The Limits of Lean

Ten years ago, "lean" -- the practice of eliminating waste and non-value-added activities in the business environment -- was the darling of the electronics industry. Like the total quality management (TQM) revolution of the 1970s and 1980s, lean spawned reams of research, consultants, practitioners, awards, and benchmarks. And, like the practices of just-in-time (JIT) and build-to-order (BTO), lean reduced the levels of physical inventory in the electronics supply chain.

There's no question that lean achieves results. In particular, Wall Street analysts that watch the electronics industry use low levels of inventory as a measure of sound financial management. Companies with too much inventory get hammered; companies with low levels of inventory are rewarded. In fact, until two natural disasters rocked the electronics industry in 2011, nobody questioned whether lean was the right practice for the high-tech supply chain.

In March 2011, an earthquake and tsunami devastated parts of Japan and shut down businesses, including wafer manufacturing facilities. In October 2011, flooding paralyzed Thailand, the global center of the hard disk drive (HDD) supply. In both cases, supplies of key electronics products were in jeopardy because years of lean had eliminated inventory redundancies in the supply chain.

Right after the Japanese disaster, Malcolm Penn, founder and CEO of research firm/consultancy Future Horizons, wrote on EBN:

Just-in-time, on-demand, lean, batch, and outsourced manufacturing models took over from inventory, work-in-progress, production lines, and multiple sourcing, despite the fact that the whole manufacturing process takes six months from wafer-build to end-product delivery...

We forecast in our January seminar that incidents like this were set to increase dramatically during the second half of this year, due to the fact the supply chain had been squeezed too far.

The electronics supply chain did not experience a widespread post-tsunami shortage, but that was more a coincidence than a planned strategy. Towards the end of 2010, semiconductor inventories were building up to "alarming" levels (in one researcher's words), and this cushioned the impact of the Japan crisis on the supply chain.

The industry wasn't so lucky in Thailand. Hard disk drive (HDD) production isn't expected to recover until the current quarter. In this case, redundancies were eliminated by clustering manufacturing plants in one centralized location. When the floods hit, an estimated 70 percent of the world's HDD production was affected.

This clustering strategy is clearly being reassessed. Seagate Technology LLC (Nasdaq: STX), for example, is reducing its number of inventory-holding JIT hubs in favor of value-added fulfillment centers closer to where end-customers consume products. Dennis Omanoff, Seagate SVP for Supply Chain & Procurement, noted in the comments to his EBN blog, Opportunities Beckon as Risks Rise:

I think it's important to have strategic partners with global capabilities and regional locations to service the requirements of a particular geography. This provides a more flexible network that can adapt rapidly to change while improving agility, responsiveness, velocity and customer service.

In light of the disasters, conversation around the supply chain has increasingly moved from lean toward terms like "resilient" and "agile." Gartner, in its annual analysis of leading supply chain companies, noted that global companies are at an inflection point:

The past year brought global-scale supply chain disruptions that impacted multiple industries, from chemicals to semiconductors and electronics to automotive. Increased demand uncertainty and more complex global supply networks dependent on high-risk geographic zones placed additional pressures on the ability of supply chains to deliver predictable results. These disruptions have even called into question whether supply chains have become too lean, requiring a fundamental change in approach.

In turbulent times, and in the face of growing complexity and risk, leading companies need sustainable, resilient supply chains that support profitability and drive industry leadership. This requires managers to re-evaluate the layout of their supply network designs to make them more resilient to future catastrophes. It may also include designing products that allow more flexibility in supply and manufacturing, increasing long-term alternative sources of raw materials and logistics capabilities, and expanding outsourced manufacturing capacity. Finally, with recent crises fresh in management mind share, now is a prime opportunity to push for more robust and funded risk management, including a "sense and respond" capability to recover quickly and profitably from disruptions.

It's unclear from Gartner -- and many other sources -- exactly how "resiliency" and "agility" are achieved. End-to-end visibility among partners is one of the components of a resilient supply chain, and an interesting thing in the electronics industry occurred after the Japan quake and tsunami. Rather than panic buying, customers were calling distributors to ensure components they ordered were actually on the shelf. They weren't interested in forecasts or whether orders were in process -- they wanted to know where their physical inventory was. This runs counter to some of the principles of lean.

Several other trends indicate the supply chain is moving toward a middle ground somewhere between lean and gluttony. In distribution, centralized hubs are being supplemented with local sales and support offices. Proximity warehouses are springing up closer to customers. Distributors even take advantage of opportunistic purchases to pad their inventory at times.

Lean has definitely increased the efficiency of the supply chain and has rendered many companies financially strong. But experts continually call for a reassessment of supply chain strategies, and lean doesn't come up in these conversations as much as it used to.