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Lean supply chain and its effect on product cost and quality: a case study on Ford Motor

Company H.M. Wee

Department of Industrial and Systems Engineering, Chung Yuan Christian University, Chung-Li, Taiwan, and

Simon Wu Department of Industrial and Systems Engineering, Chung Yuan Christian University and

Ford Production System Manufacturing Division, Ford Lio Ho Motor Company, Chung-Li, Taiwan

Abstract Purpose – The purpose of this paper is to address “how Toyota can continuously and consistently achieve its dramatic success through its competences - continuous waste elimination and the objective of long term philosophy”; the paper aims to summarize some solid suggestions and comprehensive ideas for those industries planning to implement lean production. Design/methodology/approach – The methodology used is the case based approach (CBA), which described lean supply chain (LSC) through value stream mapping (VSM) using a case study from the Ford Motor Company in Chung Li, Taiwan. The paper follows a four-step problem solving process to demonstrate how lean supply chain affects product cost and quality. Findings – Using VSM case study to demonstrate LSC, all the measurable indices helpful for cost reduction, quality enhancement and lead time reduction are shown. The paper also provides some recommendations and basic principles to implement VSM successfully through P-D-C-A improving cycle. Research limitations/implications – Since a comprehensive demonstration of VSM implementation is likely to be both expensive and time- consuming, this study provides a case study from the Ford Motor Company in Taiwan. Practical implications – VSM through lean process is considered to be one of the best practices in supply chain management. It has been shown to be successful for implementing lean production in Toyota Production System (TPS). However, other competitors struggle despite adopting similar principles. It seems that there is a special ingredient within TPS that Toyota’s competitors do not fully comprehend. Originality/value – This paper not only shows the value of VSM as a supply chain tool in implementing lean production; but also provides industrial insight for enterprising companies to follow a four-step problem-solving process to effectively develop their lean supply chain.

Keywords Supply chain management, Manufacturing systems, Lean production, Product costs, Quality

Paper type Case study

1. Introduction and methodology

The three big motor companies (the Big 3) – General Motors

(GM), Ford & Chrysler almost dominated the global market

in early twentieth century. In 1994, Toyota replaced Chrysler,

and it became the global No. 2 motor manufacturer by

squeezing out Ford in 2003 (Liker, 2004). Since 2008, Toyota

has replaced GM to be the largest automaker globally

(Bunkley, 2009). How did Toyota achieve its success? It all started with the

first President of Toyota Motor Corporation, Kiichiro

Toyoda, who set up the company’s objective “to use small lot size with cheaper vehicles to compete with the cost of American motor companies by continuously reducing cost through waste elimination”. The second president, Eiji Toyoda, went further to improve Toyota’s manufacturing process. In 1950, after the Second World War, Toyota learnt the concepts of continuous material flow, process standardization and waste elimination from Henry Ford’s book, Today and Tomorrow. Moreover, Toyota developed one- piece flow and the concept of “Pull System” which was inspired by American supermarkets. After decades of practice and refinement, the above principles and the concepts form the core of judoka and just-in-time (JIT), making TPS more functional (Liker, 2004; Abdulmalek and Rajgopal, 2007). The traditional thinking in the US and Europe was that

only mass production could reduce manufacturing costs. However, Japan’s automakers have managed to achieve low cost manufacturing with smaller volume and higher complexity and shorter lead times. Toyota products have the reputation of fuel efficient and durable or having good resell

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value. However, if the implement of TPS is the key to Toyota’s success, why have its competitors struggled despite adopting similar principles? It seems that there are special ingredients within Toyota, which are not easily learnt by their competitors (Spear and Bowen, 1999). The objective of this paper is to use a case based approach

(CBA) and follow a four-step problem solving process to demonstrate how product quality and cost are affected by lean supply chain. We hope to give some insight on the above query by focusing on the supply chain process of car manufacturing from supplier to customer (Figure 1).

2. Lean supply chain

The term “lean” means a series of activities or solutions to eliminate waste, reduce non-value added (NVA) operations, and improve the value added (VA). This VA and NVA concept were derived mainly from TPS. However, the word “Lean” was first used in the Future Car Investigation by MIT professors to interpret Japan’s new production system that do away with mass production (Womack et al., 1991; Macduffie and Helper, 1997; Conti et al., 2006) since it produces much waste. “Waste” is defined as anything that interferes with the smooth flow of production (Macduffie and Helper, 1997). The eight wastes highlighted in TPS are overproduction, waiting, conveyance, over processing, excess inventory, movement, defects and unused employee creativity, and the biggest one being overproduction (Monden, 1998; Liker, 2004). The VSM is a lean supply chain tool used by TPS to

identify between wasteful and necessary value-adding activities. The “lean supply chain” identifies all types of waste in the value stream chain and seeks to eliminate them (Rother and Shook, 1999; Abdulmalek and Rajgopal, 2007), and this is a major strength of the lean production System (Womack et al., 1991). The way Toyota uses VSM is different from the conventional thinking; they focus mainly on avoiding over production (Rother and Shook, 1999). VSM begins by listing all operations, and classifies them into VA and NVA (including waste). The VA activities are those that customers are willing to pay money for tangible goods or intangible functions. The NVA work includes the eight wastes of TPS. The application of VSM in the TPS not only identifies VA/

NVA activities for waste elimination, but also the status of their lead time in the supply chain from incoming parts to finished good delivery.

3. Value stream mapping (VSM)

VSM is all the activities in the product process, which includes: 1 production flow – from raw material input to finished

good delivery; 2 design flow – from concept to launch; and 3 material and information flow – the combination of

production and design flow (Rother and Shook, 1999).

It uses different but simple visual icons to express all activities, which expose problems and wastes, and highlight improvements quickly. Accordingly, VSM has the following benefits: 1 Provides a complete visual flow (material and

information) to support decision making. 2 Highlights and exposes the wastes. 3 Demonstrates the close linkage between information and

material flow. 4 Develops a plan to eliminate waste and continuous

improvement.

The result shows that substantial cost savings can be realized through information sharing. This motivates trading partners (see Figure 1) to share information in the supply chain and improve their performance (Zhao et al., 2001). The lean VSM links all processes from raw material to final

consumer smoothly. This results in a shorter lead time, higher quality and lower cost (Rother and Shook, 1999). The first step of VSM is to conduct on site study of the current process, including 5M – Man, Machine, Material, Method, and Message (or Information) followed by VA as well as NVA operations in order to draw visual Current State Map (CSM). Then the eight wastes and the bottleneck for further lean improvement are identified. After data collection and analysis, the CSM will become a

visual improvement tool for work group to set up challenging target with measurable indicators. Furthermore, work group can use continuous improved idea with measurable target using brainstorming to draw their future state map (FSM). Through gap analysis between CSM and FSM, one can

discover problems, and countermeasures to implement, evaluate and follow-up problems. After each improvement session, the FSM changes back to CSM. This is similar to Deming’s P-D-C-A cycle (Juran and Gryna, 1993) of continuous improvement (see Figure 2).

4. VSM measurables and improving tools

The measurable indexes or performance indicators are important target of VSM. It includes quality, cost and lead time. Following are the definitions (Def) and notations: 1 FTT (first time through): The percentage of units that

complete a process and meet quality guidelines at the first time. (Not scrapped, rerun, retested, diverted for off-line repair, or returned).

2 BTS (build to schedule): Build to schedule reveals how well a plant executes plans to build the right products at the right time in the right sequence.

3 DTD (dock to dock time): Dock to dock time is the elapsed time between unloading raw materials and releasing finished goods for shipment.

4 OEE (overall equipment effectiveness): OEE is a measure of the availability, performance efficiency and quality rate of a piece of equipment. Also, OEE for a constraint operation is a measure of capacity utilization.

Figure 1 The scope of our research

Lean supply chain and its effect on product cost and quality

H.M. Wee and Simon Wu

Supply Chain Management: An International Journal

Volume 14 · Number 5 · 2009 · 335–341

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5 Value rate: The percent of all value added time. 6 Other measurable indices:

. A/T: Available time (excludes meal time) ¼ Total present time – Break time.

. T/T: Takt time (customer demand rate) ¼ Available time/Schedule volume.

. C/T: Cycle time ¼ (Available time – Average down time – Defects time)/Schedule volume.

. W/T: Working time of each operator.

. VA: Value added time (customer wishes to pay).

. NVA: Non-value added time (normally includes

waste). 7 Icon descriptions for improving tools:

. : Visual Factory, it is a visual management

tool.

. : Quick Change Over, which is used to reduce

operation time or change over time.

. : Error Proofing, it is a fool proofed device to

prevent defects.

. : Ford TPM, it is a total productive

maintenance program used for equipment

improvement.

. : Safety, focus on safety and ergonomic

improvement.

Call part sequential feeding: It is a call part system through

lighting kanban by sequential feeding; the sequence is the

same as the main line (see Figure 3). Kitting supply sequential feeding: It is also a sequential feeding

and supplied by kits (see Figure 3). The above two parts supplies the pull systems and forms a

one piece flow. It helps to reduce NVA, pick-up operations,

duplicated conveyance, and prevent wrong parts installation

(Ohno, 1988; Womack et al., 1991; Monden, 1998; Liker,

2004).

5. VSM case study – Ford Lio Ho Motor Company

Introduction to Ford Lio Ho Ford Lio Ho Motor Company, located in Chungli city, Taiwan, is an affiliate of global Ford Motor Company. It was established in 1972, with a current employee of 1,500. The main products include passenger car, commercial car and SUV. The operations include facelift design, manufacturing, local and imported car sales as well as credit service. The major brands are Ford and Mazda with a maximum capacity of 160,000 units per year. Currently, it has 35 suppliers and 25 dealers in 2008. Ford Lio Ho’s vision is to become a competitive company

by applying new technology, improve quality and human resource management. Ford Lio Ho introduced Lean Manufacturing Design (LMD) to the Initial Application Area (IAA) in 1990 and implement Ford Production System (FPS), based on the lean production concept to achieve continuous waste elimination (Huang, 2002). Since VSM implementation is likely to be both expensive

and time-consuming (Abdulmalek and Rajgopal, 2007), this study follows the four-step problem to develop CSM and FSM step-by-step as follows (Wu et al., 2007):

Step (1). Problem finding In order to effectively identify the root causes and solutions from CSM, the first priority is to collect the measurable indices from current situation, such as FTT, OEE, C/T, W/T. The completed CSM is shown in Figure 4. From this diagram, the root causes (the square boxes with arrow) are clearly identified to three key issues as: 1 Too much NVA to pick up parts by walking – the total

value rate is only 31 per cent; there are 69 per cent of potential opportunity for improvement.

2 Low FTT – for example, the station of “Typing/Piston assembly” is 95 per cent, the defect rate is 5 per cent.

3 Low OEE – for example, the station of “Head assembly” is 73 per cent, which is caused by aged equipments and high setup time.

Figure 2 VSM improving cycle

Lean supply chain and its effect on product cost and quality

H.M. Wee and Simon Wu

Supply Chain Management: An International Journal

Volume 14 · Number 5 · 2009 · 335–341

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Step (2). Idea finding According to the above root causes, we define the task as: 1 Apply pull system concept to build sequential parts

feeding and JIT kanban to reduce NVA (pick up time) and

wastes (walking, waiting). 2 Set up error proofing devices and visual aids for critical

process control to promote the quality of first time

through. 3 Practice total productive management (TPM) to reduce

machine breakdown and use quick change over tool to

reduce setup time.

Having defined the objectives of the problem solving project,

the next immediate task is to develop a potential solution

through collecting a set of ideas (the star signs in FSM) for

further evaluation. For this purpose, we exploited the proposed FSM as Figure 5 to build the road map.

Step (3). Obstacle finding The set of solution ideas generated through the proposed FSM is of preliminary nature. There might be a number of potential problems hindering its realization. In order to highlight the hidden obstacles, we applied Five-Why analysis (Ohno, 1988, 2001) to exploit and map out a prerequisite plan for examination. Basically, the Five-Why analysis (5- why) is a logic diagram depicting the cause and effect relationship for searching root cause and generating the intermediate or final task. The Five-Why analysis for dealing with another two key

issues follows the same manner as shown in Table I.

Figure 3 The concept of sequential feeding

Figure 4 The CSM of engine assembly line

Lean supply chain and its effect on product cost and quality

H.M. Wee and Simon Wu

Supply Chain Management: An International Journal

Volume 14 · Number 5 · 2009 · 335–341

338

Step (4). Solution finding Taking the example of Five-Why analysis (Table I), the gap

between root cause and task is fitted perfectly well from our

study. Having identified the obstacles and tasks, we are ready

to formulate the solution scheme for achieving real future

state map (FSM). The solution scheme so developed proposes the following

key action plans to address former three key issues: 1 Identify working space for kitting and sequential feeding,

such as the stations of Head/Belt assembly, Starter/Intake

assembly and Generator assembly. 2 Re-design sequential rack for common used.

3 Re-balance works to identify surplus manpower from NVA reduction.

4 Set up JIT kanban for directly parts supply from suppliers. For example, the supplier directly supplies generators to line side based on JIT kanban.

5 Set up error proofing devices and visual aids to promote the quality of first time through (FTT).

6 Practice frequently TPM (total productive maintenance) and apply quick change over to improve performance for aging equipments to improve OEE.

After implementation of solution scheme, the proposed FSM will be updated to real future state map and changed back to

Figure 5 The proposed FSM of engine assembly line

Table I The Five-Why analysis for dealing with key issue 1

Topic: How can we reduce NVA and wastes effectively? Effect Cause Task (for removing obstacles)

Why the process has too much NVA and wastes? Because operators walk to pick up parts frequently Reduces quantity of racks to shorten walking distance, but NVA is still high

Why still needs so many racks for line side inventory? Because each model needs one rack

Changes supply pattern from push to pull system, but needs to re-design rack and pre-pick up parts

Why not apply one piece flow and use common rack?

Because manpower shortage to pick up sequential parts to the common rack

Identify the surplus manpower from the reduction of NVA to do kitting and sequential feeding, but need extra working space

Why shortage of working space? Because inventories occupy most of the spaces Set up JIT kanban for suppliers to directly ship parts to line side

Lean supply chain and its effect on product cost and quality

H.M. Wee and Simon Wu

Supply Chain Management: An International Journal

Volume 14 · Number 5 · 2009 · 335–341

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current state map again. That is continuous improvement of lean production (Abdulmalek and Rajgopal, 2007; Liker, 2004). Compared to the CSM and FSM, the impact of VSM is summarized as in Table II. The results show how the lean supply chain tool in the VSM case affects the product quality and cost. Through continuous waste elimination and long term philosophy, Toyota can achieve the objectives of high quality, low cost and short lead time (Liker, 2004).

6. Findings and recommendations

From the results shown in Table II, it can be seen that measurable indexes are on the right trend. It means that NVA wastes are continuously eliminated from the supply chain process. This results in a shortened lead time. The inventory reduction and built-in quality is incorporated using error proofing devices, pre-screwed and torque wrench operations. This lean supply chain of VSM definitely supports the company in continuous improvement toward business success (Rother and Shook, 1999; Liker and Meier, 2006). One question still exists: Why has Toyota Motor achieved

such dramatic high-performance (Osborne and Cowen, 2002) while GM, Ford and Chrysler (the Big 3 of US) still show decreasing market share (Wu et al., 2007) even after applying TPS or Lean related production for over ten years? This study shows most companies aim at short-term strategies, which achieve piece-meal improvements and short-term financial goals. For short-term financial goals, most companies (including the Big 3) build more products than demand through mass production. This traditional approach always results in over production at a tremendous extra cost, such as warehousing cost for vehicles and the storage of CKD (completed knock down) parts. Moreover, the Big 3 approach conceals many quality issues in the supply chain. Through continuous waste elimination with LSC, the VSM application aims at no overproduction. The needed fundamental changes are built into the enterprise’s system and working culture with a long term philosophy (Liker, 2004). The Lean supply chain concept has been applied to

industries for several decades. The reason it has remained an open issue is because the whole supply chain system is very complicated with a long lead-time, making it difficult to make

improvements throughout the system. Due to the dynamic market; there is the bullwhip effect with lots of changing measurable indexes. The VSM is the main tool used to identify the opportunities with various lean techniques (Abdulmalek and Rajgopal, 2007) and aims at the core business process, starting from lean stations to lean processes. It enables supply chains to become more efficient and effective in sustaining continuous improvement. Moreover, VSM uses the pull system and one piece flow concepts to effectively eliminate wastes and remove the bullwhip effect through lead time reduction and inventory cost control (Rother and Shook, 1999; Liker and Meier, 2006). After VSM case practice through CSM and FSM, the paper

provides some basic principles to implement VSM as follows: 1 Standardized operations – set up the standard operation

process (SOP) for different operators or different shifts, the standard which is the basis for continuous improvement must be unique.

2 Level production – if the volume and model mix are changed, then the operators and stations are changed simultaneously. That means that the operation time including VA and NVA are also changing. Changing too frequently will disturb or even stop further improvement due to the lack of stable data.

3 Model mix control – in order to enable fast and efficient improvement for line re-balance, it is suggested in Toyota’s assembly line.

4 Operations division – all operations must be divided into VA and NVA (including waste) for improving priority.

5 Manpower focused – use VSM to calculate direct- manpower and do continuous improvement.

7. Conclusion

This study shows how VSM supports the lean supply chain and identifies potential opportunities for continuous improvement to eliminate waste. Culture change is a long term philosophy; it is highlighted as the foundation for Toyota and other companies to sustain success. This paper not only shows the value of VSM as a supply chain tool for implementing lean production; but also provides industrial

Table II The impact of the VSM, from CSM to FSM

Measurable indexes CSM FSM Results Relate to cost and quality

Main line overall equipment effectiveness (OEE) (%) 75 85 10

The OEE improved, productivity increased, cost fell and output quality improved

Main line FTT (%) 94 96 2 The increase in FTT means quality is improved and the re-run rate fell, so cost and lead times fell

Line dock to dock time (seconds) 12,180 10,353 1,827 The reduction in DTD time meant lower inventory, shorter lead times and lower inventory costs

Total working time (seconds) 6,094 5,454 640 The reduction in total working time meant labor costs were reduced

VA (Sec) 1,896 1,954 258

In order to improve the assembly quality, the production line added some error proofing devices, such as pre-screwing, torque wrench, which caused the VA time to increase a little

NVA (Sec) 4,198 3,500 698 The reduction in NVA meant some wasteful and non-value added activities were reduced or eliminated, resulting in reduced costs

Value ratio (%) 31 36 5

The increased value ratio meant the production line was improved and became leaner because of lower cost, higher quality and shorter lead time

Lean supply chain and its effect on product cost and quality

H.M. Wee and Simon Wu

Supply Chain Management: An International Journal

Volume 14 · Number 5 · 2009 · 335–341

340

insight for those hesitant companies to follow the four-step problem solving process in implementing the LSC effectively. We also discuss how a complex supply chain problem can

be systematically analysed and improved effectively by VSM. Future research may consider the use of the proposed VSM system for other non-manufacturing industries.

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