FIGURE 3-4: Average inventory level.
The way to balance the priorities of purchasing and logistics is to use a total-cost analysis approach to sourcing decisions. Make sure that you’re evaluating all the elements that will cost you supply chain money. You may find that a nearby supplier that can deliver in small batches and at a low transportation cost is a much better option than a lower-cost supplier in a distant location that would require you to spend more money on transportation and inventory.
Chapter 4
Optimizing Your Supply Chain
IN THIS CHAPTER
Depending on the product or service that you’re selling, you probably have many alternatives to choose among when designing your supply chain. You may have choices of how and where to buy your materials or make your products. Perhaps you can even choose different ways to deliver your products to your customers. This chapter discusses techniques to optimize your supply chain to ensure that you’re creating the most value, in the most sustainable way, for you and your customers. It also talks about how to implement improvements to your supply chain through cross-functional projects.
Designing Your Network
It’s often useful to think about your supply chain as a network. Networks are made up of nodes and links. As Figure 4-1 shows, every stop that a product makes between raw materials and a customer is a node of the network. A factory is a node; so are a warehouse, a distribution center, and a retail store. Nodes are connected by links. Generally speaking, links are forms of transportation, such as a ship, a railroad, a truck, or a drone. Products move through a supply chain, flowing through links and stopping at nodes.
FIGURE 4-1: Nodes and links in a supply chain.
Your goal for any supply chain is to deliver maximum value at the lowest cost. One way to achieve this goal is to change the nodes and the links. Perhaps you can lower the costs of your raw materials by sourcing them from a different supplier, which means you’d be changing one of your nodes. Changing a node also means changing the links that connect that node to the rest of your supply chain.
Making changes in the links and nodes is called network optimization. One approach to network optimization is called value-stream mapping (VSM). Figure 4-2 shows a simple example of a VSM. The more of your supply chain that you’re trying to optimize, the larger — and more complex — your VSM becomes.
FIGURE 4-2: Example VSM.
VSM is an important part of a Lean professional’s tool kit, as you see in the next section, but network optimization can be done on a larger scale with sophisticated mathematical analysis. Several supply chain software platforms are available to help with analyzing supply chain flows, starting with spreadsheets and moving up to complex supply chain modeling tools. In addition to factoring in the costs for buying materials and transporting them between nodes, some network optimization tools can factor in variables such as supplier performance and the effects of tariffs and taxes. The sections on supply chain modeling software and business intelligence software in Chapter 12 discuss this topic in more detail.
Improving and Innovating Processes
Supply chains are made up of people, processes, and technologies. All three components need to improve over time for a supply chain to remain competitive. People get better through education, training, and experience. Technology gets better through improvements in hardware and software. Processes get better through innovation and … well, process improvement.
Three approaches to process improvement are particularly useful in supply chain management: Lean, Theory of Constraints, and Six Sigma. These approaches share a goal — process improvement — but achieve it by focusing on different aspects of a process. Table 4-1 highlights the primary focus of each method.
TABLE 4-1 Three Approaches to Process Improvement
| Method | Focus |
|---|---|
| Lean | Reducing waste |
| Six Sigma | Reducing variability |
| Theory of Constraints | Relieving bottlenecks |
Lean
Lean is an approach to supply chain management that originated with Toyota, which is why you may hear it referred to as the Toyota Production System (see Chapter 3). The idea behind Lean is that you use the least amount of time, effort, and resources by maintaining smooth and balanced flow in a supply chain. The best way to accomplish this goal is to have logical, disciplined processes and excellent communications.
Many people make the mistake of thinking about Lean as a training program or a set of tools that a company can buy. But Lean is really a philosophy — a different way of looking at how businesses create value. For Lean to work properly, everyone in the company needs to be working together to eliminate three things that cause inefficiency:
Muda: Waste
Mura: Unevenness or variability in operations
Muri: Overburdening of people and equipment