Lean production and the Internet

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Int. J. Production Economics 89 (2004) 247–260

Lean production and the Internet Peter Bruuna, Robert N. Meffordb,* a

Center for Technology, Economics & Management, Technical University of Denmark, Building 421, DK-2800 Kgs. Lyngby, Denmark b School of Business and Management, University of San Francisco, Ignatian Heights, San Francisco, CA 94117, USA Received 2 May 2002; accepted 2 October 2003

Abstract In this paper, the implications for lean production systems of the Internet are explored. Does the World Wide Web facilitate the implementation of Just-In-Time (JIT) production systems, or alternatively, can it serve as a substitute for JIT? The possible effects on supply chains, production scheduling, inventory control, procurement, quality improvement, and the workforce are some of the issues addressed. Some case examples of use of the Internet for these purposes are presented. Constraints on the use of the Web to foster leanness are discussed and recommendations for integrating the Internet into production systems offered. r 2003 Elsevier B.V. All rights reserved. Keywords: Production; Lean production; JIT; Internet; Supply chain management

1. Introduction In the 1990s, many manufacturing firms around the world adopted lean production as a strategy to increase their global competitiveness. Some firms have made much progress in implementing lean production in their factories while others have found it to be very difficult and are still struggling with implementation, or in some cases, given up the attempt. Some of the companies that have been successful in converting their manufacturing facilities to lean production have begun to spread lean principles to other business activities (e.g. product design, payments processing, order taking) or into their supply chains. They are attempting to move *Corresponding author. Tel.: +1-415-422-6408; fax: +1415-422-2502. E-mail address: [email protected] (R.N. Mefford).

beyond lean manufacturing to become lean enterprises. Since the advent of the concept of lean production, which itself is derived from the JustIn-Time (JIT) system developed by Toyota beginning back in the 1960s, there have been many advances in information technology (IT), particularly the widespread deployment of the World Wide Web and the Internet. Almost every firm and business function has been impacted by the Internet in the last few years and whole new industries have arisen because of the technology. Of course, lean production systems are not immune from the effects of the Internet. But what are these effects likely to be? Will they allow lean production concepts to be more fully applied, or, on the other hand, might they serve as an alternative way to increase operational efficiency? In fact, some have seen an inherent conflict between lean principles and IT such as the Internet

0925-5273/$ - see front matter r 2003 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2003.10.007

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(Piszczalski, 2000). It is argued that lean production emphasizes reducing variety and flexibility to achieve greater efficiency whereas one of the benefits of IT is its ability to provide more flexibility and product variety. Also, many proponents of lean production believe simple visual systems (such as kanban) are sufficient to control a pull system and that computer systems tend to shift production control from a line to a staff function that is undesirable in lean thinking. Furthermore, computer systems can be expensive and difficult to implement and may distract attention from continuous process improvement. In this paper, we will discuss the ways in which the Internet is already having an impact on firms using lean production methods and its potential for deepening and broadening these effects. We will argue that the Internet is a facilitator to the implementation of lean production and lean enterprises and, in fact, a synergy exists between the two. In other words, if appropriately applied, the Internet can help make production systems leaner, and even more significantly, make the entire supply chain leaner. In Section 1, the principles of lean production will be examined and how theoretically the Internet might affect the implementation of these principles. In Section 2, some examples of how firms have actually used the Internet to make their lean production operations more effective are discussed. Section 3 examines some constraints and barriers to integration of the Internet into lean enterprises. In Section 4, we reflect on the theoretical grounding of value creation in the combined system of lean production, enterprises, and the Internet. Sections 5 and 6 draw conclusions and present some guidelines for using the Internet to make the firm and its supply chain leaner, or e-lean, as it has been called (Piszczalski, 2000).

2. How lean production systems might use the Internet To identify ways in which the Internet might be useful to firms using lean production approaches, it is helpful to first define what a lean production

system is and its key characteristics. The term lean production was used by the authors of the International Motor Vehicle Project carried out by MIT in the 1980s to describe the approach originally developed in the Japanese auto manufacturing industry which is contrasted with the mass production approach common in the United States and Europe at the time. This approach is often called JIT but the authors (Womack, Jones, and Roos) of The Machine That Changed the World, which popularized the term lean production, believe that leanness goes beyond JIT and more accurately describes the production systems used in the Japanese auto industry at the time (and now in much of the world). Their definition: ‘‘Lean production is ‘lean’ because it uses less of everything compared to mass production—half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it requires keeping far less than half the needed inventory on site, results in many fewer defects, and produces a greater and ever growing variety of products’’ (Womack et al., 1990). In examining this definition, one can see that there is a strong emphasis on reducing the use of all resources, not only in the factory but also in activities extending beyond the shop floor such as product development and supplier relations. They subsequently expanded the concept of lean production to consider the lean enterprise and efforts to apply lean thinking throughout all enterprise activities (Womack and Jones, 1996). Although many use the terms JIT and lean production interchangeably, Womack, Jones, and Roos clearly believed that leanness is more descriptive of how pervasive the organizational change must be to fully benefit from a JIT approach. The key parameters are the same in the two concepts, but lean systems apply them more comprehensively throughout the firm to activities beyond the factory floor (some have called lean production big JIT) and in relationships with suppliers, customers and other important partners. While e-business, understood as trade over the Internet, is growing at an impressive overall rate, there now appears to be a slowing in the Business-toConsumer (B2C) growth rate and acceleration in

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the Business-to-Business (B2B) area (Amit and Zott, 2001). Furthermore, B2B e-business is predicted to reach $2.7 trillion in 2004 representing more than 17% of the total Web trade, while online retail is expected to represent less than 7% of total trade at that time. In fact, the greatest potential for the Internet to lean enterprises is that it will allow leanness to be applied throughout the supply chain in a way that could not have been conceived of 10 years ago. In this section we will examine that potential. To begin, it is useful to outline the characteristics of a lean production system. As the definition presented above indicates, there is a strong emphasis on reducing the use of all resources in a firm—labor, capital, materials, space, and time. Lean enterprises are always looking for ways to cut the use of any of these resources anywhere in the firm. JIT methods are at the heart of these efforts and include: Pull approach and kanban production control Inventory reduction Quick setups and orders Quality at the source (jidoka) Supplier networks Teamwork and participation Continuous improvement (kaizen) For each of these methods one can see how the Internet might help to implement the approach. For example, JIT uses a pull approach to production scheduling versus the more traditional push method that is based on forecasts of demand, rather than the actual demand. In the past, JIT could be implemented in a single factory using kanbans (cards) to alert upstream workstations to produce more of an item. This worked fairly well but was difficult to transfer outside the factory to suppliers who often delivered large batches infrequently because it was not easy to link their production schedules to that of the customer. Some firms overcame this problem by locating their factories in close proximity to the customer, assigning their own employees to work at the customer’s plant, or using Electronic Data Interchange (EDI). The Internet provides a better way of linking members of a supply chain. EDI, which links the computer systems of different firms

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through software protocols, is a closed system which requires substantial investment in software and hardware, and thus is not widely deployed, especially among smaller firms. Nor is it interactive in the way that the Internet is. Consequently, the open and inexpensive nature of the Internet has much potential to link a supply chain together and allow pull production planning and scheduling to be more effectively employed. The collaborative nature of the Internet is particularly useful for the production planning function for it will allow quick notification throughout the supply chain of any disruptions to existing schedules, for example, capacity or material constraints, or machine breakdowns. The members of the supply chain can then quickly and collaboratively adjust their production plans. The pull principle of production planning ultimately begins with the last link in the supply chain, the final customer of the product or service. By using the Internet to transmit point-of-sale transactions and orders down the supply chain, the member firms can keep their production in line with final demand, reducing inventories throughout the chain and avoiding the ‘‘bull whip effect.’’ Of course, much work has to be done by each member of the supply chain to make their internal systems truly JIT-responsive, but the Internet makes it feasible to link the entire supply chain into one long pull pipeline. Østergaard Danish Automotive Materials (ØDAM) is an example of a company that has managed to employ this principle (this firm will be discussed in a later section). A key principle of JIT is reducing inventories to the bare minimum, and the effort to do so turns out to be powerful in finding waste and inefficiencies throughout a production process. How might the Internet facilitate the inventory reduction effort? One obvious way, as explained above, is to more closely coordinate the supply chain in order that each participant is only producing what is actually being used at the next stage, not what they expect to use. The result is small lot sizes and frequent deliveries meaning low levels of inventory throughout the supply chain. In some situations, of course, lead times and production cycles are too lengthy to fully apply the pull principle, but where

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applicable, the Internet will allow firms to achieve greater coordination and collaboration in their supply chain resulting in substantial inventory reduction. Another benefit is that mass customization will become feasible for some products and services as the supply chain becomes shorter and faster. Dell Computer Corp. is a good example of a firm that makes most of its products to customer specification resulting in little or no finished goods inventories. To be able to deliver mass customization of a service or product, the supply chain must be very fast and responsive. This requires quick setups for production and rapid turnaround on orders to suppliers. The Internet will facilitate this aspect of JIT as well. As lot and order sizes come down due to the closer coordination of production schedules, firms will be forced to develop faster and more efficient ways of setting up runs of products and order delivery to customers. The Internet, by allowing closer coordination of production schedules and faster adjustment to changes in demand, will facilitate information transmittal internally within the firm, and externally throughout the supply chain. The ongoing trend towards outsourcing of manufacture and service activities that are not considered core competencies also is facilitated by the Internet. Outsourcing requires close cooperation and intensive information sharing among supply chain participants, and this aspect the Internet can facilitate. In a few cases, supply chains are moving towards becoming a virtual corporation where all the participants are so closely linked that they, in effect, operate as one entity. Cisco Systems is an example of a firm that is moving strongly in that direction. Cisco receives 80% of its orders from customers over the Internet and contracts out most of their manufacturing activities to Celestica, Solectron, and other ESM (Electronic Service Manufacturers). In many cases from order to delivery, Cisco employees never physically touch the product. There are many benefits to virtual manufacturing, but it would not be practical without the Internet to link the supply chain together. Another key JIT principle is jidoka, or quality at the source. The Internet can aid in the implementation of quality improvement in a lean enterprise

in several ways. First, internally, it can allow rapid transmittal of quality problems throughout the firm, such as when line or machine stoppages occur. A feature of jidoka that makes it effective is the highlighting of quality deficiencies so that everyone is aware of them and deals with them. Andon boards and line-stop authority are common methods to accomplish jidoka, and the Internet should broaden awareness of quality problems throughout the firm (all employees should be able to see an andon board or a stopped assembly line) and perhaps eliciting wider participation in solving them. But perhaps, the greater benefit will be spreading jidoka along the supply chain. If other firms are immediately notified via the Internet of a quality problem of a participant, they not only can adjust their production schedules but also may be able to help out in resolving the problem. For example, they may be able to send engineering personnel or contact another supplier who has had a similar problem to provide assistance. Additionally, another supplier may be able to provide the item until the quality problem is resolved. As mentioned in the Cisco case, supply chains are becoming more closely linked where the lines blur between separate corporate entities (i.e., the virtual corporation). This would not be feasible or effective without the Internet. The tremendous amount of information transmittal and cooperation possible over the Internet allows firms to link more closely with their supply chain partners. Supplier partnerships are another important feature of effective JIT systems. The Internet alone cannot create these partnerships for trust and experience are also required, but it makes it more practical to link to suppliers in production scheduling, inventory control, quality improvement, and new product development in a way that could not even be conceived of when JIT production systems were first developed in the 1960s. In fact, it is no coincidence that supply chain management has become an important operations management topic in recent years for its development closely parallels the development of the Internet. JIT production systems call for teamwork and participation of everyone to make them effective. As lean thinking spreads throughout the firm creating the lean enterprise, and along the supply

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chain creating the virtual firm, even greater teamwork and participation will be necessary. The Internet will facilitate this as virtual meetings become more widespread and much more information is available to everyone within and outside the firm. As Deming (1982) and others have pointed out, good management decisions are based on data and careful analysis of data, and the information capabilities of the Internet can disseminate the data. There are many types of information that will allow for better problem resolution and production planning, as have been discussed above, which the Internet can quickly and cheaply transmit. If firms allow their employees to actively use this wealth of data, and to work with employees in other firms in the supply chain, the result should be superior (because of broader participation) and much faster (because data and decisions can be communicated quickly) decision making in the supply chain. An example of this benefit is in ever faster and better product design as assemblers link with their suppliers and customers via design teams (both physical and virtual). The Internet provides the mechanism for such close coordination and cooperation, especially when the supply chain and the customer base are global. The final characteristic of JIT that we will discuss is the emphasis on kaizen or continuous improvement processes. Kaizen is a natural consequence of the other characteristics, previously discussed, in particular, jidoka, kanban, and teamwork and participation. The philosophy of leanness and lean thinking encourage all employees to continually search for better ways of doing things to improve quality, efficiency, and speed. The concepts of zero defects and zero inventories, although unattainable in many cases, are motivating and further improvement is almost always possible. How can the Internet help the kaizen effort? Probably the largest contribution that the Internet can make to kaizen is in its ability to rapidly disseminate all types of data (e.g. demand, production schedules, and quality performance) that are essential to effective process improvement. Many firms have capable internal kaizen programs so where the Internet can really make a contribution is by spreading these throughout the supply

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chain and allowing mutual learning. As supply chains cooperate more closely, each participant can contribute to efforts of other supply chain members to improve. If the firms in the supply chain accept their partnership role in the chain, they will then see the benefits of contributing to other’s continuous improvement efforts. Toyota, Motorola, and others have long realized that if they can help their supplier improve quality or lower costs, they also benefit. The Internet will allow each firm to know what others in the supply chain are doing, problem areas can be highlighted, performance criteria can be shared, and the entire supply chain can work as a team toward continuous improvement. Of course, this will not come automatically as trust will need to be developed among firms and expertise developed in process analysis and problem solving, but as the realization that more and more each firm is becoming a virtual corporation spreads, kaizen should intensify along the supply chain. In summary, we have seen that for many of the characteristics of JIT production systems, and their expansion outside of production activities into other business functions in the lean enterprise, the Internet becomes a potent facilitator to make each of these factors more effective, and even more importantly, to spread leanness throughout a supply chain. Only a few firms have fully realized the potential to become e-lean and even fewer have begun implementing it, but there are a few examples of firms moving in that direction. In the next section, we will discuss in depth, three of these companies: Dell Computer Corporation, Cisco Systems Corporation, and ØDAM, and also briefly describe the efforts of several other firms using the Internet to become e-lean.

3. How firms are using the Internet to become leaner Not many firms have yet learned how to use the Internet in implementing lean production principles, but a few examples will be discussed to illustrate successful applications. Three such examples are Dell Computer Corporation, Cisco Systems, and ØDAM, which have widely deployed

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the Internet in managing their supply chains. We will also cite several more specialized applications by other firms. 3.1. Dell Computer Corporation Dell Computer Corporation is the largest direct seller of PCs in the world. Dell’s sales, profits, and share prices have all increased at astounding rates in the last few years, and much of the firm’s success can be explained by its effective use of the Internet to manage its supply chain. Dell has a short supply chain comprised of only three levels: consumers, Dell itself, and suppliers. Even though short, it is a complex network involving millions of individual consumers and companies buying its products around the world, five manufacturing facilities in Texas, Brazil, China, Ireland and Malaysia, and hundreds of supplier companies. Dell’s customers, and thus its supply chain, demand a very high degree of responsiveness as Dell builds most of its computers to order, rather than to stock, and the technology, and thus components, are constantly changing. How does Dell use the Internet to make its supply chain lean and responsive? The starting point is the company’s Web pages through which a high and increasing percentage of its orders come, both from individual and corporate customers. Effective Web page layout allows customers to easily customize their PCs orders and for Dell to continually adjust options and their prices on these PCs to introduce new features and shape demand to available component supplies. On its Web pages, Dell sets component prices on a daily basis to match supply and demand. This gives Dell an ability to quickly introduce new technology and influence demand and match it to capacity through pricing adjustments, an advantage that a computer-maker selling through retail outlets lacks. Also, Dell is much closer to its customers than other PC makers and can quickly identify, and adjust to, changing customer demand. It is better able to forecast future demand and plan production schedules accordingly. Once an order is received, Dell can transmit it directly and immediately to the appropriate manufacturing facility for assembly. Not only that manufacturing facility but also its suppliers know

the current order backlog and inventories of their components at the Dell assembly plant because Dell has constructed Web pages allowing suppliers to access the Dell system. This extranet allows the suppliers to adjust their production schedules in line with Dell’s demand from customers, an effective use of the pull principle in the supply chain. For some components with longer lead times, such as microprocessors and hard drives, suppliers can do better advance production planning knowing Dell’s current level of sales and production reducing the bullwhip effect in the supply chain. The build-to-order model of Dell has a significant effect in reducing inventory levels of components at Dell. Some advanced planning of component needs must be done because of leadtime considerations, but this is much less for Dell than computer manufacturers selling through retail outlets. It also prevents buildup of components that may become obsolete and allows Dell to quickly work down inventories if a slowdown in customer demand occurs. The fact that no inventories of assembled PCs must be kept is another significant advantage of the Dell pull model. Dell carries only an average of 10 days inventories of components versus an industry average of 100 days. The fact that there is a few days interval between order receipt and shipment allows Dell to further pull components into its assembly plants in line with demand. Component commonality obtained from a limited number of suppliers allows some smoothing of demand as well as reduced inventory levels. The several day lag between order receipt and shipment also allows Dell to follow a more stable production schedule by varying the shipment dates to customers. Dell ships its computers directly to its customers by small package delivery companies such as UPS and FedEx assuring prompt delivery and eliminating the inventory at the wholesale and retail levels. For some monitors from Sony, Dell carries no inventory at all notifying Sony’s plant in Mexico when an order is received, and Sony ships directly, also via FedEx or UPS, coordinating delivery to the customer. Linking Sony’s logistics system into Dell’s over the Internet makes this possible. The

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Internet allows Dell to manage their worldwide logistics to minimize transportation costs and assure responsive delivery to customers and from suppliers. Dell can actually operate with negative working capital using its make-to-order model because the customers typically pay via credit card, or purchase order in the case of corporate accounts, resulting in prompt payment to Dell of receivables. Payables, on the other hand, are paid on typical longer terms so Dell has use of customer funds before paying suppliers. The leanness of its inventories allows Dell to gain significant financial advantage in comparison to its competitors by not having large amounts of capital tied up in inventories. A final Internet link in Dell’s supply chain is servicing. Dell outsources its warranty and repair service to third-party providers. When Dell receives a service request, it transmits this to the service provider and coordinates delivery of any needed parts to the provider, assuring that they arrive when and where the service is required. The Internet linkage of Dell with the service suppliers makes this possible and efficient and meets the customer’s need for responsiveness (much of the information on Dell comes from Chopra and Meindl (2001)).

3.2. Cisco Systems Cisco Systems, the leading manufacturer of network routers, is probably the best example available of a virtual manufacturer. More than half of its production is carried out by Celestica, Solectron, Jabil, Flextronics and other ESMs. Cisco has found there are many advantages to its outsourcing approach to manufacture, particularly in the high technology and global industry in which it operates. Among these is an ability to focus on its core competencies of product innovation and marketing while reducing capital expenditures on plant and equipment and benefiting from the process expertise of the ESMs. The Cisco virtual manufacturing model is only possible due to extensive use of the Internet to link to the ESMs, logistics providers, and Cisco customers.

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More than 80% of Cisco orders come via the Internet. This results in fast response to orders and the ability to continually update product offerings and pricing. Customer satisfaction ratings have improved for the company as it has moved the customer interface online. The electronic orders are then transmitted by Cisco to the ESMs, which operate 37 factories around the world. Component suppliers are linked in either directly by Cisco or by the ESMs to provide needed parts. The Internet linkages allow Cisco to coordinate its global supply chain and to rapidly adjust to demand changes. The suppliers in turn provide Cisco information on their production schedules, inventories, quality performance, capacities, and other vital data needed to coordinate the supply chain. To reduce transportation costs and improve customer responsiveness, many of Cisco’s products are shipped directly to customers from the ESMs without ever being handled by Cisco employees. This logistics system is coordinated over the Internet. Cisco involves their ESMs and component suppliers in product design. Cisco personnel work with their supply chain in developing components and prototypes, in quality assurance, and ramp up of production. Electronic documents supporting the design work can be transmitted electronically around the world so much of this collaboration takes place in virtual space. Cisco has found their product development approach has reduced the time-to-volume production by 25% and thus allows faster time-to-market and more product differentiation giving the firm significant competitive advantage. The virtual manufacturing model allows Cisco to benefit from the process expertise of the ESMs whose core competency is flexible, efficient, and high-quality manufacture. It would be difficult for Cisco to duplicate this capability, and by outsourcing this function Cisco can focus on product development and marketing, its core competencies. Also, new production techniques, equipment, and materials will likely be more quickly deployed by the ESMs than by Cisco allowing Cisco to focus on its strategic activities and yet keep its manufacturing capabilities stateof-the-art.

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A further advantage of virtual manufacturing is scalability. Cisco can quickly and inexpensively alter its volume of production of different products in the various countries in which it sells by increasing or decreasing orders to the ESMs. For a global product with rapidly changing technology this is a significant advantage that Cisco can utilize to expand its production capacities without incurring heavy capital expenditures for plant and equipment. It perhaps is not too surprising that Cisco Systems is an innovator in the use of the Internet to coordinate their supply chain since they are a major provider of hardware and software to make such linkages possible. Apart from demonstration benefits, however, Cisco has achieved many tangible benefits in terms of reduced capital costs, improved financial performance, and high levels of customer satisfaction. This is reflected in the company’s market valuation. Cisco has pushed the virtual manufacturing model further than any other major company (information on Cisco Systems is from Ansley (2000), Business Week (2000b) and Siekman (1999)). 3.3. Østergaard Danish Automotive Materials ØDAM is an importer and distributor of auto spare parts established in 1934 and today covers Denmark with 47 local warehouses. The basis of their business is that auto manufacturers account for only 25% of the value added in car production. Suppliers create the remaining value. Many suppliers are today large, worldwide companies. ØDAM buys and import spare parts from these suppliers and sells spare parts to auto workshops/ repair facilities. Until 1996, a manual system for all major business processes was used. Two hundred and eighty sales clerks would take calls from workshops, which wanted to place orders for parts or to ask for information or advice on a specific job. Each sales clerk would use a collection of catalogues (occupying about three meters of shelf space) to answer queries—a very time consuming process. The catalogues were supplier-specific. This meant that to fill a single order, a sales clerk would typically have to use several catalogues, and

in each catalogue would have to locate parts relevant to a specific car model and make. The product selection process was cumbersome and slow, and hence costly for ØDAM. In addition, the process resulted in problems making sure each sales clerk had up-to-date catalogues and access to information about parts on stock, etc. Finally, the process provided no assistance for warehouse management, control of delivery time, etc. Since 1997, an electronic catalogue management system has been developed resulting in a much higher growth rate of sales. The system includes all product data in one catalogue and better integration of order fulfillment and management of warehouses. A major advantage is the improved product selection process, where the system is based on car model and automatically limits all searches to relevant parts. The results are higher customer satisfaction and substantial savings in operating costs. The revolution, however, is the Internet part of it which paved the way for a totally new business concept, calling for a substantial change management process within the organization and its structure, new internal systems, and new ways of thinking. ‘‘Before we sold spare parts, now we teach customers to buy spare parts from us,’’ CEO Steen N^rret says. As a result the sales staff was cut by 50% and people were reallocated and trained in new areas, e.g. as consultants. A central part of the new way of doing business is the ØDAM Club. Customers must be members of the club in order to do business with ØDAM over the Internet. Customers pay a small membership fee. Once customers are members of the club, they can trade over the Internet and will receive rebates on traded items. This encourages customers to do as much business as possible over the Internet. Members are also offered a range of extra services, including service guides for cars, repair instruction sheets including car-specific and jobspecific instructions, car and components data, suggestions for service plans and parts for specific cars, etc. New functional areas have been added, e.g. a ‘‘Workshop module.’’ This module allows all workshop data to be recorded and stored centrally in the ØDAM database, and this allows customers

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to access and manipulate the data at all times. There are three basic information packets in the workshop module: a customer record, a car record, and a job record, all making the operations at the workshops leaner. Also, a financial module that allows workshops to record financial information along with customer, car, and job data, has been introduced with all data being exported to a local financial firm offering all kinds of financial services. Lately, ØDAM has been working on closer linkages with suppliers; i.e. completing the integration of the value chain. This provides automatic ordering and updating of product specification and service guides. However, difficulties have arisen, as suppliers in general do not have the required level of integration in their systems, and furthermore, standards for product data and guides are lacking. The order-fulfillment process is a fully integrated system controlling shipping, delivery, billing, and warehouse management. Now 25% of ØDAM revenue is generated through e-business, the goal being to increase this to 80% during the next 3–5 years (the information on ØDAM is from Fischer and Peykarimah (2001)). 3.4. Other firms A few other firms that are using the Internet to make their operations leaner can be cited to illustrate the potential applications. Much of the publicity about B2B Internet applications has been in the procurement area, particularly online auctions. But this is only one of the many applications that are possible. Below we will discuss applications in project collaboration by General Electric, logistics in the food industry, production scheduling and inventory management in the clothing industry, performance data sharing by Chrysler, Stelton’s new product development and prototyping process, and supply chain management by Harley-Davidson. General Electric Co.’s Power Systems division manufactures electric turbines used in power generation facilities around the globe. Turbines cost an average of $35 million each, contain about 13,000 parts, and are customized for each order.

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GE handles each order as a project working closely with the customer to make sure the generators meet requirements and are delivered on time. Customers are involved over the Web in the design of their generators transmitting blueprints, engaging in virtual meetings, and coordinating any design or schedule changes. GE figures this collaborate design process has reduced delivery times 20–30%. After the turbine is delivered, GE has a system called Turbine Optimizer which allows the customer to compare performance of their equipment with other users and fine-tune performance (Business Week, 2000a). Logistics in the global food industry is a major cost and essential to meeting demand while keeping inventories in check. To improve effectiveness of their logistics systems, several large food manufacturers and distributors have banded together to coordinate over the Internet procurement and shipping information. Called UCCnet it is designed to be open to all supply chain participants allowing them to link to their internal Enterprise Resource Planning (ERP) and EDI systems. Among the companies involved are Proctor & Gamble, Supervalu, RalstonPurina, and PepsiCo. Initially, the system will track purchase orders through shipping, receiving, billing and payment. Later capabilities will be added to allow online collaborative forecasting, production planning, and inventory management. Firms pay a fee to subscribe (the amount depends on the size of the firm) but will pay no transaction fees (Messmer, 2000). The clothing industry is notorious for a lengthy cycle time supply chain. In order to reduce the time from design to market and make the supply chain more efficient, a virtual private integrated supply chain called The Thread has been developed. Participating firms, who pay a fee to use The Thread, can query their supply chain partners over the Internet about design changes and availability of fabrics, dyes and other materials. The virtual system links to the partners internal production planning and inventory systems. Companies expect to reduce cycle times significantly and simplify and expedite communication with their global suppliers by replacing the current FAX and phone linkages (King, 2000).

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The Chrysler division of Daimler–Chrysler uses an extranet to share quality and delivery information with its supply base. Suppliers can log on to Chrysler’s Web site to check their delivery and quality performance and see their relative standing among similar suppliers. By sharing this information, Chrysler hopes to identify bottlenecks in the chain and improve quality at the suppliers, ultimately making the entire supply chain more responsive and efficient and lowering inventories (Lee and Whang, 1998). Stelton, a Danish company specializing in highquality design products in stainless steel and ABS plastics, has modernized its facilities on several occasions, and it is today equipped with advanced high-technology production and engineering equipment. New product development capabilities are key and take place in close cooperation with industrial designers. As a special feature, the process of prototyping has increased performance considerably by means of the Internet; e.g. specifications are laid down in a CAD system and directly transmitted via the Internet to a company in Germany, and the physical item is delivered the next day (Bruun and Christiansen, 2001). Harley-Davidson, the motorcycle manufacturer, is designing a system called SiL’K (for Supply Information Link) to link to its suppliers over the Internet. The system will share data among supply chain participants on inventories, quality and delivery performance, and billing. H-D expects the system to reduce cycle times for procurement and streamline the entire process while allowing cost savings via access to online markets and exchanges. The system is also expected to enhance partnerships with suppliers and allow closer coordination to improve quality and delivery performance as well as reduce inventories (Purchasing, 2000). These are only a few examples of how firms are attempting to use the Internet to coordinate their supply chain activities and improve operating performance. The systems cited above, some of which are still in the development stage, have the potential to reduce cycle times and inventories, improve quality, and increase productivity. As these goals are achieved the firms involved will

become increasing lean facilitated by these Web applications. However, there are many potential obstacles and constraints to attaining e-leanness. In the next section, we will discuss these.

4. Constraints and obstacles to e-leanness The examples cited above of firms using the Internet to become leaner are illustrative of the possibilities of the Web. However, there remain many potential obstacles and constraints to achieving e-leanness. Many of these are typical organizational change constraints, but some are unique to production systems and supply chain management. In this section, we will discuss some of these constraints and offer suggestions on how managers may overcome them. One common problem in linking to supply chain partners is the incompatibility of internal computer systems with other firms’ systems and the Internet. Many companies in recent years have implemented ERP systems to coordinate internal financial, marketing, and human resource data. However, most ERP systems are not linked to shop floor production scheduling, inventory, and quality control data (Vijayan, 2000). This type of information is essential to collaborative production planning and inventory management throughout the supply chain as well as making build-toorder production feasible. There exists software to provide the links; for example, Manufacturing Execution System (MES) or Advanced Planning System (APS), but many firms are loath to invest in additional software since they have made substantial investments in their ERP systems and may still be working out the bugs. In any case, for those firms which go ahead and invest in MES or APS there will be the usual implementation problems and lags to make these systems operational, thus slowing down their supply chain Internet efforts. A related issue is the widespread use of the HTML computer language which, although good for transmitting Web pages and other humanreadable information, is not optimal for transmitting and processing data. The XML language is a much more computer-efficient language, but is not

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widely deployed. Until supply chain software is compatible with XML, the efficient processing of the huge amounts of order, schedule, inventory, and related supply chain data necessary to fully utilize the Internet in supply chains will be constrained. Another potential problem is the sharing of information that has been considered proprietary with supply chain members. Many companies are still struggling with the transition from seeing their suppliers as opportunistic opponents to partners. Asked to open up their internal financial, production, and marketing data to supply chain members, many firms may balk. Additionally, some suppliers are concerned that any information they provide to their customers might be used against them to force down prices or the customer or other suppliers may expropriate their technology. This concern is heightened with online auction sites. More broadly, many firms are concerned about access of others including competitors to their data banks, and are unlikely to fully participate in Web systems until adequate firewalls are developed. So not only must there be confidence in the technology along the supply chain, but there also must be sufficient trust developed in the other chain members. Another concern, especially among companies that have developed lean production systems, is that the Internet may transform close, personal relationships with supply chain members into arms-length, virtual relationships. The best lean companies have extensive linkages to their supply chain partners, developed over the years, with frequent meetings and plant visits and, in some cases, training of other firm’s personnel in process improvement and quality methods. Much of the

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transfer of lean principles and techniques occur through these personnel exchanges and, over time, trust and confidence in supply chain partners is developed. Will the Internet replace these relationships? It could but certainly need not do so. Firms can continue to maintain personal relationships with partners and use the Internet to transmit the additional production scheduling and performance data that could make these relationships more productive. With global partners where close personnel relationships may not be possible in any case due to physical distance, the Internet can at least create virtual relationships where none may currently exist. However, some proponents of lean methods may continue to be skeptical of what the Internet may do to the relations between supply chain partners. Other problems include finding personnel such as Web site developers and training of the employees involved in implementing and operating the Internet systems. However, as the potential of the Internet to increase the efficiency and efficacy of the supply chain and allow more make-to-order processing, firms will likely find the resources and the willingness to overcome these constraints and obstacles.

5. Towards a model for lean integration As mentioned earlier, the aims of the lean principles are ‘‘to get more out of less.’’ The contributions of the Internet to lean manufacturing principles as seen from the cases may be summarized as seen in Table 1. The overall picture shows that the Internet in the three cases supports the lean manufacturing

Table 1 Internet support of lean manufacturing Lean principles companies

Pull approach

Inventory reduction

Quick setups and orders

Quality at source

Supplier network

Teamwork and participation

Continuous improvement

Dell Cisco ØDAM

O O O

O O O

(O) (O) (O)

O O O

O O (O)

(O) O (O)

(O) O O

Symbols: O support, and (O) partially support.

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principles. But in addition to this we see that the use of the Internet in supporting the lean principles results in a self-reinforcing development of broader business processes like procurement, after-sales service, invoicing and payments, and even the adoption of virtual enterprises. Michael Hammer has written that now that companies have cut waste in their internal operations they need to look beyond the walls of the organization to streamline the processes shared with other firms. He calls this the superefficient company, and says that there exists huge potential to reengineer and integrate the supply chain (Hammer, 2001). Therefore, can we model the situation and add to the theoretical development of the lean supply chain? According to Piszczalski, manufacturers seem to be divided into two opposing camps: those supporting lean manufacturing and others employing computer-based planning and control systems. The growth of e-business is forcing companies to revisit their position. The question is whether it really is an either/or situation? In a paper on value creation in e-business, Amit and Zott (2001) investigate the B2C area. Although not developed for the B2B area, which is more the focus of our research, some parallels seem to be reasonable. Using concepts from the ‘‘grounded theory approach’’ of the strategic management and entrepreneurship literature like Schumpeterian innovation, value chain analysis, resource-based view, theory of strategic networks, and transaction cost economics, they conclude that value in e-business is created by four sources: Efficiency, Complementarities, Lock-In and Novelty. They observe that none of the existing theories in and of themselves can explain the sources of new value creation in e-business. Rather, the value creation has to rest on an integrative approach. A consequence of their finding is that the value created refers to a network rather than one firm. Therefore, ‘‘ythe business model as a unit of analysis has a wider scope than does the firm, since it encompass the capabilities of multiple firms in multiple industries’’ (Amit and Zott, 2001). Coming back to the question of how to get more out of less, we have to find out (1) what are the value elements, and (2) how do we as a company

appropriate our part of the value created in these? For this purpose, we use the concept lean integration to indicate the application of lean production principles on the factory floor level as well as to other business processes within the firm. Furthermore, we apply the extension of leanness to the supply chain allowing integration that bridges participating companies and production systems. In Fig. 1, we have illustrated the elements of the business model, which in the center consists of the lean production principles (or JIT methods). The next circle includes other elements of the business, like processes, systems and services—typically such ones that can benefit from being integrated to some extent with customers and suppliers. The inherent strength of the Internet for supply chain integration is the external communication it facilitates. In our case studies, we found that the Internet contributes to the overall business processes becoming more lean. Therefore, elements like New Product Development, Order fulfillment, Logistics, Customization, etc. have been included in the model. This level will represent the lean enterprise. The outer level of Fig. 1 represents external networks towards the suppliers and the customers. As we have seen in our cases these couplings represent important elements with great potential for value creation through leveraging the value of the lean principles. This level, which includes more tiers of suppliers and customers, might be denoted e-lean. The model describes a framework in which the Internet in a symbiosis supports the lean principles, where the business processes at the same time are strengthened. The value creation elements Efficiency, Complementarities, Lock-in and Novelty are all present in the model. Efficiency improvement is caused by the support of the lean principles themselves, and Complementarities are demonstrated from the cases by the fact that the sum of the total system exceeds the sum of the individual contributions. The Lock-in contribution reflects that the value creation potential is increased to the extent that ‘‘customers are motivated to engage in repeat transactions and by the extent to which strategic partners have incentives to maintain and

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Complementarities

Finance

Order fulfilment

Supplier A

Customer 1 Logistics

Inventory Management Inventory reduction Teamwork and participation Supplier B

Production Planning

Quick setups Lean Production Quality at the and orders source (jidoka) Continuous improvement (kaisen) Pull approach and kanban production control

Demand forecast

Supplier C

Catalogs

Tracing

Customer 2

Customization Auctions

Customer 3

New Product Development

Effectiveness

Novelty

Fig. 1. Lean integration by the internet and the elements of value creation (in bold).

improve their association’’ (Amit and Zott, 2001). Lastly the Novelty element has been confirmed in the investigated cases—in fact, identified as an important value driver in the form of a first mover effect in all the cases.

6. Conclusions and a look ahead As was discussed above, there are many reasons why the Internet can facilitate the movement to lean production systems, and a few firms have made tentative efforts in that direction. Most of the applications have been in supply chain management, which is a logical target for a lean approach. Lean thinking has slowly spread from the factory floor (lean production) to activities such as order processing, billing, and product development (the lean enterprise). Now some firms are thinking of the virtual corporation where many of their processes are linked to their customers and suppliers. Once they begin thinking in this way, they soon understand that to fully realize leanness they will need to apply the concept of pull production to their customers and suppliers in one virtual supply chain (lean supply chain). The

benefits of doing this will be so compelling that firms will increasingly move in that direction. The Internet is a perfect tool for accomplishing the lean supply chain with its open, easy, and cheap access. Previous attempts to computerize the supply chain using ERP and EDI have been limited by the closed, proprietary, and costly nature of those systems as well as the limitations of the HTML computer language. There are, of course, many obstacles to accomplishing the virtual supply chain, but none of these is insurmountable. Another force that will drive the movement to an Internet-linked supply chain is the increasing globalization of business. There are very few companies that do not have some international customers and suppliers, and they will increasingly find that they need to improve communications and coordinate planning with these global supply chain partners. Although nothing can substitute for face-to-face contact for many types of business dealings, the Internet can supplement direct with virtual contacts allowing much more information transmittal globally, in real time. Coordination of new product development, production planning, and inventory management will be more feasible with greater possibilities for driving inventory out

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of the system, a key goal of lean production. Some of the disadvantages of global supply networks will become less formidable as collaboration increases because of the Web. There is huge potential to benefit from being e-lean in global supply chains.

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Fischer, L., Peykarimah, S., 2001. ‘‘E-marketplaces’’. Executive MBA Master Project, Technical University of Denmark. Hammer, M., 2001. The superefficient company. Harvard Business Review 79 (8), 82–91. King, J., 2000. Internet application integration. Computerworld 34 (37), 57. Lee, H.L., Whang, S., 1998. Information sharing in a supply chain. Research Paper 1549, Stanford University, July 1998. Messmer, E., 2000. Online supply chains creating buzz, concerns. Network World 17 (17), 12. Piszczalski, M., 2000. Lean vs. information systems. Automotive Manufacturing & Production 112 (8), 26–28. Purchasing, 2000. Harley-Davidson hopes SiL’K will be smooth. March 23, pp. 43–45. Siekman, P., 1999. How a tighter supply chain extends the enterprise as companies go to the Internet to cut costs. Fortune 140 (9), 272. Vijayan, J., 2000. Manufacturing execution systems. Computerworld 34 (31), 38. Womack, J.P., Jones, D.T., 1996. Lean Thinking: Banish Waste and Create Wealth in Your Corporation. Simon & Schuster, New York. Womack, J.P., Jones, D.T., Roos, D., 1990. The Machine That Changed the World. R.A. Rawston Associates, New York.