How Continuous Improvement Gutted the Global Supply Chain
In recent blogs, we laid out the basics of supply chain management, and discussed some of the macro factors contributing to the increase in supply chain disruptions.
In this blog, we’ll continue with these themes, exploring some of the serious problems that have cascaded down from one of the most popular process management practices of the last several decades: Lean Manufacturing. We’ll take a close look at the way this operating philosophy has directly contributed to the brittleness in today’s global supply chain. Despite its promise for continuous improvement over time, we’ll see that a singular focus on costs and reduced waste has had serious unintended consequences.
As part of this exploration into Lean Manufacturing, we’ll define the term, and cover a brief history of its development. We’ll assess its real benefits, but also take a closer look at the fatal flaws that have emerged from the “uneven” application of its major tenets.
Our Theme: Supply Chain is More Than A Cost-Center
If you’re a follower of this blog, you know that we’ve been outspoken in our criticism of the prevailing idea of supply chain management viewed as a cost center. One of the consequences of that mindset is that supply chain leaders have embraced philosophies that focus almost exclusively on cost reduction: seeking out any and all types of waste, and eliminating them. Lean Manufacturing may be the best known of these broad “cost-only” process management philosophies, but other common methodologies like Just-in-Time, Kaizen, and Six Sigma similarly endorse a “cut at any cost” mindset. What is often missing from these models is a broader perspective that enables business leaders to understand that they can be dangerous when applied in a too-selective, short-sighted way.
Let’s engage in a brief thought-experiment to see exactly what we mean by that.
Lean Sales? What’s THAT?
To illustrate our idea of “too-selective” application — let’s imagine for a moment, applying a lean philosophy in the world of….Sales.
It sounds absurd on its face, doesn’t it? That’s because the very idea violates our business instincts. At a gut level, we all know that Sales is all about one thing: results. Getting to “Yes” and Challenger Selling are just two of the most recent methods, but sales methods have forever had just one over-arching goal, and that is making more and bigger sales happen. No matter how you do it, you must get that contract! So of course, the investments made to achieve these ends are rarely questioned — and more or less never questioned when they work.
Of course, sales budgets are a real thing, but they don’t write (or sell) many books about them. However, on the other end of the dock — we find that supply side philosophies are focused almost exclusively on cost and inputs: people and supplies. And business bookshelves are lined with titles that present new methods in the ancient art of the squeeze.
Whereas sales philosophies have unfailingly focused on getting more, supply chain thinking has been limited to using less. Unfortunately, in a world where supply chain management is becoming more challenging almost daily, and ever-longer lead times have become standard operating procedure, we’ve abruptly learned that there’s only so much water to be pumped up from the supply well. And as that well has run truly dry, we’ve seen even bigger problems emerge — problems so big, no sales method in the world can pull us out of them.
Many companies are finding themselves at precisely this crossroads today. After years of cost-cutting and underinvestment, they’re now working desperately to repair a global supply chain that has seemingly become brittle overnight.
Let’s pull in our focus on Lean a bit more tightly, and see where the origins of its mis-fit with supply chain may have begun.
What is Lean Manufacturing?
The roots of Lean Manufacturing (“Lean” for short) go all the way back to the days of Henry Ford and the first assembly lines for the Model-T. As you know, Ford pioneered the idea of “process management” long before those words were ever committed to PowerPoint. His efficiency experts created single-focus work stations and equipment, all connected by the propelling and steady force of the assembly line. In many ways, his ideas have dominated the manufacturing industry ever since. In 1950, Eiji Toyoda, the nephew of Toyota founder, Sakichi Toyoda, participated in a three-month visit of Ford in their Dearborn, Michigan plant. After studying Ford’s production system, Toyoda developed several additional ideas that decreased costs while also increasing speed and quality. That system became known as the ‘Toyota Production System.’ One of the best ways to grasp Lean thinking is to recognize that it was conceptually framed by the kind of single-focused, just in time, linear assembly model pioneered by Ford and refined by Toyota and others.
What we’re seeing today is just how inadequate that process-model is for a dynamic and all too disrupt-able global supply chain.
The Reach of Lean Philosophy
Today, as described by The Lean Way, Lean embraces a broader concept of efficient manufacturing/operations that grew out of the Toyota Production model. It’s based on the philosophy of beginning by defining value from the customer’s viewpoint, and continually improving the way in which that value is delivered. However, what we want to note is that the core of the lean approach is reductive: eliminating every use of resources that does not immediately contribute to that value goal.
The Benefits of Lean
It’s undeniable that implementing Lean’s laser-focus on resource optimization contributed to much more efficient supply chains. After all, when everyone in the organization zeroes in on cost optimization, those results will be achieved…but of course, downstream effects will also be put into motion.
When I was an industrial engineer at Boeing, we invited experts from Japan to help Boeing create its own version of the Toyota Production System, which perhaps not surprisingly, soon became known as the Boeing Production System. One of the major changes we made to benefit from lean manufacturing principles was adopting a moving assembly line. Our understanding was that movement created urgency for technicians to work faster. A little bit later, we’ll check back in and see how that idea worked out…
Other Companies Using Lean Production
The use of Lean principles soon spread to large-scale product manufacturers like Caterpillar, Textron, John Deere, and Parker Hannifin — and it also became an organizing principle and business philosophy for consumer product manufacturers like Nike and Kimberley-Clark. Cost-saving results always attract attention, and Lean had a great start.
Cracks in The Lean Foundation
When we push in closer to an operational definition of Lean, we see that it achieves its goals “by eliminating every use of resources that is wasteful, or that does not contribute to the value goal.”
This simplifying approach gives Lean its power, but it also leads to serious shortcomings when it comes to inherently complex and dynamic environments like supply chain. In fact, when we examine supply chain over time, we see an environment that is particularly ill-suited to what we might call “isolational” or single-focus approaches. Pulling the lens back to explicitly include the forces of change and everyday business dynamics, we can immediately see some fairly obvious problem-sources. First and foremost, we recognize that what may seem wasteful today, may not be wasteful tomorrow. In fact, what may seem wasteful on Monday, could prove to be a lifesaver on Wednesday…let alone next month, or next year.
Single Sourcing: A Dangerous Way To Save
Let’s take an example like single-sourcing. Of course, single-sourcing is inherently cheaper, because it gives more volume to one supplier, who can thereby decrease fixed costs per unit. In a steady-state world, it makes sense to single-source everything. Dual sourcing? As long as things never change, it will always appear wasteful. But of course, the world we live in is not static. For supply chain especially, it’s just the opposite. Somewhere along the timeline, every single supplier will experience disruption. It could come due to a natural disaster, from political interference, or simply from one or more bad business decisions. And quite often, when these breaks in single-source supply line occur, all of the incremental savings — even if they’ve been made over the course of several years — can disappear all at once.
For Supply Chain, “Value” Must Contemplate Variables
When we focus on the dynamics of supply chain management, we also recognize that the way we define “value goals” may require both broadening and refinement. Again, for most companies, the default goal in supply chain is to reduce costs as much as possible, while maintaining the lowest acceptable service levels. Don’t break your SLAs, but expend as little as possible to achieve them!
The fatal flaw in this perspective is the way it disconnects supply chain capability and flexibility from revenue. Actually, in the midst of the current crisis, leading companies like Amazon, Starbucks, and McGee & Co. have demonstrated that well-run supply chains do in fact contribute, directly, to growing the top-line. This happens by:
- Significantly increasing customer satisfaction, and expanding recurring business
- Operating as an accelerator for new product launches, bringing in new business faster
- Going on offense, and outflanking competitors to grab market share
These powerful options are foreclosed by purely defensive methods like Lean, which defines the singular goal of cutting costs — often at the expense of the company’s broader mission to grow. Again, these consequences may not make themselves immediately apparent, but over the long haul, deficiencies in resiliency and innovative leverage will eventually take their toll.
Too Lean for Innovation?
Lean Manufacturing exalts continuous improvement as one of its key virtues. However, “improvement” within the Lean context means only one thing: continuous reductions in costs. Lean doesn’t look ahead, and it doesn’t look around corners for investments in innovation. Cost cutting will invariably make today’s P&L look incrementally better, but nothing-but cost-cutting can starve a business of the kind of innovations that can lead to major, step-function improvements.
Think of it this way: had he lived until today, Henry Ford might have led the way with electronic vehicles… but not by focusing on improvements on his vaunted assembly line.
For a modern day equivalent, we can look to the lack of adoption for new (and proven) technology within supply chain management. Specifically: almost every other function within today’s enterprise conducts their day-to-day operations within a modern SaaS platform. Sales has Salesforce. HR has Workday. Finance has Netsuite. IT has ServiceNow. Marketing has Marketo or Hubspot. And, so on…
In contrast, critical supply chain processes still run exclusively on…Excel. Worse yet, communications are still predominantly reliant on trusty old email. Yikes. In today’s complex business environments, it simply isn’t viable to track key business updates via spreadsheets or manage real-time collaboration via email.
Just ask all those other departments to give up their SaaS systems, and see what they have to say!
However, the light is beginning to shine through the cracks. It’s nice to see companies like Flexport and Project44 starting to get traction. We need to see more of this innovation, and we need to see it move beyond logistics.
An Object Lesson In Resiliency: The Pandemic
When the first pandemic in over a century swept the globe, virtually every industry was impacted: Healthcare, Education, Retail — and of course, Supply Chain.
Today, while almost every other industry sector has bounced back to normal (and some better than normal, due to accelerated investments in innovation) — supply chain has seemingly been sabotaging the global recovery. Worse yet, this has now been going on for more than a year.
The European Central Bank estimated that since 2020, supply chain disruptions have reduced trade and industrial production in the US by 4.3% and 2.0%, respectively, costing the US economy hundreds of billions of dollars. In Q3 and Q4 2021 alone, Moody’s estimates that global GDP decreased by $354B and $275B, respectively. We can think of these costs as an overdue bill for an ongoing lack of investment in innovation and resiliency.
When other functions snapped back, supply chain stubbornly continued to act as a drain. Bled dry by “continuous improvement,” shipping lanes, manufacturing lines, and warehouse floors had no redundancy, and precious little in the way of executable plan B’s.
No doubt, the pandemic was worse than anyone expected, but it’s also true that the problem of supply chain brittleness had been building for a long time. We can see adumbrations of the pandemic crisis through major disruptions dating back for years — from the Taiwanees floods, to the Tianjin port explosion, to the Japanese tsunami.
Today? Little Improvement
Like that famously unclothed-emperor, the pandemic has exposed supply chain’s physical fragility — and the same dangerous lack of self-critical vision. Unfortunately, to date, very little has been done to fix the underlying problems. We see the roots of these issues in the use of models like Lean, encouraging a cost-first (and in many cases cost-only) conception of business operations.
Just recently, the US baby formula shortage has demonstrated both the endurance of these problems and their roots in a “savings at all costs” philosophy for supply chain. Even with young lives on the line, the US supply chain for baby formula broke down in a catastrophic way. It’s a cautionary tale that we hope will spur not only an immediate reaction, but deeper thought about the roots of these problems. Business philosophy may seem removed and abstract, but when shelves start going empty of baby formula, the problems that the wrong philosophy can cause become as real as it gets.
What Comes Next?
You’ll recall that I mentioned earlier that I was at Boeing when they rolled out the moving assembly line as part of the Boeing Production System. Sad to say, despite heroic efforts, these lines were eventually scrapped, as they ended up being both inflexible and impractical. This failure has stayed in my own imagination as a metaphor for lean manufacturing: along with the idea that “inflexible” sooner or later, leads to “impractical.”
In today’s challenging and dynamic business environment, it’s the fastest and the strongest that will thrive. We’ve seen (and shared above) how some of today’s faster and stronger companies have transcended the cost-center mentality. The best of them understand and approach supply chain management as a profit maker.
This means moving beyond incremental cost cuts, and it means that quarter-to-quarter management won’t cut it anymore.
Here are a few more key moves we’re seeing that offer clear advantages:
- Focus on long-term growth objectives, and implementation of multi-year supply chain strategies that can help drive growth goals.
- Innovation and investment in new technology to make your supply chain real-time, flexible, and agile.
- Offering real rewards for problem solving and critical thinking, and recruiting talent that wants to expand the pie, so that everyone in the business can benefit.
Lean Manufacturing has been around for 70+ years. For many, it may take (even) more than a pandemic to change this deeply ingrained mentality. (Perhaps especially during a tightening cycle in the economy.) But for those who are willing to invest their time and energy to solve what has now become a chronic problem with supply chain, the competitive advantages of developing innovation and resiliency will never be greater.
The time to address this crisis is now — and here’s the bonus: the time frame for the advantages you can reap now will extend far into the future — and may well carry you beyond the next great disruption — whenever it may come.