Lean Way to the Danger Zone

Looking for motivation on industry topics, I searched around various sites and stumbled across an article on lloyds.com called Building Supply Chain Resilience. The article brought up something that I hadn’t written about yet; lean manufacturing, like most engineering decisions, has risks. This article specifically refers to the natural disasters in 2011 that left large businesses crippled and the negative effects that lean principles have in such cases.

The crippled, or even destroyed, businesses were suppliers for other businesses and manufacturing facilities, which then sell their finished goods to retailers. The effects of disasters reach deeply into the affected industries. Lean manufacturing principles, specifically just-in-time (JIT) production, emphasizes low inventory levels of raw materials, work-in-process, and finished goods so as to minimize costs. For companies that are in the affected disaster area, JIT is ideal because it means losses were minimized. However, if you practice JIT production, what happens when your supplier unexpectedly shuts down or is destroyed by a natural disaster? One day, you’re running at full capacity, at a cheap, low-inventory level when suddenly, your supply runs out. You might get lucky and have a backup supplier, but if you need a proprietary product, you are probably forced to shut down at least temporarily. This is what the article points out as a lack of supply chain resilience. At this point, little can be done, and having a large inventory would obviously help considerably. However, the question remains; how can this situation be prevented?

Natural disasters certainly cannot be prevented. So do you shut down certain JIT production techniques to prevent substantial losses? If so, how much inventory do we keep? Since you can’t predict the timing or extent of the damage from disasters, it’s impossible to determine the optimum level of inventory to hold. If you hold too much, you are costing your company a lot of money for an  extended period of time just because of a rare occurrence. If you hold too little, you won’t survive the storm. The decision would be arbitrary and potentially useless. So what do we do? Are we helpless? Well, if your supplier is in a disaster-prone area, perhaps ditching JIT for raw materials to some extent is a good idea. The true way to prevent this issue resides all the way back into the business decisions made during developmental and engineering stages of manufacturing.

During these developmental stages, key decisions are made: what to make, how to make it, where to make it, and why make it. Certainly, the what and why must be decided before the where and how because a demand must be determined. However, it is the where and how decisions that contain all of the risk. In these stages, suppliers are explored and manufacturing sites/methods are explored. Certainly the cheapest options are the most appealing as long as quality is equal or acceptable between the options. From a business standpoint it is hard to justify spending more money than necessary, after all lean manufacturing tells us the same thing. As noted in the article, this is where risk management comes in.

Risk management involves identifying, assessing, and minimizing/preventing risks and is most often applied to financial investment decision-making. Developing manufacturing processes is also a financial investment, and has many risks. Risk management is used to determine risk of the market for the products made, however it also needs to consider the potential cost of natural disasters or other volatile environments. This may sound ridiculous to some, but many areas in the United States and overseas have tsunami, earthquake, tornado, and hurricane risks each year that can cause significant damage. If risk management is used in this way, lower-cost decisions may be evaluated at higher costs, which may lead to two beneficial decisions: the first being deciding to manufacture your product in a safer, lower-risk area; and the second being choosing a supplier in a lower risk area. Both of which may cost slightly more on paper, but may save your company potentially a very substantial amount of money, which may outweigh the extra cost depending on your evaluation process. Risk management may be viewed as just another way to predict failure, but instead of it being directed at the product or process, it is directed at the overall investment

While lean manufacturing may lead to a lack of supply chain resilience, risk management techniques can reduce the dangers involved with the low resilience. As the saying goes, better safe than sorry. In extreme cases, it may save your bacon; especially if you’re in the pork industry and your pig farm is in New Orleans.

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