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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 beyond lean manufacturing to become lean en-


terprises. Since the advent of the concept of lean
In the 1990s, many manufacturing firms around production, which itself is derived from the Just-
the world adopted lean production as a strategy to In-Time (JIT) system developed by Toyota begin-
increase their global competitiveness. Some firms ning back in the 1960s, there have been many
have made much progress in implementing lean advances in information technology (IT), particu-
production in their factories while others have larly the widespread deployment of the World
found it to be very difficult and are still struggling Wide Web and the Internet. Almost every firm and
with implementation, or in some cases, given up business function has been impacted by the
the attempt. Some of the companies that have been Internet in the last few years and whole new
successful in converting their manufacturing facil- industries have arisen because of the technology.
ities to lean production have begun to spread lean Of course, lean production systems are not
principles to other business activities (e.g. product immune from the effects of the Internet. But what
design, payments processing, order taking) or into are these effects likely to be? Will they allow lean
their supply chains. They are attempting to move production concepts to be more fully applied, or,
on the other hand, might they serve as an
*Corresponding author. Tel.: +1-415-422-6408; fax: +1-
alternative way to increase operational efficiency?
415-422-2502. In fact, some have seen an inherent conflict
E-mail address: mefford@usfca.edu (R.N. Mefford). 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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248 P. Bruun, R.N. Mefford / Int. J. Production Economics 89 (2004) 247–260

(Piszczalski, 2000). It is argued that lean produc- system is and its key characteristics. The term lean
tion emphasizes reducing variety and flexibility to production was used by the authors of the
achieve greater efficiency whereas one of the International Motor Vehicle Project carried out
benefits of IT is its ability to provide more by MIT in the 1980s to describe the approach
flexibility and product variety. Also, many propo- originally developed in the Japanese auto manu-
nents of lean production believe simple visual facturing industry which is contrasted with the
systems (such as kanban) are sufficient to control a mass production approach common in the United
pull system and that computer systems tend to States and Europe at the time. This approach is
shift production control from a line to a staff often called JIT but the authors (Womack, Jones,
function that is undesirable in lean thinking. and Roos) of The Machine That Changed the
Furthermore, computer systems can be expensive World, which popularized the term lean produc-
and difficult to implement and may distract tion, believe that leanness goes beyond JIT and
attention from continuous process improvement. more accurately describes the production systems
In this paper, we will discuss the ways in which the used in the Japanese auto industry at the time (and
Internet is already having an impact on firms using now in much of the world). Their definition: ‘‘Lean
lean production methods and its potential for production is ‘lean’ because it uses less of every-
deepening and broadening these effects. We will thing compared to mass production—half the
argue that the Internet is a facilitator to the human effort in the factory, half the manufactur-
implementation of lean production and lean ing space, half the investment in tools, half the
enterprises and, in fact, a synergy exists between engineering hours to develop a new product in half
the two. In other words, if appropriately applied, the time. Also, it requires keeping far less than half
the Internet can help make production systems the needed inventory on site, results in many fewer
leaner, and even more significantly, make the defects, and produces a greater and ever growing
entire supply chain leaner. variety of products’’ (Womack et al., 1990). In
In Section 1, the principles of lean production examining this definition, one can see that there is
will be examined and how theoretically the a strong emphasis on reducing the use of all
Internet might affect the implementation of these resources, not only in the factory but also in
principles. In Section 2, some examples of how activities extending beyond the shop floor such as
firms have actually used the Internet to make their product development and supplier relations. They
lean production operations more effective are subsequently expanded the concept of lean pro-
discussed. Section 3 examines some constraints duction to consider the lean enterprise and efforts
and barriers to integration of the Internet into lean to apply lean thinking throughout all enterprise
enterprises. In Section 4, we reflect on the activities (Womack and Jones, 1996). Although
theoretical grounding of value creation in the many use the terms JIT and lean production
combined system of lean production, enterprises, interchangeably, Womack, Jones, and Roos
and the Internet. Sections 5 and 6 draw conclu- clearly believed that leanness is more descriptive
sions and present some guidelines for using the of how pervasive the organizational change must
Internet to make the firm and its supply chain be to fully benefit from a JIT approach. The key
leaner, or e-lean, as it has been called (Piszczalski, parameters are the same in the two concepts, but
2000). lean systems apply them more comprehensively
throughout the firm to activities beyond the
factory floor (some have called lean production
2. How lean production systems might use the big JIT) and in relationships with suppliers,
Internet customers and other important partners. While
e-business, understood as trade over the Internet,
To identify ways in which the Internet might be is growing at an impressive overall rate, there now
useful to firms using lean production approaches, appears to be a slowing in the Business-to-
it is helpful to first define what a lean production Consumer (B2C) growth rate and acceleration in
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the Business-to-Business (B2B) area (Amit and through software protocols, is a closed system
Zott, 2001). Furthermore, B2B e-business is which requires substantial investment in software
predicted to reach $2.7 trillion in 2004 representing and hardware, and thus is not widely deployed,
more than 17% of the total Web trade, while especially among smaller firms. Nor is it inter-
online retail is expected to represent less than 7% active in the way that the Internet is. Conse-
of total trade at that time. In fact, the greatest quently, the open and inexpensive nature of the
potential for the Internet to lean enterprises is that Internet has much potential to link a supply chain
it will allow leanness to be applied throughout the together and allow pull production planning and
supply chain in a way that could not have been scheduling to be more effectively employed. The
conceived of 10 years ago. In this section we will collaborative nature of the Internet is particularly
examine that potential. useful for the production planning function for it
To begin, it is useful to outline the character- will allow quick notification throughout the supply
istics of a lean production system. As the definition chain of any disruptions to existing schedules, for
presented above indicates, there is a strong example, capacity or material constraints, or
emphasis on reducing the use of all resources in machine breakdowns. The members of the supply
a firm—labor, capital, materials, space, and time. chain can then quickly and collaboratively adjust
Lean enterprises are always looking for ways to their production plans.
cut the use of any of these resources anywhere in The pull principle of production planning
the firm. JIT methods are at the heart of these ultimately begins with the last link in the supply
efforts and include: chain, the final customer of the product or service.
By using the Internet to transmit point-of-sale
Pull approach and kanban production control
transactions and orders down the supply chain, the
Inventory reduction
member firms can keep their production in line
Quick setups and orders
with final demand, reducing inventories through-
Quality at the source (jidoka)
out the chain and avoiding the ‘‘bull whip effect.’’
Supplier networks
Of course, much work has to be done by each
Teamwork and participation
member of the supply chain to make their internal
Continuous improvement (kaizen)
systems truly JIT-responsive, but the Internet
For each of these methods one can see how the makes it feasible to link the entire supply chain
Internet might help to implement the approach. into one long pull pipeline. Østergaard Danish
For example, JIT uses a pull approach to Automotive Materials (ØDAM) is an example of a
production scheduling versus the more traditional company that has managed to employ this
push method that is based on forecasts of demand, principle (this firm will be discussed in a later
rather than the actual demand. In the past, JIT section).
could be implemented in a single factory using A key principle of JIT is reducing inventories to
kanbans (cards) to alert upstream workstations to the bare minimum, and the effort to do so turns
produce more of an item. This worked fairly well out to be powerful in finding waste and inefficien-
but was difficult to transfer outside the factory to cies throughout a production process. How might
suppliers who often delivered large batches infre- the Internet facilitate the inventory reduction
quently because it was not easy to link their effort? One obvious way, as explained above, is
production schedules to that of the customer. to more closely coordinate the supply chain in
Some firms overcame this problem by locating order that each participant is only producing what
their factories in close proximity to the customer, is actually being used at the next stage, not what
assigning their own employees to work at the they expect to use. The result is small lot sizes and
customer’s plant, or using Electronic Data Inter- frequent deliveries meaning low levels of inventory
change (EDI). The Internet provides a better way throughout the supply chain. In some situations,
of linking members of a supply chain. EDI, which of course, lead times and production cycles are too
links the computer systems of different firms lengthy to fully apply the pull principle, but where
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applicable, the Internet will allow firms to achieve in several ways. First, internally, it can allow rapid
greater coordination and collaboration in their transmittal of quality problems throughout the
supply chain resulting in substantial inventory firm, such as when line or machine stoppages
reduction. Another benefit is that mass customiza- occur. A feature of jidoka that makes it effective is
tion will become feasible for some products and the highlighting of quality deficiencies so that
services as the supply chain becomes shorter and everyone is aware of them and deals with them.
faster. Dell Computer Corp. is a good example of Andon boards and line-stop authority are common
a firm that makes most of its products to customer methods to accomplish jidoka, and the Internet
specification resulting in little or no finished goods should broaden awareness of quality problems
inventories. throughout the firm (all employees should be able
To be able to deliver mass customization of a to see an andon board or a stopped assembly line)
service or product, the supply chain must be very and perhaps eliciting wider participation in solving
fast and responsive. This requires quick setups for them. But perhaps, the greater benefit will be
production and rapid turnaround on orders to spreading jidoka along the supply chain. If other
suppliers. The Internet will facilitate this aspect of firms are immediately notified via the Internet of a
JIT as well. As lot and order sizes come down due quality problem of a participant, they not only can
to the closer coordination of production schedules, adjust their production schedules but also may be
firms will be forced to develop faster and more able to help out in resolving the problem. For
efficient ways of setting up runs of products and example, they may be able to send engineering
order delivery to customers. The Internet, by personnel or contact another supplier who has had
allowing closer coordination of production sche- a similar problem to provide assistance. Addition-
dules and faster adjustment to changes in demand, ally, another supplier may be able to provide the
will facilitate information transmittal internally item until the quality problem is resolved.
within the firm, and externally throughout the As mentioned in the Cisco case, supply chains
supply chain. The ongoing trend towards out- are becoming more closely linked where the lines
sourcing of manufacture and service activities that blur between separate corporate entities (i.e., the
are not considered core competencies also is virtual corporation). This would not be feasible or
facilitated by the Internet. Outsourcing requires effective without the Internet. The tremendous
close cooperation and intensive information shar- amount of information transmittal and coopera-
ing among supply chain participants, and this tion possible over the Internet allows firms to link
aspect the Internet can facilitate. In a few cases, more closely with their supply chain partners.
supply chains are moving towards becoming a Supplier partnerships are another important fea-
virtual corporation where all the participants are so ture of effective JIT systems. The Internet alone
closely linked that they, in effect, operate as one cannot create these partnerships for trust and
entity. Cisco Systems is an example of a firm that is experience are also required, but it makes it more
moving strongly in that direction. Cisco receives practical to link to suppliers in production
80% of its orders from customers over the Internet scheduling, inventory control, quality improve-
and contracts out most of their manufacturing ment, and new product development in a way that
activities to Celestica, Solectron, and other ESM could not even be conceived of when JIT produc-
(Electronic Service Manufacturers). In many cases tion systems were first developed in the 1960s. In
from order to delivery, Cisco employees never fact, it is no coincidence that supply chain manage-
physically touch the product. There are many ment has become an important operations man-
benefits to virtual manufacturing, but it would not agement topic in recent years for its development
be practical without the Internet to link the supply closely parallels the development of the Internet.
chain together. JIT production systems call for teamwork and
Another key JIT principle is jidoka, or quality at participation of everyone to make them effective.
the source. The Internet can aid in the implemen- As lean thinking spreads throughout the firm
tation of quality improvement in a lean enterprise creating the lean enterprise, and along the supply
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chain creating the virtual firm, even greater team- chain and allowing mutual learning. As supply
work and participation will be necessary. The chains cooperate more closely, each participant
Internet will facilitate this as virtual meetings can contribute to efforts of other supply chain
become more widespread and much more infor- members to improve. If the firms in the supply
mation is available to everyone within and outside chain accept their partnership role in the chain,
the firm. As Deming (1982) and others have they will then see the benefits of contributing to
pointed out, good management decisions are other’s continuous improvement efforts. Toyota,
based on data and careful analysis of data, and Motorola, and others have long realized that if
the information capabilities of the Internet can they can help their supplier improve quality or
disseminate the data. There are many types of lower costs, they also benefit. The Internet will
information that will allow for better problem allow each firm to know what others in the supply
resolution and production planning, as have been chain are doing, problem areas can be highlighted,
discussed above, which the Internet can quickly performance criteria can be shared, and the entire
and cheaply transmit. If firms allow their employ- supply chain can work as a team toward contin-
ees to actively use this wealth of data, and to work uous improvement. Of course, this will not come
with employees in other firms in the supply chain, automatically as trust will need to be developed
the result should be superior (because of broader among firms and expertise developed in process
participation) and much faster (because data and analysis and problem solving, but as the realiza-
decisions can be communicated quickly) decision tion that more and more each firm is becoming a
making in the supply chain. An example of this virtual corporation spreads, kaizen should inten-
benefit is in ever faster and better product design sify along the supply chain.
as assemblers link with their suppliers and In summary, we have seen that for many of the
customers via design teams (both physical and characteristics of JIT production systems, and
virtual). The Internet provides the mechanism for their expansion outside of production activities
such close coordination and cooperation, espe- into other business functions in the lean enterprise,
cially when the supply chain and the customer base the Internet becomes a potent facilitator to make
are global. each of these factors more effective, and even more
The final characteristic of JIT that we will importantly, to spread leanness throughout a
discuss is the emphasis on kaizen or continuous supply chain. Only a few firms have fully realized
improvement processes. Kaizen is a natural con- the potential to become e-lean and even fewer have
sequence of the other characteristics, previously begun implementing it, but there are a few
discussed, in particular, jidoka, kanban, and examples of firms moving in that direction. In
teamwork and participation. The philosophy of the next section, we will discuss in depth, three of
leanness and lean thinking encourage all employ- these companies: Dell Computer Corporation,
ees to continually search for better ways of doing Cisco Systems Corporation, and ØDAM, and also
things to improve quality, efficiency, and speed. briefly describe the efforts of several other firms
The concepts of zero defects and zero inventories, using the Internet to become e-lean.
although unattainable in many cases, are motivat-
ing and further improvement is almost always
possible. How can the Internet help the kaizen 3. How firms are using the Internet to become
effort? Probably the largest contribution that the leaner
Internet can make to kaizen is in its ability to
rapidly disseminate all types of data (e.g. demand, Not many firms have yet learned how to use the
production schedules, and quality performance) Internet in implementing lean production princi-
that are essential to effective process improvement. ples, but a few examples will be discussed to
Many firms have capable internal kaizen programs illustrate successful applications. Three such ex-
so where the Internet can really make a contribu- amples are Dell Computer Corporation, Cisco
tion is by spreading these throughout the supply Systems, and ØDAM, which have widely deployed
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the Internet in managing their supply chains. We the current order backlog and inventories of their
will also cite several more specialized applications components at the Dell assembly plant because
by other firms. Dell has constructed Web pages allowing suppliers
to access the Dell system. This extranet allows the
3.1. Dell Computer Corporation suppliers to adjust their production schedules in
line with Dell’s demand from customers, an
Dell Computer Corporation is the largest direct effective use of the pull principle in the supply
seller of PCs in the world. Dell’s sales, profits, and chain. For some components with longer lead
share prices have all increased at astounding rates times, such as microprocessors and hard drives,
in the last few years, and much of the firm’s success suppliers can do better advance production plan-
can be explained by its effective use of the Internet ning knowing Dell’s current level of sales and
to manage its supply chain. Dell has a short supply production reducing the bullwhip effect in the
chain comprised of only three levels: consumers, supply chain.
Dell itself, and suppliers. Even though short, it is a The build-to-order model of Dell has a sig-
complex network involving millions of individual nificant effect in reducing inventory levels of
consumers and companies buying its products components at Dell. Some advanced planning of
around the world, five manufacturing facilities in component needs must be done because of lead-
Texas, Brazil, China, Ireland and Malaysia, and time considerations, but this is much less for Dell
hundreds of supplier companies. Dell’s customers, than computer manufacturers selling through
and thus its supply chain, demand a very high retail outlets. It also prevents buildup of compo-
degree of responsiveness as Dell builds most of its nents that may become obsolete and allows Dell to
computers to order, rather than to stock, and the quickly work down inventories if a slowdown in
technology, and thus components, are constantly customer demand occurs. The fact that no
changing. How does Dell use the Internet to make inventories of assembled PCs must be kept is
its supply chain lean and responsive? another significant advantage of the Dell pull
The starting point is the company’s Web pages model. Dell carries only an average of 10 days
through which a high and increasing percentage of inventories of components versus an industry
its orders come, both from individual and corpo- average of 100 days.
rate customers. Effective Web page layout allows The fact that there is a few days interval between
customers to easily customize their PCs orders and order receipt and shipment allows Dell to further
for Dell to continually adjust options and their pull components into its assembly plants in line
prices on these PCs to introduce new features and with demand. Component commonality obtained
shape demand to available component supplies. from a limited number of suppliers allows some
On its Web pages, Dell sets component prices on a smoothing of demand as well as reduced inventory
daily basis to match supply and demand. This levels. The several day lag between order receipt
gives Dell an ability to quickly introduce new and shipment also allows Dell to follow a more
technology and influence demand and match it to stable production schedule by varying the ship-
capacity through pricing adjustments, an advan- ment dates to customers.
tage that a computer-maker selling through retail Dell ships its computers directly to its customers
outlets lacks. Also, Dell is much closer to its by small package delivery companies such as UPS
customers than other PC makers and can quickly and FedEx assuring prompt delivery and eliminat-
identify, and adjust to, changing customer de- ing the inventory at the wholesale and retail levels.
mand. It is better able to forecast future demand For some monitors from Sony, Dell carries no
and plan production schedules accordingly. inventory at all notifying Sony’s plant in Mexico
Once an order is received, Dell can transmit it when an order is received, and Sony ships directly,
directly and immediately to the appropriate also via FedEx or UPS, coordinating delivery to
manufacturing facility for assembly. Not only that the customer. Linking Sony’s logistics system into
manufacturing facility but also its suppliers know Dell’s over the Internet makes this possible. The
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Internet allows Dell to manage their worldwide More than 80% of Cisco orders come via the
logistics to minimize transportation costs and Internet. This results in fast response to orders and
assure responsive delivery to customers and from the ability to continually update product offerings
suppliers. and pricing. Customer satisfaction ratings have
Dell can actually operate with negative working improved for the company as it has moved the
capital using its make-to-order model because the customer interface online.
customers typically pay via credit card, or The electronic orders are then transmitted by
purchase order in the case of corporate accounts, Cisco to the ESMs, which operate 37 factories
resulting in prompt payment to Dell of receivables. around the world. Component suppliers are linked
Payables, on the other hand, are paid on typical in either directly by Cisco or by the ESMs to
longer terms so Dell has use of customer funds provide needed parts. The Internet linkages allow
before paying suppliers. The leanness of its Cisco to coordinate its global supply chain and to
inventories allows Dell to gain significant financial rapidly adjust to demand changes. The suppliers in
advantage in comparison to its competitors by not turn provide Cisco information on their produc-
having large amounts of capital tied up in tion schedules, inventories, quality performance,
inventories. capacities, and other vital data needed to coordi-
A final Internet link in Dell’s supply chain is nate the supply chain. To reduce transportation
servicing. Dell outsources its warranty and repair costs and improve customer responsiveness, many
service to third-party providers. When Dell re- of Cisco’s products are shipped directly to
ceives a service request, it transmits this to the customers from the ESMs without ever being
service provider and coordinates delivery of any handled by Cisco employees. This logistics system
needed parts to the provider, assuring that they is coordinated over the Internet.
arrive when and where the service is required. The Cisco involves their ESMs and component
Internet linkage of Dell with the service suppliers suppliers in product design. Cisco personnel work
makes this possible and efficient and meets the with their supply chain in developing components
customer’s need for responsiveness (much of the and prototypes, in quality assurance, and ramp up
information on Dell comes from Chopra and of production. Electronic documents supporting
Meindl (2001)). the design work can be transmitted electronically
around the world so much of this collaboration
takes place in virtual space. Cisco has found their
3.2. Cisco Systems product development approach has reduced the
time-to-volume production by 25% and thus
Cisco Systems, the leading manufacturer of allows faster time-to-market and more product
network routers, is probably the best example differentiation giving the firm significant competi-
available of a virtual manufacturer. More than tive advantage.
half of its production is carried out by Celestica, The virtual manufacturing model allows
Solectron, Jabil, Flextronics and other ESMs. Cisco to benefit from the process expertise of the
Cisco has found there are many advantages to its ESMs whose core competency is flexible, efficient,
outsourcing approach to manufacture, particularly and high-quality manufacture. It would be difficult
in the high technology and global industry in for Cisco to duplicate this capability, and by
which it operates. Among these is an ability to outsourcing this function Cisco can focus on
focus on its core competencies of product innova- product development and marketing, its core
tion and marketing while reducing capital expen- competencies. Also, new production techniques,
ditures on plant and equipment and benefiting equipment, and materials will likely be more
from the process expertise of the ESMs. The Cisco quickly deployed by the ESMs than by Cisco
virtual manufacturing model is only possible due allowing Cisco to focus on its strategic activities
to extensive use of the Internet to link to the and yet keep its manufacturing capabilities state-
ESMs, logistics providers, and Cisco customers. of-the-art.
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A further advantage of virtual manufacturing is in each catalogue would have to locate parts
scalability. Cisco can quickly and inexpensively relevant to a specific car model and make. The
alter its volume of production of different pro- product selection process was cumbersome and
ducts in the various countries in which it sells by slow, and hence costly for ØDAM. In addition,
increasing or decreasing orders to the ESMs. For a the process resulted in problems making sure each
global product with rapidly changing technology sales clerk had up-to-date catalogues and access to
this is a significant advantage that Cisco can utilize information about parts on stock, etc. Finally, the
to expand its production capacities without process provided no assistance for warehouse
incurring heavy capital expenditures for plant management, control of delivery time, etc.
and equipment. Since 1997, an electronic catalogue management
It perhaps is not too surprising that Cisco system has been developed resulting in a much
Systems is an innovator in the use of the Internet higher growth rate of sales. The system includes all
to coordinate their supply chain since they are a product data in one catalogue and better integra-
major provider of hardware and software to make tion of order fulfillment and management of
such linkages possible. Apart from demonstration warehouses. A major advantage is the improved
benefits, however, Cisco has achieved many product selection process, where the system is
tangible benefits in terms of reduced capital costs, based on car model and automatically limits all
improved financial performance, and high levels of searches to relevant parts. The results are higher
customer satisfaction. This is reflected in the customer satisfaction and substantial savings in
company’s market valuation. Cisco has pushed operating costs.
the virtual manufacturing model further than any The revolution, however, is the Internet part of
other major company (information on Cisco it which paved the way for a totally new business
Systems is from Ansley (2000), Business Week concept, calling for a substantial change manage-
(2000b) and Siekman (1999)). ment process within the organization and its
structure, new internal systems, and new ways of
3.3. Østergaard Danish Automotive Materials thinking. ‘‘Before we sold spare parts, now we
teach customers to buy spare parts from us,’’ CEO
ØDAM is an importer and distributor of auto Steen N^rret says. As a result the sales staff was
spare parts established in 1934 and today covers cut by 50% and people were reallocated and
Denmark with 47 local warehouses. The basis of trained in new areas, e.g. as consultants.
their business is that auto manufacturers account A central part of the new way of doing business
for only 25% of the value added in car production. is the ØDAM Club. Customers must be members
Suppliers create the remaining value. Many of the club in order to do business with ØDAM
suppliers are today large, worldwide companies. over the Internet. Customers pay a small member-
ØDAM buys and import spare parts from these ship fee. Once customers are members of the club,
suppliers and sells spare parts to auto workshops/ they can trade over the Internet and will receive
repair facilities. rebates on traded items. This encourages custo-
Until 1996, a manual system for all major mers to do as much business as possible over the
business processes was used. Two hundred and Internet. Members are also offered a range of extra
eighty sales clerks would take calls from work- services, including service guides for cars, repair
shops, which wanted to place orders for parts or to instruction sheets including car-specific and job-
ask for information or advice on a specific job. specific instructions, car and components data,
Each sales clerk would use a collection of suggestions for service plans and parts for specific
catalogues (occupying about three meters of shelf cars, etc.
space) to answer queries—a very time consuming New functional areas have been added, e.g. a
process. The catalogues were supplier-specific. ‘‘Workshop module.’’ This module allows all
This meant that to fill a single order, a sales clerk workshop data to be recorded and stored centrally
would typically have to use several catalogues, and in the ØDAM database, and this allows customers
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to access and manipulate the data at all times. GE handles each order as a project working
There are three basic information packets in the closely with the customer to make sure the
workshop module: a customer record, a car generators meet requirements and are delivered
record, and a job record, all making the operations on time. Customers are involved over the Web in
at the workshops leaner. Also, a financial module the design of their generators transmitting blue-
that allows workshops to record financial informa- prints, engaging in virtual meetings, and coordi-
tion along with customer, car, and job data, has nating any design or schedule changes. GE figures
been introduced with all data being exported to a this collaborate design process has reduced deliv-
local financial firm offering all kinds of financial ery times 20–30%. After the turbine is delivered,
services. GE has a system called Turbine Optimizer which
Lately, ØDAM has been working on closer allows the customer to compare performance of
linkages with suppliers; i.e. completing the inte- their equipment with other users and fine-tune
gration of the value chain. This provides auto- performance (Business Week, 2000a).
matic ordering and updating of product Logistics in the global food industry is a major
specification and service guides. However, difficul- cost and essential to meeting demand while
ties have arisen, as suppliers in general do not have keeping inventories in check. To improve effec-
the required level of integration in their systems, tiveness of their logistics systems, several large
and furthermore, standards for product data and food manufacturers and distributors have banded
guides are lacking. together to coordinate over the Internet procure-
The order-fulfillment process is a fully inte- ment and shipping information. Called UCCnet it
grated system controlling shipping, delivery, bill- is designed to be open to all supply chain
ing, and warehouse management. Now 25% of participants allowing them to link to their internal
ØDAM revenue is generated through e-business, Enterprise Resource Planning (ERP) and EDI
the goal being to increase this to 80% during the systems. Among the companies involved are
next 3–5 years (the information on ØDAM is from Proctor & Gamble, Supervalu, RalstonPurina,
Fischer and Peykarimah (2001)). and PepsiCo. Initially, the system will track
purchase orders through shipping, receiving, bill-
3.4. Other firms ing and payment. Later capabilities will be added
to allow online collaborative forecasting, produc-
A few other firms that are using the Internet to tion planning, and inventory management. Firms
make their operations leaner can be cited to pay a fee to subscribe (the amount depends on the
illustrate the potential applications. Much of the size of the firm) but will pay no transaction fees
publicity about B2B Internet applications has been (Messmer, 2000).
in the procurement area, particularly online The clothing industry is notorious for a lengthy
auctions. But this is only one of the many cycle time supply chain. In order to reduce the
applications that are possible. Below we will time from design to market and make the supply
discuss applications in project collaboration by chain more efficient, a virtual private integrated
General Electric, logistics in the food industry, supply chain called The Thread has been devel-
production scheduling and inventory management oped. Participating firms, who pay a fee to use The
in the clothing industry, performance data sharing Thread, can query their supply chain partners over
by Chrysler, Stelton’s new product development the Internet about design changes and availability
and prototyping process, and supply chain man- of fabrics, dyes and other materials. The virtual
agement by Harley-Davidson. system links to the partners internal production
General Electric Co.’s Power Systems division planning and inventory systems. Companies ex-
manufactures electric turbines used in power pect to reduce cycle times significantly and simplify
generation facilities around the globe. Turbines and expedite communication with their global
cost an average of $35 million each, contain about suppliers by replacing the current FAX and phone
13,000 parts, and are customized for each order. linkages (King, 2000).
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The Chrysler division of Daimler–Chrysler uses become increasing lean facilitated by these Web
an extranet to share quality and delivery informa- applications. However, there are many potential
tion with its supply base. Suppliers can log on to obstacles and constraints to attaining e-leanness.
Chrysler’s Web site to check their delivery and In the next section, we will discuss these.
quality performance and see their relative standing
among similar suppliers. By sharing this informa-
tion, Chrysler hopes to identify bottlenecks in the 4. Constraints and obstacles to e-leanness
chain and improve quality at the suppliers,
ultimately making the entire supply chain more The examples cited above of firms using the
responsive and efficient and lowering inventories Internet to become leaner are illustrative of the
(Lee and Whang, 1998). possibilities of the Web. However, there remain
Stelton, a Danish company specializing in high- many potential obstacles and constraints to
quality design products in stainless steel and ABS achieving e-leanness. Many of these are typical
plastics, has modernized its facilities on several organizational change constraints, but some are
occasions, and it is today equipped with advanced unique to production systems and supply chain
high-technology production and engineering management. In this section, we will discuss some
equipment. New product development capabilities of these constraints and offer suggestions on how
are key and take place in close cooperation with managers may overcome them.
industrial designers. As a special feature, the One common problem in linking to supply chain
process of prototyping has increased performance partners is the incompatibility of internal compu-
considerably by means of the Internet; e.g. ter systems with other firms’ systems and the
specifications are laid down in a CAD system Internet. Many companies in recent years have
and directly transmitted via the Internet to a implemented ERP systems to coordinate internal
company in Germany, and the physical item is financial, marketing, and human resource data.
delivered the next day (Bruun and Christiansen, However, most ERP systems are not linked to
2001). shop floor production scheduling, inventory, and
Harley-Davidson, the motorcycle manufacturer, quality control data (Vijayan, 2000). This type of
is designing a system called SiL’K (for Supply information is essential to collaborative produc-
Information Link) to link to its suppliers over the tion planning and inventory management through-
Internet. The system will share data among supply out the supply chain as well as making build-to-
chain participants on inventories, quality and order production feasible. There exists software to
delivery performance, and billing. H-D expects provide the links; for example, Manufacturing
the system to reduce cycle times for procurement Execution System (MES) or Advanced Planning
and streamline the entire process while allowing System (APS), but many firms are loath to invest
cost savings via access to online markets and in additional software since they have made
exchanges. The system is also expected to enhance substantial investments in their ERP systems and
partnerships with suppliers and allow closer may still be working out the bugs. In any case, for
coordination to improve quality and delivery those firms which go ahead and invest in MES or
performance as well as reduce inventories (Pur- APS there will be the usual implementation
chasing, 2000). problems and lags to make these systems opera-
These are only a few examples of how firms are tional, thus slowing down their supply chain
attempting to use the Internet to coordinate their Internet efforts.
supply chain activities and improve operating A related issue is the widespread use of the
performance. The systems cited above, some of HTML computer language which, although good
which are still in the development stage, have the for transmitting Web pages and other human-
potential to reduce cycle times and inventories, readable information, is not optimal for transmit-
improve quality, and increase productivity. As ting and processing data. The XML language is a
these goals are achieved the firms involved will much more computer-efficient language, but is not
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widely deployed. Until supply chain software is transfer of lean principles and techniques occur
compatible with XML, the efficient processing of through these personnel exchanges and, over time,
the huge amounts of order, schedule, inventory, trust and confidence in supply chain partners is
and related supply chain data necessary to fully developed. Will the Internet replace these relation-
utilize the Internet in supply chains will be ships? It could but certainly need not do so. Firms
constrained. can continue to maintain personal relationships
Another potential problem is the sharing of with partners and use the Internet to transmit the
information that has been considered proprietary additional production scheduling and performance
with supply chain members. Many companies are data that could make these relationships more
still struggling with the transition from seeing their productive. With global partners where close
suppliers as opportunistic opponents to partners. personnel relationships may not be possible in
Asked to open up their internal financial, produc- any case due to physical distance, the Internet can
tion, and marketing data to supply chain mem- at least create virtual relationships where none
bers, many firms may balk. Additionally, some may currently exist. However, some proponents of
suppliers are concerned that any information they lean methods may continue to be skeptical of what
provide to their customers might be used against the Internet may do to the relations between
them to force down prices or the customer or other supply chain partners.
suppliers may expropriate their technology. This Other problems include finding personnel such
concern is heightened with online auction sites. as Web site developers and training of the
More broadly, many firms are concerned about employees involved in implementing and operating
access of others including competitors to their data the Internet systems. However, as the potential of
banks, and are unlikely to fully participate in Web the Internet to increase the efficiency and efficacy
systems until adequate firewalls are developed. So of the supply chain and allow more make-to-order
not only must there be confidence in the technol- processing, firms will likely find the resources and
ogy along the supply chain, but there also must be the willingness to overcome these constraints and
sufficient trust developed in the other chain obstacles.
members.
Another concern, especially among companies
that have developed lean production systems, is 5. Towards a model for lean integration
that the Internet may transform close, personal
relationships with supply chain members into As mentioned earlier, the aims of the lean
arms-length, virtual relationships. The best lean principles are ‘‘to get more out of less.’’ The
companies have extensive linkages to their supply contributions of the Internet to lean manufactur-
chain partners, developed over the years, with ing principles as seen from the cases may be
frequent meetings and plant visits and, in some summarized as seen in Table 1.
cases, training of other firm’s personnel in process The overall picture shows that the Internet in
improvement and quality methods. Much of the the three cases supports the lean manufacturing

Table 1
Internet support of lean manufacturing

Lean Pull Inventory Quick setups Quality Supplier Teamwork and Continuous
principles approach reduction and orders at source network participation improvement
companies

Dell O O (O) O O (O) (O)


Cisco O O (O) O O O O
ØDAM 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 appropriate our part of the value created in these?
use of the Internet in supporting the lean principles For this purpose, we use the concept lean
results in a self-reinforcing development of broad- integration to indicate the application of lean
er business processes like procurement, after-sales production principles on the factory floor level as
service, invoicing and payments, and even the well as to other business processes within the firm.
adoption of virtual enterprises. Michael Hammer Furthermore, we apply the extension of leanness
has written that now that companies have cut to the supply chain allowing integration that
waste in their internal operations they need to look bridges participating companies and production
beyond the walls of the organization to streamline systems.
the processes shared with other firms. He calls this In Fig. 1, we have illustrated the elements of the
the superefficient company, and says that there business model, which in the center consists of the
exists huge potential to reengineer and integrate lean production principles (or JIT methods). The
the supply chain (Hammer, 2001). next circle includes other elements of the business,
Therefore, can we model the situation and add like processes, systems and services—typically
to the theoretical development of the lean supply such ones that can benefit from being integrated
chain? According to Piszczalski, manufacturers to some extent with customers and suppliers. The
seem to be divided into two opposing camps: those inherent strength of the Internet for supply chain
supporting lean manufacturing and others em- integration is the external communication it
ploying computer-based planning and control facilitates. In our case studies, we found that the
systems. The growth of e-business is forcing Internet contributes to the overall business pro-
companies to revisit their position. The question cesses becoming more lean. Therefore, elements
is whether it really is an either/or situation? like New Product Development, Order fulfillment,
In a paper on value creation in e-business, Amit Logistics, Customization, etc. have been included
and Zott (2001) investigate the B2C area. in the model. This level will represent the lean
Although not developed for the B2B area, which enterprise.
is more the focus of our research, some parallels The outer level of Fig. 1 represents external
seem to be reasonable. Using concepts from the networks towards the suppliers and the customers.
‘‘grounded theory approach’’ of the strategic As we have seen in our cases these couplings
management and entrepreneurship literature like represent important elements with great potential
Schumpeterian innovation, value chain analysis, for value creation through leveraging the value of
resource-based view, theory of strategic networks, the lean principles. This level, which includes more
and transaction cost economics, they conclude tiers of suppliers and customers, might be denoted
that value in e-business is created by four sources: e-lean.
Efficiency, Complementarities, Lock-In and No- The model describes a framework in which the
velty. They observe that none of the existing Internet in a symbiosis supports the lean princi-
theories in and of themselves can explain the ples, where the business processes at the same time
sources of new value creation in e-business. are strengthened. The value creation elements
Rather, the value creation has to rest on an Efficiency, Complementarities, Lock-in and Novelty
integrative approach. A consequence of their are all present in the model. Efficiency improve-
finding is that the value created refers to a network ment is caused by the support of the lean principles
rather than one firm. Therefore, ‘‘ythe business themselves, and Complementarities are demon-
model as a unit of analysis has a wider scope than strated from the cases by the fact that the sum of
does the firm, since it encompass the capabilities of the total system exceeds the sum of the individual
multiple firms in multiple industries’’ (Amit and contributions. The Lock-in contribution reflects
Zott, 2001). that the value creation potential is increased to the
Coming back to the question of how to get more extent that ‘‘customers are motivated to engage in
out of less, we have to find out (1) what are the repeat transactions and by the extent to which
value elements, and (2) how do we as a company strategic partners have incentives to maintain and
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P. Bruun, R.N. Mefford / Int. J. Production Economics 89 (2004) 247–260 259

Lock-in Complementarities

Finance

Supplier A Order fulfilment Customer 1

Inventory Management Logistics


Inventory reduction

Teamwork and participation

Supplier B Production Quick setups Lean Production Quality at the Tracing Customer 2
Planning and orders source (jidoka)
Continuous improvement (kaisen)
Pull approach and kanban
production control
Demand forecast Customization

Supplier C Catalogs 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). benefits of doing this will be so compelling that
Lastly the Novelty element has been confirmed in firms will increasingly move in that direction. The
the investigated cases—in fact, identified as an Internet is a perfect tool for accomplishing the lean
important value driver in the form of a first mover supply chain with its open, easy, and cheap access.
effect in all the cases. Previous attempts to computerize the supply chain
using ERP and EDI have been limited by the
closed, proprietary, and costly nature of those
6. Conclusions and a look ahead systems as well as the limitations of the HTML
computer language. There are, of course, many
As was discussed above, there are many reasons obstacles to accomplishing the virtual supply
why the Internet can facilitate the movement to chain, but none of these is insurmountable.
lean production systems, and a few firms have Another force that will drive the movement to
made tentative efforts in that direction. Most of an Internet-linked supply chain is the increasing
the applications have been in supply chain globalization of business. There are very few
management, which is a logical target for a lean companies that do not have some international
approach. Lean thinking has slowly spread from customers and suppliers, and they will increasingly
the factory floor (lean production) to activities such find that they need to improve communications
as order processing, billing, and product develop- and coordinate planning with these global supply
ment (the lean enterprise). Now some firms are chain partners. Although nothing can substitute
thinking of the virtual corporation where many of for face-to-face contact for many types of business
their processes are linked to their customers and dealings, the Internet can supplement direct with
suppliers. Once they begin thinking in this way, virtual contacts allowing much more information
they soon understand that to fully realize leanness transmittal globally, in real time. Coordination of
they will need to apply the concept of pull new product development, production planning,
production to their customers and suppliers in and inventory management will be more feasible
one virtual supply chain (lean supply chain). The with greater possibilities for driving inventory out
ARTICLE IN PRESS

260 P. Bruun, R.N. Mefford / Int. J. Production Economics 89 (2004) 247–260

of the system, a key goal of lean production. Some Fischer, L., Peykarimah, S., 2001. ‘‘E-marketplaces’’. Executive
of the disadvantages of global supply networks MBA Master Project, Technical University of Denmark.
Hammer, M., 2001. The superefficient company. Harvard
will become less formidable as collaboration
Business Review 79 (8), 82–91.
increases because of the Web. There is huge King, J., 2000. Internet application integration. Computerworld
potential to benefit from being e-lean in global 34 (37), 57.
supply chains. 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.
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