December 19, 2003

By Darren Dolcemascolo

In a lean transformation, companies typically focus on their "door-to-door" value streams. That is, they analyze and improve the flow of value between (but not including) their suppliers and their customers. After this transformation has progressed considerably, organizations want to know how to take Lean Manufacturing to the next level. Analyzing the extended value stream and then developing and executing an effective outsourcing plan is the answer. This article focuses on the five basic steps to accomplish this:

1. Map your extended value stream(s).

Inherent in true lean thinking is the concept of a complete value stream that includes customers and suppliers. Using the same value stream mapping techniques that are used for mapping your door-to-door value stream, map the entire value stream for your product lines from the raw material level to your suppliers to your plant(s) to your customer(s).

2. Define your core competencies.

Using the insight gained through a view of the entire extended value stream, re-define which components, processes, and products your organization should be producing in house. Recognized as one of the world's leading authorities in outsourcing, Michael F. Corbett & Associates, Ltd. uses a simple test for identifying core competencies: "First, if starting your company today would you do this yourself? If the answer is yes, then the function's criticality is widely recognized. Second, would other companies hire you to do this for them? This gets at your firm's ability to perform the task in question. Third, will tomorrow's CEO come from this area? This question addresses the importance of the activity to the firm. Importantly, you must answer yes to all three questions before considering a business activity a core competency." (Outsourcing Helps Firms to Focus on Core Competencies, Michael F. Corbett and Associates, http://www.firmbuilder.com). While this step can be a difficult task, it is something that all World Class Organizations must do to stay competitive and maximize value.

3. Rate your key suppliers.

Use the Pareto principle to determine who your key suppliers are; typically, about 80% of your purchasing dollars will go to 20% of your suppliers. Define those characteristics that are most important to your organization, and rate your key suppliers according to those characteristics. They should include all of the basics of lean with particular emphasis on the most critical items for your business.

4. Develop a plan.

First, select the key suppliers with which you plan to continue doing business and plan to forge a long-term relationship. Next, decide which suppliers you can no longer afford to keep. These key decisions should be based on your current relationship and ranking of your suppliers. It should also be based on their willingness to embrace lean. Then, develop an outsourcing plan. Decide which suppliers will handle which business activities. List the voids you have and put together a plan to find new suppliers to fill the voids. Ideally, your goal should be to find suppliers that are already on a lean journey.

5. Act on your plan.

Develop agreements with key suppliers that you intend to keep. Many American companies continue to struggle with this issue. Typically, American companies still have an adversarial relationship with their suppliers, even though many of them will say that they have long-term supplier relationships. Competitive bidding is still going on even with long-time suppliers. Before helping or convincing your suppliers to go lean, you need to have already in place "open-book" relationships with those suppliers. This is because the major improvements you are going to help them make (and they are going to continue making as they progress on their lean journey) should be shared between your company and theirs. After these long term agreements are formed, begin helping your suppliers develop a lean manufacturing plan. Demonstrate the successes your organization has had with lean and explain that their going lean will benefit them as well. Some of the benefits to your suppliers are:

Cost savings are shared with your organization. (Instead of your dictating a drop in price while offering no way for them to achieve it, you are both working within a lean continuous improvement environment in which cost reductions are achievable.)

The ability to easily win bid wars when they are quoting their other non-lean customers' jobs. Lean Thinking, by Womack and Jones, actually talks quite a bit about this with reference to the success experienced by Toyota's suppliers.

Incentive and the ability to produce even more cost savings for themselves through lean.

Provide implementation assistance to those suppliers; help them map their door-to-door value streams to get started. Ultimately, these suppliers should become an important part of your organization. After they set up a lean manufacturing operation, key suppliers should be involved (or even take a primary role) in the development of your products and key components of your products. Since they will be manufacturing them (and you've assured them of this), they must meet your cost targets. To do this, they need to play a major role in the design.

Finally, act on a plan to find new suppliers and develop agreements with those suppliers. Again, in cases where these new suppliers are not lean, help them take their first steps.

At the completion of these 5 steps, your organization will have further distanced itself from your non-lean competitors. You will be more focused on your core activities, your suppliers will be more profitable and will be focused on what they do best, and you will have an improvement methodology in place that will continue to perfect your entire value stream.

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