Lean Production & Sustainable Supply Chains In The Fast Moving Consumer .

Introduction Increasing customer awareness of their personal environmental impact and a desire to be environmentally friendly has led to the acceptance to pay more for green (e.g. environmental friendly) products.[3] Reputation related to sustainability is now a major concern that companies must deal with.[2] Despite being challenging for companies to manage profitability, environmental and social aspects, the outcome can increase a competitive advantage. If companies exceed accepted standards and can generate business opportunities with other companies (suppliers, competitors or customers) who value these principles, the competitive advantage is achieved. It is currently important for companies to integrate sustainability issues in their Supply Chain Management. Ageron et al. highlight that upstream partners, and more precisely, suppliers, are frequently the most concerned with environmental preoccupations.[2] Therefore, the focus on effective and sustainable supply chains will be inevitable aspects for companies in order to be competitive on the market, regardless to the type of industry the focal company belongs to.[2] Improving production and gaining operational control is broadly speaking about locating waste and removing it.[4] By controlling waste, companies can lower production costs and environmental impact.[2] The many dimensions of waste will be discussed in section 2.2. Supply chains on the other hand are mainly improved and transformed into sustainable supply chains by collaborating with suppliers, upstreams and downstreams.[2] 1.2 Fast Moving Consumer Goods Industry FMCG are products that are sold quickly at relatively low cost. The FMCG industry can be categorised into three major segments: food, beverage, and household. It is part of the business to business category, and customers are typically retailers through whom goods are sold to consumers. The industry is characterized by few customers compared to producers, leading to fierce price competition. Producers are therefore forced to focus on cost reduction and furthermore many FMCG companies emphasise the short term gains of getting stock costs down.[5] Soft drinks are generally categorized as a FMCG and have a relatively short shelf life. The beverage industry refers companies that produces drinks, in particular ready to drink beverages. Therefore, the beverage industry is part of the FMCG industry. There 2

Introduction has been little apparent long-term change in the nature of its core products, such as beer and carbonated soft drinks. Barriers to entry are considered low, making the industry very competitive.[6] The major issues within the FMCG industry are forecast accuracy, seasonal shifts in demand and supplier reliability. Forecast difficulties are a problem throughout the whole industry. Supplier reliability can often be differentiated and is not as much of a general problem as the forecast difficulty. Forecast difficulties in the beverage industry are due to the consumer’s decision to purchase. Typically this is done on the spot and is not planned ahead. A reason that the market demand is seasonal, is due to the nature of the product.[5] These issues, even if they may vary from company to company, makes it difficult to achieve levelled demand, a key prerequisite for production levelling. Therefore, the need for effective supply chains and effective production is crucial in order to compensate for uneven demand and hence uneven production. Effective supply chains and effective production are mainly needed in order to deliver what is demanded by customers when it is demanded. If the supply chains and production is well designed and managed, it constitutes a competitive advantage.[2] The supply chain within the beverage industry is characterized by a series of exchanges from the suppliers of ingredients and material to the brewery, to the distributor, to the retailer, and to the consumer.[7] Thus, making the supply chain complex upstreams and downstreams. Furthermore, Business Insider UK argues that it is a dramatic time to be in the world of beverages. Being a customer-driven industry with fast changing customer demand and preferences, the beverage industry is in need of effective supply chains and production in order to meet customer expectations.[8] To summarize the introduction, this paper will address and include: Operational control and how it can be achieved within production. The role of the supply chain in order to become a competitive company and how a sustainable supply chain can be obtained. A case study in the beverage industry, where the above mentioned factors are analyzed. 3

Introduction 1.3 Objective Our objective is to recommend how the beverage industry can work with Lean management in order to obtain Lean production. Furthermore the objective is to deliver a conclusion regarding sustainable supply management (SSM) within the beverage industry. 1.4 Purpose The main purpose with this project is to investigate how the FMCG industry is working with Lean management in order to achieve production efficiency. A second purpose is to understand how the FMCG industry works with sustainability by investigating the design of the supply chain. 1.5 Problem Definition Our major research question is: How can the FMCG industry minimize waste and achieve sustainable production? This could further be divided into two sub research questions: 1. How can the FMCG industry work with Toyota Production System (TPS) principles in order to minimize waste? 2. How can the FMCG industry obtain sustainable supply chain (SSC)? The research questions will be answered in chapter five. 1.6 Methodology In order to accomplish the purpose of the project a literature review and case studies at Coca Cola Enterprises (CCE) and Spendrups was performed. The literature review contained scientific publications and books within the area of Lean management and supply chain management (SCM). By reviewing important literature a wide knowledge base was obtained which was used to perform a qualitative study. 4

Introduction To widen perspective and get a better understanding of the theoretical framework presented in the literature and to get a company’s point of view, case studies were undertaken at CCE and Spendrups. Both beverage companies. Observations and semi-structured interviews were the fundamental sources of information during the case studies. The interviewees were both operators and managers, which gave a more complete picture of the organization. By visiting the production line we obtained a practical understanding of the supply chain and activities performed there. These observations and interviews were later on the basis of the analysis and facilitated the comparison between the theoretical framework and the reality. 1.7 Critical Review of the Methodology The FMCG industry consists of three large subsections: food, beverage, and household. We only conducted case studies at beverage companies. Therefore, the applicability of our findings to the entire FMCG industry could be questioned. We argue in chapter five why our findings are applicable for the entire FMCG industry. 1.8 Delimitation We will focus on the first seven principles of TPS when analyzing operational control in our case studies, thus leaving principles eight to fourteen without further discussion or analysis. We will not consider details within the life cycle assessment when looking at environmental impact of the CCE and Spendrups supply chain. We will rather focus on general guidelines proposed in the literature when analyzing the supply chain downstream and upstreams. The case study will only focus on CCE’s factory in Jordbro (Sweden) and Spendrups factory in Grangesberg (Sweden) when analysing both the operations within the production and the supply chain. Observations regarding internal operations will be conducted on the production line “S5” (the can line) at Jordbro. 5

2. Literature Review In this chapter we will review relevant theory in order to accomplish the purpose of this project. The chapter will primarily discuss Lean management and secondly discuss Supply Chain Management. 2.1 Lean Management Lean is a production paradigm that primarily developed from the automotive industry. Lean is the western name given to TPS.[5] Lean could arguably be considered a consistent concept comprising Just In Time (JIT) practices, resource reduction, improvement strategies, defects control, standardization and scientific management techniques. However, it is hard to formulate a clear definition that captures all the elements of Lean and integrate the various goals proposed in published literature.[9] The general opinion that the purpose of Lean is to reduce waste does not seem to be consistent with all authors, although J.Pettersen et al. argue for this.[9] 2.2 Toyota Production Systems TPS is Toyota’s way of managing their production and was mainly founded by Taiichi Ohno during the early twentieth century. Lean production mainly consists of methods and tools found in TPS. If TPS is correctly implemented in all parts of the organization, a Lean organization is obtained.[10] As the figure below show, TPS is built upon an underlying philosophy of long term thinking, followed by principles within processes. In the top we find employees and partners, and finally the continuous improvements in order to become a learning organization. TPS is divided into four categories (see figure 2.1) and within the categories there are 14 principles. Principles concerning processes, principle one to seven will be discussed below. 6

Literature review Advantages with a successful implementation of TPS is cost reduction. Cost reduction is due to increased quality (i.e. fewer defects), reduced inventory, improved customer service and shortened order cycle time. In addition, improved manufacturing and supply chain visibility, improved manufacturing and supply chain flexibility, improved operational performance, increased operational capacity, shortened product development time, and workplace safety and cleanliness.[5] Figure 2.1: The Toyota Way model. [10] 2.2.1 Category 1: Long Term Thinking The first principle states that decisions ought to be based on long term thinking, even though it is at the expense of short term economical goals. This principle forms the fundamental philosophy that Toyota is built upon and is a part within every business unit. The Toyota Way is about giving employees, customers and the society an increased value by focusing on purposes beyond short term profits and reward a few amount of people.[10] 7

Literature review 2.2.2 Category 2: Right Process Delivers Right Results In this category we find the seven principles that are used to improve manufacturing processes and routines in order to develop products. Not all principles are concrete tools, some are more of a conceptual kind. But TPS suggests several tools in order to achieve the desired results that the concepts suggest. Below these principles, concepts and tools will be presented. 2.2.2.1 Principle 2: Continuous Process Flows Create continuous process flows that highlights problems. A common metaphor to explain this is the Japanese lake. If you lower the water level (lower stock level), problems and inefficiency will surge to the surface. This is because stock functions as a buffer that compensates for inefficiency in the production. Since you have time to correct the problem without risking the flow to be disturbed, you can use the material from the stock.[10] If the inventory were to be removed, problems and inefficiency would need to be dealt with immediately in order to have a continuous production flow. This leads to continuous improvements (Kaizen) and shortening of lead times. In short, inside the inventory lies hidden problems and inefficiency. Flow is defined as the process needed to deliver a product from the moment a customer places an order until it is delivered. Everything from obtaining raw materials, to produce the product, and finally to deliver the product to the customer. This flow ought to be as fast as possible and only consist of value adding activities. TPS focuses on reducing all kinds of waste and remove non value adding activities. TPS categorises all kinds of waste in to three categories: Muda, Muri, Mura.[10] Muri and Mura will be discussed in Heijunka (see 2.2.2.4) and below follows a description of Muda. 8

Literature review 2.2.2.2 Muda: Eight Types of Waste Muda consists of eight non value adding types of waste and these activities ought to be eliminated.[10] The eight types wastes are presented in figure 2.2 and the wastes overproduction and unnecessary inventory will be discussed more in detail below. Figure 2.2: Eight types of waste [11] Overproduction is viewed as the most serious waste as it discourages a smooth flow of goods or services and is likely to prevent quality and productivity. Overproduction also tends to lead to excessive lead and storage times. As a result defects may not be detected as normal. Products may worsen, which means that the consumer will end up with a degenerated product. To overcome this, companies can implement Kanban or pull system. Unnecessary Inventory leads to a number of strategic drawbacks and negatively influences operations.[4] Such as increasing lead time and delay the process to identify problems. In addition, unnecessary inventory create significant storage costs, extensive rework when problem arises and lower the competitiveness of the organization. This can be corrected by reducing the inventory. 9

Literature review 2.2.2.3 Principle 3: Excess Production Excess production occurs when more goods than demanded are being produced, leading to overproduction. Pull-based production is a fundamental aspect in order to produce on customer demand. To achieve a pull-based system Kanban can be used. Kanban means “card”, “sign” and indicates that the stations in front sends a signal to the stations before that more material is wanted. Therefore material is "pulled" through the production. The opposite of pull-based production is push-based. It means that products being produced without a specific demand and the products are being "pushed" through the factory in to the inventory.[10] Within the TPS, JIT is an important concept. JIT refers to the manufacturing and conveyance of only what is needed, in the amount needed and in time when needed. To accomplish JIT production it presupposes levelled production (Heijunka) and is built upon the two basic operating principles of the pull system: continuous flow processing and Takt Time.[12] 2.2.2.4 Principle 4: Heijunka Heijunka is the overall levelling in the production schedule of the variety and volume of items produced in given time periods.[13] This is a prerequisite for JIT production. Advantages with Heijunka are: Flexibility to produce what customers wants and when they want it. Decrease risk of unsold goods Balanced utilization of machines and employees Balanced demand on processes upstreams and on suppliers If customer orders varies a lot over time it can be hard to achieve pull-based production. The two wastes Muri and Mura are typically increased by uneven production. Muri and Mura will be discussed below. Muri: to overburden people, machines and equipment: When overloading people, risk of quality and security problems arise. Overloading machines and equipment increases the risk of breakdown. 10

Literature review Mura: present when irregularities occur. Variations within production volumes, production occupancy demands machines and people to be on stand by (e.g. ready to maximal production capacity even though the average workload is less than that). Heijunka is important in order to eliminate Muri and Mura. Womack claims that many organizations focuses on Muda (see 2.2.2.2) and forgets Muri and Mura. And in many companies Mura is present while trying to “make the numbers” at the end of reporting periods. This leads to sales writing to many orders resulting in equipment and employees to work too hard as the finish line approaches which creates the “overburden” of Muri. Thus, Mura creates Muri that undercuts previous efforts to eliminate Muda. In closing, Mura and Muri are therefore the root causes of Muda in many organizations, see figure 2.3.[14] Figure 2.3: Mura-Muri-Muda [11] 2.2.2.5 Principle 5: Jidoka Jidoka is a method to design quality in to the product by stopping the process when problems being encountered. It suggests a culture where you stop the process when problems being faced, and solve these problems immediately so that the quality is assured. It consists of two parts. The first part is about detecting problems and the second part is about understanding the problems. The first part, Poka-Yoke, is the low-cost highly reliable devices or innovations that detect abnormal situations before they occur in a production process. They can be used in work-stations in order to eliminate mistakes and failures. The second part is to solver problems. TPS suggests that Gentsi Genbutshu (go see for yourself) is the most effective 11

Literature review tool in order to analyze the situation. While at site, the method to ask why five times is a highly effective way of finding the root cause of the problem.[10] 2.2.2.6 Principle 6: Kaizen Kaizen is the concept of continuous improvements. In order to achieve Kaizen, tasks ought to be standardized. Use stable, repetitive methods in order to sustain predictability, timing and regularity of the process. This enables a pull-based system. By acquire knowledge about a process it is possible to standardize it with the best known work methods. By doing so it enables continuous improvements.[10] 2.2.2.7 Principle 7: Visual Control & 5S Control processes visually so that no problems remain hidden. Use simple indicators that helps staff to determine if they work according to standard or not. Use 5S in order to keep the factory clean.[10] Below 5S is presented in a bullet list. Sort - rarely used articles from frequently used Structure - organize and mark each object’s position Clean - keep it clean Standardise - create rules for the above three themes. Create a habit - follow ups Figure 2.4: The first seven principles of TPS [11] 12

Literature review 2.3 Supply Chain Management Supply Chain Management (SCM) is referred to as the management of design, planning, execution, controlling and monitoring of supply chain activities. Supply chain is the system of organizations, people, information, activities, and resources involved in transporting a product from supplier to customer.[15] SCM’s objective is to create net value, build a competitive infrastructure, synchronize supply with demand, and measure performance globally. In addition, SCM plays a central role in regulating the product flow, cash flow and information flow between supplier, producer and customer.[16] The idea with SCM is to make sure focal companies relate the customer’s need in the processes of making the goods by connecting the focal company to the consumer. Following this procedure, the focal company can make sure that all activities that are used in the production create value for the consumer. This exercise show where savings can be made and how the whole supply chain can be more responsive to sudden changes in consumer demand.[17] Figure 2.5: Visual figure explaining technical terms regarding supply chain [11] 2.3.1 Sustainable Supply Chain Management Sustainable Supply Chain Management (SSCM) involves integrating financially and environmentally viable practices into the complete supply chain life cycle. It includes activities such as product design and development, material selection, manufacturing, packaging, tran

THE ROYAL INSTITUTE OF TECHNOLOGY(KTH) Lean Production & Sustainable Supply Chains in the Fast Moving Consumer Goods Industry by Per Bondeson & Stefan Liss