Lean Six Sigma Techniques
for
Inventory
Management
Please use the following two slides
as a template for your presentation
Norman Pugh-Newby, CPPA, PMP
at
NES.
Manager
Deloitte
FCC NPMA MEETING
March 27th 2012
Outline
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Lean Six Sigma - Short Overview
Inventory Management Issues
Excess & Obsolete Inventories
10-Step Solution Process
Conclusion
What is Lean Six Sigma
• Lean Six Sigma is a combination of two separate but
complementary process improvement methodologies
with an Enterprise Level perspective
What is Lean
• Lean Concepts grew out of the Toyota Production
System (1960s)
• Lean’s goal is to eliminate all forms of waste in the
process and engage employee creativity
• The currency of lean is time
 Simplicity
• Requires process mapping
 Waste
Reduction
– ID value added step in process
 Efficiency
– ID non-value added steps
What is Six Sigma
• Six Sigma dates back to the 1920’s and work done on
Statistical Process Control in the US
• Six Sigma’s goal is to understand customer need and
deliver perfection every time
• Six Sigma’s currency is consistency
 Consistency
 Reduced
– Reduce variation in process
Variability
– Reduce defects
 Effectiveness
– Produce consistently good product
Six Sigma DMAIC Approach
Define
Measure
Analyze
Improve
Control
• Define: Define the problem
• Measure: Gather information on the current system
• Analyze: Analyze data and current process to
identify root causes
• Improve: Develop and implement a solution
• Control: Validate results, standardize new process,
and monitor results of new process
How Do Lean & Six Sigma Blend
• Both require an organizational paradigm shift in how
we view work
• Both aim to reduce operational costs
• Lean reduces waste in the process then Six Sigma
creates consistency to reduce your defect rate
• Together they add both efficiency and effectiveness
to a process
• Generally you “lean” a process first then apply six
sigma tools
LSS Inventory Applications
• Ensuring system parameters are accurate
• Demonstrate relationships between inventory
investment and lead time/demand variation
• Verify inventory valuation
• Identify & eliminate root causes of inventory
discrepancies
• Elimination of excess & obsolete inventory
• Improving cycle counting accuracy & efficiency
Excess & Obsolete Inventory
• A symptom of issues with inventory management
• Improvement strategies often have a short-term focus
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Sell below standard cost
Donate to charity
Sell for scrap
Pay to remove
• Improvement strategies often fail to identify root
causes
– Excess & obsolete inventory quickly return to former
levels
– Endless cycle of building up excess and disposing of
excess
• Multi-billion dollar problem
Excess & Obsolete Inventory
• Benefits of a solution:
– Private Sector: Firms that can generate a given level of profit
with a lower level of investment in inventory will generate
higher cash flows and better ROIs
– Federal Sector: Minimizing inventory investment maximizes
available funding for executing validated mission
requirements
– Optimize capital investment of which inventories are a key
component
10-Step Solution Process*
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Align Project to Business Goals
Clearly Define Project Goals
Ensure Buy-In from Stakeholders
Identify Variables
Collect Data
Identify Root Causes
Develop Improvement Plan
Develop Standard Operating Procedure (SOP)
Implement Improvement Plan
Develop Control Strategies
*Adapted
from, Martin, J. W. (2007). Lean Six Sigma for supply chain management. New York, NY: McGraw-Hill.
1. Align Project to Business Goals
• Be strategic in marketing your Excess & Obsolete
inventory project by focusing on potential long-term
business benefits
• Align the project with your senior managements’
goals and objectives
• Typical business benefits include:
– Cost Savings
– Cost Avoidance
– Benchmarking
• All your great work can sometimes be in vain
without proper alignment of your project with
to
your organization’s business goals
2. Clearly Define Project
• Project Charter
– Objectives
– Scope
– Overall Approach – to include choice of inventory model for
the analysis
• Communications plan
• Current State Process
• Risk Assessment
3. Ensure Buy-In From Stakeholders
• Ensure everyone understands the fundamentals of
Lean Six Sigma, but vary your focus based on the
audience
• Executive Training Sessions
– Emphasize strategic focus
– Emphasize Enterprise benefits
• Champion Training
– Emphasize Operational effectiveness
• Other Stakeholder Training
– Emphasize impact on their area of operation
4. Identify Variables
• Begin process by asking relevant questions to help
you understand how the system works:
– How do demand variation and lead time impact
inventory?
– Is my excess inventory linked to particular
suppliers?
– How do lot size impact inventory?
– What are your current safety levels?
– What is my desired target for excess and
obsolete inventory?
• Define your critical input variables, Xs [Y = f(X)]
4. Identify Variables (EOQ MODEL)
Demand
rate
Inventory Level
Order qty, Q
Reorder point, R
0
Lead
time
Order
Order
Placed Received
Lead
Time
time
Order
Order
Placed
Received
16
5. Collect Data
• Develop comprehensive data collection plan
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Requirements planning
Inventory record files
Warehouse management system
Current metrics
• Extract data from IT system/s
• Validate system data by conducting a manual count of
inventoried items associated with problem
• Collect management data, e.g., lead time, lot size,
expected demand and its variation, forecasting
accuracy, on-time delivery
• Organize/align data with inventory model
6. Identify Root Causes
• Construct a value stream map for the entire inventory
process
• Use an inventory model to analyze inventory
population to understand how key process input
variables impact excess and obsolete inventory, i.e.,
key process output variables
• Calculate target maximum inventory balance for
every item and location in population of interest
based on each items safety level, lead time, and
demand variation
• Develop a fishbone diagram to support the root
cause analysis process
6. Identify Root Causes
Fishbone Diagram
Problem:
Excess & Obsolete
Inventory
6. Identify Root Causes (continued)
Some typical root causes associated with excess and
obsolete inventory include:
• Long lead times
– Large Lot Sizes
• Poor forecasting accuracy
– Inaccurate historical demand data
– Poor forecasting model methodology
• Poor management
– No early warning mechanism to identify build
up of excess
– No system in place to ensure oldest inventory
issued first
7. Develop Improvement Plan
• Develop countermeasures to eliminate root causes
• Incorporate countermeasures into implementation
alternatives
• Use cost benefit analysis to select implementation
solution
• Test solution
• Develop pilot plan
• Implement pilot and analyze results
• Develop full scale improvement plan
8. Develop SOP
• Distill important concepts, techniques, and
requirements into a format that can be readily used
by supply personnel in their regular work
• Clearly delineate the various roles and their
associated responsibilities and expected performance
standards
• Don’t rush the SOP! If you do you will have
problems during implementation:
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Build a team
Get organizational support
Review and test SOP
Ratify and approve SOP
9. Implement Improvement Plan
• Leverage SOP to support your implementation plan:
– Publicize your SOP and emphasize the significance of the
changes being implemented by the SOP
– Distribute as needed and make it readily accessible to
potential users and stakeholders
• Implement change management:
– Conduct training classes to ensure personnel understand
their roles and have the knowledge and skill to implement
– Get buy-in from implementers regarding the change
• Develop a mechanism to monitor performance,
identify potential problems, and provide support
during the implementation process
10. Develop Control Strategies
• Monitor and control implementation plan
– Sustain monitoring (metrics, control charts)
– Show improvement is sustainable.
• Assess change effectiveness
– Compile before and after operational metrics to validate the
success of the implementation
– Show impact in senior leader metrics to emphasizes
enterprise benefit
• Conduct after action review and record lessons
learned
• Reward key contributors
– Builds esprit de corps
– Sustains support for the implementation
Conclusion
• Typical benefits of LSS projects to reduce and
eliminate excess and obsolete inventory include:
– Accurate demand data
– Effective inventory management modeling
– Checks to spot and fix excess problems quickly
– Effective procedures to issue oldest stock first
– Permanent reduction in excess and obsolete
inventory
– Higher cash flows and better ROIs for private
sector firms
– Maximizes available funding for executing
validated mission requirements in federal sector
Questions?
Please Contact:
Norman A. Pugh-Newby CPPA, PMP
Deloitte Financial Advisory Services
(m) 240-460-4499
[email protected]
8. Develop SOP