situated with the OEM, causing many coordination efforts because price and component validity were not always transparent to the first tier supplier. This also affected valuation prices for it’s own component stock as well as purchase and sales prices.

In such a business environment one could question if evaluation and property of components are inevitable. The evaluation process originates from a classic business model, its derivation of supplier and customer relations aswell as the accounting aspect of these. According to a lean excellence approach “value” is only created if a desired product is produced and delivered on the requested date, and consequently compensated by a customer. A product that remains in the warehouse due to wrong evaluations is a waste (“muda”). A process for the evaluation of such stock is even more “muda”. Therefore, according to a lean excellence approach these activities need to be reduced. Since an evaluation process, provided that the supply chain cannot operate without stock, needs to exist for tax reasons alone, it is worthy to consider an establishment of the process in aforementioned scenario with the second tier supplier until payments are made by the first tier supplier. In this case, the transfer of ownership would take place subsequently and not at the time of delivery (vendor consignment stock).

In aforementioned case the first tier supplier operated according to both demonstrated models, depending on the OEM. The different positioning of the processes was customer-driven. In case of a subsequent transfer of ownership the first tier supplier operated without an own value purchasing component stock, their accounting processes were therefore highly simplified.

The subsequent transfer of ownership in terms of payment flows is comparable to the classic model of delivery and invoice in many cases, due to payment conditions, dynamic safety stock and ‘lead time’ of the involved parties. An optimized flow of materials and fast material throughput generally allows that this model is cash flow neutral when directly compared to the classic model.

To sum up, lean collaboration can be regarded as a bundle of measures within the scope of the lean excellence approach that aim to achieve optimization reserves through a collaborative organization of supply chains. With appropriate contractual basis between the partners, this can be achieved by the replacement of classic business models with consistent “lean” oriented processes.

The consistent focus of corporate culture on customers and customer needs

The focus of a business model on few or one single OEM often creates a strong dependence on these. Furthermore, the processes of a first tier supplier are often closely linked to those of the OEM due to just-in-time / just-in-sequence scenarios. Therefore, they increasingly have to satisfy the requirements of the OEM. If first tier suppliers are located on-site of the OEM, they additionally have to consider a high level of transparency in their processes. In such cases, the customer quickly registers even small shortcomings and it is all the more important for a first tier supplier to align their business model according to the customer and the customer’s needs.

Insufficient customer orientation is often caused by deficiencies in corporate culture, management structures (“empowerment”) or by few effective or non-transparent processes within the company. It is not sufficient to maintain good customer relations solely on top-management levels; the corporate culture of customer care needs to be practiced at all operational levels and represent the ethos of the company. The establishment of personal contact on various staff levels enables a first tier supplier to familiarize themselves with the needs, expectations and wishes of the OEM.

Consequently, this promotes a collaborative and cooperative relationship that often enables informal and fast solution finding of possible difficulties in practice.

In this particular case, an evaluation of the first tier supplier’s workload proved that the supplier invested a disproportionate amount of time in self-imposed administration, maintenance and support processes but only relatively little time for active customer management.

In such cases, the OEM tend to apply escalation mechanisms more quickly when problems arise.

Measures for improvement of “customer culture” are often accompanied by measures for the improvement of corporate culture. They lay the foundations for superior “lean” solutions and promote the business model with the OEM in the long term.

The maintenance of a continuous and consistent improvement culture

The Japanese Kaizen management concept proclaims “change for the better”, the turning away from pure result-orientation to a focus on efficiency-relevant practices and the organizational environment during production. The emphasis here is on the reduction of “muda”, waste, with the help of continuous improvement efforts that aim to reduce non-profitable activities.

A first tier supplier should aim to implement a continuous improvement process in the context of a lean excellence approach within the company and to train staff to be able to create ‘lean’ business processes largely independently.

The continuous realization of suggestions for improvement by staff in their own working groups leads to a significant increase of productivity in the long term compared to the detailed planning of extensive concepts by management and executives with the aim to enforce radical interventions into existing work flows.

This approach is the opposite position to reengineering – a fundamental rethink and radical redesign of existing business processes – and promotes theoretically efficient but possibly culturally unaccepted and practically untested new processes.

Contrary to the philosophy of the lean excellence approach, many measures for improvement still originate from management levels. However, how can the basis be motivated to initiate and implement improvements if they are continuously “over ruled” and not consulted or integrated into these processes? Faster regulatory circuits within improvement cycles usually exist if a systematic “empowerment” and a basis team structure that is enabled to initiate and coordinate improvements replaces a centralistic improvement system that is characterized by staff positions.

This implies an environment that is anxiety-free and promotes creativity, allowing for discussions of new ideas and constant evaluation of implemented processes.

Furthermore, the authentically experienced self-instruction of measures for the improvement of quality, time efficiency and cost structures in work processes promote an identification of staff with the company and the product and dismantle any possible alienation, leading to higher job satisfaction.

Boundary condition: supply reliability of the OEM

The guaranteed supply reliability of the OEM has absolute priority in a competitive critical environment and needs to be assured by corresponding precautions.

In the “leanest” case the replenishment of supplies is realized by just-in-time / just-in-sequence deliveries of the second tier suppliers to the first tier suppliers and from there to the OEM. Consequently, the first tier supplier can only work with assembly buffers and avoid conventional stock keeping. However, this is only possible in very stable scenarios with certain boundary conditions.

However, stock provisions of necessary components that guarantee the supply reliability for the first tier supplier are inevitable in less stable scenarios with certain interferences. Examples for such interferences are: an unpredictable request by the OEM on short notice, incorrect requests, last-minute variation changes, a higher risk of rejections in the internal production process and if suppliers or shipping companies fail to meet deadlines. The first tier supplier needs to decide whether or not a guarantee of supply reliability for deterministic components is ensured with classic safety stocks or needs to be realized with with a dynamic safety period. Here, the frequency and variance of component requests is of vital importance: Rarely requested components that tend to have short-term demand-peaks with little response times are generally disposed via safety stock components and regular components of flow stock.

In order to guarantee supply reliability current stock information on respective disposition systems need to be shared to avoid stock blurring that can distort the planning screen.

Whereas nightly or weekly planning runs are sufficient in classic logistics scenarios, JIT scenarios often involve underground procurement planning – in case of daily repeated supplies a necessity provided they are not organized in a Kanban system anyway.

Therefore, prompt inventory entries are of vital importance. The warehouse structure should also be transparent with regard to stock numbers. In one specific case the first tier supplier was not able to distinguish their stock of components in their incoming warehouse from their WIP (work-in-progress) inventory during their disposition. During supply shortfalls they needed to go into production and the warehouses and check the number of components that had not yet been used in order to determine whether or not the stock would last until the next supply truck arrived. Therefore, stock accuracy in the planning system is an essential requirement for a successful disposition in a JIT scenario. In order to achieve this it is necessary to establish a timely booking of stock movements, the useful division of several stock types and measures for the reduction of stock-keeping errors.

It can be concluded, that the measures for guaranteed supply reliability of the OEM often result in additional expenses. Scanner systems may reduce the necessary process effort for more precise inventory entries and improve the booking quality. However, they can hardly compensate for necessary increases in inventory.

In particular cases, the guarantee of supply reliability with the help of individual measures needs to be assessed in a risk analysis. Since production stops that are caused by stock shortages can lead to enormous revenue loss, measures for supply reliability do not contradict with the lean excellence approach. On the contrary: supply reliability is a boundary condition for lean excellence.

Just-in-sequence supply

JIT ensures the prevention of overproduction and stock through timely production of customer requirements. Therefore, various components need to be provided during assembly. In case of a wide variety of components multiple variant parts need to be in stock and positioned in line. Warehouse space needs to be available for large prefabricated modules. Since space is often limited but it is also undesirable to cram assembly lines with provided material the first tier suppliers may also sequence corresponding modules. They can put the components in chronological order according to their manufacturing sequence and place them in an area that is specifically intended for this purpose. The provision for assembly then happens within a factory’s just-in-time sequence reference.

This ensures a “lean” supply of material for the assembly. However, it cannot be regarded as a “lean” overall solution. The workload that is required for unpacking and sequencing of components as well as additionally required space increase the total costs. Therefore, a correct chronological order of supplies through the supplier is desirable. The communication of corresponding sequence-requests for suppliers and the supply and placement of trucks with sequence references minimize the effort in the overall supply chain and is therefore cost effective.

Therefore, the lean excellence approach even allows for a reduction of stock that is predetermined by size and number of Kanban containers in alternative traditional just-in-time scenarios. The larger the wealth of product variants, the greater the effect.

Consequently, lean excellence requires a just-in-sequence supply in case there are modules with larger space requirements and/or large variant diversity. However, JIS can principally be used for every variant component. It is useful to assess the respective expenses and income. As a requirement for a JIT/JIS supply, the supplier needs to be able to manage and react to sequence resquests. Without this precondition it is essential to establish a collaborative analysis of faults and initiatives for a mutual and continuous improvement process.

Conclusion

In the development from component suppliers to system suppliers or overall solution suppliers the logistic integration capacity of the first tier suppliers plays an increasing role. Thereby, transparency towards the OEM is increased. In an environment of excellent supply chain performance it is important to be aware how to maintain and further improve this excellence. In order to develop and maintain a leading position in logistic performance across from the OEM, the first tier suppliers need to use a reference model that aids them in their selection and prioritization of improvement measures and corporate initiatives as well as to remain competitive.

The concept lean excellence that is partially outlined here is an overall approach that aims to reach the best-in-class status in a lean scenario. Neuralgic points that are mentioned require a fundamental and pervasive understanding of lean initiatives. Thereby, lean excellence is not a ‘best-of’ collection but rather the contemplation of original motivations for the introduction of lean processes and the situational adaption onto the respective business scenario.