Outsourcing and the Extended Value Stream: Taking Lean Manufacturing to the Next Level

Outsourcing and the Extended Value Stream: Taking Lean Manufacturing to the Next Level

In a lean transformation, companies typically focus on their "door-to-door" value streams. That is, they analyze and improve the flow of value between (but not including) their suppliers and their customers. After this transformation has progressed considerably, organizations want to know how to take Lean Manufacturing to the next level. Analyzing the extended value stream and then developing and executing an effective outsourcing plan is the answer. This article focuses on the five basic steps to accomplish this:

1. Map your extended value stream(s).
Inherent in true lean thinking is the concept of a complete value stream that includes customers and suppliers. Using the same value stream mapping techniques that are used for mapping your door-to-door value stream, map the entire value stream for your product lines from the raw material level to your suppliers to your plant(s) to your customer(s).

2. Define your core competencies.
Using the insight gained through a view of the entire extended value stream, re-define which components, processes, and products your organization should be producing in house. Recognized as one of the world's leading authorities in outsourcing, Michael F. Corbett & Associates, Ltd. uses a simple test for identifying core competencies: "First, if starting your company today would you do this yourself? If the answer is yes, then the function's criticality is widely recognized. Second, would other companies hire you to do this for them? This gets at your firm's ability to perform the task in question. Third, will tomorrow's CEO come from this area? This question addresses the importance of the activity to the firm. Importantly, you must answer yes to all three questions before considering a business activity a core competency." (Outsourcing Helps Firms to Focus on Core Competencies, Michael F. Corbett and Associates, http://www.firmbuilder.com). While this step can be a difficult task, it is something that all World Class Organizations must do to stay competitive and maximize value.

3. Rate your key suppliers.
Use the Pareto principle to determine who your key suppliers are; typically, about 80% of your purchasing dollars will go to 20% of your suppliers. Define those characteristics that are most important to your organization, and rate your key suppliers according to those characteristics. They should include all of the basics of lean with particular emphasis on the most critical items for your business.

4. Develop a plan.
First, select the key suppliers with which you plan to continue doing business and plan to forge a long-term relationship. Next, decide which suppliers you can no longer afford to keep. These key decisions should be based on your current relationship and ranking of your suppliers. It should also be based on their willingness to embrace lean. Then, develop an outsourcing plan. Decide which suppliers will handle which business activities. List the voids you have and put together a plan to find new suppliers to fill the voids. Ideally, your goal should be to find suppliers that are already on a lean journey.

5. Act on your plan.
Develop agreements with key suppliers that you intend to keep. Many American companies continue to struggle with this issue. Typically, American companies still have an adversarial relationship with their suppliers, even though many of them will say that they have long-term supplier relationships. Competitive bidding is still going on even with long-time suppliers. Before helping or convincing your suppliers to go lean, you need to have already in place "open-book" relationships with those suppliers. This is because the major improvements you are going to help them make (and they are going to continue making as they progress on their lean journey) should be shared between your company and theirs. After these long term agreements are formed, begin helping your suppliers develop a lean manufacturing plan.

Demonstrate the successes your organization has had with lean and explain that their going lean will benefit them as well. Some of the benefits to your suppliers are:
• Cost savings are shared with your organization. (Instead of your dictating a drop in price while offering no way for them to achieve it, you are both working within a lean continuous improvement environment in which cost reductions are achievable.)
• The ability to easily win bid wars when they are quoting their other non-lean customers' jobs. Lean Thinking, by Womack and Jones, actually talks quite a bit about this with reference to the success experienced by Toyota's suppliers.
• Incentive and the ability to produce even more cost savings for themselves through lean.

Provide implementation assistance to those suppliers; help them map their door-to-door value streams to get started. Ultimately, these suppliers should become an important part of your organization. After they set up a lean manufacturing operation, key suppliers should be involved (or even take a primary role) in the development of your products and key components of your products. Since they will be manufacturing them (and you've assured them of this), they must meet your cost targets. To do this, they need to play a major role in the design.
Finally, act on a plan to find new suppliers and develop agreements with those suppliers. Again, in cases where these new suppliers are not lean, help them take their first steps.

At the completion of these 5 steps, your organization will have further distanced itself from your non-lean competitors. You will be more focused on your core activities, your suppliers will be more profitable and will be focused on what they do best, and you will have an improvement methodology in place that will continue to perfect your entire value stream.


About the Author
Darren Dolcemascolo is an internationally recognized lecturer, author, and consultant. As Sr. Partner and co-founder of EMS Consulting Group, he specializes in productivity and quality improvement through lean manufacturing. Mr. Dolcemascolo has written the book Improving the Extended Value Stream: Lean for the Entire Supply Chain, published by Productivity Press in 2006. He has also been published in several manufacturing publications and has spoken at such venues as the Lean Management Solutions Conference, Outsourcing World Summit, Biophex, APICS, and ASQ. He has a BS in Industrial Engineering from Columbia University and an MBA with Graduate Honors from San Diego State University.

Key Metrics of the Extended Value Stream

Key Metrics of the Extended Value Stream


Many organizations have mapped their door-to-door or internal value streams. These show material and information flow for a given facility. Taking the door-to-door concept up one unit of analysis, the extended value stream stretches across several organizations and facilities from raw materials to the end user. A lean extended value stream has the following characteristics:
Everyone in the value stream knows the takt time and rate of customer demand.
There is little inventory in the system, and there is a standard amount of inventory in the system based on the variability and availability of processes.
Lead-time is minimized.
Transportation is minimized.

There are several key metrics that will set a baseline and assist in developing goals and an action plan to reach the goals. This article attempts to help the reader gain an overview of some of these key metrics:
Value-Creating Time: Within a value stream, the time the material/product is physically being changed in such a way that value is added to the product.
In-Plant Time: Within the extended value stream, the time the material/product is in the factories/plants (but not necessarily being physically worked on).
Transport Time: Within the extended value stream, the time the material/product is moving between facilities.

Total Time: The total lead-time from raw materials to the end user.
Total Time = In-Plant Time + Transport Time
Value % of Time: % of Total Time that is value-creating.
Value % of Time = Value-Creating Time/Total Time X 100%
Value % of Steps: % of total steps in a lean extended value stream that are value-creating.

Inventory Turnover: The ratio of annual sales to average inventory, which measures the speed, that inventory is produced and sold.
Inventory Turnover = Annual Sales / Average Inventory
Product Travel Distance: The total physical distance that product travels in a lean extended value stream (between facilities).


About the Author
Darren Dolcemascolo is an internationally recognized lecturer, author, and consultant. As Sr. Partner and co-founder of EMS Consulting Group, he specializes in productivity and quality improvement through lean manufacturing. Mr. Dolcemascolo has written the book Improving the Extended Value Stream: Lean for the Entire Supply Chain, published by Productivity Press in 2006. He has also been published in several manufacturing publications and has spoken at such venues as the Lean Management Solutions Conference, Outsourcing World Summit, Biophex, APICS, and ASQ. He has a BS in Industrial Engineering from Columbia University and an MBA with Graduate Honors from San Diego State University.

Seven Wastes of the Extended Value Stream

Seven Wastes of the Extended Value Stream


Most people who have had any exposure to lean thinking have heard of “The Seven Wastes.” Taiichi Ohno, the former Chief Engineer at Toyota that popularized the Toyota Production System, is responsible for identifying the seven wastes of manufacturing. As he observed activity on the shop floor, he identified the following wastes:
Overproduction
Transportation
Unnecessary Inventory
Inappropriate Processing
Waiting
Excess Motion
Defects

In 1996 James Womack identified an eighth waste, the waste of underutilized employees (with respect to their ideas/minds), in the book Lean Thinking.

The idea of the lean value stream is to continuously work to eliminate the sources of these wastes based on their relative contribution to key lean metrics. Many organizations have reached the point in their lean journey in which they are working to create a lean extended value stream. That is, they would like to work on the value stream that includes their suppliers and customers. This value stream stretches from raw materials to the end user. One key to successfully achieving a lean extended value stream is to understand the types of waste one might find in the extended value stream. This article attempts to help the reader understand the implications of the seven wastes for the extended value stream.

1. Overproduction – Overproduction simply means producing more than what is actually needed by an upstream process or customer. On the shop floor, this generally occurs because changeover times are high, equipment is unreliable, the process is unreliable (causes defects), and standard cost accounting metrics are used. In the extended value stream, overproduction certainly occurs for some of these same reasons. However, probably the biggest reason for overproduction is poor information flow (communication) between facilities. Improved information flow between facilities is one of the key characteristics of a lean extended value stream.

2. Transportation – Moving product does not create value; this is amplified when examining the extended value stream. Unnecessary transportation is generally caused by making supplier selection decisions based on single points in a value stream rather than seeking to optimize the entire value stream. Proper selection of supplier/facility location is critical to a lean value stream.
3. Unnecessary Inventory – For the extended value stream, unnecessary inventory is generally the result of poor information flow and batch processing. Suppliers often hold inventory to support a lean customer; this ultimately gets passed on to the customer in the form of higher pricing and/or poor quality. Sometimes, suppliers and their customers are holding redundant inventory. Extended value stream mapping will expose this waste.

4. Inappropriate Processing – In the door-to-door value stream, this usually refers to using larger scale equipment than necessary; it also refers to building in rework to a process. In the extended value stream, it can also refer to using the wrong suppliers and/or the wrong process. With regards to rework, many times organizations rework parts after they come in from a supplier simple because of poor communication between facilities.

5. Waiting – This waste refers to operators waiting for machines as well as product waiting (inventory). This waste is generally the same for the extended value stream as the door-to-door value stream.

6. Excess Motion- Generally, this waste applies to production personnel having to move out of their work area to locate tools, materials, etc. Like the waste of waiting, this is essentially the same for the extended value stream as the door-to-door value stream.

7. Defects- This waste refers to defective product and information (paperwork). Its unique application to the extended value stream is defective product moving between facilities. This results in additional waste in the form of excess inventory and rework.

8. Underutilization of Employees’ Minds/Ideas – This waste could be changed to “Underutilization of Suppliers’ and Customers’ Minds/Ideas.” Organizations rarely approach their customers and suppliers to leverage their know-how with respect to manufacturing processes, information processing, and product design. This is a very important waste of the extended value stream.
“The seven wastes” is a powerful tool for implementing lean manufacturing in a facility. When analyzing the extended value stream, one must consider the seven wastes with a slightly different paradigm.



About the Author
Darren Dolcemascolo is an internationally recognized lecturer, author, and consultant. As Sr. Partner and co-founder of EMS Consulting Group, he specializes in productivity and quality improvement through lean manufacturing. Mr. Dolcemascolo has written the book Improving the Extended Value Stream: Lean for the Entire Supply Chain, published by Productivity Press in 2006. He has also been published in several manufacturing publications and has spoken at such venues as the Lean Management Solutions Conference, Outsourcing World Summit, Biophex, APICS, and ASQ. He has a BS in Industrial Engineering from Columbia University and an MBA with Graduate Honors from San Diego State University.

Toyota's Extended Lean Enterprise

Toyota's Extended Lean Enterprise


Many organizations are progressing in their Lean journey with the goal of developing into a true Lean Enterprise. To build a strong lean enterprise companies need to develop a world-class supplier network. Toyota has spent decades investing in their extended network of partners and suppliers, with the principle of challenging and helping them to improve. Most companies seem to focus on new information technologies and price squeezing with their suppliers instead of following the extended lean enterprise model of enabling and partnering with their supplier network.

Auto industry suppliers consistently report that Toyota is their best customer but also their toughest. The US auto manufacturers have a reputation for being tough; however, "tough" is defined as unreasonable or hard to get along with. In Toyota's case, "tough" is defined as having high standards of excellence, with the expectation that their partners will rise to those standards. US companies and Toyota have similar quality methods and procedures with extensive standards, auditing procedures, and rules. What sets Toyota apart is that suppliers view US manufacturers as coercive while Toyota is viewed as enabling.

Over the last few decades Toyota created a strong supplier network in Japan that has distinguished them from other automakers. As they moved to build the same network in North America with US suppliers, their demanding but fair partnership approach has received positive reactions. The principal measure of supplier relations in the American auto industry is the OEM benchmark Survey that is published by John Henke of Oakland University. Suppliers rank auto manufacturers using 17 measures from trust to perceived opportunity. In the 2003 survey Toyota ranked first followed by Honda and Nissan, while Chrysler, Ford and GM were fourth fifth and sixth. The survey also showed that Toyota's scores had improved over 7% over 2002. Another automotive supplier survey published annually comes from J.D. Power. The 2003 survey found that Toyota, Nissan and BMW are the best North American automakers in promoting innovation with their suppliers. Chrysler, Ford and GM were all rated below average.

The rewards for Toyota's investment in building a network of highly capable suppliers are obvious. Their quality that has distinguished them as a leader in the industry is a direct result of their excellence in innovation, engineering, manufacturing, and overall supplier reliability. But the investment can also pay off in other ways as seen in 1997 when a potential crisis threatened to halt Toyota's production.

Aisin is one of Toyota's largest and closest suppliers. Toyota usually dual sources most parts but was using Aisin as a sole source. Aisin produces a part called a "p-valve" which is an essential brake part used in all Toyota vehicles worldwide. In 1997 Aisin was producing around 32,500 parts a day, which was about 2 days of production inventory for Toyota. On February 1, 1997 a fire destroyed their factory and threatened to leave Toyota without any parts in 2 days. Two hundred of Toyota's suppliers self organized in an attempt to get production of the valve started in two days. Sixty-three companies pieced together engineering documentation, used their own equipment, set-up temporary lines to make parts, and as a result Toyota did not miss a day of production. A new information technology system or a coercive environment did not keep production running, but long-term relationships and an enabling environment did. To reach the level of a true Lean Enterprise with suppliers, an enabling environment needs to be created.



About the Author
David McBride is co-founder of EMS Consulting Group (http://www.emsstrategies.com), a Carlsbad, CA based engineering and management consulting firm. David has a BS in Mechanical Engineering from Ohio State University. He has a successful track record in the development and implementation of FMEA and Design for Manufacturability programs at several organizations and has greatly reduced Manufacturing costs through the utilization of Lean Manufacturing, Kaizen Events, and Manufacturing System Analysis. He has also been highly successful at developing and executing New Product Introduction processes, and Staffing and Capital Equipment Plans.