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Strategic sourcing and lean manufacturing with value stream roadmapping

By Eric Olsen

We have arrived at the nexus of two powerful trends in business process improvement and product manufacturing operations management. One, lean operations, offer streamlined flow of value to the customer with minimal inventory and waste. The other, outsourcing, offers dramatically lower cost of goods sold (COGs).

Both can result in highly competitive pricing positions and healthy profit margins. Both trends are ostensibly valid responses to competitive price pressure, offering significant advantages with respect to cost. Combining the two would lead to an advantage, but one might ask, is ‘lean outsourcing’ an oxymoron? Many companies see the trends unfolding in this manner, viewing the outcome as no more than a tradeoff.

How do executives remain true to the tenants of lean while stretching their company value stream across the globe? How do companies build close relationships with suppliers if each party speaks, and acts, differently? How does an organization make value ‘flow’ when its raw materials, or products, might be arriving in batches the size of large, ocean-going ship containers, or perhaps even the size of the container ship?

The situation becomes more complex when you realize many companies started their lean efforts in an attempt to save jobs from going overseas by avoiding outsourcing and offshoring.

Identify value
For a partial answer, let’s look at the first principle of lean thinking: Identify value. Womack and Jones, in their seminal work, “Lean Thinking” (Womack and Jones, 1996) lay out five principles, or steps, on lean thinking (Figure 1). Step one is to develop a thorough understanding of ‘why’ the customer is buying your product. Or, in other words, ‘how’ does he value the product or service your company provides.

Figure 1

Too often, companies take step one for granted and then immediately move on to mapping value streams; cutting waste, and implementing kanban systems and continuous improvement — all the while, losing sight that neglecting a thorough identification of the ‘value’ can lead to not one, but possibly four, different outcomes. A two-by-two Value/Process Position Matrix displayed below (Figure 2) describes these four potential outcomes.

Figure 2

 

It’s important to keep in mind traditional manufacturers are becoming increasingly rare. For most companies, manufacturing executives are abandoning mass production and vertical integration models and are embracing a variable-asset business model or, outsourced contract manufacturing model, enabling companies and executives to become more globally competitive.

In looking at contract manufacturers, or electronics manufacturing services (EMS) providers, those with a track record in lean manufacturing may have a competitive advantage with original equipment manufacturers (OEM) looking to go lean. (Tuck, 2006) A recent study by Oracle Corp., and conducted by Beacon Technology Partners (Baljko, 2005), confirms our own research that companies engaged in some form of lean implementation initiative have surpassed the 50 percent point.

 

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Moving away from traditional manufacturing, there are two failure paths if the company gets only the value or the process correct. Companies that understand how their customers value ‘their value proposition’ (e.g., get the ‘value’ right) can fall into the short-term trap of chasing low-cost sourcing around the globe.

These companies may enjoy a temporary advantage but, competitors soon find equal or better delivery process solutions and, ultimately, their position is not sustainable. Companies that incorrectly identify value may succeed in developing an effective system for delivering that value (e.g., get the ‘process’ right), only to see they have missed the market with an attractively priced product or service no one wants.

 

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Being truly lean
The only sustainable position in the matrix is to be ‘truly lean’. In this position, companies have correctly identified the value or, at least for the present, they have a better value proposition than their competitors. Executives must then proceed to empower their leaders and teams to design and execute processes to optimize delivery of the value identified.

Every appropriate tool in a company’s lean toolbox is made available. The process is completed correctly only with a generous amount of long-term thinking; proper guidance, employee involvement, and resource investment. Everything is fine. For awhile…at this point, you are the quintessential lean competitor.

However, to be ‘truly lean’ means a company has signed-on to chasing a moving target. Many manufacturing organizations seem to miss the dynamic nature of value.

Toyota, the foremost lean manufacturer in business today (with its now famous, industry-leading Toyota Production System (TPS), which many companies have tried to copy but few have been able to duplicate) views value as a combination of cost; quality, and time. Cost is the total expense involved in the delivery of the product.

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