Most resources used in the process of delivering a product or service add value—some do not. Those resources consumed that do not add value—be they people, time, or equipment—should be eliminated. This is the essence of the famous Toyota Production System (TPS), or Lean, as the system is known in the United States.

Taiichi Ohno created the TPS in the mid-20th century. Ohno founded the system on five core principles that, if consistently applied, could improve production quality and most importantly reduce or eliminate waste. They are:

• Muda: A Japanese word referring to anything that is wasteful and doesn't add value.

• Process Focus: Managers work cross-organizationally to develop and sustain robust business processes.

• Genchi Genbutsu: A Japanese phrase that refers to collecting facts and data at the actual site of the work or problem.

• Kaizen: A Japanese word for continuous and incremental process improvement.

• Mutual Respect: Toyota values a strong relationship between management, employees, and business partners.

By grasping these core ideas you can begin to apply them to make your supply chain lean and efficient. Most importantly, you will be able to identify what we call “Seven Deadly Supply Chain Sins”—the wastes that keep supply chain management from achieving its full business potential. These “sins” are overproduction; delay/waiting; transportation/conveyance; motion; inventory; over-processing; and defects/corrections.

This article explains each of these wastes and then shows how the TPS principles can be effectively applied to correct them. We also include real-world examples to illustrate how Toyota and other leading companies have rid themselves of the wasteful actions and processes.

1. Overproduction: Build first, wait for orders later. A common example of this is delivering products before they are needed. More serious for the entire supply chain is demand information overproduction—what Toyota calls “created demand.” Created demand is caused by requesting a quantity greater than needed for end use or requesting it earlier than needed. Created demand typically adds 40 percent to supply chain volume fluctuation at the part number level.

For example, Toyota identified and eliminated created demand to slash its inventory. Initially the company, and the automotive industry as a whole, used weekly stock replenishment orders. That, combined with traditional sales policies (e.g., volume discounts and month-end sales pushes), continued to cause large volume fluctuations. This distorted true demand and burdened suppliers, warehouse operations and transportation.

At Toyota, weekly dealer service parts stock replenishment orders were received throughout the day and processed to the warehouses on night batch. Starting the next morning, orders were picked and staged on the shipping dock where the day's critical order parts were added prior to shipment. Trucks would leave in the evening for delivery to dealers the following day. Order cutoff to receipt time averaged over 40 hours. Weekly stock replenishment and supply lead time required dealers to carry 70 days' supply of inventory.

To fix the problem, Toyota transitioned to daily stock order replenishment with a new model that led the industry to change. Using a “sell one, buy one” method, Toyota scheduled separate order cutoff times by delivery route. Immediately after the cutoff time, orders were processed, picked, packed and shipped. With daily stock order replenishment and Toyota's industry-leading fill rate, critical orders dropped to 1-3 percent of volume from over 30 percent. Average order cutoff to receipt time dropped to 14 hours. Daily stock replenishment and lead time reduction allowed dealers to reduce their supply of inventory to 35 days (-50 percent) while increasing the number of part numbers stocked by 50 percent. Leveling demand dramatically improved supplier efficiency and delivery performance (up to 50 percent higher than competitors). Eliminating “created demand” enabled Toyota to cut its inventory and increase productivity.

In another example, ConAgra streamlined its demand planning system to rein in its overproduction. Each day, a total of between 15,000 and 20,000 head of cattle were slaughtered at four of the company's meat packing plants (located in Colorado, Kansas, Nebraska, and Texas) prior to implementing improvements. The focus was on maximizing production and yield every day with little consideration given to actual demand for the products.

While production numbers may have been impressive, this caused serious logistical problems. Logistics had less than one day of finished inventory storage capacity in its automated warehousing network, which meant that the inventory had to move, regardless of demand.

This frequently required loading trailers and shipping products (generally eastbound with no firm destination) while the sales department desperately searched for customers to buy the product. Every hour that passed and every mile driven required price reductions until a customer could be found. If no customer was found, the product was delivered to a refrigerated warehouse where the product was flash-frozen and stored until it could be sold—usually at a significant loss.

Applying genchi genbutsu techniques, ConAgra discovered that its problems were rooted in inadequate demand planning for their finished product.

Weather patterns and economic shifts played an important role in determining the type of product to produce. Cold weather meant more roasts; warm weather meant more steaks or burgers grilled outside. A depressed economy might force a spike in demand for lower-cost cuts of meat while a robust economy might support more filet mignon. While this might be intuitively apparent, ConAgra possessed no reliable demand-planning tool to predict these changing demand patterns.

To address this problem, a sophisticated demand-planning tool was developed and implemented, taking all the variables into account. ConAgra was now able to effectively align production with demand and develop more accurate production plans. These improvements resulted in a 35 percent increase in sales forecast accuracy.

2. Delay/Waiting: Any delay between the end of one activity and the start of the next activity, such as the time between the arrival of a truck for a pick-up and the loading of the trailer, and the delay between receiving the customer's order information and beginning to work on fulfilling the order.

Because of the separation of production, warehousing and transportation activities, each of these functions is often unaware of the schedule for the subsequent process. Many operations and modes of transportation operate with cutoff times.

For example, FedEx and UPS have cutoff times at the end of the workday so that shipments can clear their hubs and be loaded on night flights to destination hubs; railroads have cutoff times for railcars to reach their switching yards for train makeup; ocean carriers have cutoff times for containers to arrive at their terminals to be loaded on specific vessels.

By coordinating production and shipping operations with these cutoff times, shippers can avoid having their shipments delayed and waiting for the next shipment by their logistics partner. Here are some examples of added supply chain lead-time from poor coordination of logistics hand offs:

• A shipment is not sent early enough to reach the port of departure for the weekly vessel sailing—seven days added to lead-time.

• A shipment does not arrive at our customer's warehouse during today's receiving window—one day added to lead-time.

• The parts needed to complete an assembly due to be shipped today arrive after the FedEx truck leaves with today's other urgent shipments—one day added to lead-time.

• Customer Service does not enter a key customer's order until after the cutoff for finalizing next week's production schedule—seven days added to lead-time.

At Formica, strict labor union rules and a complex handling operation caused wasteful delays. It was not allowed, for example, for production personnel to move product beyond an imaginary line in the facility that separated manufacturing operations from the finished goods storage and distribution operation.

When receiving product, forklift drivers could take material no further than the dock. From the dock, designated forklift drivers could take the product no further than the end of the row where it was to be stored. These products were then picked up and put away by yet another forklift operator.

For shipping operations, similar restrictions applied. In total, there were some 29 job classifications that caused serious delays and overall productivity levels that led to a significant loss of market share for the company.

Applying genchi genbutsu techniques, the company instructed both qualified industrial engineers and union stewards to closely observe each production and distribution activity and identify opportunities for improvement.

These opportunities were then evaluated for their impact on productivity improvements and a plan developed to present to the union for approval. The goal was to significantly reduce and rationalize the number of restrictive work rules in order to eliminate delays and increase productivity. With the ultimate support of the union, the work rules were rationalized (from 29 to 18), dramatically reducing unnecessary delays.

3. Transportation/Conveyance: Any kind of unnecessary transport. Out-of-route stops, excessive backhaul, locating fast-moving inventory to the back of the warehouse and other transport wastes cause unnecessary material handling distances to be incurred.

Ironically, Toyota's transformation from weekly to daily service parts stock replenishment orders may have solved overproduction problems, but it created a new transportation problem for nine large Toyota dealers in the Denver area. Parts for those dealerships come from a regional parts depot in Kansas City—600 miles away.

In the days of weekly stock order replenishment, five dealers got their parts on Wednesday and four on Thursday (two shipments per week). Usually, one semi-trailer for each day was sufficient, but occasionally (such as after a month-end sales push) an extra truck (dispatched partially empty, of course) had to be called in for the overflow.

When Toyota transitioned to daily stock order replenishment, the carrier got out his rate book and quoted a price for five trucks per week servicing all nine Denver dealers each day—150 percent more money than two trucks per week.

Toyota's “systems thinking” approach to JIT logistics dramatically reduced demand fluctuation, allowing Toyota to promise its carrier 40 percent of a truckload from Kansas City to Denver each day. Toyota asked the carrier to throw out his rate book and go sell his daily, time-specific 60 percent of a truckload to other customers. This solution was revenue neutral to the old way.

Transplace, a North American third party logistics service provider (3PL), also managed to solve a transportation problem. At first, the company managed dozens of major shippers' transportation needs independent of each other. There were significant wasted (i.e., deadhead) miles in many of these shippers' networks between the unloading process and driving to pick up the next assigned load.

By employing genchi genbutsu techniques, various account teams methodically identified specific lanes and the deadhead miles that were traveled within each of their respective account networks. Working collaboratively with other account teams, they systematically combined multiple shipper networks into a single network and identified regular backhaul lanes for one shipper that were regular headhaul lanes for another shipper.

Then, by negotiating “dedicated” lane agreements with select truckload carriers, they were able to offer dedicated services within specific lanes that dramatically reduced deadhead miles. This also provided a reduction in transportation costs and, due to more dependable service reliability, overall inventory reductions. Kaizen processes continue to identify more freight to add to the overall network.

4. Motion: Any kind of unnecessary movement by people, such as walking, reaching and stretching. Motion waste also includes extra travel or reaching due to poor storage arrangement or poor ergonomic design of packaging work areas.

Storage arrangement in warehouses can have a surprisingly significant impact on labor productivity and space/equipment utilization. Toyota's U.S. service parts warehouse network and inventory control system were originally set up in the 1960s through mid 1980s by managers hired from U.S. automakers and run in a traditional fashion. Rapid sales growth put a great strain on warehouse facilities and people, potentially adding greatly to costs. Most of the regional depots were running out of space, and labor productivity was just around industry average.

By the late 1980s, Toyota Japan had successfully deployed Toyota Production System concepts to their service parts distribution operations. In 1987, Toyota's Japanese warehouse experts began supporting hungry learners in Toyota's U.S. Parts operations to implement TPS and JIT logistics. Three key methods were used:

1. Lean Storage—designing storage locations precisely sized to the parts to be stored in each location and locating parts based on frequency of demand and picking/stock keeping efficiency.
2. Small Batch Processing—applying the concepts of Standardized Work to warehouse operations.
3. Kaizen—engaging employees in continuous improvement.

During a 13-year period when sales grew 126 percent and stocked part numbers grew 72 percent, warehouse space was increased by only 14 percent, greatly reducing capital investment. This denser storage and intelligent location of parts, combined with efficient small batch processing, enabled Toyota to achieve a 50 percent labor productivity advantage over competitors.

At Denso, a manufacturer of electrical components for Toyota and many other auto makers, the company assembled air conditioning kits for Toyota. These kits were shipped in cartons to dealers and to various ports around the country to be installed in vehicles as options. Basically, components were brought in from Denso-Japan and from various U.S. suppliers and then packaged into master shipping cartons in a two-step process. The first step was to perform sub-assembly work for components procured from different vendors that could be joined together in some logical fashion that would streamline the eventual installation process into a vehicle. The second step was to take the sub-assemblies and combine these with already finished components into the master carton.

The problem: Two separate assembly lines were used for this process. At the end of the first assembly line, the now assembled sub-components were put into a temporary storage container or bin, palletized, and then moved to a temporary rack location. At some later time, usually within a day or two, the sub-assemblies were retrieved from their temporary storage location, brought to the second assembly line (for final packaging), and combined with finished components to make the final shipping carton. This was clearly a waste of motion by double handling and the movement of inventory into and out of storage locations.

The solution was simple—and at the same time very complex. Through a series of questions (see sidebar: the “Five Why's) the company discovered that there was no clear reason why the assembly process required two steps. A dramatic reduction in unnecessary motion could be gained by combining the two lines into one continuous process. This required a significant improvement in synchronizing inbound component receipts and scheduling assembly operations. But, within six months all the plans were complete and the new process implemented.

The results were impressive. There was now one continuous assembly process and the components were now handled and moved only once. This resulted in a 40 percent reduction in unnecessary movement, elimination of temporary storage requirements, and a reduction in day's inventory due to the new JIT process.

5. Inventory:Any logistics activity that results in more inventory being positioned than needed or in a location other than where needed. Examples include early deliveries, receipt of order for a quantity greater than needed, and inventory in the wrong distribution center (DC).

“Sell One, Buy One, Make One” is the cornerstone of Toyota's industry-leading Just-In-Time Logistics supply chain performance. Inventory and operational efficiency is achieved through a constant focus on reducing lead time and variation in demand and lead time. All dealers order daily what they have sold daily. Heijunka (leveling volume and variety) is applied to the operations of the entire supply chain, with excellent synchronization among supply chain partners. More than 80 percent of the volume is ordered daily from suppliers and shipped daily 96 percent on time in standard lead time.

In another example, Curtin Matheson Scientific (now part of Fisher Scientific) distributed thousands of SKUs throughout the 48 contiguous states. These products belonged to clinical and industrial groupings depending on the type of customer they were sold to. Each of the company's 22 U.S. distribution centers stocked virtually all of these products, even though the typical customers for each line were dramatically different.

A kaizen, supported by sales and marketing, determined that the ordering processes and lead time requirements were significantly different for these two customer groups. Industrial customers were typically large manufacturing operations that placed replenishment orders with a 30-day order-to-delivery lead time.

Clinical customers were typically small doctor's offices or clinics that relied on nurses or other support staff to place orders. It was not unusual in this environment to place an order when supplies were nearly out or entirely depleted and expect a next-day delivery. The result of these findings was that the company was able to consolidate industrial products into five DCs with clinical supplies stocked in all 22 DCs.

After further kaizen, the company determined that the necessary delivery requirements could be met with only 19 DCs. Additional kaizen resulted in slow-moving or dead stock being located in one central DC. The result was an overall inventory reduction of nearly 40 percent.

6. Space:Use of space that is less than optimal, such as less than full/optimal trailer loads, cartons that are not filled to capacity, inefficient use of warehouse space, and even loads in excess of capacity.

Rapid growth at Toyota's first North American parts center began causing congestion at the shipping dock doors. Warehouse operations management submitted a capital proposal to construct additional dock doors.

Practicing genchi genbutsu, the company discovered that there was some unused space in many outgoing trucks (estimated at 6 percent additional capacity). A kaizen activity involving the loaders effectively utilized this additional space, eliminating the need for additional dock doors and cutting transportation costs by 6 percent.

Further genchi genbutsu revealed the cartons used by some North American suppliers had more empty space than like parts previously sourced from Japanese suppliers. The company also found cartons stocked with parts from different pickers were not completely filled. Kaizen activities by the responsible personnel further improved the density of shipments, allowing more sales growth before investing in new dock doors and saving 10 percent in transportation costs.

In another Denso example, the manufacturer used pallets measuring 60” x 60” for shipping air conditioning kits. This created waste when loading trailers, since a typical 96” wide trailer could only be loaded one pallet wide—not two, as is optimal with a standard 40” x 48” GMA pallet.

Applying genchi genbutsu techniques, the company discovered the Freon tubing used in most Toyota, as well as Honda models was constructed in one continuous piece, resulting in oversized carton sizes requiring a 60” x 60” pallet. The “Five Whys” technique uncovered an opportunity to redesign the tubes by “breaking” them into several shorter pieces and reconnecting them into a continuous piece during installation into the vehicle. This solution resulted in packaging dimensions that enabled the use of standard pallets, cutting transportation costs by nearly 40 percent.

7. Errors. Any activity that causes rework, unnecessary adjustments or returns, such as billing errors, inventory discrepancies and adjustments, and damaged/defective/wrong/mislabeled product.

In Toyota's service parts packaging operations, mislabeled cartons were the number one cause of errors. In a kaizen, Toyota implemented a very inexpensive and effective countermeasure. If, for example, a packer had five cartons of a part number to pack, he/she was given seven labels. The first label was stuck on a form with a row of circles below the label for each digit in the part number. The packer would write the part number from the parts to be packed in the circles and compare it with the part number on the label. After packing the five cartons, the packer repeated the process with the 7th label and last part. Labeling errors dropped dramatically.

In another example, Formica Corporation produced a wide variety of laminated and solid-surfaced materials. As a result of manufacturing and logistics metrics that rewarded short cycle times and on-time shipments, product was often shipped that was damaged or defective. In addition, Formica carried a legacy of poor labor relations that created a lack of pride and a labor force that just didn't trust management. This resulted in poor quality of work, high error rates (i.e., returns, credits, warranty claims), and ultimately dissatisfied and angry customers.

To address this problem, a cross-functional kaizen team was assigned and quickly determined that a comprehensive set of performance metrics could align overall execution with strategy and would eliminate conflicting performance objectives by department.

The company developed a comprehensive set of Key Performance Metrics (KPIs) that focused on customer requirements, were applied throughout the organization, and supported by labor—because many of the adopted KPIs were their suggestions. Rewards were tied to customer satisfaction, market share, overall corporate performance objectives, and a reward system for labor. The results were impressive, with a 70 percent reduction in claims, steady market share gains, improved financial performance, and a labor group that had regained a measure of trust in management and again cared for the future of the company.

Companies attempting to adopt and apply TPS principles to their supply chain operations will be challenged to approach the efficiency and quality achieved at Toyota. For your company to begin its journey down this road to a leaner supply chain, you must first clearly understand, fully embrace, and put into practice the five principles of the TPS—Muda, Process Focus, Genchi Genbutsu, Kaizen, and Mutual Respect. This is an absolute necessity in order to utilize the full human potential of every employee for the continuous improvement of your business. While there are many seminars and consulting practices geared toward the tools of TPS (or lean/Six Sigma), this is only the tip of the iceberg. TPS requires a top-down approach that becomes part of the corporate fabric. Teaching TPS cannot take place in a classroom or through seminars, but where the operations actually take place.

To be effective, everyone must be fully aware of the various forms that waste can take and be constantly vigilant of any opportunities to attack and eliminate the seven deadly supply chain wastes—Overproduction, Delay/Waiting, Transportation/Conveyance, Motion, Inventory, Space, and Errors. Senior executives must regularly walk through the operations, observing the activities, asking questions (the “Five Why's”) to develop the problem-solving capability of their people, and demonstrating their commitment to the process. Too often, companies treat these processes as programs that can be started and stopped as needed. They seldom give it the necessary support and time to become part of the corporate culture—what is referred to as the Human System for Lean Management by Lean Consulting Associates colleagues who have used their 20-plus years of Toyota experience to document the Toyota business and management culture in North America.