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The Lean Sustainable Supply Chain: Lean Sustainable Technologies

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Robert Palevich discusses the major components of the Lean Green Supply Chain: external and internal.
This chapter is from the book

The supply chain is composed of all the parts of the enterprise and its associated trading partners. The Lean Green Supply Chain is made up of two major components: external and internal. There is a synergy between these two parts. The internal savings can, in some cases, be equal to the external supply chain savings. To exclude the internal improvements that supplement the productivity of the External Lean Supply Chain is to miss out on a major component of long-term sustainability.

The external side represents the suppliers and customers throughout the supply chain. Collaborative technologies and software can be used to minimize the cost of the organization and decrease the company’s carbon footprint. Forecasting procedures reduce the variation in systems processes in their connection with suppliers and customers in the external supply chain. Improving forecasting methodology through the implementation of Gamma Smoothing increases accuracy in forecasting and stimulates savings.

The typical EOQ (Economic Order Quantity) considers mere receiving and carrying costs in the warehouse. The new EOQ model moves companies beyond current warehousing needs and into the external environment. Through the incorporation of inbound and outbound freight, the EOQ model increases forecasting accuracy, leading to cost reduction throughout the external supply chain.

The internal supply chain is composed of the technologies that can be used to make the corporation and its employees more productive. Implementation leads to lowering the amount of space and resources necessary to perform the job. This represents the definition of Lean and Green sustainability. The sustainability effort needs to incorporate workflow technologies and the use of software to minimize the use of paper and other costly resources.

Putting It All Together

Now it’s time to enter customers and suppliers into the equation of collaboration. The most important consideration at this point is what is best for the entire supply chain. This can be emphasized only by involving the other suppliers and customers. What is good for one may not work for all. For example, 10% of the United States GDP (Gross Domestic Product), which was $14.26 in 2010, is involved with supply chain. Today’s companies are realizing that the competition is not with their competitors but with competing supply chains.

According to a study by consultants A.T. Kearney, inefficiencies in supply chains can waste up to 25% of a company’s operating costs. In companies with profit margins of 3% to 4%, even 5% improvements in supply chain efficiencies focusing just on material flow can double profit margins.(1) The supply chain is the greatest cost in today’s industry and consequently has the best chance for the highest return if the process can be further improved.

One measure of the ability of a company to enhance its standing among the competition is the metric called Gross Margin Return on Investment (GMROI). GMROI looks at a company’s quantitative ability to compete. GMROI is the gross margin percentage of a company multiplied by the inventory turns of that company. Turns are the term used to convey how well a company turns its inventory. Turns = while GMROI = GM × Turns. If two companies have the same gross margins, with one company’s inventory turns being 50% better than its competitor’s, the company with the higher turns is making more profit for the enterprise. For example:

  • Company A has a gross margin of 20% and has 3 inventory turns. The GMROI throughout the year on their inventory investment is an average of 3 × 20% = 60%.
  • Company B has a gross margin of 20% and has higher inventory turns of 4.5. Company B’s GMROI is 4.5 × 20% = 90%.

Company B is making 90% on its inventory investment for the year. It is also making more money on opportunity cost because company B has 50% fewer inventories held as compared to Company A. This frees up capital or expenses if loans are involved. Company B can now afford to sell at a lower cost and also sell more expensive alternatives at lower prices.

Sustainability is meeting the needs of the present generation without compromising the needs of future generations. For every $1,000 spent on Lean Technologies, there is a Green payback of approximately $426, which includes savings in the environment. The greatest Green Savings is found in the transportation highway infrastructure yearly maintenance costs. Removing the cost of the transportation infrastructure from the scenario still provides for approximately $280 savings for every $1,000 spent on Green. The payback is well worth the cost, not only in dollars but also in sustainability.

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