Lean manufacturing and coping with uncertainty and rapid change

[Randy Littleson]

Undoubtedly if demand disappears there is nothing that can be done to save many members of a value chain. Uncertainty is another matter. The combination is very toxic, to borrow a term from the credit crunch. Without a doubt Lean manufacturing does not cope very well with uncertainty and rapid change, especially if the Lean implementation focused only on inventory reduction without any process changes.


Any standard text on inventory management will include the following variables in mathematical equations to determine the optimal inventory target for a particular item at a particular location:

• Average and standard deviation of demand side order to deliver lead time
• Average and standard deviation of supply side order to delivery lead time
• Lot size and delivery frequency on both the demand and supply side

In my experience inefficient and ineffective processes contribute greatly to both the average and the standard deviation of order to delivery lead times, on both the demand and supply side. In some cases I have seen order processing take 3 times as long as the physical delivery of the material. Lean six sigma can address the process inefficiencies in order to reduce the average order to delivery lead time. Six Sigma is focused on repeatable process, in other words reducing the variability (or standard deviation) of the order to delivery lead times. Simply reducing inventory without reducing both the average and the standard deviation of the order to delivery cycles is a recipe for disaster. Inventory levels must be “right-sized” to match the processes.


We have known about the bullwhip effect since J Forrester published Industrial Dynamics in 1961, which is largely due to the lack of visibility up and down the supply chain, particularly across organizational boundaries. The adoption of outsourcing and globalization over the past 15-20 years has made supply chain visibility even more important as a way to combat the bullwhip effect. The Beer Distribution Game, devised by the MIT Sloan School of Management in the 1960’s to demonstrate some key supply chain management concepts, particularly Forrester’s bullwhip effect, illustrates the effectiveness of supply chain visibility. As is the case in most organization, the participants are rewarded for delivering to customer order and penalized for holding inventory. The game is played in 2 parts. In the first, communication is only allowed between single tiers of the supply chain. Chaos ensues very quickly even though customer demand is changed only once during about 10 order and delivery cycles. In the second, customer demand is made visible to all participants. The improvements in both reduced inventory levels and increased customer service are dramatic. Adding visibility into inventories would improve the KPI’s even more.


But supply chain visibility is not enough to truly replace inventory with information. Other capabilities required are the ability to:

• identify quickly when an unexpected event has occurred in the supply chain
• determine the actual or potential harm the unexpected event will cause
• identify the person or people responsible for responding to the harm
• quickly and effectively devise several scenarios for responding to the unexpected event
• compare the scenarios side-by-side using both operational and financial KPI’s in a scorecard
• collaborate quickly between all stakeholders, especially across organizational boundaries, in order to reach agreement on the course of action, which almost always requires compromise

In other words, knowing about something is only the start of the process. Doing something about it is where the value is created. Knowing the effect and being able to devise ways to reduce or eliminate the effect are requirements for being able to act. In a recent article titled Building Better Link in High-tech Supply Chains, McKinsey makes many of the same points. The article also addresses precursors, particularly trust, which are required before supply chain partners can gain most from supply chain visibility and collaboration. If you don’t trust the information you are receiving from your trading partner, it is unlikely you will make decisions based upon that information.


Trevor Miles is the Director, Product Marketing for Kinaxis, provider of the on-demand RapidResponse service that empowers multi-enterprise manufacturers with the collaborative and integrated demand-supply planning, monitoring, and response capabilities.