Like many of the best ideas by Japanese business, it started in America. After World War II, Toyota drew on the teachings of quality guru W. Edwards Deming, as well as the assembly-line practices of Ford Motor Co., to create the Toyota Production System. Among other things, the TPS was built around the idea of just-in-time (JIT) manufacturing, in which parts and product weren't delivered to the plant until they were needed on the line. The goal was to eliminate all unnecessary inventory. From that idea eventually sprang the notion of Lean manufacturing, the relentless hunt for waste in the assembly of product.

The practice of Lean has been well-entrenched in manufacturing for decades. (The actual term was coined at MIT in the early 1990s.) More recently, managers have come to realize that the precepts of Lean can be applied throughout the supply chain, especially in dealings with external partners. Today, Lean is just starting to be viewed as an essential part of the quest for continuous improvement.

For Lean practitioners, the enemy is muda-a Japanese word connoting various types of waste. In manufacturing, there are seven: overproduction, waiting, transporting, inappropriate processing, unnecessary inventory, unnecessary motion and product defects. The list had to be tweaked a bit when applied to the greater supply chain, says Robert Martichenko, president of LeanCor LLC in Florence, Ky. He cites six sources of supply-chain waste: inventory, transportation, lead time, space, packaging and process complexity.

The last category, complexity, is particularly devilish. "Every time you introduce a new piece of paper, or put inventory down, you create opportunities for errors," Martichenko says. But each element contains its unique set of traps. "Overall logistics efficiency is the multiplied efficiency of each part of the process," he says.

Progress can be agonizingly slow. The Toyota Production System has evolved steadily over the last 30 years, says Bob Parker, vice president of research with Framingham, Mass.-based IDC Manufacturing Insights. It has moved from basic JIT principles to a system that is tied directly to consumer demand. Rather than maximize factory use by churning out big batches of a particular model, Toyota frequently switches over its assembly line to produce what's actually selling.

Activities within the four walls of a factory are relatively easy to control. The real challenge lies in reaching out to suppliers at one end of the chain, and distributors, retailers and end users at the other. According to Parker, Lean's migration from manufacturing to the total supply chain began modestly, spreading into aerospace and defense about five years ago, then finding a foothold in industrial machinery, chemicals and consumer packaged goods. But few companies have managed to apply the concept across the board.

There's plenty of room for improvement. According to Martichenko, transportation accounts for up to 75 percent of logistics costs, while inventory eats up another 20 percent. In companies lacking Lean methodologies, both areas are rife with waste.

Smoothing It Out
In its mature form, Lean is more than a method of eradicating waste. Its deeper goal, says Parker, is coping with the inherent variability of processes. Promotions, transportation, seasonal spikes and fickle consumer demand are all sources of variability, frustrating suppliers' efforts to maintain a steady flow of high-quality product. Process inefficiency is the inevitable result.

Awareness of Lean among business executives is high, says Martichenko. But the rate of execution in organizations "is still reasonably low." The problem is getting a handle on external parties and processes, which can make up 80 percent of the supply chain. Many companies can't track product flow through those stages, let alone head off glitches and promote efficiency on a continuous basis.

Step one is figuring out what's wrong. The waste-busting aspects of Lean can help. Martichenko recommends "lowering the water level-inventory-to expose the rocks-waste-that are in your organization." Only then can managers identify the sources of trouble.

Lean can be a valuable tool in fostering a culture of continuous improvement, but it's no instant fix. Martichenko likens the effort to building a house. The foundation consists of process stability-it's harder to hit a moving target-and standardization. Here, companies will attack such issues as transit-time variance, port delays and carrier quality. Otherwise, they are forced to stock inventory according to a worst-case scenario, and waste is sure to result.

The keys to success, says Martichenko, are collaboration with outside partners and reduction of lead time in the supply chain. When Toyota decided to build an $800m vehicle assembly plant in San Antonio, Tex., it asked suppliers to locate their production facilities nearby. So much for the notion of saving money through offshore manufacturing.

The "walls" of Martichenko's theoretical structure are JIT and first-time quality. The first focuses on inventory reduction by eliminating safety stock and product at rest. The second shines a light on core processes and promotes quality as something that must be built into the product.

Last comes the "roof": the intense focus on meeting customer demand. End-user expectations must be factored into all processes, so as to avoid the production of unwanted goods and excess inventory. "If we are not meeting customer expectations," says Martichenko, "we have to improve."

Lean is often linked to Six Sigma, the rigorous quality effort which aims virtually to eliminate defects in production, logistics, customer service and other supply chain processes. Parker says the two concepts go hand in hand. Lean washes waste out of the system and sets a baseline for efficiency. Six Sigma applies statistics to curb process variability and identify areas of improvement. In fact, the ideas are so close in spirit that Maytag Corp. coined the term "LeanSigma" to describe how it matches supply chain processes to customer needs.

Going Beyond the Walls
A truly effective Lean program will involve multiple partners in the chain. Ford Motor Co. turned to TNT Logistics North America for help in boosting customer satisfaction, reducing overall costs, increasing operating efficiency and finding new business opportunities through enhanced competitiveness. The two have worked together to implement Lean for approximately five years, says Dennis Gerard, director of operations services with Jacksonville, Fla.-based TNT.

Projects have focused around lead-time reduction, process quality and the set of formal Lean principles known as "5S." The term comes from five Japanese words, all beginning with the letter "S," which describe ways of organizing and standardizing processes in the workplace on a continuous basis. (See sidebar for a list.)

TNT is implementing Lean at seven locations; activities there include cross-docking, sequencing and metering of inventory flow. Each contract is tied to specific goals which are regularly reviewed by Lean "champions" and their teams. The progress of each task is monitored via a visual matrix colored green, yellow or red. Results are communicated by phone, e-mail, internet and, most recently, a quarterly newsletter.

TNT developed a nine-step process for transforming an area to Lean principles, along with check sheets and action-planning tools for champions. It also created a training manual and accompanying CD for warehouse personnel. Next, TNT is bringing in a team of three Lean experts from the company's worldwide headquarters in Amsterdam to Ford's distribution facility in Brownstown, Mich. Over nine weeks, they will work with local champions to develop dozens of new ideas for Lean applications. The ideas will be implemented over the following six months to a year.

The road to continuous improvement is paved with kaizen, another Japanese term that describes projects targeting improvements in discrete areas of the supply chain. The easiest wins, says Gerard, typically involve the elimination of wasted motion, as warehouse workers shorten the distance they must travel to pick the most active parts.

Much harder to accomplish is the creation of a Lean culture, especially in a business with high turnover. "It takes six to 18 months, once a project is formally launched, to get everyone on the Lean page," Gerard says. Once a kaizen is completed, the original goal becomes the current state of operations, and a new target is established.

WhereNet Corp., the Santa Clara, Calif.-based provider of RFID and other types of wireless communications systems, is another partner in Ford's Lean program. TNT utilizes WhereNet's real-time locating technology to manage the JIT sequencing of parts to the assembly line. It went live with the system in Dearborn, Mich. late last year, managing inbound parts sequencing to a Ford truck plant.

WhereNet participates in TNT and Ford kaizens when appropriate. At the automaker's plant in Chicago, construction of a nearby supplier park had greatly increased the frequency of shipments, causing delays at the gate. Rather than spend money on additional gates, Ford deployed a WhereNet RFID system which authenticates incoming trucks from a short distance, then opens the gate automatically. Not only did the technology clear up the logjam, it saved 40 man-hours a day, claims Gary Latham, WhereNet's director of industry marketing for automotive.

Waste is common in a distribution operation, says Latham. In a high-volume plant, with hundreds of trailer moves a day, one driver's failure to park a unit in its designated space could cause severe delays. But active RFID technology can locate that trailer instantly, regardless of where it was left.

Another transplant from Lean manufacturing with applications to distribution is kanban, the system that triggers a replenishment signal whenever stocks of a particular part are exhausted. Commonly found on the assembly line, kanban can also be used by warehouse staff to transmit a message to the external supplier for delivery, says Latham. In the process, inventory becomes tied more closely to demand-and takes up less space in the warehouse.

Solectron Gets Lean
One might expect Lean to flourish in an industry with tight profit margins. That's certainly the case with Solectron Corp., the Milpitas, Calif.-based electronics manufacturing services (EMS) company. Solectron is one of a handful of big vendors making product on behalf of original equipment manufacturers (OEMs) in the high-tech and consumer electronics sector. Operating in an environment of fixed costs and heavy assets, their margins can be razor-thin.

Solectron began taking a serious look at Lean in mid-2003, says Ravi Ramanan, vice president of functional excellence. The goal, he says, was to "become the Toyota of the EMS industry."

It started with the formal process known as value-stream mapping, whereby the whole operation is laid out for viewing, analysis and diagnosis. Key customers were involved from the start, says Ramanan. Identifying multiple sources of waste, they proceeded to apply 5S principles to all 57 of Solectron's sites. Six Sigma quality measurements were also part of the mix. SPS-the Solectron Production System-was born.

The three-year effort extends to the end of 2007, Ramanan says. Early efforts focused on internal operations. More recently, the company has reached out to suppliers, hiring Perry Mulligan as senior vice president of supply chain management and chief procurement officer.

Formally launched last September, the externally focused branch of SPS is still in its formative stages. So far, says Mulligan, it has hosted around 200 kaizen events, compared with 5,000 internally. Areas of improvement include kanban techniques, visual signaling for replenishment, streamlined invoice processing and consolidation of logistics flow.

Kanban can be applied to the extended supply chain, Ramanan says, although it requires "a very highly evolved state of emancipation." First, the entire operation must be converted to the 5S principles of workplace organization and standardization. Inventory should conform to "first-in, first-out" (FIFO) principles of flow. Product must be of pristine quality with zero defects (a job for Six Sigma). On the assembly line, rapid machine changeovers must be perfected to meet ever-changing customer demand.

Solectron's target is the optimistically named single-minute exchange die (SMED), which measures the duration of the switch. Already the company has slashed changeovers from two and a half hours to around 10 minutes. The goal, says Ramanan, is a breathtaking 99 seconds, although Solectron's best time so far is between two and a half and three minutes.

Equally critical to Lean is the principle of heijunka, yet another Japanese word, for the leveling and sequencing of output in a process that's endlessly repeatable. Again, the idea is to build and ship a multitude of product types according to customer demand. Ramanan calls it the "deli-shop" approach, akin to making a tuna sandwich for one customer, then turkey for the next. "Before," he says, "we would produce tuna for a week."

All of those tools combine to create a culture of continuous improvement. "The technique is self-fulfilling," says Ramanan. "You're never achieving your target."

Like it or not, the effects of Lean reverberate throughout the supply chain. Steelcase Inc., the maker of office furniture, found that Lean manufacturing was disrupting the scheduling and receipt of materials downstream, says Joe Gallick, senior vice president of sales with Penske Logistics in Green Hills, Pa. Product was arriving either early or incomplete, delaying installation. Steelcase set up remote consolidation centers closer to customers in its major markets, asking logistics service providers to design systems for efficient flow. For its part, Penske created a whole new facility at a Pennsylvania industrial park to serve the Northeast region, managing the movement of components to installers.

For General Motors Service Parts Organization, Penske helped to reduce the automaker's reliance on premium freight-a prime example of waste-by increasing the use of cross-dock facilities. Gallick says the provider took a hard look at product in queue or on hold, reducing both inventory and physical work, and boosting the amount of parts flowing through the regular network.

Penske employs Six Sigma to improve operations on its customers' behalf, as well as within its own organization. In the area of logistics, says Gallick, Six Sigma averages are less meaningful than the measurement of standard deviations, which nail down process variability. "Too early or too late may be causing the customer pain," he says.

The Role of Technology
While information technology can be a big help in implementing Lean throughout the supply chain, there's no category of software under that name. Applications include enterprise resource planning, advanced planning and scheduling and supplier relationship management. Each offers a piece of the puzzle.

SAP AG approaches the topic through the notion of "adaptive supply chain networks," groups of companies that share information and resources in order to adapt to changing market conditions. According to Ganesh Wadawadigi, director of supply chain management solutions strategy with SAP Labs, Lean helps companies to function on a global scale. Any successful manufacturing operation will have a clear view of both suppliers and customers. Tight communications reduce the need for inventory and other types of waste in the system.

SAP operates an inventory collaboration hub which deploys kanban principles across manufacturers and their suppliers. The concept is beginning to take hold in the automotive industry, Wadawadigi says, with additional progress in chemicals, pharmaceuticals, high-tech and consumer products. The process starts with customer requirements, which feed directly into the product-development cycle.

SAP next plans to utilize enterprise service architecture (ESA), a concept which ties together business applications both from SAP and other vendors into a coherent system. ESA will allow companies to plan inventory in a multi-partner environment, while achieving visibility of product and data every step of the way, Wadawadigi says.

Even the best software offers no magic wand to make inefficiencies disappear. A customer of Manugistics Group Inc., the Rockville, Md.-based vendor of planning software and other supply chain management applications, complained that the system wasn't delivering on its promises. Manugistics spent two weeks analyzing the problem, only to find that the company, a retailer with seasonal peaks and multiple promotions, had shifted 60 percent of its sourcing to offshore suppliers. In the process, it had failed to account for the impact on inventory levels, says Ron Kubera, Manugistics' senior vice president of consumer goods in Europe.

With markets constantly changing, it's not enough to implement software and wait around for results, says Kubera. Technology must be used to drive continuous improvement. Manugistics offers a "Supply Chain Tune-Up Program," helping clients to identify opportunities for further efficiencies and the use of best practices in supply chain management.

It's essential, says Kubera, to follow up on projects to see whether they're yielding the expected benefits. "So many people talk about continuous improvement," he says. "And so many fail to continuously improve."

Global supply chains are natural repositories of waste. Time, distance, language and culture all combine to frustrate the efficient flow of products and data. But information technology can help, says Holly Allison, vice president of marketing and business development with Gloucester, Mass.-based TradeStone Software. Retailer Deutsche Woolworth GmbH, which split off from its American parent in 1998, sources around 50 percent of its products in the Far East. A "process improvement event"-think kaizen-resulted in the linkage of planning, procurement, tracking and tracing processes between the company's German and Hong Kong buying units. By collecting all data into a central repository, realized through TradeStone's Web-based application, Deutsche Woolworth eliminated 200,000 faxes a year.

To make Lean work, each buyer and vendor in the supply chain must lay "critical-path" milestones throughout the product lifecycle, Allison says. Quality must be tested at multiple stages-for example, a particular fabric might be checked once for color fastness, again for durability of seams, then a third time for fit. Management dashboards can keep parties current on all system failures, such as a shipment delayed at a port, so that the retailer can alter its store plan accordingly.

Lean is one method of achieving the ever-elusive goal of a "pull"-oriented supply chain, where production is geared to demand instead of forecasts. Kanban can be a big help in that effort, says Tom Buffo, director of productivity with QAD Inc. in Summerland, Calif. His company makes software that allows for the communication of demand signals throughout the supply chain, from raw materials suppliers to customers. Buffo speaks of the Lean concept of single piece flow, whereby parts are made one at a time, moving through the production process only as they are needed. Replenishment signals are transmitted back through the chain electronically.

Integrated with that system is a QAD tool for supply visualization, giving managers a continuous view of kanbans, and linking to the supplier network. Benefits, claims Buffo, include reduced inventory, inventory turns, and floor space in the factory and warehouse. At the same time, companies can shave lead times and boost product fulfillment.

All admirable goals, and all tough to achieve-at least until companies finish the job of extending Lean and Six Sigma beyond the factory floor. So far, few have managed to match the example of Toyota. Says Solectron's Ramanan: "We are not pristine. But we are slowly making strides toward that on a daily basis, if not an hourly basis."