lean six sigma logistics

Strategic Development to

Operational Success

LEAN

SIX SIGMA

LOGISTICS

by

Dr. Thomas Goldsby • Robert Martichenko

Copyright ©2005 by J. Ross Publishing, Inc.

ISBN 1-932159-36-3

Printed and bound in the U.S.A. Printed on acid-free paper

10 9 8 7 6 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Goldsby, Thomas J.

Lean Six Sigma logistics / by: Thomas Goldsby & Robert Martichenko.

p. cm.

Includes index.

ISBN 1-932159-36-3 (hardback : alk. paper)

1. Business logistics—Management. 2. Six sigma (Quality control

standard). 3. Process control. 4. Inventory control. 5. Waste

minimization. 6. Industrial efficiency. I. Martichenko, Robert, 1965–. II.

Title.

HD38.5.G63 2005

658.4′013—dc22 2005011208

This publication contains information obtained from authentic and highly regarded sources.

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Direct all inquiries to J. Ross Publishing, Inc., 6501 Park of Commerce Blvd., Suite 200,

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Phone: (561) 869-3900

Fax: (561) 892-0700

Web: www.jrosspub.com

iii

TABLE OF CONTENTS

Preface ............................................................................................................. xi

Acknowledgments ......................................................................................... xiii

About the Authors ......................................................................................... xv

Web Added Value™ ................................................................................... xvii

Section 1. Lean Six Sigma Logistics: Why Bother?

Chapter 1. What Is Lean Six Sigma Logistics? ............................................ 3

What Is Logistics? ........................................................................................... 4

What Is Lean? .................................................................................................. 4

Lean and the Logistician ............................................................................ 4

What Is Six Sigma? ......................................................................................... 5

Six Sigma and the Logistician ................................................................... 5

What Is Lean Six Sigma Logistics? ............................................................... 6

The Logistics Bridge Model ........................................................................ 7

Chapter 2. The Importance of Logistics and

Supply Chain Management ............................................................................. 9

Discovering the Dark Continent of Logistics ................................................ 9

This Thing Called “Supply Chain Management” ........................................ 11

The Logistics Wastes ..................................................................................... 14

Section 2. The Logistics Wastes

Chapter 3. The Waste of Inventory .............................................................. 19

Logistics and Inventory Management ........................................................... 19

The Temptation of Inventory ........................................................................ 20

The Costs of Holding Inventory ................................................................... 22

iv Lean Six Sigma Logistics

Chapter 4. The Waste of Transportation ..................................................... 27

Logistics and Transportation Management ................................................... 27

Transportation and Logistics Trade-offs ....................................................... 29

Transportation Carrier Relationships ............................................................ 31

Minimizing the Day-to-Day Wastes in Transportation ............................... 32

Chapter 5. The Waste of Space and Facilities ............................................ 35

Logistics and Warehousing ........................................................................... 35

How Many Facilities? How Much Space? .................................................. 36

Are Advanced Technologies a Cure or Merely a Crutch? ......................... 37

Chapter 6. The Waste of Time ..................................................................... 39

Logistics and Time Wastes ........................................................................... 39

Order Transmission ................................................................................... 39

Order Processing ....................................................................................... 41

Order Filling .............................................................................................. 42

Order Staging and Verification ................................................................ 43

Order Shipping and Delivery ................................................................... 44

Chapter 7. The Waste of Packaging ............................................................ 47

Logistics and Product Packaging .................................................................. 47

Packaging as a Source of Waste .................................................................. 48

Packaging as a Waste .................................................................................... 49

Packaging as a Visual Control ..................................................................... 50

Chapter 8. The Waste of Administration ..................................................... 51

Logistics and Administration ........................................................................ 51

Administration as Help and Hindrance ........................................................ 52

Technology and Administration .................................................................... 52

Chapter 9. The Waste of Knowledge ........................................................... 55

Logistics and Knowledge .............................................................................. 55

Cultivating Knowledge .................................................................................. 56

Managing the Flow of Knowledge ............................................................... 57

The River of Wastes ..................................................................................... 59

Section 3. The Logistics Bridge Model

Chapter 10. A Tour of the Bridge ................................................................ 65

History of Lean Six Sigma Logistics ........................................................... 66

Table of Contents v

The Importance of the Logistics Bridge Model .......................................... 66

The CEO’s Perspective .............................................................................. 67

The Implementer’s Perspective ................................................................ 69

The Logistics Bridge Model: Getting Started .............................................. 70

Chapter 11. Logistics Flow: Asset Flow ...................................................... 71

People Flow ................................................................................................... 72

The People “Perfect Order” ...................................................................... 73

Organizing People ..................................................................................... 73

Bridging the People Gap .......................................................................... 74

Inventory Flow ............................................................................................... 75

Understanding Safety Stock ...................................................................... 76

Inventory Management .............................................................................. 77

Starting with the Systems Approach ........................................................ 77

Inventory and Cause and Effect ............................................................... 78

Inventory Management Fundamentals ...................................................... 79

Fixed Resources Flow ................................................................................... 80

Identifying and Mapping Fixed Resources .............................................. 81

Questioning the Need ................................................................................ 82

Vision of Excellence and Fixed Resource Flow ..................................... 83

Chapter 12. Flow: Information Flow ........................................................... 85

Data Flow ....................................................................................................... 86

Historical Data ........................................................................................... 86

Event and Real-Time Data ....................................................................... 87

Future and Deterministic Data ................................................................. 87

Data Excellence ......................................................................................... 89

Knowledge Flow ............................................................................................ 89

Continuous Improvement and Knowledge Flow ..................................... 90

Standardized Work and Knowledge Sharing ........................................... 91

Getting Knowledge to Flow ..................................................................... 92

Communication Flow ..................................................................................... 93

Strategic Communication .......................................................................... 93

Hoshin Planning .................................................................................... 94

Operational Communication ..................................................................... 95

Chapter 13. Flow: Financial Flow .............................................................. 97

Income Statement Flow ................................................................................. 98

Logistics Activities and Hidden Operating Costs ................................... 99

vi Lean Six Sigma Logistics

Logistics Costs Flow Across the Organization ..................................... 100

Inventory Carrying Costs and the Income Statement ........................... 101

Vision of Excellence and the Income Statement .................................. 102

Balance Sheet Flow ..................................................................................... 103

Inventory as a Current Asset .................................................................. 104

Inventory Turns and the Balance Sheet ................................................ 105

The Balance Sheet and Business Strategy ............................................ 106

Flexibility ............................................................................................. 106

Visibility .............................................................................................. 107

Cash Flow .................................................................................................... 107

Cash Flow Drivers .................................................................................. 108

Accounts Payable and Cash ............................................................... 108

Accounts Receivable and Cash .......................................................... 110

Revenue Growth and Cash ................................................................. 110

Gross Margin and Cash Flow ............................................................ 111

Selling, General, and Administrative Expense and Cash Flow ....... 111

Capital Expenditure and Cash Flow .................................................. 112

Inventory and Cash Flow ................................................................... 113

Vision of Excellence and Cash Flow .................................................... 113

Chapter 14. Capability: Predictability ....................................................... 115

Organization ................................................................................................. 116

Highlighting Waste and Creating Visibility .......................................... 117

Standardized Operations and Setting Priorities ..................................... 118

The Organized Workplace: Clutter, Complexity, and Quality ............. 119

Measurement and the Organized Workplace ......................................... 119

Coordination ................................................................................................. 120

Coordination and Value Stream Mapping ............................................. 121

Coordination and Detailed Planning ...................................................... 122

Coordination and Measurement .............................................................. 124

Complexity ................................................................................................... 124

Complexity of Products .......................................................................... 125

Complexity of Processes ......................................................................... 126

Chapter 15. Capability: Stability ................................................................ 129

Standardization ............................................................................................. 130

The Key Aspects of Standardization ..................................................... 130

Standardization and Continuous Improvement ...................................... 131

Flexibility ..................................................................................................... 132

Developing Flexibility and Back to Basics ........................................... 133

Table of Contents vii

Flexibility and Lead Time ...................................................................... 134

Logistics Infrastructure Flexibility ......................................................... 135

Planned Network Design and Visibility ................................................ 136

Control .......................................................................................................... 137

Today’s Capability Is the System’s Capability ..................................... 138

Common and Special Cause Variation .................................................. 139

Chapter 16. Capability: Visibility ............................................................... 141

Understandability ......................................................................................... 142

Beginning to Understand ........................................................................ 143

Channel Partners and Their Important Role .......................................... 143

Opportunities and the Moment of Truth ............................................... 144

Measurability ................................................................................................ 145

Voice of the Customer ............................................................................ 146

Creating Internal Measures of Meaning ................................................ 148

Actionability ................................................................................................. 149

Chapter 17. Discipline: Collaboration ....................................................... 153

Teamwork ..................................................................................................... 154

Processes and Knowing the Customer ................................................... 155

Building Teams ....................................................................................... 156

Complementary Skills and Opposing Views ..................................... 156

Natural Stages of Team Development ............................................... 157

Strategic Sourcing ........................................................................................ 158

Raw Material Suppliers .......................................................................... 159

Standardization, Complexity, and Dual Sourcing ................................. 160

Beware the Term “Partnership” ............................................................. 160

Collaboration and Logistics Services ..................................................... 161

Third-Party Logistics ............................................................................... 162

Developing a Lean Third-Party Logistics Relationship ........................ 163

Project Management .................................................................................... 165

Project Management: The Basics ........................................................... 166

Meeting Agenda (Compass) ............................................................... 167

Storyboard ............................................................................................ 167

Gantt Chart .......................................................................................... 168

Failure Mode and Effects Analysis .................................................... 169

Chapter 18. Discipline: Systems Optimization .......................................... 173

Total Cost ..................................................................................................... 174

Explicit and Implicit Costs ..................................................................... 174

viii Lean Six Sigma Logistics

Horizontal Integration .................................................................................. 177

Perceived Difficulty and System Constraints ........................................ 179

Compensation and Incentive Programs .................................................. 179

Teamwork, Imperfection, and Defensive Behavior ............................... 180

Breaking Down the Walls ...................................................................... 181

Vertical Integration ...................................................................................... 181

From Customer to Supplier .................................................................... 182

Vertical Integration and Information ...................................................... 182

Variability, Leveled Flow, and Vertical Integration ............................. 183

Chapter 19. Discipline: Waste Elimination ............................................... 185

Quality at the Source ................................................................................... 186

The Benefits of Quality at the Source .................................................. 187

Logistics and Quality at the Source ...................................................... 189

Continuous Improvement ............................................................................. 190

Continuous Improvement: The Bare Facts ............................................ 190

The Challenges of Continuous Improvement Implementation ............. 192

Bridging the Gap ..................................................................................... 193

Getting People Trained ........................................................................... 194

Execution ...................................................................................................... 195

Acting as Lean Six Sigma Logistics Leaders ....................................... 195

Section 4. Building the Bridge: Lean Six Sigma Logistics Tools

Chapter 20. Strategy and Planning Tools ................................................. 201

Surveying the Tool Kit ............................................................................... 201

Voice of the Customer ................................................................................ 202

Voice of the Business ................................................................................. 204

Value Stream Mapping ................................................................................ 206

Pareto Analysis and ABC Classification .................................................... 208

The XY Matrix ............................................................................................ 211

Chapter 21. Problem-Solving Tools ........................................................... 213

DMAIC (Define-Measure-Analyze-Improve-Control) ............................... 213

Define ....................................................................................................... 214

Measure .................................................................................................... 214

Analyze .................................................................................................... 215

Improve .................................................................................................... 216

Control ..................................................................................................... 217

Causal Analysis Tools ................................................................................. 218

Brainstorming .......................................................................................... 218

Cause-and-Effect Diagrams .................................................................... 219

Table of Contents ix

Five-Why Analysis .................................................................................. 220

Design of Experiments ............................................................................ 222

Inferential Statistics ................................................................................. 223

Chapter 22. Operational Tools ................................................................... 227

Flow Concepts ............................................................................................. 227

Just-in-Time and the Pull System .......................................................... 227

Lead-Time Management, Speed, and Flexibility .................................. 229

Leveled Flow ........................................................................................... 230

Frequency and Lot Size .......................................................................... 232

Organization Concepts ................................................................................. 232

Standardized Work Plan ......................................................................... 233

The SIMPOC Model ............................................................................... 233

5S Organization and Visual Control ...................................................... 234

Red Tag Initiatives .............................................................................. 235

Poka-Yoke ............................................................................................ 236

Chapter 23. Measurement Tools ................................................................. 237

Data Collection Plan .................................................................................... 237

Process Capability ........................................................................................ 238

Defects per Million Opportunities .......................................................... 241

Sigma Calculations .................................................................................. 242

Conventional Measures of Logistics Performance ..................................... 245

Total Cost Analysis ..................................................................................... 246

Chapter 24. Case Study: GoldSMART Products, Inc. .............................. 249

Lean Six Sigma Logistics: A Real-World Story ....................................... 249

GoldSMART Products, Inc.: A Case in Lean Six Sigma Logistics ........ 250

The Calm Before the Storm ................................................................... 250

The Approach of Ominous Clouds ........................................................ 251

In the Eye of the Storm ......................................................................... 252

Riding Out the Storm ............................................................................. 255

Seeing Daylight Again ............................................................................ 260

Chapter 25. Summary and Conclusion ...................................................... 267

Index ............................................................................................................. 271

PREFACE

As logistics and supply chain professionals, we all have one thing in common.

This commonality is that time is a scarce resource, one that must be treated as

a treasured commodity. This means that we must choose wisely when deciding

what books to read or what avenues to pursue for professional development.

With any luck, when we do invest our time in reading an industry book, we

will walk away with one or two “golden nuggets” that can help us with our day￾to-day responsibilities and challenges.

As the authors of Lean Six Sigma Logistics, we certainly kept the above in

mind as we developed the framework for this book. To begin, we continuously

asked ourselves whether a certain topic or theme was relevant to today’s logis￾tics and supply chain practitioner. We continuously asked ourselves whether

each point passed the “so what?” test.

Consequently, we spent significant time up front developing the framework

for the book. Using the serene background of Benson Lake in Eastern Ontario,

Canada, we devised what we believe to be the key drivers for all logistics

processes. This was no easy task. First of all, we must consider the two authors:

one practical-thinking academic and one academic-thinking practitioner. Many

times, we debated theory versus practicality and, oddly enough, many times the

academic argued for practicality and the practitioner argued for rigor of theory!

What lesson did we learn from this? The first was that theory relates directly

to strategy. The second lesson is that practicality relates to tactical realities. To

be sure though, we recognized that strategy and tactics are both required to

achieve anything of significance. We must know what we want to accomplish

and we must understand how to accomplish it!

A majority of our discussion surrounded the topic of “flow.” Not flow from

an inventory point of view, but rather the flow of the book itself. We continu￾xi

ously reminded ourselves that readers must be able to see the book as a whole,

such that by the end they will say, “I see it, I get it!” And, therefore, the

Logistics Bridge Model was born.

The Logistics Bridge Model is a compass and map. It will help us to set

a strategic destination and direct us on the operational journey. It is not a step￾by-step “how-to” guide, but rather a path for critical thinking. In our opinions,

it is critical thinking that is required in logistics and supply chain management

today. We need to be able to look at operations differently. We need to under￾stand what value is and what waste is. We need to leverage value and eliminate

waste. That is the primary purpose of this book.

In all sincerity, we appreciate your valuable time and we hope this book

will help you to achieve your professional goals and organizational objectives.

As well, we hope you will embrace the Logistics Bridge Model and enhance

your ability to look at your supply chain with a critical eye and vision for

improvement.

Thomas Goldsby and Robert Martichenko

xii Lean Six Sigma Logistics

ACKNOWLEDGMENTS

Writing a book might be compared to any number of challenging yet rewarding

experiences. We have likened it to a great mountain expedition. Mountaineering

is regarded as one of the most grueling pursuits of human endeavor. Writing

a book and living to tell about it may not be far behind! Yet, we recognize that

many people have helped us in our expedition.

We would like to acknowledge our many friends and colleagues for their

support of this effort. In particular, we would like to thank Douglas Boyd, Brent

Buschur, Pascal Dennis, Michael George, Craig Germain, Michael Goldsby,

Steven Gran, Stanley Griffis, Jack Hines, Ted Stank, Glen Wright, Ike Kwon,

Pamela Ruebusch, Helen Zak, Rachel Regan, Steve Scholten, Dean Dixon, and

Richard Holland for their invaluable support and dialogue. We would like to

thank David Kmet, Tom Taranto, Antonio Tong, and Sarah Valles, all graduates

of The Ohio State University, for their research assistance over the past five

years. A special thanks to Sarah for her contribution of visual illustrations used

in the book.

From a writing perspective, we thank Drew Gierman and the team at J. Ross

Publishing. A huge “thanks” to Carole Boyd and June Martichenko for convert￾ing very rough drafts to near-final copy. We thank Fred Moody of Logistics

Quarterly magazine for encouraging the pursuit of writing on supply chain

issues.

A warm thanks to Joe and Sujane Goldsby. Perhaps most importantly, we

must thank our spouses, Kathleen Goldsby and Corinne Hines, for looking after

the most important aspects of life while providing us the luxury of engaging

in mountain climbs. And last, but not least, we would like to acknowledge our

wonderful children: Emma, Aiden, Emilee, and Abigail, who taught us that

“you can work on the laptop and be the tickle monster at the same time.”

xiii

To close, we have realized that writing a book is comparable to climbing

a mountain not only in the preparation and process but also in the outcome. For

in reaching the peak of the mountain, one does not enjoy the view for long

before realizing how many more peaks have yet to be climbed.

xiv Lean Six Sigma Logistics