Chapter 18: Discipline: Systems Optimization

OVERVIEW

A fundamental of Lean Six Sigma Logistics is the goal of managing total cost. Lean teaches us that an organization works as an entire system. Even though the logistician does not always have total system authority or accountability, we must drive toward the goal of optimizing the entire system by reducing inventories and eliminating waste at all levels. The three strategic focus areas for logistics Systems Optimization are:

1. Total Cost

2. Horizontal Integration

3. Vertical Integration

These three areas will be discussed in this chapter.

TOTAL COST

Truism: Talk about total cost is everywhere; action on total cost is not so easy to find.

Lean teaches us that our business acts as a system. This system is a complex web of interdependent people and processes, where each has an effect on the others. To this end, we recognize that it is false to look at any particular activity in isolation. This is a fact for all business processes, but is particularly relevant in logistics. Logistics has inherent dynamics that make the concept of total cost confusing and frustrating. The main perplexing dynamic is a result of the less than obvious relationship between visible operational costs and inventory carrying costs. As well, organizations need to manage the concept of explicit costs as compared to implicit costs. Typically, most operational costs are explicit, whereas many inventory carrying costs are implicit.

Optimization is a term used to describe a situation where an entire system is performing at the optimal level, given all...