1 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Supply Chain Management Principles and Practices 2 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Supply Chain Management Basics Learning Points null Lean supply chain management represents a new way of thinking about supplier networks null Lean principles require cooperative supplier relationships while balancing cooperation and competition null Cooperation involves collaborative relationships & coordination mechanisms null Supplier partnerships & strategic alliances represent a key feature of lean supply chain management a spectrum of 3 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Theory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships null “Markets” (Arm’s Length): Lower production costs, higher coordination costs null Firm buys (all) inputs from outside specialized suppliers null Inputs are highly standardized; no transaction-specific assets null Prices serve as sole coordination mechanism null “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs null Firm produces required inputs in-house (in the extreme, all inputs) null Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination null “Lean” (Hybrid): Lowest production and coordination costs; economically most efficient choice-- new model null Firm buys both customized & standardized inputs null Customized inputs often involve dedicated investments null Partnerships & strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, arm’s length relationships with suppliers 4 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Supply Chain Management Differs Sharply from Conventional Practices ILLUSTRATIVE CHARACTERISTICS CONVENTIONAL MODEL LEAN MODEL Number & structure Many; vertical Fewer; clustered Procurement personnel Large Limited Outsourcing Cost-based Strategic Nature of interactions Adversarial; zero-sum Cooperative; positive-sum Relationship focus Transaction-focused Mutually-beneficial Selection criteria Lowest price Performance Contract length Short-term Long-term Pricing practices Competitive bids Target costing Price changes Upward Downward Quality Inspection-intensive Designed-in Delivery Large quantities Smaller quantities (JIT) Inventory buffers Large Minimized; eliminated Communication Limited; task-related Extensive; multi-level Information flow Directive; one-way Collaborative; two-way Role in development Limited; build-to-print Substantial Production flexibility Low High Technology sharing Very limited; nonexistent Extensive Dedicated investments Minimal-to-some Substantial Mutual commitment Very limited; nonexistent High Governance Market-driven Self-governing Future expectations No guarantee Considerable 5 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Supply Chain Management Principles Derive from Basic Lean Principles null Focus on the supplier network value stream null Eliminate waste null Synchronize flow null Minimize both transaction and production costs null Establish collaborative relationships while balancing cooperation and competition null Ensure visibility and transparency null Develop quick response capability null Manage uncertainty and risk null Align core competencies and complementary capabilities null Foster innovation and knowledge-sharing 6 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value A Set of Mutually-Reinforcing Lean Practices Translate these Principles into Action Design supplier network architecture ? Design of supplier network driven by strategic thrust ? Fewer suppliers; “clustered control” ? Supplier selection based on performance Develop complementary supplier capabilities ? Ensured process capability (certification) ? Targeted supplier development (SPC, Kaizen) ? Greater responsibilities delegated to suppliers Create flow and pull throughout supplier network ? Linked business processes, IT/IS infrastructure ? Two-way information exchange & visibility ? Synchronized production and delivery (JIT) Establish cooperative relationships & effective coordination mechanisms ? Joint problem-solving; mutual assistance ? Partnerships & strategic alliances ? Open and timely communications ? Increased interdependence & “shared destiny” Maximize flexibility & responsiveness ? Seamless information flow ? Flexible contracting ? Rapid response capability Optimize product development through early supplier integration ? Integrate suppliers early into design & development IPTs ? Collaborative design; architectural innovation ? Open communications and information sharing ? Target costing; design-to-cost Integrate knowledge and foster innovation ? Knowledge-sharing; technology transfer ? Aligned technology roadmaps This lecture highlights key enablers & practices by ng on: ? Synchronized production and delivery ? Partnerships and strategic alliances ? Early supplier integration into design and development IPTs focusi 7 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Synchronized Production and Delivery Throughout the Supplier Network is a Central Lean Concept null Integrated supplier lead times and delivery schedules null Flows from suppliers pulled by customer demand (using takt time, load leveling, line balancing, single piece flow) null Minimized inventory through all tiers of the supply chain null On-time supplier delivery to point of use null Minimal source or incoming inspection null Effective two-way communication links to coordinate production & delivery schedules null Striving for zero quality defects essential to success null Greater efficiency and profitability throughout the supplier network 8 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Aerospace Firms Have Faced an Uphill Challenge in Synchronizing Flow with Suppliers PERCENT OF SUPPLIER SHIPMENTS TO STOCKROOM/FACTO W/O INCOMING OR PRIOR INSPECTIONS 10.7 42.2 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 Defense (25) Commercial (9) (Year: 1993; N= Number of responding business units/c Defense/Commercial: than 75% of sales to defen or commercial markets More 9 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Supplier Certification has been an Important Early Enabler of Achieving Synchronized Flow in Aerospace PERCENT OF DIRECT PRODUCTION SUPPLIERS OF A TYPICAL AEROSPACE ENTERPRISE THAT ARE CERTIFIED (1991, 1993, 1995) 7.40 6.86 2.55 15.28 10.86 10.38 5.63 19.62 23.19 20.11 15.63 36.33 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 Industry (48) Airframe (13) Electronics (20) Engines and Other (15) (N=Number of respondents answering this question for all three years) 1991 1993 1995 10 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Closer Communication Links with Suppliers Paved the Way for Synchronizing Flow TYPES OF INFORMATION PROVIDED TO RESPONDING BUSINESS UNITS BY THEIR MOST IMPORTANT SUPPLIERS ON A FORMAL BASIS, 1989 vs. 1993 48.72 70.51 17.95 83.33 41.03 88.46 19.23 70.51 20.51 52.56 17.95 69.23 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 1989 (38,14,32,15,16,14) 1993 (55,65,69,55,41,54) (N=78: Production Cost Data SPC Data Performance Improvement Actions Longer-term Business Strategies & Plans Financial Information not Publicly Available Feedback on Purc/Supplier Mgmts Operations Total number of responding business units) 11 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Concrete Example: Engine Parts Casting Supplier Worked with Customer Company to Achieve Synchronized Flow 12 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Mastering & Integrating Lean Basics with Prime was Necessary for Achieving Synchronized Flow null 6S -- Visual factory null Total productive maintenance null Quality control null Process certification null Mistake proofing null Setup reduction null Standard work null Kaizen 13 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Supplier Partnerships & Strategic Alliances Ensure Substantial Performance Improvements null Long-term relationships and mutual commitments null Intensive and regular sharing of technical and cost information null Mutual assistance and joint problem-solving null Customized (relationship-specific) investments null Risk-sharing, cost-sharing, benefit-sharing arrangements null Trust-building practices -- “one team” mindset; collocation of technical staff; “open kimono” null Progressively increasing mutual dependence -- shared fate discouraging opportunistic behavior null Self-enforcing contracting driving continuous improvement 14 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Supplier Partnerships & Strategic Alliances Bring Important Mutual Benefits null Reduced transaction costs (cost of information gathering, negotiation, contracting, billing) null Improved resource planning & investment decisions null Greater production predictability & efficiency null Improved deployment of complementary capabilities null Greater knowledge integration and R&D effectiveness null Incentives for increased innovation (through cost- sharing, risk-sharing, knowledge-sharing) null Increased mutual commitment to improving joint long- term competitive performance 15 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Major Lean Lessons for Aerospace Industry null Supply chain design linked to corporate strategic thrust null Fewer first-tier suppliers null Greater supplier share of product content null Strategic supplier partnerships with selected suppliers null Trust-based relationships; long-term mutual commitment null Close communications; knowledge-sharing null Multiple functional interfaces null Early supplier integration into design null Early and major supplier role in design null Up-front design-process integration null Leveraging supplier technology base for innovative solutions null Self-enforcing agreements for continuous improvement null Target costing null Sharing of cost savings 16 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Chrysler: Supplier Partnerships Speed Development Length of Product Development Cycle LH Cars (98E) 160 Weeks* JA; Cirrus/ Stratus (95) 184 Weeks Neon (94) 180 Weeks LH Cars (93) 183 Weeks Dakota Truck (87) 232 Weeks K-Car (81) Minivan (84) Shadow (87) 234 Weeks * Estimated Source: Dyer (1998) 17 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE GRAMS: IMPACTS ON PRODUCIBILITY AND COST 20.0 77.8 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Group A (With) Group B (Without) Firms facing producibility and cost problems % of responding firms in Group A(4/20) % of responding firms in Group B(7/9) Numerator(s): N=4,7: Number of affirmative responses to this question (i.e., faced producibility and cost problem) in each group (i.e., Group A and Group B) Denominator(s):R=20,9: Total number of respondents to this question in each group Sample Size: S=29: Maximum possible number of respondents to any question in the survey (Group A:20 ; Group B:9) WITH: supplier involvement in IPTs WITHOUT: Without early supplier involvement in IPTs EARLY: Before Milestone SOURCE: Lean Aerospace Initiative Product Development Survey (1994) Aerospace: Early Supplier Involvement in IPTs Impacts Producibility and Cost DEVELOPMENT PROPRODUCT With early 18 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Early Supplier Involvement: Key Success Factors FIRMS WITH EARLY SUPPLIER INVOLVEMENT IN IPTS IN U.S. MILITARY AEROSPACE PRODUCT DEVELOPMENT PROGRAMS: KEY SUCCESS FACTORS 55.0 11.1 40.0 22.2 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 GroupA (With) GroupB (Without) EARLY SUPPLIER INVOLVEMENT IN IPTS Established co-located IPTsincluding suppliers Used commercial parts Numerator(s): N=11,8 (Group A) ;1,2 ( Group B): Number of affirmative responses to this category of practice/implementation ( i.e., co-located IPTs, use of commercial parts) Denominator(s): R=20,9: Total number of respondents to this question in each group Sample Size:S=29: Maximum possible mumber of respondents to any question in the survey (Group A:20 ; Group B:9) NOTES Early: Before Milestone 1 With / Without: Early supplier involvement in IPTs (before Milestone 1) question in each group, by Lean Lean Enterprise Value Value Evolution of Early Supplier Integration in the Aerospace Industry Arm’s length; interfaces totally defined and controlled Collaborative; but constrained by prior workshare arrangements Collaborative and seamlessly integrated, enabling architectural innovation Virtual Team w/o boundaries Prime Key Suppliers Subtiers “Old” Approach “Emerging” Lean Prime Key Suppliers Subtiers “Current” Lean Collaborative with rigid organizational interfaces Prime Key Suppliers Subtiers Rigid vertical FFF interfaces and control ARCHITECTURAL INNOVATION: Major modification of how components in a system/product are linked together ?Significant improvement in system/product architecture through changes in form/structure, functional interfaces or system configuration ?Knowledge integration over the supplier network (value stream perspective ; prime-key suppliers-subtiers; tapping supplier technology base) 20 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Summary: Architectural Innovation Yields Significant Benefits Case Studies Key Characteristics Case Study A (SMART MUNITION SYSTEM) Case Study B (ENGINE NOZZLE) MAKE-BUY; DESIGN RESPONSIBILITY ? Early supplier integration into IPT ? Teaming with key suppliers to optimize design ? New joint design and engineering approach based on make-buy ? Prime retains design control SUPPLIER ROLE ? Collaborative design ? Suppliers given design responsibility and configuration control ? Part of joint design team ? Component design responsibility ? Joint configuration control SUPPLIER SELECTION; AGREEMENT ? Competitive pre-sourcing ? Commercial pricing ? Long-term commitments ? Long-term warranty ? Supplier downselect after joint preliminary design period ? CPFF ? Not-to-compete agreements PROCESS; RELATIONSHIPS ? Collocated teams ? Open communications; knowledge-sharing ? Worksharing ? Electronic linkages ? Gov’t part of team ? Collocated teams ? Concurrent engineering ? Knowledge-sharing ? Electronic linkages ? Government involvement MAJOR DRIVERS Cost Performance ARCHITECTURAL INNOVATION Guidance control unit redesigned from modular to integrated system architecture Riveting, rather than welding, resulted in redesign of interfaces and how components are linked together MAJOR BENEFITS ? Over 60% reduction in unit cost ? Cycle time: to 48 mo. (down by 25%) ? Win-win for value stream ? Five-fold reduction in unit cost ? Cycle time reduction not as important ? Substantial risk reduction ? Win-win for value stream 64 mo. down 21 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Summary of Key Practices Enabling Architectural Innovation null Pre-sourcing; long-term commitment null Early supplier integration into IPTs; IPPD; co-location; joint design & configuration control null Leveraging technology base of suppliers (key suppliers; tooling suppliers; subtiers) null Workshare arrangements optimizing supplier core competencies null Retaining flexibility in defining system configuration null Open communications; informal links; knowledge-sharing null Target costing; design to cost null Supplier-capability-enhancing investments null Incentive mechanisms (not to compete agreements; long-term warranty); maintaining trade secrets null Government part of the team; relief from military standards and specifications Lean Lean Enterprise Value Value Electronic Integration of Supplier Networks: null Important success factors include: null Clear business vision & strategy null Early stakeholder participation (e.g., top management support; internal process owners; suppliers ; joint configuration control) Challenge: Electronic integration of supplier networks for technical data exchange as well as for synchronization of business processes Early Results null Migration/integration of specific functionality benefits of legacy systems into evolving new IT/IS infrastructure null Great care and thought in experimental IT/IS projects into fully-functional operational systems null Electronic integration of suppliers requires a process of positive reinforcement -- greater mutual information exchange helps build increased trust, which in turn enables a closer collaborative relationship and longer-term strategic partnership null Close communication links with overseas suppliers pose a serious security risk and complex policy challenge scaling-up 22 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology 23 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Fostering Innovation across Supplier Networks Ensures Continuous Delivery of Value to all Stakeholders null Research: Case studies on F-22 Raptor avionics subsystems -- what incentives, practices & tools foster innovation across suppliers? null Major finding: Innovation by suppliers is hampered by many factors. This seriously undermines weapon system affordability. null Excessive performance and testing requirements that do not add value null One-way communication flows; concern for secrecy; “keyhole” visibility by suppliers into product system architecture null Little incentive to invest in process improvements due to program uncertainty; limited internal supplier resources; often narrow business case null Major subcontractors switching rather than developing subtier suppliers null Yearly contract renegotiations wasteful & impede longer-term solutions null Recommendations: null Use multiyear incentive contracting & sharing of cost savings null Improve communications with suppliers; share technology roadmaps null Make shared investments in selected opportunity areas to reduce costs null Provide government funding for technology transfer to subtiers 24 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Quick Review of Aerospace Progress null Aerospace industry has made important strides in supplier integration, but this is only the beginning of the road null Production: Supplier certification and long-term supplier partnerships -- process control & parts synchronization null Development: Early supplier integration into product development critical null Strategic supply chain design is a meta core competency null Implementation efforts have required new approaches null Re-examination of basic assumptions (e.g., make-buy) null New roles and responsibilities between primes and suppliers null Communication and trust fundamental to implementation null Aerospace community faces new challenges and opportunities null Imperative to take “value stream” view of supplier networks null Focus on delivering best lifecycle value to customer null Need to evolve information-technology-mediated new organizational structures for managing extended enterprises in a globalized market environment 25 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Supplier Networks Offer Significant Competitive Advantages null Exhibit superior performance system-wide -- greater efficiency, lower cycle time, higher quality null Not an accident of history but result of a dynamic evolutionary process null Not culture dependent but are transportable worldwide null Can be built through a proactive, well-defined, process of change in supply chain management 26 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Key Questions for Aerospace Enterprise Management null Does the size, structure and composition of the supplier network reflect your enterprise’s strategic vision? null Has your enterprise created partnerships and strategic alliances with key suppliers to strengthen its long-term competitive advantage? null Are major suppliers as well as lower-tier suppliers integrated into your enterprise’s product, process and business development efforts? null Has your enterprise established mutually-beneficial arrangements with suppliers to ensure flexibility and responsiveness to unforeseen external shifts? null Does your enterprise have in place formal processes and metrics for achieving continuous improvement throughout the extended enterprise? 27 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Emergence of Strategic Supplier Partnerships has been a Central Feature of Aerospace Industry’s Transformation in the 1990s* null Survey: 85% of firms established production-focused supplier partnerships involving long-term agreements (LTAs) with key suppliers null Major reasons: null Reduce costs 97% null Minimize future price uncertainty 85% null Mutual performance improvement 85% null Chief characteristics: null One or more products, 3+ years 97% null Multi-year design/build 49% null On-going (evergreen) 24% *Responding firms with LTAs; based on an MIT Survey (1994-95) 28 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Case study: Major producer of complex airframe structures Months REDUCED CYCLE TIME (Main Product Order-to-Shipment, months) 36 12 0 5 10 15 20 25 30 35 40 1989 1997 Percent of all supplier IMPROVED SUPPLIER DELIVERY (Dock-to-Stock, w/o prior inspection) 0% 75% 0% 10% 20% 30% 40% 50% 60% 70% 80% 1989 1997 sh ip men t s 19971989 REDUCED SUPPLIER DEFECTS (Defects found at factory floor) 7.10% 2.90% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% Rejectio n s as % o f all incoming sup p lier shipmen t s Case Study Results Show Significant Performance Improvements by Building Integrated Supplier Networks through Supplier Partnerships 29 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks 95 100.0 0 50.0 Established strategic supplier partnerships null Procurement dollars under long-term agreements(%) null “Best value” subcontracts as % all awards 75 83.0 0 76.4* Improved supplier quality and schedule null Procurement (dollars) from certified suppliers null Supplier on-time performance (% of all shipments) 1.9 7 4.9 13 Improved procurement efficiency null Procurement personnel as % of total employment (%) null Subcontracting cycle time (days) 162542 Reduced and streamlined supplier base null Number of direct production suppliers AFTERBEFORE KEY PRACTICES BEFORE: 1989 AFTER: 1997 *Refers to 1991 (%) Lean Lean Enterprise Value Value Focus on Early Supplier Integration Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier integration into design and development process null Nearly 80% of life cycle cost committed in early design phase null Design and development of complex aerospace systems calls on core capabilities of numerous suppliers, providing as much as 60%-70% of end product value null Supplier network represents an enormous beehive of distributed technological knowledge & source of cost savings null What are better ways of leveraging this capability for more efficient product development in aerospace sector? null Worldwide auto industry experience provides critical lessons 30 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology 31 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Difference: Lean Difference: Significantly lower development cost and shorter cycle time Average engineering hours per new car (millions of hours) Average development cycle time per new car (months) Prototype lead time (months to first engineering protoype) US Japan US Japan US Japan 3.4 1.7 50% 61 45 11.8 6.5 26% 45% Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 1985-89. Auto Industry 32 - Bozdogan -Lean Supplier Networks, September 2002 ? 2002 Massachusetts Institute of Technology Lean Lean Enterprise Value Value Lean Difference: Auto Industry Supplier Role in Design Lean difference starts with significant supplier role in design and development 1980’s (1985-89) 1990’s (1992-95) US Japan 3% 81% 16% 8% 62% 30% 58% 30% 12% 39% 55% 6% Supplier Proprietary Parts Supplier Designed “Black Box” Parts Assembler Designed Detail-Controlled Parts Source: Clark, Ellison, Fujimoto and Hyun (1995) Percent of total cost of parts purchased from suppliers