Insiders Insight: Lean Logistics Deliver Results

By  Jim Womack and Dan Jones — July 27, 2006




While RFID technology is all the rage, nobody can forecast whether this ambitious initiative will truly take hold or what the real benefits will be. Giant retailers such as Wal-Mart, Target and Albertsons have begun affixing RFID tags to cases and pallets but are finding that issues ranging from costs to standards to the critical mass needed to gain the promised benefits are proving thornier than predicted.


Yet theres a more fundamental reason why supply chain managers should reconsider the value of RFID: This much-touted technology fails to address the real sources of waste cluttering up supply chains at a tremendous cost. As hard as it may be to believe, especially for tech-savvy managers at the beginning of the 21st century, these systemic problems cannot be fixed with more information.


Consider the case of food retailers. Over the last decade these firms have demanded a very rapid response and perfect quality from food manufacturers. The manufacturers have endeavored to forecast exactly what the retailers will order and have supplied them from stocks of finished goods held in their distribution centers. Both parties have invested large sums in more advanced planning and forecasting systems. However these measures have not significantly improved the accuracy of forecasts or the data on which they are based. Nor have they led to a reduction in total inventories in the channel or to higher in-store availability. Food manufacturers are still juggling gyrating orders from retailers and changing their schedules on a daily basis, a problem that more information from RFID tags cannot solve.


Tesco Learns from Toyota


The real solution entails completely rethinking the flow of goods through the entire supply chain. One company has demonstrated the enormous savings to be gained through the concept of lean supply chain management. In 1996, Tesco recognized how much the company could learn from Toyota, whose aftermarket parts distribution system supplying more than 400,000 parts numbers to thousands of car dealers is probably the most efficient supply chain in the world. Based on previous experience with its own suppliers using its famous just-in-time or pull system, Toyota in the 1990s pioneered a series of tightly integrated replenishment loops all the way up the distribution and production stream.


After working with its suppliers over an extended period, two thirds are now capable of making every part each day to exactly fulfill daily orders and Toyota has achieved industry-leading levels of part availability at dealers. At the same time it has achieved the lowest stock levels in the total channel, with smooth orders from a single ordering point for the entire channel at the service bay in the dealer where the parts are actually consumed. To benefit from this approach in the grocery industry, Tescos first step was to build the capability to replenish every store several times a day from its regional distribution centers. This dramatically increased on-shelf availability and reduced the cost of stocking shelves because many fast-moving products could be packed on dollies at the factory and simply rolled from truck to truck through a Tesco cross dock and to the point of sale in the stores.


Having every store order several times a day on the basis of point-of-sale data also has taken noise out of the order signal. Previously scheduling systems at headquarters, at the Tesco distribution center, at the manufacturers distribution center and at the factory were battling with each other and were being constantly overridden by managers to deal with perceived anomalies. By having each point simply reorder from the next upstream point the amount that was just consumed by the next downstream point and by introducing frequent, predictable pick ups at each point it was possible to dramatically smooth and accelerate the entire channel.


For smaller retail points and smaller suppliers it may take time to sort out the best combination of consolidation centers, mixed-product milk rounds for pick-ups, and cross-docking. But 7-Eleven in Japan, which runs just such a synchronized distribution system, has learned that little and often delivers higher availability at lower total cost than waiting for a full truck load before delivering to retailers. The savings results from precisely timed deliveries with no waiting to unload, no expedited shipments and much higher truck utilization.


Smoother Ordering


The biggest gains of lean logistics will occur at the manufacturers where smoother orders and more frequent pick-ups will permit lower finished goods stocks, smoother factory operations, and the elimination of manufacturers national distribution centers.


This information management system is reflexive, because each step in the process signals an immediate need to the next upstream step in the process. There is no need to send information to a central brain in the form of a computerized Material Requirements Planning (MRP) system.


The key point about the use of information is all too often missed in the RFID debate. Too much inventory in too many locations is the real culprit, which will only be obscured by new and enormous oceans of RFID information. As Tesco has shown, lean logistics systems are capable, transparent, reflexive and responsive. They produce better results at lower total cost while needing much less information. This simple insight should move the whole debate over RFID to the back burner, where hopefully nobody will get scorched.


Womack and Jones are the authors of the book Lean Solutions: How Companies and Customers Can Create Value and Wealth Together.



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