High-Tech Manufacturers Walk a Fine Line to Get a Lean Supply Chain


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By Chris Cookson

Can the lean supply chain get too lean? That’s a hot topic now that Toyota is suffering safety and quality woes possibly related to its supply chain. While the lean manufacturing pioneer grapples with the fallout and recovery from “unintended acceleration” and other issues, high-tech manufacturers would do well to view the troubles at Toyota as a cautionary tale in lean supply chain practices. Regardless of the final verdict on Toyota, the supply chain can, indeed, get too lean. As a veteran of several lean implementations in the high-tech industry, I’ve got a few suggestions for staying on the right side of the lean line.

Don’t dismiss Toyota. People who say that Toyota has messed up because of lean are not clear about Toyota’s history or the real root cause of their problems. Toyota has a great supply chain as well as the original and best, long-term implementation of lean manufacturing. In fact, the Toyota Production System that the company started to develop in the 1950s is the original blueprint for lean manufacturing. The real root cause of their problems: the change of strategy in the 1990s to become the largest automotive manufacturer in the world. Bottom line, they tried to grow too fast!

More humbling for U.S. automakers, Toyota drew heavily on the works of W. Edwards Deming, an American. After Toyota successfully implemented lean, the U.S. automakers adopted lean manufacturing. Bottom line, whatever lessons Toyota may learn from any supply chain errors will certainly be worth studying.

Pay attention to the details. Many lean implementations are done sub-optimally. They may look good because of the emphasis on the visible. People pay attention to establishing visual controls, fool-proofing assembly lines, laying out factory floors and “walking the Gemba” — all of which are great. You have to do those things. But that’s only half the job.

The other half of the job involves the unseen. Utilizing analytics and statistics to understand, control and then improve processes. Whether it’s measuring variability of output from a CNC machine or understanding demand patterns, you have to be reasonably sophisticated in the way that you apply these techniques in a lean environment. You have to be able to collect and interpret data correctly to do things right, e.g., know what your inventory level needs to be to provide a desired service level or know when a result is outside a control limit. When you don’t pay attention to the details — or you don’t know what you’re doing with the details — things can (and will) go wrong.

Reinterpret inventory. Lean manufacturers view inventory as a necessary evil. Why? Because as a manufacturing discipline, lean encourages the elimination of waste, which includes inventory. Meanwhile, Wall Street takes a negative view of inventory when it comes to corporate valuation. To Wall Street, inventory is a non-performing or under-performing asset.

But manufacturers can’t just take inventory out of the supply chain altogether without exposing themselves to many risks. Look at Texas Instruments, for example. It cut back so much in the downturn that a lot of their parts are factory allocated, and Texas Instruments can’t make enough, fast enough to meet overall demand. The company cut everything back, from manufacturing facilities to staff, and it took all of its inventory out of the supply chain.

Another way manufacturers reduce inventory levels is to implement vendor-managed inventory programs. Dell is a good historic example, having earned raves about its supply chain as best in class with a negative cash-to-cash cycle and a configure-to-order model that had a two hour lead time from order to build complete. Basically, Dell pushed its entire inventory into warehouses that sat next to its factories. Until it’s actually delivered to the Dell factory, the inventory is owned by the vendors. Dell has immediate access to inventory, but the vendors carry the burden when Dell was probably best suited from a cost of capital perspective to actually own the inventory.

Unless you have a perfect supply chain, you’re going to need inventory to help manage supply and demand. And for most high-tech manufacturers, that means walking a fine line to get a lean supply chain.

Josef Ruef
Co-founder Josef Ruef is president and CEO at Verical, an online outlet for electronic components that provides buyers traceable, branded goods at discount prices.


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