The End of Lean Manufacturing?
Business philosophies and practices often move in one direction until they reach an extreme, and then reverse course back in the opposite direction, like a pendulum swinging over time in a long arc. The reversal of that swing is often triggered by an event and we believe we are experiencing an event like that now.
Lean Manufacturing is an operational discipline aimed at reducing the production cycle within a manufacturing facility, increasing the responsiveness from suppliers, and theoretically decreasing delivery leadtime to customers.
The discipline has roots in 1930’s Toyota and “The Toyota Way”. Since that time, branches of the core production philosophy have given rise to Six Sigma, JIT, 5S, 8D, etc. Since its inception, the operational method has moved beyond just the automotive industry to almost all other industries, perhaps even where it is of questionable effectiveness.
The efficiencies gained by the top levels of the supply chain during the expansion of lean manufacturing, it may be argued by those at the bottom of the supply chain, have not been shared. We have seen many reasons for this behavior: 1) suppliers are not incorporated into the customer’s plans or conversations regarding lean manufacturing, 2) suppliers are too stubborn to change or are insincere about their adoption, and 3) customers are reluctant to share, fearing transparency weakens competitive advantages.
Very often the drive of lean manufacturing is financial. Reduced leadtime, lower capital costs, more efficient processes and higher quality products are all worthy objectives. They are also all tied to a financial result and incentive. If they were not, they likely would cease being worthy objectives. So is lean manufacturing all about the money?
To satisfy lean metric objectives, customers have knowingly and unknowingly transferred costs to their suppliers, such as requiring consigned inventory and shorter commitments, without providing commensurate value to offset these costs in terms of improved forecasting capabilities or better payment terms. In terms of the supply chain in the aggregate, one could argue lean manufacturing has simply shifted costs, and that there has been little actual improvement shared amongst all the participants.
Thankfully there are exceptions and true partnerships do exist, to the credit of all participants. It is also true that these successful partnerships would likely thrive with or without the principles of lean manufacturing. The idea of supply chain partnerships mutually enjoying the benefits of a relationship is not dependent upon lean manufacturing principles.
Aside from the metrics and KPIs, one of the key tenants of lean manufacturing is just-in-time (“JIT”) material delivery. In the fourth quarter of 2021, a trip to the grocery store or mall will speak volumes about the value of having inventory on the shelf. The risk of getting that inventory “just in time” is that sometimes, “just in time” to quickly becomes “some other time”, and then “just too late”.
The financial incentive behind JIT is that customers stock and make commitments for as little inventory as possible. It looks great on the balance sheet when the CEO is presenting to Wall Street. It doesn’t look so good when your shelves are bare and there are sixty cargo ships that can’t dock to unload their goods (https://nypost.com/2021/09/25/la-port-backup-grows-to-62-ships-in-supply-chain-crunch/).
The current supply chain fracture we are experiencing could end the concept of lean manufacturing. Certainly, consultants and those employed to defend the concept will have their response, likely stating that further investment in lean manufacturing is required to address the crisis. When you are fully invested, the only answer seems to be to double down on what you already have. We would argue looking around the corner for alternatives is warranted.
The same CEO that was boasting of low inventory two years ago will not be able to defend the shuttering of production facilities today because there is no raw material on hand. This is especially true when considering the fed funds rate is 0.25%. The actual cost of low inventory mandates is having production facilities that aren’t producing. In retrospect, the risks of JIT were never given sufficient voice.
The list of production delays resulting from disruptions in the supply chain are literally too numerous to list here and readers would be better served by searching “raw material shortages” in your favorite browser. The easy conclusion is that stalled production lines are neither productive or profitable.
So what’s the answer? In the immediate future the answer will be blended. The top of the supply chain will begin taking larger inventory position on A items. Secondary to that behavior, and what will be very productive, is an increased digital conversation between customers and suppliers. Let computers automate redundant tasks, and let information flow more freely.