Lean Six Sigma Techniques for Inventory - Federal Center

Lean Six Sigma Techniques
Please use the following two slides
as a template for your presentation
Norman Pugh-Newby, CPPA, PMP
March 27th 2012
Lean Six Sigma - Short Overview
Inventory Management Issues
Excess & Obsolete Inventories
10-Step Solution Process
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
– 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
– Reduce defects
 Effectiveness
– Produce consistently good product
Six Sigma DMAIC Approach
• 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
• 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
Sell below standard cost
Donate to charity
Sell for scrap
Pay to remove
• Improvement strategies often fail to identify root
– Excess & obsolete inventory quickly return to former
– Endless cycle of building up excess and disposing of
• 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
– Optimize capital investment of which inventories are a key
10-Step Solution Process*
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
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
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
• 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
– Is my excess inventory linked to particular
– 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)
Inventory Level
Order qty, Q
Reorder point, R
Placed Received
5. Collect Data
• Develop comprehensive data collection plan
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
• 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
Excess & Obsolete
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
• Use cost benefit analysis to select implementation
• 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
• Don’t rush the SOP! If you do you will have
problems during implementation:
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
• Reward key contributors
– Builds esprit de corps
– Sustains support for the implementation
• 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
– Higher cash flows and better ROIs for private
sector firms
– Maximizes available funding for executing
validated mission requirements in federal sector
Please Contact:
Norman A. Pugh-Newby CPPA, PMP
Deloitte Financial Advisory Services
(m) 240-460-4499
[email protected]
8. Develop SOP

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