Leveling: why customers and suppliers don’t buy into it
When you have been working on improving flow across the value stream, I am sure you have come across a situation where customers seem to order infrequently and erratically. We do our best and level the demand using the principle of heijunka, but still, this increases inventory and lead time. As a supplier, we definitely would love to see customers that order in short and regular intervals with little variability in demand. But we seem to be having a hard time getting our commercial teams and customers on board on our Lean journey…
How strange things are on “the other side of the building”. When we, as a customer this time, are trying to improve the flow of purchased parts and materials, we are often confronted with suppliers that are opposing the move towards highly frequent deliveries. And we are having a hard time getting them and our purchase teams along on our Lean journey…
Now isn’t that funny in a sense? We, as a Lean supplier would love to have level demand and deliver frequently. But our suppliers don’t seem to be willing… And we, as a Lean customer, we would love our supplier to deliver more frequently. But our customers don’t seem to be willing… How come that we, in both roles, want these things, but at the same time can’t seem to get our suppliers and customers along?
Why suppliers want… and don’t want level demand
Let’s first explore the viewpoint from us as a supplier. When we are confronted with non-level (i.e., infrequent, non-regular and variable) demand signals, we either need to level demand or allow the signal to mess up our upstream flows. Both are undesirable.
When we do not level, we allow these individual orders to impact our utilization creating peaks and valleys. The peaks will create the perception of a lack of capacity (although on average there is sufficient capacity), possibly even leading to requests for even more capacity. The case is, most organizations already have more capacity than truly required. In other periods we are then confronted with underutilization and seriously tempted to overproduce leading to even greater wastes. And during moments of peak demand there typically also will be more fire fighting as well as risks for safety and quality. Large orders create “waves” across the value stream, sometimes blocking resources for other work, limiting the overall flexibility in the plant. The intermittent pattern of peak demand and underutilization caused by waves that travel through the value stream also leads to the well-known “traveling bottleneck”. Today it’s this machine, tomorrow it’s the other one… And non-level utilization leads to variable lead times, making it hard to properly commit to delivery dates, and subsequently delivering on these promises. As a result, lead times are often inflated (“let’s release the order at p95 of the lead-time distribution”), just in case, deteriorating the competitive market position of the supplier.
And when we are not producing to order but to stock and try to absorb some of the variation with inventory, the infrequent and variable demand will lead to situations where on one day we are confronted with out-of-stocks (feeding the call for even more kanban in the loop) and the next one we are at (or even over) the max making everyone doubt about the quality of the kanban loop calculation and the usefulness of the kanban system. And as all machines face similar problems and will be held accountable for their service to the next in line, they will all be calling for more inventory at each step in the value stream.
Also, but sometimes forgotten, large orders typically lead to transport and physical delivery and receiving problems. Customers, although they ordered the parts, cannot handle the volume at unloading or the deliveries block their receiving areas. I have seen cases where parts are even sent back, resulting in even more waste related to these returns and their subsequent administrative handling. In any case, large orders that have been received by the customer will not be consumed instantaneously but over a period of time, leading to questions on why the order seemed to be so urgent at the time…
All in all, it is clear that working with non-level demand creates huge amounts of waste across the entire value stream.
All of the above has led to the production leveling or load-smoothing approach used in the Toyota Production System. In this approach, also known as heijunka, we lower the peaks and fill in the valleys as much as possible, and we do so at the part level, i.e., we fully mix all variants and sequence them in the fashion of a true one-piece flow. I always refer to the heijunka schedule as representing our “perfect customer”: he always orders the same amount in a full mix, without any batching. Don’t you just love him?
We should never forget, however, that when we apply heijunka, we need to increase lead time to the customer (to be able to level) and inventories will increase (in the supermarket when we can only level production directly, or in the staging area when we level our staging). So even when we apply load-smoothing, somewhere we need to absorb the non-level entry signal. So leveling can be seen as a compromise, as the least worse course of action. In that sense, heijunka still is “caught in the middle”, between a rock and a hard place and still leads to waste, but only isolated and clearly visible there where it needs to be visible now. But the problem isn’t gone of course!
So in any case, all of the above leads to more waste and unjust cost, and therefore an unnecessary margin loss on both sides. Therefore, as a supplier we are definitely interested in better understanding where the non-level demand is coming from, and – together with our customer – finding was to prevent these patterns to develop. This might involve changing month-end practices on both sides, campaign and batch policies, delivery or pick-up schedules and policies and discussions on who absorbs what, where and why (including the costs of doing so). The overall aim thereby is to create a win-win and to put pressure on the root cause until it can be eliminated.
Suppliers typically feel threatened when a customer proposes changes.
So why wouldn’t our suppliers and purchasing teams also think like this, you wonder?
Suppliers typically feel threatened when a customer proposes changes, fearing prices should be reduced immediately after “buying in” into the proposals. And who can blame them after having gone through these initiatives so often already? For them, highly frequent deliveries typically lead to disconnects with currently existing internal batch-sizes which would call for decoupling and the subsequent requirement for FG inventory. Or alternatively, it would require smaller batches so they will be confronted with more losses due to changeovers and related costs. Another potential effect they will see is the loss of optimization possibilities in transportation. Images of less-than-truckload shipments will typically leave them with a horrifying feeling.
So, in general, suppliers’ traditional and initial reflex will be to see a higher cost. That is, when they don’t see the advantages of level demand and when they don’t try and improve their own capabilities. So we typically turn to price negotiation and try to sell it as an additional service at a higher price. Or as Ohno said, they’ll try the “easy way out” instead of improving their process to be able to reap the benefits for their customer, but also for themselves as we have seen.
Purchasing teams often are afraid of the potentially resulting discussion on proposed price increases and try to avoid them. This then again leads to a lack of internal support for the initiatives towards suppliers.
Why customers want… and don’t want level supply
From the viewpoint of us as a customer, we are interested in getting leveled deliveries in order to reduce our inventory. Reducing inventory has many associated benefits like needing less space, creating allocated zones with improved visual management, opening the door to direct delivery to the production lines, enabling the production of more variants for the market without having to increase storage areas, less safety risks, less quality problems, less shrinkage, markdowns and write-offs, improved FIFO management, less damage, higher re-activity to problems and so on, and so on.
It also leads to a more level demand for capacity at receiving, which may lead to needing less docks and space, and often leads to a simplification in managing the logistics teams that now often are handling peaks on one moment and have little to do at other times.
So also the customer has many benefits from a leveled interface between him and his suppliers. Often this requires discussing delivery schedules, minimum order quantities (MOQs) and multiples, pallet configuration and transportation policies and ordering policies and patterns. Again, the overall aim hereby is to create a win-win and to put pressure on the root cause until it can be eliminated.
So why wouldn’t our customer and commercial teams then be thinking in the same way?
Customers may feel “mothered” by their supplier, proposing changes in the way they should work. After all, “the customer is king”. And of course, they want “just-in-time” deliveries, but “just-in-time” for them often translates into “just-on-time” requiring deliveries in line with their campaigns, batches and orders, whatever they are. Surely it cannot be correct that suppliers tell customers what to do?
Commercial teams, of course, are afraid of these discussions that may negatively impact the relationship with their clients. They are also afraid of being confronted with a demand for consignment stock to overcome the differences in supply and demand frequency. And they are afraid that this obviously needs to be put in place without price increases as weren’t we just explaining it has a lot of advantages for the supplier? Evidently, the perspective of poorer client relationships, consigned stock and margin loss isn’t very appealing to commercial teams. So it will be difficult to get internal support from commercial to try and get customers on board for these initiatives.
Customers may feel “mothered” by their supplier.
How to move ahead?
First, we need to share the paradox that we sometimes don’t seem to want something that “on the other side of the building” we desperately do want. This calls for a top-level, shared vision based upon a shared understanding of the why behind this vision. We cannot tolerate inconsistencies at the level of the vision and its subsequent principles and derived policies. Organizations should be clear on what their future state will be, also with regards to the organization’s material flows from suppliers and to customers. And all teams should have policies consistent with this shared vision.
Second, collaboration has to be sought, starting from the shared objective of creating a win-win for all parties. The goal should be an improved process for both and a closed wallet in achieving it. It means purchasing and commercial need to position themselves as facilitators of the process, bringing the right operational teams together, instead of entering in a commercial negotiation when it is not called for.
Third, both sides need to develop a detailed understanding of how work really works at the gemba and how our current shared practices lead to waste. This understanding should be gained also by commercial functions involved in the discussions (sales, purchasing), facilitated by seasoned Lean practitioners that can accompany the learning of these teams as they are not always accustomed to these processes nor to Lean thinking.
Fourth, it requires hard work to develop, implement and document the way work will work between the partners. As already mentioned, this might involve a change in planning, ordering and call-off processes and policies, MOQs, delivery schedules and windows, incoterms, transportation and so on, often formally documented in a logistics protocol or annex to the contract.
Stop negotiating your way into a new way of working
So the question again was why we can’t seem to get our suppliers on board, if we know it would be beneficial to us as a supplier. And why we can’t get our customers on board when we know it would be beneficial to us as a customer.
Our current way of thinking and our traditional reflexes are in our way. We think more frequent delivery will cost more and we don’t want to start the discussion with our suppliers, afraid it will turn into a price negotiation. The same thing on the other side. We don’t want to take the initiative towards our customers as we think it will lead to increased “cost-to-serve”, margin loss, difficult discussions around price increases and a potential loss of market share.
But when we stick to the level of “negotiating our way into a new way of working” I feel we won’t get very far. We need all parties to go-to-gemba and to jointly see and experience the results of our wasteful practices at the process level. We need to get out of the negotiating game and into the process improvement game. And this requires a change in mentality and attitude between customers and suppliers and in commercial and purchasing teams. It requires collaboration externally as well as internally between these two commercial functions and operations.
So next time you want to integrate Lean thinking in commercial functions don’t start 5S-ing desks and cabinets, don’t start process-mapping indirect processes. Instead, start spreading Lean thinking and intensify internal and external collaboration for the sake of an improved value stream. As it is the value stream that is at the core of fulfilling the purpose of your organization; your “raison d’être”!