A lean supply chain is one that produces only what is needed, when it is needed, and where it is needed. Using this approach has four advantages over traditional supply chain management: Supply is tightly linked with demand, inventory risk is reduced, processes focus on activities that add value for the customer and employees work to create mistake-proof processes. These four advantages lead to improved customer service at a lower cost.
Linking Production to Customer Demand
A fundamental piece of a lean supply chain is creating a tight connection between customer demand and production rates. In a lean environment, customer demand is said to "pull" inventory through the supply chain. This is done by restricting quantities produced and purchased to match the quantities ordered by customers. Creating this linkage removes wasteful inventory and overproduction by suppliers that lead to increased costs.
The "pull" approach of lean differs from the "push" approach used in traditional supply chains. In a "push" environment, production is planned to meet forecast. The error contained within the forecast drives the supplier to produce inventory for items that are not needed, while, at the same time, not fulfilling demand for the items ordered by customers. This is called a "push" system, because the supplier is building inventory in anticipation of customer demand, rather than against actual customer orders.
The "push" model inherently adds to the supplier's risk levels. Creating inventory before there is customer demand increases the supplier's cost to hold the inventory and also opens the possibility that the inventory produced could become obsolete.
A lean supply chain utilizes a kanban system to manage inventory levels. One type of kanban used is called a two-bin system. In this example, two bins of parts of maintained in stock. When the first bin is emptied, the employee pulling stock takes a card form the bin that notes the item and quantity required, and forwards the card to the buyer. The buyer then places an order for exactly the item and quantity noted on the card. While the second bin of material is being consumed, the supplier is in the process of replenishing the first bin. The quantities contained in each bin is set to provide sufficient stock for the operation to continue while additional materials are being brought in.
By managing inventory in this way, inventory is kept low, and purchases are only made if a bin is emptied. This approach reduces inventory over traditional methods while reducing risk of obsolescence.
Muda is the Japanese word for "waste." In the lean supply chain, waste is defined as anything the customer isn't willing to pay for. For example, say that two labels are applied to the product during manufacturing; the first label notes the customer item, quantity and purchase order number, and the second is a green dot indicating that the product was manufactured during the first shift. The first label adds value because the customer is willing to pay the supplier to attach a label containing information the customer needs to receive the product into inventory. The second label doesn't add value; while it might be helpful to the supplier, it does not help the customer. For that reason, if applying the second label had a cost of $1 per unit, that cost would be absorbed by the supplier, since the customer is not willing to pay for that label. Lean supply chain works to eliminate wasteful processes, functions and activities that the customer isn't willing to pay for.
Another aspect of the lean approach to supply chain management is its focus on making processes as mistake-proof as possible. Examples of mistake-proofing a process include setting up one's email account to automatically scan for spelling and grammar errors or creating a hard halt in a program if all required information is not entered.