How Lixil transformed its global supply chain operations

Whether triggered by pandemic-fueled shutdowns, geopolitical conflicts, or extreme weather events, global supply chain disruptions have had a profound impact on businesses around the world. According to research conducted by The Economist in 2021, supply chain disruptions have produced “substantial financial costs (averaging 6–10% of annual revenues), as well as reputational costs—in terms of customer complaints and damage to brand reputation—as companies have struggled to maintain supplies of their goods. Indeed, firms were as likely to report damage to brand reputation as a consequence of supply chain disruption as increased costs of operations.”¹

As businesses work to repair fractured supply chains, some are struggling to accommodate increasing stakeholder demands for sustainability, flexibility, and customization. Oftentimes they also lack the talent they need to do so, making them increasingly vulnerable to future disruptions. While these challenges are certainly formidable, they also invite tremendous opportunity to design and implement global supply chain models that are more agile, sustainable, and technologically enabled. 

At Lixil, we have not been immune to these disruptions. As a water and housing product manufacturer, we faced a general shortage of many critical materials at the start of the pandemic, the main example being lumber. We use lumber for packaging and pallets, and when its supply dropped, the cost was driven up exponentially and lead times extended dramatically. Another example is when a heavy winter storm in Texas in 2021 shut down some of the refineries and impacted the material availability of plastics and other components. Further, ocean shipping delays over the last few years have impacted the availability of finished products and assembly parts being imported from Asia to North America and Europe. (For more information about Lixil and its supply chain, please see the sidebar “About Lixil.”)

Even prior to the pandemic, however, we understood the importance of designing a supply chain operating model that could withstand global economic and political shocks, while mitigating systemic shutdowns to our operations. We sought to standardize, integrate, and scale supply chain operations across our business, and we’ve made good progress; but, like every other business on a road to transformation, we still have work to do.

To start, we provided our geographic regions more flexibility to account for differences in supply and demand and customer needs. In response to increasing consumer demand for sustainable practices and social and ecological accountability, we also placed sustainability front and center in consideration of how we source materials to manufacture toilets, faucets, and showers, and in the processes we use to drive greater energy efficiency. Additionally, we’re enhancing customer collaboration and improving our capabilities in forecasting supply and demand—all of which are putting us in a stronger position to achieve long-term, sustainable growth.

Using the key learnings and insights gleaned during our ongoing supply chain transformation, we outline below our main tips and takeaways for other supply chain leaders navigating economic, geopolitical, and climate dynamics.

1. Prioritize agility and efficiency 

Every business is different, but global manufacturers that operate across a variety of markets will certainly benefit from increasing their operational agility and efficiency. Disruptions wrought by extreme weather events, geopolitical volatility, and inflationary pressures underscore the need for multiple sourcing and distribution centers (DCs). Should operations within a specific region falter, having various touch points will minimize risk of delays. They also help cut down lead times, as customers can rely on quicker, local shipments, rather than depending on one central distribution center. 

We have built our supply chain to be agile and have added multiple DCs, sourcing centers, and manufacturing facilities across regions such as the Americas, Europe, and Asia that together create a truly global network we can rely on. For example, in the past, there were certain finished goods that we used to only be able to source in Asia from suppliers. But now, by expanding our manufacturing and sourcing capabilities, we are able to make those same products in Mexico, providing multiple sourcing options and shorter lead times.

We have also improved our supply chain agility by improving visibility across our end-to-end supply chain, particularly for our ocean freight. For example, in the last few years, we have implemented origin and destination cargo management for better end-to-end ocean freight visibility from the time the container is picked up at origin to the time it gets delivered to the DC at the destination. This includes visibility into value-added services like selecting the ocean carrier with the best rate for that route, tracking service metrics by ocean carrier, consolidating freight at origin, and transloading at destination, to name just a few.

2. Improve planning

At Lixil, we use the Supply Chain Operations Reference (SCOR) model as a way to help us think about and optimize our supply chain. The SCOR model defines the four key processes making up supply chain management as “plan, source, make, and deliver.” In this model, planning is the most critical element, serving as the anchor for all other phases of the process. If we do not plan properly and with careful consideration, the model will fail. We dedicate significant time and resources to the planning phase, considering product demand first and foremost, and adjusting subsequent operations accordingly.  

Recently, we have taken several steps to improve our planning process by increasing the amount of collaboration between the sales and operations sides of our business. We have found that by doing this, we enhance our strategic planning and provide better value to customers and suppliers, while advancing company growth and profitability. 

One way we have accomplished this is by revamping our sales and operations planning (S&OP) process to ensure that participants are actively engaged and contributing to the decision-making process. To create this active engagement, we have reduced the number of participants, making sure they are the decision-makers for their function and are investing the quality time needed to make those informed decisions. These efforts have improved collaboration and communication across sales and operations. Because of our collaborative work, we have been able to better identify any supply constraints and adjust product mix and supply sources to avoid customer disruption.

We also redesigned demand planning to be a commercial sales/merchandising-driven function. In the past, the supply chain team had full responsibility for demand planning, which was giving us less than desirable results. We realized that we needed to better bridge the commercial and operations sides of our business and improve information gaps in demand planning. To accomplish this, we formed a Commercial Demand Planning organization within our merchandising division. We structured our commercial demand planning organization so that it was aligned with our sales and merchandising channel structure and with our key accounts.

Our demand planning process is multilayered, as follows: (1) begin with a review by customers, (2) then review by channel, (3) then review by business unit. This approach begins at the earliest stage, when the sales team has the closest connection with the customers. In this way, we are enabling our sales team, who work with customers daily, to increase collaborative demand planning. We are focusing more on getting customers to share point-of-sale data with us, which will enable us to collaboratively plan with the customers. This reorganization helped to improve collaboration with customers, key account planning, and demand forecasting accuracy. 

As a result of these efforts, we are now able to provide even higher quality service with lower inventory levels. However, our work does not end here. We are always striving to continuously improve our planning process with the objective of optimizing service levels, cost, and working capital.

3. Implement and scale sustainable practices 

Another way that Lixil is transforming its global supply chain operations is by increasing its focus on sustainability. Social responsibility and environmental stewardship have a positive impact on our communities and the planet and are consistent with the desires and expectations of our customers, employees, and investors. Moreover, environmental, social, and corporate governance (ESG) initiatives have become commonplace at many companies, with some organizations seeing negative legal, financial, and regulatory consequences if their ESG standards are inconsistent with stakeholder expectations. Thus, by meeting ESG standards (and ensuring that their suppliers do so as well), companies reduce their exposure to disruption from these negative consequences.

It is important that an organization’s commitment to its sustainability practices is all-encompassing and embedded in the fabric of its supply chain operations. As such, our purpose—to make better lives a reality for everyone, everywhere—is enabled by our unwavering commitment to a sustainable business, extending beyond Lixil to our suppliers and partners, including architects, designers, general contractors, and building owners. They, too, want partners that prioritize and demonstrate a commitment to sustainability, making these relationships mutually beneficial for our businesses, the environment, and the communities we operate in. We believe that the way a company addresses sustainability will determine how effectively it differentiates itself in the market, increases value for investors, and appeals to employees and prospective employees. 

For these reasons, Lixil promotes responsible procurement across our supply chain. We base our procurement processes on the Ten Principles of the United Nations Global Compact in the four areas of human rights, labor, environment, and anti-corruption as well as our own Procurement Principles and Procurement Compliance Policy. 

Our Lixil Code of Conduct also specifies the ethical behavior that is expected of all of our staff, and it includes the prohibition of bribery. Meanwhile, our Supplier Code of Conduct, compiled in 2018, requires that suppliers respect human rights, observe international labor standards, conserve the global environment, and ensure fair business conduct. At the same time, we request that suppliers demand equivalent standards from their own suppliers. 

Additionally, in January 2020, we created Green Procurement Guidelines outlining our policy and standards for procuring parts and materials that exert the least impact on the environment. In collaboration with our environmental management department, we ask suppliers to understand and support our environmental initiatives and procurement activities based on these guidelines.

Agility and sustainability

The past few years have taught us that risks to business continuity and supply chain disruptions will not abate anytime soon. Therefore, it is critical for supply chain leaders to design, standardize, and integrate supply chain operating models that are rooted in agility and sustainability, while adding in multiple distribution centers closer to customers. We are on a journey of continuous learning and adaptability, as are our colleagues in the manufacturing and supply chain space. By embracing these lessons and applying them in the transformation of global supply chains, businesses will become far more resilient, and gain a competitive advantage in the marketplace. 

Notes:

1.The Economist Intelligence Unit, The Business Costs of Supply Chain Disruption (2021): https://impact.economist.com/perspectives/sites/default/files/the_business_costs_of_supply_chain_disruption_gep_1.pdf