 As I’m starting up a new lean sigma mentoring relationship next week I’ve been pondering roles and approaches: what will I do the same, what will I change as I approach a new student? As a lean sigma sensei my job is to assist the organization in implementing lean and six sigma by guiding and teaching. The knowledge transfer approach is see one, do one, teach one. At first the apprentice just watches. Usually I don’t explain what I’m doing, I just run the kaizen event. After a time the student is called upon to perform some of the routine activities. Then comes the day when the roles start to reverse; the student tries to run a kaizen and the sensei observes, intervening off line, giving feedback, asking questions. As confidence and experience grow the student becomes the sensei when able to teach others.
I’m reminded of something James Womack once wrote "We’re now trying to write down all of the techniques you need to actually become lean. The Toyota teaching method is what we would call sensei-deshi, with the sensei being the great teacher and the deshi, the student. Basically, here’s how it works at Toyota: The kids get out of the university and join the company. Then they’re told, “Okay, you know how to do math, and you know how to read. Forget all the rest of the crap. We hope you had a lot of party time because now you’re going to be working long hours for the next 40 years, and we will teach you what you need to know. We’ll start by having you stay right here and look around for waste—muda in Japanese— and we’ll be back in a few hours.” When the teacher comes back, he’ll ask the employee to tell him all about the waste he sees. It’s an empirical teaching method in which the sensei simply asks questions: “What do you think about this operation?” “Why aren’t you looking over here?” “Over there?” “Why is something happening this way?” They start with applications, and let you figure out the principles. Generally, the way we teach in the West is to start with principles, and then let the pupil to work out applications."
 Recently I heard a speaker disclaim that Lean was just warmed over and repackaged Just-In-Time; nothing new. For some reason I dismissed the thought as rubbish. But his comments got me thinking. So, what’s different about Lean?
In The Machine That Changed the World, Womack & Jones coined the term "lean production" as a synonym of "JIT," it has caught on and made the earlier label somewhat obsolete. People who still talk about JIT are often dismissed as stale peddling yesterday’s panacea, while those who say the exact same things but call it "lean" get attention. As interest in Lean grows, as the philosophy Lean espouses become better understood, the application has moved from the factory floor to cover product design, office work, distribution, and services. And new terms follow: you now hear about "lean manufacturing", "lean management", "lean enterprise", "lean supply chain", and even "Lean Six Sigma".
Wikipedia defines Just In Time as an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. While Lean manufacturing is defined as a management philosophy focusing on reduction of the 7 wastes (Over-production, Waiting time, Transportation, Over-processing, Inventory, Motion and Scrap) in manufactured products. By eliminating waste, quality is improved, production time is reduced, and cost is reduced. At least in my early experience with JIT we had little awareness of being in a system and about making culture change, we attempted to change the production process without much regard for scheduling, customer service, people. We thought all we had to do was rearrange the deck chairs. We made some progress, improved productivity certainly. But did we understand what we were doing? Later, with Lean, we learned the logic and philosophy of what we were doing. JIT seemed more like a formula and Lean more like a cultural awakening.
 Pete Sinisgalli, president & CEO of Manhattan Associates was the guest speaker at the Atlanta Council of Supply Chain Management Professionals Roundtable on Monday night. His talk was on Trends in Supply Chain Software Industry. Starting with the perpetual problem statement "Why are our inventory levels up?". Sinisgalli’s premise is that the world is ever more complicated; he lists several reasons:
- Globalization: more players, time zones, languages cultures, touch points, hand offs
- Outsourcing: complicated control of services and products
- Regulations: SOX, ePedigree, Homeland Security
- Shorter product life cycles: time to market and excess inventory
- Channel convergence: phone, web, retail
- Integration: collaboration across cultures and languages
- Emerging technology: RFID, Voice Automation
All leading to increases in cost, risks, and complexity that will be a barrier for some and an opportunity for others. Sinisgalli goes on to describe the "Bullwhip Effect" of inventory accumulation along the supply chains as a result of all of the above. There are a number of causes that contribute to the Bullwhip Effect:
- Demand signal processing: Use of recent demand to generate a forecast, which tends to exaggerate both high and low swings, especially as that forecast is propagated back up the supply chain
- Order batching (or lumping): The end retailer/distributor combines potential smaller orders to gain efficiencies in administrative costs, volume-pricing opportunities, and/or transportation savings
- "Gaming" of tight supply products: Buyers at each level "over order" to ensure supply or mitigate against allocations
- Price variations: Deals offered at any level promote orders that exceed true demand, followed by long periods of no orders while true demand continues
Individually and together, these factors cause spikes and valleys in orders in the face of relatively consistent and predictable end consumer demand. These spikes confuse members of the supply chain on the true level of demand, causing them to produce and stock goods according to the spikes, resulting not only in excess inventory, but often more manufacturing and distribution assets than should be required. Material planners often get into more trouble when they stock out then when they create excess. The solution? The key is passing true end user demand back up through the chain, and then using this information to drive continuous replenishment strategies. Sinisgalli finished with a rhetorical question "Is your supply chain a necessary evil or a strategic weapon to differentiate and add shareholder value?" He propositioned that there are four phases or waves of supply chain maturity.
- Optimized execution
- Demand management
- Collaborative
- Predictive
Many (most?) companies are well along on stage 1 and beginning to look up and down stream. Few but the huge channel masters are able to drive collaboration, while he points to Dell and Wallmart as examples of supply chain leaders now pushing the frontiers by predicting supply disruptions and taking preplanned responses.
Pioneer in Quality Philosophy, W. Edwards Deming is widely held to have been one of the leaders who helped create the Total Quality Movement. Deming’s 14 points and his book “Out of the Crisis” are key documents in the development of Quality Systems for Business management. Dr. Deming is best known for his revolution in the quality and economic productions in Japan where from 1950 onward he taught top management and engineers, quality management methods. These teachings are widely credited for dramatically altered the economy of Japan. In recognition of his contributions the Union of Japanese Science and Engineering (JUSE) instituted the annual Deming prizes for achievement in quality and dependability of product.
Deming’s 14 Points:
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Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.
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Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.
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Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.
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End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.
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Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.
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Institute training on the job.
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Institute leadership. The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul as well as supervision of production workers.
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Drive out fear, so that everyone may work effectively for the company.
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Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.
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Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.
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Eliminate work standards (quotas) on the factory floor. Substitute leadership. Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.
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Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. This means, inter alia, abolishment of the annual merit rating and of management by objective.
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Institute a vigorous program of education and self-improvement.
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Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.
A day ago I had a debate/discussion with a fellow lean thinker on EOQ, or Economic Order Quantity. It seems some think EOQ is incompatible with Lean and Just In Time. So lets define what we mean by EOQ. EOQ was first developed by F. W. Harris in 1915, though R. H. Wilson is credited for his in-depth analysis of the model.  Calculation of the simple form of economic order quantity is not difficult if you remember:
“The square root of two Quarter Pounders (w/) Cheese.”
EOQ=√(2QP/C)
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Q = Quantity in annual units |
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P = Placing an order cost |
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C = Carry costs |
EOQ is our economic order quantity, or how much we will make or buy to minimize our total costs Q is the demand rate for our product P is our ordering or set up cost, this may be the cost of delivery of raw material, changing a die in a press, setting up an assembly area, all costs that under normal accounting principals are not considered direct labor costs and in some cases are rolled up into overhead costs C is the carrying cost which is the actual product cost required to produce an item, again this can be the unit cost of raw material, the direct labor and material costs, etc. times the bank or opportunity rate of inventory. For example if our average inventory is $10,000, and we could earn about 5%, or $500 (5% of $10,000) so we are missing out on an opportunity to earn $500 from the bank for our $10,000 investment in inventory. Also, the EOQ is based on a couple of assumptions: i) the demand rate is constant, and ii) stock is replenished as soon as it is depleted. What becomes evident in looking at the EOQ is that our lot size is proportional to our set-up costs and our demand rate, and inversely proportional to your product costs and the bank rate. So as you travel along your lean journey and start making some real progress your MRP may be giving you some undesirable results. For example; when you reduce your product costs your EOQ goes up and your inventory levels will go up which is contradictory to one of the expected benefits of your lean journey, i.e. inventory reductions. Also, one of the advantages of low interest rates is that you’d be able to borrow at a good rate to build a new warehouse for all of that excess inventory. So, don’t be fooled! You need to ensure that your inventory holding costs C are reflective of all the costs of inventory. Holding costs C won’t be prime plus, it can often be two or three times prime when you include warehouse rent, depreciation, insurance, taxes, cycle counting, obsolescence. You don’t want to forget the forklift driver and the forklift to move all this material around and the scrap created by engineering change orders and damage. Don’t forget the planning department, controlling the inventory is part of the cost to hold it as well. These costs can be 40% or more of the value of the inventory and are unlikely to be less than 15%.
What then of Lean and Just-In-Time with its philosophy of (essentially) very small orders/levels of stock (i.e. EOQ=1). Is thhere a contradiction between EOQ and Lean?
In fact there need not be. This is because in JIT we notice that we need not take ordering and holding cost as fixed. In particular, if we can reduce the cost of ordering then the EOQ will get smaller as well. For example, if we were to reduce P by a factor of 4 we would reduce total cost by a factor of 2 (note the EOQ would change as well, being halved). This, in fact, is exactly one of the ideas behind JIT to reduce (continuously) the cost of ordering P and holding cost C so as to drive down total cost.
Hence, when we are able to build close links with our suppliers so as to reduce ordering cost dramatically it becomes, just by a straightforward application of the EOQ formula, much more attractive to have small order quantities. In the limit, if the ordering cost P is zero (or the set up cost is zero), i.e. ordering is free, then we order each and every unit as we need it, that is one-piece flow (remember here our EOQ model assumes a zero lead time, i.e. orders received as soon as they are placed).
In summary then in order to reconcile JIT and EOQ we do not take cost of ordering P and holding cost C as fixed but seek to continuously to reduce them, thereby reducing the EOQ thereby simultaneously reducing the total annual cost.
- Harris, F. W. Operations Cost (Factory Management Series), Chicago: Shaw (1915).
- Wilson, R. H. “A Scientific Routine for Stock Control” Harvard Business Review, 13, 116-128 (1934).
- Wikipedia
- Dave Piasecki at Inventoryops.com writes about Optimizing EOQ.
- Picture of an EOQ slide ruler from the days before calculators.
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