The Dangers of Lean — Ignore at Your Peril

Even though I'm married to a Six Sigma black belt who wants to run Kaizen events to improve my personal organization and process efficiency both in the office and out, I'll be the first to suggest that lean principals can introduce material risk into the supply chain -- especially in volatile and risky economic markets. A short column penned by APICS New Hampshire Chair Dave Turbide does a quick and commendable job of pointing out some of these risks from a supply chain perspective. In the piece, Dave captures the essence of a point I and many others have made over the years that "Lean supply chains contribute to keeping costs and prices down, but they also present more risk, since there is less slack in the chain. A disruption like the volcano or a strike at a component plant can quickly ripple down the chain and stop production or cause stock-outs at the store."

In other words, the more inventory you and your suppliers have on hand during a disruption, the greater the likelihood you'll emerge unscathed from the perspective of keeping your production lines running and customer orders filled. One way of looking at the problem is that inventory, which for many years was the enemy of supply chain professionals, is really just a form of insurance. Treating excess inventory in this manner is useful on many levels -- for one, with Marsh and Aon now acting as brokers for supply risk insurance policies which allow organizations to insure named suppliers, supplies and facilities, it's now possible to directly quantify the best "hedge" against disruptions.

For some, the cost of added inventory may prove more cost effective than a third-party insurance contract. Moreover, some companies might not want to go through the full supply chain body cavity search and assessment that is often part of the underwriting process (despite the benefits of knowing how an objective third-party assesses their own risk). Other organizations may realize that it's worth developing alternative supply options and giving these alternative suppliers a share of the business (e.g., 80/10/10 or 60/30/10 splits) in addition or as an alternative to adding inventory or an insurance policy. Regardless, one thing is clear: the importance of plowing some of the savings and working capital improvements we've all realized from lean back into our supply chain to reduce the business risk we've created for ourselves.

Jason Busch

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