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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. {complink 4842|Seagate Technology LLC}, 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.

10 comments on “The Limits of Lean

  1. _hm
    July 23, 2012

    These are very valuable lessons learned. Lean and other tools are good, but organization should fine tune it with their own need and sensitvity to supply / demand. Japanese have suffered most and sholud come out with innovation in lean strategy.

     

  2. FLYINGSCOT
    July 24, 2012

    I suppose it depends upon recent history and because we just experienced a natural disaster the downside of lean has become apparent.  Once the tsunami is a distant memory I imagine lean will become key again to reducing costs which is always the foundation of most sucessful companies.

  3. elctrnx_lyf
    July 24, 2012

    Automotive and consumer elctronics giants faced huge disruption in supplychain and it has created havoc in order fulfilment during natural disasters like Tsunami and floods. The agile and resilience are given more importance to reduce any risk associated with particular region natural calamities. 

  4. Eldredge
    July 24, 2012

    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.

    As one should expect, circumstances drive the conversation. When supply is adequate, companies can focus on driving out cost by implementing lean practices at their own facilities and their suppliers. When supply is critically short, lean is not the focus, and in some cases, is not possible to implement. A lean   line does no goods if major portions of it sit idle.

       

  5. prabhakar_deosthali
    July 24, 2012

    The recent natural disasters have taught us all a lesson that being too much lean in the supply chain context can be sometimes disastrous to our businesses.

     

    Also shedding some of the side activities in the name of being lean can also become a stumbling block in the organization's growth.  For growth you need to widen your horizon and for that you need to spend some money on experimenting, trying new things, new methodologies, new technologies – all of which may not bear fruit.

  6. bolaji ojo
    July 24, 2012

    Lean is a way. It's not an end goal and companies therefore must use it as a tool to help them achieve clearly specified objectives. That's why even if people are not talking about it today, it remains a valid tool, one of many that a company can use in pursuit of their goals.

    I wouldn't say Lean is losing grounds. It is just now like an old, worn hat and even though it's lost its shine, can still provide protection against the harsh sunlight.

  7. cruz_ncatx
    July 24, 2012

    The real issue(s) arise when a company randomly reduces inventory (raw material, WIP or finished good) without properly analyzing their processes. By that I mean understanding the math / formulas (yes math) required to properly calculate the inventory levels you need in your supply chain to meet demand. The rewards of lean are great but properly implementing it takes a tremendous amount of effort and commitment. More than most American companies are willing to stomach. Toyota did not develop the Toyota Production System over night. It took years and years….

  8. stochastic excursion
    July 25, 2012

    Economic adversity too can be a condition where lean is not desirable.  Observers of the sluggish centrally-planned Soviet economy during the post-glasnost collapse cite high inventory as one of the things that helped the society deal with the inevitable shortages.

  9. Strive4Excellence
    July 25, 2012

    I think Barbara missed the mark on this article.  What is the root cause?  According to the article, the root cause is that companies implemented too much lean thinking and when the flood came through, being too lean crippled the supply chain. But this is not correct. There was no mention if these high tech factories were built in a flood zone.    There was no mention on how companies assess risk when looking for low cost sourcing and whether or not they knew that there was a risk of tsunami's and floods.  Rather than providing sound advice on how to improve the robustness of the supply chain, Barbara spun a story about how a philosophy of continual improvement has limits.  This is nonsense.  A better article would have been to focus on developing secondary supply sources as a strategic initiatve or maybe how low cost sourcing correlates to high supply chain risk.  I see this article as a lost opportunity to properly educate the supply chain community. 

  10. Clairvoyant
    July 29, 2012

    Lean doesn't work well for all company types. Has anyone here had experience or heard of QRM (Quick Response Manufacturing)?

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