How Lean maximizes value by eliminating waste while maintaining high levels of customer service
A "Lean" supply chain subscribes to the management philosophy that driving out waste is a sure route to business efficiency. Penske Logistics supports Lean practices as part of its culture of continuous improvement.
The COVID-19 pandemic has shined a light on Lean supply chains, especially the unending struggle to minimize inventory volumes without compromising service quality. The spectacle of empty supermarket shelves during the early part of the pandemic served as a stark reminder of what can happen when inventory and service levels are out of sync.
There is always room for constructive reappraisals of operational models. And Lean will continue to be a key strategy for managing supply chains, albeit with the benefit of lessons learned from the pandemic experience.
The Pandemic's Burning Platform
Even though Lean has become foundational to supply chain management, it is still subject to misinterpretation. A common misconception is that this management philosophy is essentially about taking people out of business operations. While this can be an outcome, it is far from the primary purpose of Lean.
In essence, Lean maximizes value to the customer by eliminating waste from processes. Another interpretation is that the model strives to meet customer needs with as much precision — and hence as little inventory — as possible.
Excess inventory is a form of business waste that ties up capital and consumes organizational resources that are better deployed elsewhere. Over recent decades, companies have made considerable strides in reducing inventory volumes while maintaining high service levels.
However, COVID-19 delivered a shock to the system that gave companies pause about their ability to unerringly fulfill customer demand during surges when product stockpiles had been cut to the bone. The crisis has sparked much discussion about the need to revisit approaches to safety stock management.
Planning for Uncertainty
To a large extent, these conversations are centered on managing the risks associated with fine-tuning inventory to shifts in demand. During the pandemic, high-profile product shortages appeared to prove that inventory pruning has gone too far. An understandable reaction to these emergencies is to review or even reverse inventory reduction efforts. Such reviews are sensible — provided they are based on robust analysis and not just knee-jerk reactions to headlines.
For example, a client company in the food business asked Penske Logistics to evaluate the addition of two safety stock locations to its distribution network. The extra inventory would provide some insurance if a pandemic-related surge hit the company.
"We ran various total logistics cost models that looked at the cost of transportation, warehousing, cross-docking, and inventory should the company add the locations," says Andy Moses, senior vice president, sales and solutions for Penske Logistics.
Another Penske customer was concerned about what might happen if a severe disruption struck the external distributor network it sold into, preventing the network from functioning.
In this case, looking at contingency planning around different models of distribution, Penske modeled alternative models and cost implications in terms of critical parameters such as warehousing costs.
Changes in inventory management need to reflect the company's risk profile, notes Moses. A risk-averse enterprise may skew toward supporting plenty of buffer stock, while a risk-tolerant company might take a much leaner approach. The modeling capabilities and deep domain knowledge of a leading third-party provider such as Penske are invaluable when evaluating different approaches. For instance, Penske can present alternative distribution scenarios based on different degrees of risk.
As the pandemic subsides, Lean supply chain practices will likely evolve with increased activity around contingency planning and continuous improvement. Increased interest in planning for demand surges is likely to persist. And Penske Logistics will continue to leverage Lean alongside other continuous improvement tools such as Six Sigma and Kaizen.
But the pandemic will not diminish the importance of Lean. "Competitive companies will still be the ones that figure out how to handle surges by eliminating waste through shorter lead times and fast product flows — to navigate surges with a minimum of inventory," says Moses.