Supply Chain Excellence: A Manufacturing Firestarter
Manufacturers feed on the flames of innovation, R&D, and operational efficiency. But when it comes to seeing beyond the plant, supply chain excellence can spark a world of change.
One core foundation of Lean manufacturing and the Toyota Production System (TPS) is the Japanese concept of heijunka—leveling production by volume and mix to mediate variability. The objective is to create a smooth flow of raw materials and finished product while reducing labor, inventory, and defect waste. Production leveling is the reason why automotive manufacturers often assemble different car models in smaller batches; it allows them to build more low-volume product efficiently and economically.
Just-in-time manufacturing does incur costs, notably in the transportation of smaller, more frequent quantities. But better asset and time utilization, and greater standardization, can go a long way toward offsetting these other bleeds. More importantly, manufacturers that match production to demand reduce lead times, and can quickly react to change. That's a competitive differentiator in any market.
Production leveling is a strategy that makes sense beyond just cell manufacturing and the assembly line. Businesses of all stripes struggle with variability—seasonal or otherwise. Sudden, unexpected demand spikes or troughs present planning and execution challenges. When shippers have to scale up or down without warning, costs escalate.
This is especially relevant in today's world. Global consumerism has become so dynamic that suppliers, manufacturers, distributors, carriers, and retailers have to be flexible. A one-size-fits-all supply chain is too rigid to accommodate the kind of chaos e-commerce, omni-channel, and 3D printing spawn.
Manufacturers are still vulnerable to change even though they have become sophisticated at mass customization. The reasons are manifold. Global currency volatility, commodity prices and corollary bullwhip effects, and evolving sourcing/selling paradigms give manufacturers and their supply chain partners every incentive to be hyper-reactive—better yet, predictive. They don't want to be on the tail end of change with no other recourse than to ride it out. Demand signals and supply disruptions consequently have greater sensitivity.
This point is driven home in a recent Accenture study—How Leading Manufacturers Thrive in a World of Ongoing Volatility and Uncertainty. The management consultant surveyed 250 executives from manufacturing companies around the world. Nearly nine in 10 U.S. respondents "agreed" or "strongly agreed" that the ability to flexibly and dynamically move production from one existing facility to another, or to change the product mix at an existing facility to match demand, is critical to achieving growth goals.
While there's consensus that flexibility is important, finding it is a whole other matter. Supply chain visibility becomes paramount. So does partnership. Manufacturers thrive on innovation, research and development, and operational efficiency. They do well managing the things they can control. But when it comes to transportation and logistics, and seeing beyond the plant, third-party perspective can complement a world of change.
Whirlpool's Supply Chain Spin
In summer 2006, appliance manufacturer Whirlpool brought Reading, Pa.-based Penkse Logistics on board as lead logistics provider (LLP) for its North American supply chain—augmenting the 3PL's existing transportation responsibilities. The manufacturer's acquisition of Maytag one year earlier partly precipitated the move. Whirlpool wanted a more strategic partnership predicated on network visibility.
"The relationship with Penske started heavily on the inbound side; with Penske managing the transportation of components from our supply base to our manufacturers," explains Jim Thompson, senior manager of transportation for Whirlpool, based in Benton Harbor, Mich. "It then expanded into outbound distribution to support finished goods through our network."
By the late 2000s, as Whirlpool was expanding into Canada and Mexico, Penske's purview grew as well. It became accountable for inbound materials into all eight U.S. manufacturing facilities and five locations in Mexico, as well as outbound distribution for both U.S. and Canadian markets.
As a global manufacturer, Whirlpool has progressively moved toward regionalizing its supply chain, manufacturing closer to demand.
"Whirlpool builds and sells more than 80 percent of product in the United States," says Thompson. "We import a small volume from Mexico, but that production primarily supports the Mexico market. The same holds true around the world."
Because Whirlpool is heavily invested in the United States, it hasn't felt much of a nearshoring pull. "We never went offshore only to have to bring it back," Thompson adds.
Whirlpool's business is tied to the overall health and performance of the U.S. economy, especially the housing market. As consumer confidence and discretionary spending ebb and flow, so does the manufacturer's business.
Like other U.S. shippers, Whirlpool is challenged by domestic transportation dynamics. Dealing with driver and capacity constraints, and ancillary costs, presents a huge obstacle.
"Working with Penske over the last four to five years allowed us to diversify transport modes from boxcar to intermodal to over-the-road, and even small parcel where it makes sense," Thompson says.
An Outside-In Approach
Penske Logistics' role as LLP has marked the cornerstone of Whirlpool's North American supply chain transformation. The two companies have been working on building a Transportation Center of Excellence since 2006—in effect, creating an integrated and outsourced transportation management program to help Whirlpool reduce costs and improve service.
The manufacturer maintains control over capital assets—facilities, technology, and carrier contracts—while the 3PL oversees day-to-day transportation management and distribution center operations. Whirlpool has its own TPS-type model cast within the organization. Penske has become an extension of that system, all the way through distribution. It brings an "outside-in" approach to eliminate costs and standardize processes.
"If we were a manufacturer, we'd make data," says Bob Daymon, vice president of transportation management for Penske Logistics. "Our role as LLP is to figure out how to use that data to drive the network forward, tailored to Whirlpool's processes and desired outcomes."
The manufacturer similarly benefits from Penske's perspective. As an LLP, it works with myriad companies in automotive and other industries, which provides different insights and best practices that can be adopted and applied accordingly.
Control Tower Power
But the key is data. Increasingly, companies are pushing Lean and Six Sigma directives by paying closer attention to granular-level details.
For example, Accenture's manufacturing survey suggests that companies should implement a control tower to increase visibility, reduce variability, and provide better decision support. Such action yields four critical takeaways:
- Allows the manufacturer integrated visibility across all dimensions of its network, including demand, capacity (supplier, manufacturing, and distribution), inventory, orders/shipments in transit, and logistics partners.
- Helps the manufacturer conduct predictive analytics to make sense of the data it collects to trigger alerts, detect tipping points, run what-if analyses of scenarios to model the outcome of potential decisions, and ultimately initiate appropriate action.
- Empowers the manufacturer to monitor the execution of supply chain activities, and alert one part of the supply chain when it will be impacted by another—for example, predicting raw material shortages and reallocating production and inventory accordingly.
- Helps the manufacturer orchestrate the work of shared service centers—enabling a "super back office" to maximize business process, IT investment, and execution skills synergies across businesses and geographies.
In Whirlpool's example, Penske is that control tower for its North America operations. From the outset, both companies outlined key milestones they wanted to hit as the partnership progressed.
"When we began this relationship, our guiding principle was to use data to make decisions," Daymon explains. "By focusing on data accuracy, timeliness, and completeness, we're not driving the supply chain by looking through the rear view mirror."
Traditionally, shippers and service providers dig through freight bill data, and start building models to better understand performance, find tactical problems, and prescribe business process fixes. Penske took a more proactive approach by using data to predict what will happen, and getting out in front of carriers from a capacity perspective.
It's not unlike the way manufacturers engineer just-in-time production systems—getting better forecasts, synchronizing upstream processes to pull in accordance with demand, and leveling variability. It's just happening on a bigger scale at a macro level. Whirlpool is allowing its manufacturing strengths to bleed into other aspects of its supply chain, with Penske's assistance.
"Whirlpool has its own system that is well-defined and built around competencies, as well as the appropriate structures and milestones," says Thompson.
Whirlpool has a culture of continuous improvement. Lean Six Sigma runs through its production and distribution nodes. But over the past several years, the company has made a greater effort to extend this ethos throughout the entire organization.
"We have dedicated resources assigned to each functional area that are responsible for embedding Lean culture beyond the four walls of manufacturing or even warehousing," says Thompson. "We are investing around the concepts of Lean and Six Sigma to drive standardization and improvement in the overall process."
Dating back to the late 1990s, distribution and manufacturing have worked in lockstep. But now, Whirlpool is taking Lean Six Sigma to finance, human resources, and other back office support functions.
"Lean Six Sigma is a key piece. Our daily focus is weeding out cost and inefficiencies," says Daymon. "Transformations—some small, some big—happen every day."
Whirlpool's center of excellence is built around agility. Whether it's absorbing a Maytag acquisition, weathering a housing market crash, or providing greater latitude to expand as the economy rebounds, the company has a sustainable structure in place that can flex and adapt to change.
"Consider the market dynamics we had to deal with in 2008," says Thompson. "We had to adjust down and make sure we had flexibility within our network. Accurate data allowed us to make precise decisions."
Whirlpool also recognized that Penske needed end-to-end access to planning functions in order to become a true extension of the enterprise, and fully optimize transportation operations. That requires a certain level of trust between the two companies.
While Thompson acknowledges the center of excellence has been transformative, he's also quick to point out that this change has been evolutionary, not revolutionary. "We didn't just bring Penske in and flip the switch on the network," he says.
It has been a multi-year journey. Penske's scope and touch has slowly expanded as the project hit new milestones and contracts were renewed. The 3PL has become as much an input to setting strategy as it is executor.
Objectives and expectations have similarly evolved as the two companies refine metrics and data to get a better read on future trends. This pays dividends in some interesting ways.
"When we started out, we decided to just get the data and metrics right, see how it performs, then figure out how to optimize transportation," says Thompson. "Today, we're taking a more holistic approach by looking at how we can get ahead of the curve, especially as the economy improves.
"We're in a better position to forecast out and provide some reliability to our carrier base," he adds. "Carriers want shippers they can depend on. When we award a bid, we consistently tender that business. We provide heavy drop-and-hook, driver-friendly scenarios."
As capacity tightens, and carriers start picking where they want to put their assets, they'll want to do business with companies such as Whirlpool and Penske because they have a good handle on demand. In a hardening market, that type of value is hard to come by and increasingly important.
The Toyota Production System has had a profound impact on how manufacturers approach variability and work flow on the shop floor. So it's little wonder that many are taking a page out of their own production manuals to better manage variability elsewhere in the supply chain. It's a trend that transcends even the manufacturing space as other industries follow suit.
Whether it's adapting Lean and/or Six Sigma best practices throughout the enterprise, shortening lead times by nearshoring production, or separating non-core functions and outsourcing, manufacturers are creating latitude in their networks to account for demand variability—good and bad. Agility has become a critical success factor, especially as economic uncertainty persists around the world.
Whirlpool's Transportation Center of Excellence demonstrates how one company is moving the outsourcing needle in a different direction to build more responsiveness and resiliency in the supply chain. As Penske's Daymon suggests, a rear-view-mirror approach to data analytics and process improvement works to an extent. But at some point, companies need to move beyond that myopic focus and find a more holistic view of upstream and downstream flows to get ahead of the variability curve.
That's where and why lessons from the just-in-time assembly line resonate.