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Supply chain managers can thank thinkers like Ian Glenday for providing tools like the Glenday Sieve analysis. The Glenday Sieve can help you and your enterprise begin to identify and separate out the stability hidden beneath the chaos and firefighting that seems to dominate daily activity.


The chart above shows a Glenday Sieve analysis of three actual working warehouse. This analysis is by volume (usage quantities for SKUs). (We will discuss other options later.)

What strikes most folks when they look at this graphical presentation of the data is the fact that for all three warehouses, 50 percent of the unit volume is reached with fewer than twelve percent of the SKUs.


Actually, Warehouse W100, in our sample set, is a very small warehouse—carrying only 30 SKUs in total, so it is slightly outside the norm. The larger warehouses (i.e., W200 and W300) are more typical, reaching 50 percent of their unit volume with fewer than six percent of their total SKUs.


To the astonishment of most who see their company’s data in this way for the first time, typically 95 percent of the typical warehouse volume will involve fewer than half their total SKUs.


The tail that wags the dog

Consider this: In most warehouses, the last one percent of unit volume is spread across 30 percent or more of SKUs.


This is the long tail that “wags the dog.”


It is, generally, the low-volume SKUs with, more often than not, relatively high demand volatility, that consume most of the time and energy in operations management.


Sadly, that time and energy is not, most often, spent in production and improvements. Rather, it is all too frequently time and energy wasted in firefighting and attempts to minimize the impact of chaos across the rest of the organization—or supply chain.


By the way, the same situation probably exists all across your supply chain. Segmented by supply chain—rather than warehouse—a Glenday Sieve analysis would probably give you very similar results.


Start by focusing on the underlying stability


If we want “the tail” to stop “wagging the dog,” it should become readily apparent that we need to not attempt to manage our inventory, our operations or our supply chain the same way across the full range of SKUs.


Ian Glenday and other have suggested that products and processes can be broken down conveniently in four “streams” or flows:



When your management team looks at all of the daily firefighting, expediting and energy it takes to get through a typical day or week, it may seem overwhelming to even think about spending even more time and energy on lasting improvements.


However, when seen in the light of the Glenday Sieve, it no longer seems so overwhelming to spend some time focusing on just six percent of products or processes to begin a process of ongoing improvement (POOGI).


This (typically) six percent of products constitutes an underlying flow of stability in the midst of what otherwise might appear to a sea of turmoil in your supply chain or on the production flow.

Focusing on just six percent seems like a reasonable goal, especially when the reward for the effort—any improvement gained—will affect half or more of your volume.


Seeing things in this way may help your executive and management team to discover that there is light at the end of the tunnel. And, improvements in “the green stream” will free up time, energy (and, perhaps, money) to begin improvement efforts on “the yellow stream,” as well.


Steps toward improvement and agility


This kind of analysis and the adoption of a POOGI (as an executive-sponsored program, not a one-time effort) has led to dramatic improvement in a great many organizations.


In order to stop the tail from wagging the dog, some enterprises have segmented their processes based on “the streams.” For example, green and yellow stream products are run on separate lines or managed in separate supply chains from products in the blue and red streams.


This kind of arrangement helps quiet the chaos and stop the firefighting over upwards of 90 percent of the volume. It also liberates the blue and red lines to make more time available for changeovers and setups that may be required to handle the broader range of SKUs in smaller volumes.


There is no one answer, but recognizing the cause of the present chaos is a great place to start for dealing with the subject in a rational way.


Same analysis for other aspects


The Glenday Sieve analysis presented above is based on product volume (number of units sold, for example). This would be very helpful in prioritizing POOGI efforts in the areas of inventory management, production management or supply chain execution.


But consider some other potential applications for the Glenday Sieve:


Analysis by “Hits” (i.e., number of distinct orders for a SKU)Example application: Use this analysis to organize your warehouse, placing the items with the most “hits” in the spots most convenient for picking
Analysis by RevenuesExample application: Use the Glenday Sieve by revenues to help sales and marketing segment the market; Partition the sieve on geography, on the demographics of the customers, or even by salesperson and try to identify why some products sell better (or more poorly) across geographic or demographic boundaries, or perform differently by salesperson
Example application: Partition the sieve by product line to help product development see patterns of behavior based on product characteristics, customer groups, or marketing support


We are confident that the light gained from such an analysis can be leveraged effectively for ongoing improvement in dozens—perhaps, hundreds—of ways.



Let us know your thoughts in this topic. We would like to have your comments entered here. However, if you would prefer, you may contact us directly.


We look forward to hearing from you soon.


A short time ago, in a previous article, we posted problem and asked for your input. The problem that was posed is this:


Your firm is considering replacing and upgrading a machine that presently manufactures an average of 100 parts per hour, producing (on average) 150,000 parts a year.


Direct labor related to the machine’s operations is set at $15 per hour. The overhead factor is 2.80, so the overhead allocation is $15 times 2.80, or $42 per hour.


The machine being considered for replacement will manufacture at a rate of 300 units per hour (average).


The primary question posed was: Would you advise the purchase of the new machine as a good investment for the firm? Why, or why not?


If you are like most folks


If you are like most folks, you would calculate your answer along these lines:



You would have concluded that, since the new machine can produce parts three times faster than the existing machine, your firm can save 1,000 hours a year in direct labor. That is, 150,000 units at 100 units per hour equals 1,500 hours; whereas, the same 150,000 units produced at 300 units per hour would take only 500 hours.


As a result, direct labor “savings” would be $15,000 (as shown above), and the related overhead allocations would save another $42,000 annually (also shown above). Since the machine will cost only $45,000 installed, the calculated “payback period” is under a year—about nine-and-a-half months.


Is this really a valid calculation?


Your first clue


The very first clue—the very first thing that should have made you doubt whether the purchase of the new machine would be a good investment should have been a look at the hours the existing machine was running.


If the existing machine were fully utilized, we would expect the productive hours on the machine to be in the range of 2,000 hours (i.e., 50 weeks at 40 hours a week—leaves two full weeks for downtime, setups, etc.).


Stated another way, the productive capacity of the existing machine would be 2,000 hours times 100 units per hour, or 200,000 units. Since only about 75 percent of the existing machines capacity is presently being consumed by production, we can readily assume this machine (at least) is not the “bottleneck” to producing more Throughput for the firm.


Furthermore, we can also readily conclude that, if it were the bottleneck—if the existing machine really were a capacity-constrained resource—this machine had not yet been fully exploited.

The numbers in our example clearly show that the existing machine still has 25 percent reserve capacity that has not yet been tapped (even if we limit ourselves to one eight hour shift a day, and operate only five days a week).


If the firm actually could uncover market demand for the remaining 50,000 units of available production capacity, they certainly had not done so yet.


So, let’s look at the real numbers that might result.


True accounting (not cost-world thinking)


In the real world—not the Alice In Wonderland world of cost-accounting—here is what the numbers might end up looking like:



Think about the answers to these questions:

  1. Where will the $15,000 in calculated “Direct Labor Costs” savings come from? Will the firm’s payroll actually be reduced by $15,000 when the new machine is placed in service?

  2. Where will the $42,000 in calculated “OH Costs” savings originate? When the new machine is placed in service, what overhead in the organization will actually be cut so that operating expenses are reduced by $42,000?

  3. If the $15,000 in direct labor savings are not real, and the $42,000 in overhead cost savings are also a cost-world-thinking fiction, how will the company reap payback on the acquisition of the new machine?

The proper calculation


Is there a calculation that save a firm like yours from making bad “investment” decisions like the one above?


The answer is a resounding “Yes!”


Here is the correct formula:

Where ROI = return on investment, delta-T = change in Throughput, delta-OE = change in Operating Expenses, and delta-I = change in Investment.

When using this formula, we further define “Throughput” as the change in Revenue less the change in TVC (Truly-variable costs). TVCs are generally restricted to raw materials, commissions, labor (if paid on a piece-rate, but not hourly), unless there are other costs that truly and directly vary with changes in per-unit revenues.



Applying this calculation to our example


This formula is very easy to apply to our example.


Since we know that the existing machine is not a CCR (“bottleneck”), changing the speed at which it produces will not change Throughput at all. Therefore, delta-T, in our example, calculates to zero.


Nothing in our calculation suggests that there will be a change in Operating Expenses either—up or down. Therefore, we will put down delta-OE as zero, also.


The change in investment was given to us in the original example. We know that we must invest $45,000 to purchase the new machine and have it installed. So, delta-I becomes $45,000.


Putting this all together we find that ROI = ($0 - $0)/$45000 = ZERO.


The ROI on this suggested “improvement” project is ZERO and the payback period is infinite. This investment will NEVER pay for itself under the present scenario.



We would be delighted to hear from you if you have a comment or opinion on this matter. We know it it somewhat controversial and may be surprising to some. Leave your comments here, or feel free to contact us directly, if you’d prefer.


We’re looking forward to hearing from you.


In Part 1 and Part 2 of this series, we have been discussing the nothing-short-of-amazing results achieved by firms that move toward repetitive, flexible supply (RFS). The report we are discussing was written by Alan Richards and it is entitled The Magic of Levelled Scheduling. [Mitchell]


So far in the series we have addressed three outstanding benefits that accrue to firms moving toward RFS-style production. These have been:

  1. Stability and predictability supplant chaos and fire-fighting in the production environment
  2. Both inventory levels and stock-outs drop dramatically for all classes of inventory—finished goods, raw materials, and work-in-process (WIP)
  3. Production output increases and increased production capacity is unveiled

We will pick-up from where we left off.


Moving away from chaos and consternation


In his report, Mitchell relays this anecdote:

“Before we introduced the green stream [see Part 1 for explanation of ‘green stream’], shift coordinators would spend the first three to four hours of each shift in the warehouse trying to locate all the materials for that schedule,” remembers Fred Boyd, Manufacturing Director for Kimberly-Clark. After introducing levelled [sic] scheduling, he asked one coordinator how his life had changed. “He told me, ‘I haven’t been out there [to the warehouse] for three months.’ He knows what he’s going to be making, and he knows that it will be there. So, now he is saying, ‘last week, what were the biggest issues that impacted the green stream?’… and he’s working on planning what to do differently, for instance—how to make that grade change better. He is proactively planning rather than reactively looking for materials. That’s three to four hours that was spent on fire-fighting now focused on improvement. That’s the really big effect. Now we can focus on what is really important for flow.”

Moving away from the formerly ineffective mass-production, big-batch, mentality and in synchronous manufacturing using fixed and repetitive production reduces the level of inventory (as we have previously stated). Formerly, the inventory functioned as a cushion—an ineffective cushion, in the long run; but a cushion nonetheless—to obscure the real problems in the stream of production.

Removing the inventory in the system is like lowering the level of water in a stream. If the stream bed is not smooth, then the turbulence of the water increases and the rocks in the stream are exposed for what they really are—disruptions to the flow.


In this way, production bottlenecks and obstacles become immediately—and sometimes, painfully—apparent. It becomes much easier to recognize what needs to change and to prioritize the changes that must occur to smooth out the stream.


“Whatever the problem—machine capacity, machine reliability, materials quality, supplier reliability, changeover times—it becomes clear what has to be fixed,” Mitchell states flatly from his experience. “So, the focus of improvement shifts to what really matters, now.”


The effect of focus (and the absence of chaos)


Fred Boyd of Kimberly-Clark highlights an incident in Mitchell’s report: “One of the real barriers in our green stream was a grade change that took five hours…. There were many possible changeovers on which to focus. But, we realized that this is the one! So, we just worked on that one and we reduced the time by 43 percent in five weeks. We created focus on the one issue that was really important.” [Emphasis added.]


Why don’t companies improve?


I have had dozens of conversations with clients over the years. Not a single one has ever objected to the concept of ongoing improvement.


A great many, however, never actually institute a POOGI—a process of ongoing improvement.




Because these companies find themselves “too busy” to focus on improvement.


In fact, all of “their best people’s efforts are squandered on fire-fighting rather than improving,” as Mitchell noted.


But, it gets worse than that.


Because high levels of inventory, bad assumptions and outmoded cost-accounting practices obscure the real causes of problems in production, even when improvement actions are undertaken, they are frequently not directed at the things that really matter.


Moving toward greater agility by applying RFS principles actually liberates people’s time to do what they do best: innovate, apply their intuition, and dig into the things that really need to change in order to bring about lasting improvement.


Not only better financials


Mitchell’s report bring to our attention the fact that moving from a daily regime of chaos, consternation and fire-fighting brings benefits that transcend the immediately evident financial gains. The RFS flow work environment “creates a happier workplace.”


In theory, advanced MRP systems should bring huge benefits. Unfortunately, their manifest shortcomings actually create cultures of “finger-pointing” and “blaming.” This is because the MRP’s unrealistic “plans are never met,” so “there’s always somebody at fault. Planners blame operations, operations blame suppliers and so on, ad infinitum. Back-biting becomes the norm” within the company’s culture.


By stark contrast, “[a] stable, repetitive production cycle” produces a work environment where “failing to meet the plan is not the fault of any individual or group; it’s the fault of the system itself,” Mitchell points out.


While MRP systems set up people for failure on a routine basis, the whole MRP-driven system ends up demotivating people—frustrating them day after day.


“Fundamentally, people want to do a good job. But, if operators’ routines are repeatedly changed, they lose interest,” notes 3M’s Steve Ackroyd. And that’s what constant re-scheduling and repeated failure to meet schedules does.


With RFS or flow production in place, “it’s a much better life with much less frustration,” according to Fred Boyd of Kimberly-Clark. Jayne Kelly, Planning Director at Kimberly-Clark, concurs with Boyd. “Nowadays, people spend less time arguing [with] each other and more time solving core issues. Informal relationships have improved. People simply like working with each other more.”


It’s hard, but it’s worth it


I can readily think of three reasons more companies don’t move to RFS or flow production environments:

  1. “Our business is unique” – We hear this all the time, and executives usually sincerely believe this. The fact is, no company is so unique that it cannot benefit from moving in the direction of flow production
  2. “We don’t have time to make these changes” – And, of course, the reason these companies don’t have time to make these changes is because their present production environment is chock-full of chaos, consternation and fire-fighting.
  3. “We don’t know where to begin” – This, of course, is a real and legitimate reason; but it is not an insurmountable obstacle. There are people available to help you started in the right direction.


We freely admit that making these kinds of dramatic changes is not easy.


But we are also fully convinced that it is well worth the effort.


What you need to get started


It takes guts to take a stand against an entrenched mass-production, cost-world culture and thinking. It takes a willingness to not let cost-accounting rules—rules that have been thoroughly shown to be no longer valid for modern-day decision-making—stand in the way of real and lasting improvement.


Since there are so many obstacles standing before you when you begin, chances are you are going to need an executive sponsor to make any headway. Find one that is willing to learn and to think outside the box. In the beginning, all the executive sponsor needs to do is give permission for some experiments and small steps in the right direction.


If the executive sponsor is willing to do that, the results should soon start to speak for themselves.



We would like to hear what you think about this topic. Please leave your comments here, or contact us directly.



Mitchell, Alan. The Magic of Levelled Scheduling.Report. Accessed September 20, 2013.


In Part 1 of this series, we began discussing the amazing results achieved by firms such as 3M, Kimberly-Clark and Wrigley (the chewing gum company) when they took steps to move toward repetitive, flexible supply (or RFS). The details are found in a report by Alan Mitchell entitled The Magic of Levelled Scheduling.” [Mitchell]


In Part 1, we covered the first two effects to emerge from moving toward leveled scheduling. They were:


  1. Stability and predictability begin replace the prior staple of most production operations—namely, chaos and fire-fighting

  2. Simultaneously—and contrary to what one might think would happen—both stock-outs and inventory levels of finished goods, raw materials and work-in-process (WIP) begin to fall dramatically

We will pick up where we left off.


Production output increases


The third effect experienced by companies that move toward RFS (repetitive, flexible supply) is the dramatic unveiling of increased capacity. This increased productive capacity was previously masked by the misallocation of resources under the old “mass production” and “efficiency” mindset.

Cost accounting, as we have discussed elsewhere in other articles, is the chief enemy of increasing Throughput. The mistaken principles of cost accounting and “efficiency” measure hamper a firm’s ability to achieve greater production.


This unfortunate relationship between cost accounting and real productivity is why H. Thomas Johnson, of Portland State University’s School of Business Administration, reports that “the Toyota accounting system treats daily plant operations essentially as a "black box" that it does not enter. Accountants, of course, record everything that goes into the plant, and all the products that come out. But within the plant they don't track the flow from incoming resources to outgoing finished product. Everything one needs to know about the transformation that takes place inside the plant is inherent in the flow of the work itself. In the Toyota Production System, the work provides all the information needed to control its state.” [Emphasis added.]


Alan Richards, production director at Wrigley, reported his firm’s result from moving toward RFS this way: “Out bottleneck in production of pellets was being able to coat…. We had nine big machines running 24 hours a day, five days a week, and they were so busy we had to run overtime every weekend and [even] send volume to another factory to help us out. After going to flow through fixed frequent repetitive cycles, we only needed to run eight of [the nine] machines; we had no overtime; and we didn’t have to send any volume to another factory.”


This was all accomplished, Richards states, simply by changing the way they organized and schedule production in the RFS method.


The obstacle of set-ups


Mitchell writes, “One common obstacle to improved output is changeovers,” sometimes referred to as set-ups between runs of different products. Setups that take a long time are a major hurdle to be overcome if smaller batches are to be run more frequently as RFS requires.


Part of the problem with the big-batch mentality and operations is that the number of setups is intentionally minimized. As a result, no one focuses on the inefficiencies in performing the changeovers themselves.


Once RFS becomes the order of the day, “everyone has to focus” on the time and expense involved in setups and changeovers. Increasing the frequency of changeovers begins to force improvements in the changeover methods immediately.


Just how much improvement might be achieved by focusing on changeover methods?


Taichii Ohno. Toyota’s leading industrial engineer, worked tirelessly focusing on the time it took to changeover die-stamping machines in the automotive industry. At a time when it was still taking Detroit-based auto manufacturers upwards of a full day to changeover these machines in their plants, Ohno managed to get the time down to an amazing three minutes! And, he did so while also eliminating the need for changeover “specialists” in Toyota plants. The line workers themselves were fully capable of making a timely and accurate changeover. [Womack, p. 53]


“At 3M,” Mitchell tells us, “one of the most important changeovers took over five hours. By focusing on it, [3M’s] team [has] already reduced it by 50 percent, freeing up one [whole] day’s worth of machine time [every] month. At Wrigley, the average changeover time was 100 minutes. Now, it is down to seven, and Richards believes that is just the beginning. He thinks he can see ways of getting it down to one minute.”


Think about this


Under your present system of scheduling and production, what do you have your very best people doing a large share of the time?


Chances are, your best people are spending a lot of their time putting out fires!


But the best your firm will ever be able to achieve with the best of “fire-fighters” is to restore normality.


Fighting-fires does not produce improvement.


Improvement comes from focus.


Where your best people are focusing their energy makes all the difference in the world—in lots of ways. In part three, you will see just how much a difference this matter of focus can make.



Please leave your comments here, or contact us directly. We would be delighted to hear from you on this (or any) topic.



Mitchell, Alan. The Magic of Levelled Scheduling. Report. Accessed September 20, 2013.


Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine That Changed the World - The Story of Lean Production: How Japan's Secret Weapon in the Global Auto Wars Will Revolutionize Western Industry. New York, NY: HarperPerennial, 1991. Print.


In a fascinating report entitled The Magic of Levelled Scheduling, Alan Mitchell tells of the dramatic improvements achieved through the simple process of leveling production schedules.


In particular, Mitchell speaks of improvements actually experienced at three companies, which names you will surely recognize:


Mitchell tells, “One 3M operation has boosted output by a third and almost halved material waste, without any extra investment in machinery or people. Kimberly-Clark has seen throughput increases of 15% at no extra cost, with much more predictable and stable production. For Wrigley, the chewing gum company, an output jump of 10% at its Plymouth factory was just the beginning. After leveled scheduling was introduced, huge amounts of space were freed up (50% on the packing floor), and that space is being filled with new machines to produce new products for new markets. In other words to deliver real growth.”


While such improvements may seem like a far-away dream to many small to mid-sized business enterprises, there is hope for improvement in almost any operation. It is possible to get much, much closer to “the dream” than where most executives and managers find their operations today.


Recognizing your current reality


“The starting point,” declares Mitchell, is for management to admit to itself “that today’s production schedules are far from stable.” They are, in fact, completely the reverse of stability.


Unfortunately, today’s MRP or Material Requirements Planning systems are purchased and implemented with the best of intentions. Unfortunately, while trying to plan according to customer orders, they instead end up creating chaos all too frequently. Mitchell explains how and why.

MRP is designed to be responsive to customer orders. Every time the plan is calculated, the MRP system adjusts planned production schedules to reflect all the new customer orders before re-balancing back to a target stock level. As a result, each time the plan is calculated it triggers a change to the plan because actual orders will always be different to what was forecasted. What’s more, because something always seems to go wrong in production (a machine breaks down, a vital supply doesn’t turn up on time, somebody is off sick) very few production plans are ever met 100%. So, to make up for the difference between plan and actual output – and to accommodate the endless spikes and troughs of batch ordering from customers who are also using MRP to plan their orders – MRP systems end up issuing plans and replans on a frequent basis. Result: chaos rules. Fire-fighting becomes the norm.

Recognize the underlying stability


“The second step,” Mitchell sets forward in his report, “is to realize that demand for some products is more stable than for others.” In many industries, about six percent of the overall product range has relatively stable demand and, in turn, account for about half or more of overall demand.


This stable, relatively high volume product group has been dubbed the ‘green stream’ by Ian Glenday, inventor of a statistical process called the Glenday Sieve, which can be used to help identify these products. If possible, this should be discovered by looking at actual end-user consumption or “shelf take-away,” as it is sometimes called. Looking at orders placed by distributors and wholesalers may be misleading due to “the bullwhip effect.”


Repetitive, Flexible Supply


Once the underlying stable stream is identified, the next step is to begin moving from the production of big batches toward producing the same volume by running more frequent batches in small quantities.


For example, Mitchell says, “instead of producing 100 units of Product A once every four weeks or so, produce 25 units once a week, regular as clock-work…. Less predictable ‘red stream’ items are dealt with separately.”


What are the results?


The new production rule becomes: “Produce to the RFS (repetitive, flexible supply) schedule. Never depart from the schedule.”


When this concept takes hold in the organization—with support from the executive level on down to the shop floor—”stability and predictability begin to replace chaos and fire-fighting,” Mitchell recounts from his experience [emphasis added].


The second noticeable effect of introducing RFS scheduling “is that both stock-outs and inventory levels of finished items, materials and work-in-process fall.”


Although this seems to be counter-intuitive, it happens simply because the former “big batch” philosophy required the firm to store the big batches of finished goods items (until they were consumed); meanwhile, the big-batch runs used up resources so that other items that were running low could not be produced on time to satisfy demand.


“Thus,” states Mitchell, “many, shorter runs [help] to tackle both  problems at the same time….”


Wrigley company reported that, before moving to RFS, they “had one warehouse with 5,000 pallet spaces, and it was chock-full.” In fact, Wrigley had rented an additional 1,000 pallet spaces off-site to handle the overflow.


After implementing RFS, Wrigley’s production director Alan Richards reported that “we now have 4,000 spaces left” while “producing more volume that we were….” In fact, Richards continued, “We have started dismantling racking in our warehouse because we just don’t need it any longer.”

Creating new opportunities for profit


After the move to RFS, reduced inventory (while also reducing stock-outs) has liberated floor space for new equipment to produce new products. This is a “massive saving” for Wrigley, which previously had thought they would need to build a new factory for this expansion in production.



Stay tuned for more exciting information about the benefits of RFS (repetitive, flexible supply) and how to reap these benefits in your firm.


We look forward to your comments. Please leave them here, or feel free to contact us directly, if you wish.



Source: Mitchell, Alan. The Magic of Levelled Scheduling. Report. Accessed September 20, 2013.


In "the 1950s, the Ford Motor Company under Henry Ford II had a new idea, which, as it turns out, was actually an old idea. Ford put out to bid to completely independent supplier firms many categories of components formerly supplied from within the company.... This was, in fact, the world Ford had left around 1913; the world of arm's-length, market-based, short-term interactions with independent businesses." [Womack, p. 139]


Between 1913 and 1950, Ford Motor Company made every effort to manufacture as many components as possible in-house, so that the firm would have full control of both production and costs. After nearly four decades of this, and with automobiles becoming increasingly complex, Ford Company had had enough. So, Henry Ford II reversed direction and went back to buying many components based on bids from other suppliers.


Most supply chains have been stuck in “the world of arm’s-length, market-based, short-term” relationships ever since. Of course, of few have tried Henry Ford’s original approach—bringing everything in-house; and a very few American innovators have actually ventured into more open relationships with their supply chain partners.


As far back as the mid-1980s, however, studies revealed that it really makes very little difference whether the supplier is in-house (a subsidiary, department or division) or a completely separate company. The most successful supply chains are successful, not because of the legal constructs between the parties, but success comes from the ways in which the trading partners interact. It’s all about relationships.


Here is how the most successful supply chains collaborate

Involve the Supply Chain Early, beginning with Product Design and Development


Instead of designing a product end-to-end and then handing off design specifications and drawing to suppliers for bids, the most successful supply chains typically select their suppliers and involve them very early in the product development cycle.


These suppliers are not selected based on “price.” After all, they can’t be at this point, because no one knows what the price-point is going to be for the components the suppliers will provide for the new product under development.


No. The suppliers are not selected based on price, but upon two other critical criteria: their experience working in similar integrated design and development projects for similar products, and the record of their performance as a supplier in terms of quality and reliability.



Advisors from the tier-1 suppliers are frequently incorporated into the product design and development team at the assembler’s operations. There, working closely together, the team decides how the components should be packaged (in terms of functions and interfaces), and the suppliers team is provided with a set of performance and quality specifications—not a set of materials specifications and design drawings.


It then becomes the tier-1 suppliers’ responsibility to design, develop and even prototype the components meeting the functional and quality specifications and compatible with the design interfaces.


In the best-performing supply chains, the tier-1 suppliers frequently replicate this approach in working with their tier-2 suppliers.


This process helps assure that the product design also incorporates all the ideas that might lead to lower cost of production (i.e., manufacturability) while delivering the highest performance and quality, as well.


Take Time to Learn


Successfully integrating supply chains and creating an atmosphere of collaboration across a supply chain takes time. It is imperative that the trading partners take time to learn about each other and about their operations, costs, methods and quality.


In order to get to this level of cooperation, the relationships cannot be built at arm’s-length and predicated only on lowest-cost.

Creating a Rational Framework for Collaboration


Achieving the openness required for deeper levels of supply chain integration and collaboration requires that, first, there be frank discussions between the trading partners during which they create a rational framework for determining costs, prices and profits that serve to encourage both the buyer and the seller to work together for mutual benefit. This kind of openness and trust must supplant an atmosphere of mutual suspicion before significant progress can be made.


One simple way to move in this direction is to have the discussions around Throughput, where Throughput (T) is defined as revenue per unit less (only) Truly Variable Costs (TVC) per unit. This should eliminate all allocations of overhead and even labor (which is variable with efficiencies, utilization, number of set-ups, and so forth).


Placing your discussions in this realm makes both Investment and Operating Expenses something to managed within each trading partner’s organization and not, generally, a part of the cost-price framework discussions. This simplifies the discussion down to the trading price and TVCs (generally, just raw materials and per-unit outside processing costs).


Mutuality can then be focused on increasing Throughput for both trading partners involved. Increasing T can be achieved in several ways:

  1. Increasing the quantity sold
  2. Increasing the trading price
  3. Decreasing the TVCs


Negotiations should focus, not on driving the price down, but on how to reach the goal of increasing Throughput for the trading partners involved, thus helping to assure that all the supply chain participants are making reasonable progress on profitability.

On a Mutual Process of Ongoing Improvement (POOGI)


Over the lifecycle of the product, the trading partners should work together to find ways to reduce the cost of manufacture without sacrificing quality. This should be done through a dedicated POOGI efforts.


When cost-reductions or other savings stem from collaborative efforts between trading partners, these savings should be shared between the partners involved. However, when an individual trading partner, working entirely on its own, finds ways to reduce TVCs, reduce Operating Expenses or drive down the need for new investment or reduce inventories, the additional profits from these efforts should accrue solely to the trading partner making the POOGI effort.


A Better Cycle


Properly done, this kind of supply chain integration and collaboration can reap huge benefits for all its participants. It does so by replacing a vicious cycle of mistrust with a virtuous cycle of cooperation and collaboration.



Perhaps in a later article we will have opportunity to address how this kind of supply chain collaboration can contribute to making your supply chain increasingly agile in its response to changing customer needs and demand volatility.


In the meantime, we would like to hear from you. Please leave your comments here, or feel free to contact us directly, if you prefer.


Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine That Changed the World - The Story of Lean Production: How Japan's Secret Weapon in the Global Auto Wars Will Revolutionize Western Industry. New York, NY: HarperPerennial, 1991. Print.


This will be a short post. We will be adapting an example from Synchronous Manufacturing* as a tool to get some user feedback (hopefully).


Here is the scenario: You are an executive at a manufacturing firm. You have an older model stamping machine that can produce 100 units per hour (on average) for a product line that typically moves about 150,000 units per year.



Some of your middle managers have come to you with information about a new machine. This new model can produce an average of 300 units per hour—three times the output of your present machine.


Your managers have gotten estimates and believe they can have the machine (complete and installed) for about $45,000.


The direct labor rate you presently use in costing is $15 per hour and your overhead allocation factor is 2.80. So, your overhead allocation for each hour of direct labor is presently 2.80 times $15 per hour or $42 per hour.


The decision is yours


The decision is yours. When replying to this article, you may leave a comment here or, if you wish to remain anonymous, please feel free to contact us directly.


Please answer the following questions:

What will be the direct labor cost savings from the purchase of the new machine, if any?

How much will overhead be reduced, if at all, through the acquisition of the new machine?

What do you estimate will the total annual savings for your company if the new machine is put into service?

If you spend the $45,000 to acquire the new machine, what do you calculate the payback period to be?

Should you approve the investment in the new machine? Why or why not?


After we have some responses, we will address this question further.


Again, leave your replies as comments here, or feel free to use this link >> contact us << to contact us directly.


We look forward to hearing from you soon.



* Umble, M. Michael., and Mokshagundam L. Srikanth. Synchronous Manufacturing: Principles for World-class Excellence. Guilford: Spectrum, 1996. Print.

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