The Perfect Lean Market:Future Of The Supply Chain

It may be the future of manufacturing, but customization also may herald change for manufacturing models. Replenish-to-stock is less viable when each car is a custom mix of components. Consumer choice can render forecasts outdated in just days – or less, and conventional planning in daily increments is too slow.

     Auto manufacturers can offer thousands of option combinations for a car’s exterior, interior and detailing. And they plan to fuel consumers’ passion for personalization with new cars such as the Scion FUSE from Toyota. Unveiled at the 2006 New York Auto Show, the FUSE even has headlights and fog lamps that can be customized to light up in different colors. 

     It may be the future of manufacturing, but customization also may herald change for manufacturing models. Replenish-to-stock is less viable when each car is a custom mix of components. Consumer choice can render forecasts outdated in just days – or less. Conventional planning in daily or longer increments is too slow.

     The risk of supply and demand imbalance looms larger than ever. Call it waste, in manufacturing parlance, or call it friction, in the language of e-commerce. When they can’t predict demand and produce goods based on quantity, suppliers must find ways to understand and respond to the rate of demand, and adjust their rate of manufacture, to minimize friction.

     That approach requires the right information at the right time – conditions for what economists call “the perfect market.” For manufacturers, timely, equitable flow of information could lead to the perfect lean market, in which the rate of supply and rate of demand are aligned.

Cashing in on standardization, collaboration, automation

     Economists might point out the evolution of payment illustrates the requirements for progress toward a frictionless environment: standardization, collaboration and automation.

     There was nothing standard about the earliest currency, used in ancient Lydia. Though consistent in size, coins’ composition varied – and so did their perceived worth.  Thousands of years later, the Spanish real was suitable for world trade: Its specifications and gold composition were standard. Although the real’s manufacture reached beyond Spain, equivalence was not an issue.

     Bank notes brought convenience, but notes – and then personal checks – could be redeemed only at the issuing bank. Travelers’ checks restored standardization with guaranteed value. In the mid-20th century, New York merchants and banks chose to collaborate on another payment standard and introduced the Diners’ Club credit card, freeing consumers from cash and individual store accounts.

     The ATM’s debut in the late 60s brought access to cash, but limited to ATMs within the bank’s network. Once banks collaborated on a standard for automated data exchange, consumers could use any ATM – a boon for them and their banks.

Manufacturing gets in line

     The manufacturing sector also has charted progress thanks to standardization, collaboration and automation.

     Ford’s assembly line standardized a fundamental process. In the 1920s, General Motors and others took the next step and standardized the components of assembly so that they could be manufactured by other firms. This brought a measure of predictability to assembly and engaged suppliers in a closer relationship: the supply chain.

     Cooperation evolved into closer collaboration that remains important today. For example, Nissan Motor Co. and Suzuki Motor Corp. recently announced a plan to produce cars for each other in markets around the world, including collaboration in emerging markets by sharing manufacturing plants.

     In the 1970s and 80s, automation matured as a means of eliminating friction. From the Oliver Wight Checklist published in 1977 to the Toyota Production System (TPS), techniques for standardization and consistency improved operations inside the enterprise, including workflow communication.

     In the last decade, the Internet has introduced a standard platform for communication inside and outside the enterprise. In contrast to electronic data interchange (EDI) networks, the communication of information is not determined by proprietary requirements.

New pressures

     Meanwhile, product complexity has grown and so has potential for friction. The forces of globalization, customization and sophistication have put unprecedented strain on the foundation of standardization and collaboration laid by Ford, GM, Toyota and others over the last 80 years.

     Airbus and Boeing are two manufacturers that are feeling the effects. According to the Wall Street Journal, Airbus announced A380 delivery will be delayed until 2009  in part due to problems in the installation of sophisticated in-flight entertainment, communications and other systems provided by its customers. The ripple effect of changes to the 555-seat passenger jet’s highly integrated electronic systems requires engineers to check the rest of the plane’s design.

     Boeing recently told BusinessWeek  that its competing entry, the massive Dreamliner 787, has experienced similar problems. Its electronic and software systems are proving difficult to integrate, a challenge exacerbated by strained communications among competing vendors working on the plane.

The perfect lean market

     Industry progress shows that when manufacturers work together, use agreed-upon conventions for conducting business, automate operations, and take advantage of greater connectivity, friction is replaced by clarity, agility and unity – the characteristics of the perfect lean market, where information flows freely. 

     Standards for data and information exchange enable systems to receive and process information automatically and even instantly, inside and outside the organization. Manufacturers such as Johnson Controls Inc. are pioneering a new era in just-in-time production, signaling suppliers to change their workflow in near-real-time with changes in demand. That responsiveness underpins the agility to keep pace with the rate of change in demand. In contrast, quantity-based production, and forecasts and scheduling in intervals, create friction between demand and the right level of inventory.

     The effect of cooperation between manufacturer and suppliers is unity. Food manufacturer Gorton’s has challenged suppliers to adopt lean practices. Collaborating consistently, Gorton’s and its vendors may respond to events more quickly and competitively.

     Standardization of technology fosters unity, too. North America’s Automotive Industry Action Group and Odette, its European counterpart, are developing standards for sharing inventory data. Even regulation such as the U.S. Food and Drug Administration’s requirements for electronic signatures is driving standardization and unity.

     Finally, agreement on a common way to communicate lets trading partners – and their systems – “understand” one another. The Web provides information flow without the friction that accompanies proprietary systems. In the banking realm, this means funds can be transferred from bank accounts to businesses, to purchase goods or pay bills. For manufacturers, Web-based communication can yield clarity about what’s selling, where, and how quickly.

Letting go without losing control

     But its taken manufacturers some time to identify how best to take advantage of the Web to share information. The earliest public Internet exchanges faltered because data was disseminated more widely than participants required or preferred.

     Now, manufacturers and industry organizations are using a mix of Web- and enterprise-based approaches to eliminate friction throughout the supply chain. They’re making progress toward perfect lean market conditions that can benefit advanced initiatives such as distributed production, where insight into

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