Minarai: apprentice, beginner; learn by observing January 18, 2006
Posted by Lawrence Loucka in : Consulting, Lean, Lean Sigma , add a comment
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. (more…)
Is Lean more than warmed over JIT? January 17, 2006
Posted by Lawrence Loucka in : Lean, Lean Sigma , 3comments
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?
Trends in Supply Chain Technology - Bullwhip January 10, 2006
Posted by Lawrence Loucka in : Supply Chain , add a comment
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.
W. Edwards Deming January 8, 2006
Posted by Lawrence Loucka in : Quality , add a comment
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.
So, what’s so wrong with EOQ? January 6, 2006
Posted by Lawrence Loucka in : Definitions, Lean, Supply Chain , 5commentsA 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. 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)
| where | Q = Quantity in annual units |
| P = Placing an order cost | |
| 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 there not a contradiction?
If 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 reduces. 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 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 (remember here our simple 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 (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).