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Sometimes referred to as an agile supply chain, a lean supply chain is a term used to describe a supply chain management process that ensures that a company has all the resources on hand to operate at full production, but no unnecessarily high inventories of supplies and raw materials. There are several advantages to this arrangement, including lower tax assessments and a reduction in warehousing and storage costs. Considered to be one of the most effective forms of supply chain management, going with a lean supply chain approach can free a significant portion of a business’ cash resources, while still making it possible to make the most of all raw materials on hand.
A foundation of the lean supply chain is maintaining an adequate but not exorbitant inventory of raw materials on hand. The idea is to have enough resources to keep the operation going until the next batch of materials arrive from the supplier. This requires monitoring the usage of materials on hand closely, while also determining the amount of time it takes the supplier to fill and deliver an order. If managed efficiently, this makes it possible to establish a schedule for ordering that ensures there are no interruptions in production, but also no raw materials languishing in a warehouse for extended periods of time. Ideally, the materials on hand will be just about to run out as the next delivery from the supplier arrives, making it necessary to store the newly arrived materials for no longer than a few days before they are moved to the production floor.
While one facet of a lean supply chain has to do with keeping inventories low, the process also often involves looking closely at how raw materials and supplies are used in the production process. Here, the focus is on making sure that waste is kept to the absolute minimum. This can sometimes involve making changes in how the production floor is arranged, or replacing equipment or machinery that is no longer able to make the most efficient use of the materials that go into the production process. By keeping waste as low as possible, this in turn also aids in structuring the re-ordering of raw materials so less resources are required to produce the same number of units, and inventories can be kept a little smaller.
A key benefit of creating a lean supply chain process is that smaller inventories mean smaller tax assessments. In many nations around the world, companies are assessed taxes on supply and raw stock inventories, even as they pay taxes on any finished goods that are currently warehoused and awaiting purchase by customers. By keeping those supply and raw stock inventories low, businesses help to minimize their tax burden, leaving more of their income to be used for other functions, including funding strategies that will help the business grow.