UNIT IV- LEAN SUPPLY CHAIN MANAGEMENT

Learning Objectives:
1. Understand the historical development of lean supply chain principles.
2. Apply lean principles to improve supply chain efficiency.
3. Evaluate cost-to-serve metrics for optimizing supply chain performance.
4. Analyze factors driving the adoption of lean practices.

Pre- test

Essay questions

1. What is the equivalent of the Toyota Production System (TPS) in the hospitality industry?

2. What are the two key principles of lean operations in a hotel or restaurant setting?

3. What is the primary focus of lean operations in optimizing a hotel's or restaurant's performance?

4. How does the ideal supplier base for a lean hotel or restaurant differ from a traditional approach?

5. What are the key characteristics of ideal supplier relationships in a lean hospitality environment?

Origins of Lean Supply Chain Management

- from the beginning of the 1950s to the end of the 1980s, Toyota led Japanese automotive industry
created a unique production/manufacturing system
- known as the Toyota Production System (TPS), now more commonly known as lean manufacturing
- ‘lean’ was first coined in a large-scale research programme called IMVP (International Motor Vehicle
Programme) initiated by MIT (Massachusetts Institute of Technology)

Lean Manufacturing
- comprehensive production management system developed in Toyota originally but later gradually
refined and improved by many scholars and practitioners around world
- emphasizes the optimization across organizations and supply bases not just the functional silos
- promotes close partnership relations with the first-tier suppliers and other strategic partners in the
distribution channel
- created the tiered supply base structure

Major Features of Lean Manufacturing

1. increased efficiency through the reduction of waste and error
2. reduced carrying cost of inventories achieved by manufacturing in small ‘batches’

Lean Supply Principles

1. Supply from a smaller 1st-tier supply base

- The suppliers directly supply the buyer is called the first-tier supplier

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 - the first-tier suppliers’ group is called the supply base
- The number of suppliers in the supply base for the lean structure is about 200 to 300
2. Develop appropriate close partnership
- using a much smaller supply base, the lean producer can manage to spare more time and other
resources to interact with each and every one of the first-tier suppliers.
- made it possible for the operational relationship between the buyer and the suppliers to become close
- typically entail the shared vision and mission, joint design and development of new products,
strategically collaborated capital investment planning, capacity synchronization, coordination on JIT
delivery and inventory optimization
- contractual terms for the suppliers are normally from medium to long term
- communication and engagement are at multiple levels in both formal and informal regularity
3. Supplier selection based on performance
- lean producers will base its ranking and selection on a number of higher-level performance focused
criteria, such as quality standard, R&D capability, delivery reliability, management system and standard,
commitment and relationship
- price will also be considered as one of the criteria, but it will always be referenced to the value that the
company can offer
- once selected as the suppliers, the lean producer will treat them as the ‘family member’ and an open
and trust culture will be enforced
4. Single or dual sourcing only
- lean producer tends to prefer the ‘single sourcing’ or ‘dual sourcing’ strategy, not ‘multiple sourcing’
- single sourcing means the lean produce will source the product from only one supplier; no back-up
suppliers and no duplicated suppliers for the same product.

Advantages of Single Sourcing:

1. consolidates the volume to one supplier so that the unit cost can be minimized
2. provides the convenience and focus when research and product development is required
3. helps to develop close partnership

5. “Market price minus” rather than “Supplier cost-plus”

- first determine the market price of the supplied component through market research and
benchmarking; then take away (minus) the agreed reasonable profit margin that the supplier need to
make on each unit; what’s left is the ‘target cost’
- If the target cost is lower than supplier’s actual cost, the buyer and the supplier will then work together
to lower the cost to meet the target cost
6. Early and close engagement with suppliers for New Product Information
- lean supply system chooses to identify its suppliers first and then get them involved in the design and
planning stage for the new product introduction
- suppliers will have plenty opportunities to contribute their expertise to the design and by working with
other experts from the buyer innovation and new ideas can be generated much more effectively
7. Synchronized flexible capacity
- In the lean supply system, the assigned capacity for both suppliers and buyers are not permanently
fixed, because a fixed capacity will either be over-capacitated when the demand is low; or it will be
under-capacitated when the demand is high
- capacities of the supplier and buyers throughout the supply chain should ideally be synchronized to
achieve the optimum supply chain efficiency
- the key is to have the flexible capacity at each link of the supply chain
- capacity flexibility means having the ability to rapidly increase or decrease production levels, or to
shift production capacity quickly from one products or service to another
8. Just-in-time delivery
- a well-known lean approach
- an approach to material control based on the view that a process should operate only when a customer
signals a need for more parts from that process
- the process of creating goods in a ready state, or completing their production, so that a minimal
inventory can satisfy demand and a delivery can take place with immediate effect in order that
consumers receive what they want precisely when they want
- goods are produced and delivered just-in-time to be sold
- parts are produced and delivered just-in-time to be built into the subassemblies
- throughout the supply network, the trigger to start work is governed by demand from the customer
- lean supply chain can be conceived as a chain of customers, with each link coordinated with its

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 neighbors by JIT signals
- parts are pulled through the chain in response to demand from the end-consumer
9. Incentive and reward alignment
- lean supply chain pays great attention on the alignment with the suppliers through incentive and
reward
- the objective of the lean producer as the buyer is not to take piece of profit from the supplier, but to
work with the supply to get the cost down so that together they build a stronger supply chain
- contributions on better design and quality improvement will be rewarded with more businesses
- not only aligns the value adding to the reward, but also significantly boosts the suppliers’ motivation
and commitment in creating a competitive supply chain
10. Willingness to share a substantial part of its proprietary information
- lean supply chain also represents a culture of mutual trust loyalty at least and usually within the supply
chain
- suppliers are willing to share substantial amount of proprietary information with the buyer
- this openness and trust not only make the supply chain much more visible, thus easy to coordinate, but
more importantly it creates synergy between the parties

Focusing on Cost-to-Serve
- in a lean supply chain, a cost-cutting idea can only be acceptable if it passes the ‘cost-to-serve test’.
- the focus of lean is not on the cost but on the cost-to-serve
- fundamental concept of lean is identifying and eliminating waste in the material, processes, time and
information, and adding value perceived from the eyes of consumer
- waste is the one to be cut across the management spectrum, not necessarily the cost
- when a cost is identified as the waste, which does not seem to have added any value, it should be rightly
slashed
- if the cost that does add value to the supply chain has been cut, value has been cut with it

Toyota’s three original criteria for value adding activities are:

1. there must be physical changes
2. it must be concerned by the customer
3. it must be right first time

Wasteful Activities
- non-value adding activities

Cost-to-serve
- lean supply chain identifies and eliminates the non-value adding or non- ‘serving’ activities
- measure for how wasteful is a cost or a cost incurring activity
- Cost-to-serve = Total cost involved /Customer perceived value and service

Drivers for Lean Supply Chain

1. Waste Reduction
- waste can be found from all aspect of business activities
- supply chain members must work together to identify and eliminate all those possible wasteful and non-
value adding elements in order to become lean
- will lead to reduction of cost to the supply chain
- when the cost is reduced, assuming that the output of the supply chain remains the same, the supply
chain efficiency improves and cost-to-serve reduces.
- collaborative policies and jointly formed multifunctional teams are much more effective in identifying
the waste lurking in the gaps of the supply chain

Types of Wastes in Lean Supply Chain:

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2. Demand Management
- the performance of the supply chain viewed by the end-consumer is largely hinged on how the
consumer demand is managed, fulfilled and satisfied
- process that businesses use to ensure they meet customer demands.
- involves planning, controlling, and regulating the product demands or services to maintain the right
supply level and meet customer requirements.
- the status quo of the demand management in supply chains is now a measure of supply chain capability
which is often facilitated by sophisticated POS (point of sale) data communication system
- how well firms manage the demand and demand related information such as forecasting and market
signals is also reflected in how they view and manage their collaboration with buyers and suppliers
- collaboration must begin with management’s understanding and acceptance of the concept, followed by
a communicated commitment throughout the managers as well as the workforce
- regular meetings and reviews between the partners should be hardwired into the processes.
- documentation, such as supplier’s manual, could be a great building block.
3. Process Standardization
- also known as Business Process Management (BPM)
- process of making processes repeatable and predictable
- enables the continuous flow to run through the company and the supply chain
- standardized processes can only be achieved through wide range of close collaborations between the
members of the supply chain
- typical processes to be standardized are planning and production
- products and material standardization can help to share the subcomponents across the product lines,
which will lead to volume advantages, consistency and operational cost savings

Flow
- uninterrupted movement of a product or service through the system to the customer
- best enabled when material and processes are standardized across the supply chain to reduce the
complexity

Process Flow
- helps to see and understand the value stream of the production and the supply chain
- represents a shift from the vertical organizational structure and functional silos to a horizontal
connectivity of processes in a stream of value
- linked the business activities to the need of customers
- managing the supply chain process flow means focusing on system efficiency rather than activity
efficiency.

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Steps of Process Standardization

4. Engaging People
- task that everyone in the organization must get involved
- improvement ideas and innovative changes are often come directly from the people who do the job

Importance of Engaging People in Supply Chain:

1. By engaging everyone in the company, you have dug into the goldmine of intellectual assets of people. Their
knowledge and expertise have been mobilized to contribute to the value adding activities.
2. It is the best way to motivate them. People are the only active force in the business. How powerful this force is
depends almost entirely how well they are motivated for the common courses of the supply chain.
3. It is the only practical way to change the organizational culture; culture is can only be carried and displayed by
people. A lean supply chain can be built to last if and only if it is created with the embedded culture.

5. Collaboration
- coordinating with internal departments and external partners to sustain an optimized flow through the
supply chain in order to efficiently meet demand and ensure on-time, in-full delivery
- can take place between organizations within the supply chain or across different supply chains.
- results in shred resources leading to high level of economy of scope
- reduces the business risks for the partners by sharing it and jointly averting it
- it promotes technological advancement and innovative product and service development
- Many is created from bottom-up approaches
- practice and experience in working together in the past will have laid a good foundation; managers then
build on that to expand the scope of activity and formalize the collaboration through institutionalizing
the processes

6. Continuous Improvement
- an ongoing effort to improve products, services or processes
- kaizen is the Japanese word for continuous improvement

Key Features of Kaizen

1. Improvements are based on many, small changes rather than one radical changes
2. Ideas of changes are often come from the workers at the operational front
3. Small improvements do not usually require any capital investment or major change of process
4. All employees are engaged to participate to seek the ways to improve their own performance
5. Encourages the workers to take the ownership of their performance

Three main components of the Kaizen methodology are:

1. Housekeeping:
- also known as "5S."
- consists of five steps: Sort, Set in order, Shine, Standardize, and Sustain.
- designed to create a clean, organized, and safe workplace that is conducive to productivity and efficiency
2. Elimination of Waste

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 - focuses on identifying and eliminating waste in all forms
- by reducing or eliminating waste, organizations can improve quality, reduce costs, increase
productivity, and improve customer satisfaction
3. Standardization:
- ensure consistency and reduce variability
- involves creating clear procedures, work instructions, and standards that are followed by all employees
- helps to reduce defects, improve quality, and increase efficiency by ensuring that work is performed in
a consistent manner

Lean Process Mapping Tools

- created originally by the Toyota production systems
- visualize the material flows in the production lines and in the supply chains; to see where the waste is

1. Value Stream Mapping

- designed to map out the value adding and wastage from the supplier to customer, including logistics,
purchasing, order fulfilment, production processes

2. Time Based Process Mapping

- ‘walk through’ tool to identify and map out the value-adding activity time and non-value adding or
waste time in every steps that the material has gone through

3. Process activities mapping

- maps out the four different activities: operation, transport, inspection and storage that the materials
have to go through
- keys are assigned to each activity types to help visualization
- plan flow diagram can also be added to optimize the flow

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4. Supply chain response matrix
- evaluate the inventory and lead times incurred by a supply chain in maintaining a given level of
customer service
- used to identify large sects of time and inventory and allows managers to assess the need to hold the
inventory

5. Logistics pipeline map

- a compliment to the supply chain response matrix
- shows the accumulation of process time on the horizontal axis and of inventory levels on the vertical
axis
- shows exactly where the inventory and time accumulate within each operation

6. Production variety funnel

- visual mapping technique that plots the number of product variety at each stage of the manufacturing

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 process
- used to identify the point at which a generic product becomes either increasingly or totally customer
specific

7. Quality filter mapping

- designed to identify quality problems in the order fulfillment process or the wider supply chain
- shows where three different types of quality defects occur in the value stream: service, product, scrap

8. Demand amplification mapping

- graph of quantity against time
- shows the batch sizes of a product at various stages of the production process
- may be plotted with a company or along the supply chain
- can be used to show inventory holdings at various stages long the supply chain

9. Value adding time profile

- plots the accumulation of both value-adding and non-value adding costs against the time
- excellent tool for looking at time compression or mapping out where the money is being wasted

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Guide Questions:
1. How did the Toyota Production System (TPS) evolve into lean manufacturing, and what were the key
principles that contributed to its development?
2. In the context of hospitality, how can lean supply chain principles such as close supplier partnerships and just-
in-time delivery improve the efficiency of inventory and supply management?
3. How can the concept of "cost-to-serve" be applied to the hospitality industry, particularly in managing guest
services and reducing operational costs without compromising quality?
4. What are the main drivers for adopting lean supply chain practices, and how do factors like waste reduction,
demand management, and continuous improvement contribute to a leaner supply chain?
5. How can hospitality businesses use tools like Value Stream Mapping and Time-Based Process Mapping to
identify inefficiencies in the supply chain, such as food and beverage delivery or room service operations?

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