Lean Six Sigma Techniques

for
Inventory
Management
Please use the following two
slides as a template for your
Norman Pugh-Newby, CPPA, PMP
presentation Manager
at NES.
Deloitte

FCC NPMA MEETING

March 27th 2012

Outline

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

LeanSixSigma

Lean SixSigma

(Simplicity) (Reliability)

What is Lean
Lean Concepts grew out of the Toyota Production
System (1960s)
Leans 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
Reduction
Efficiency
ID non-value added steps

What is Six Sigma

Six Sigma dates back to the 1920s and work
done on Statistical Process Control in the US
Six Sigmas goal is to understand customer
need and deliver perfection every time
Six Sigmas currency is consistency Consistenc
y
Reduce variation in process
Reduced
Reduce defects
Variability
Produce consistently good product
Effectivene
ss

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 shortterm focus

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*

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 organizations 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

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
Dont 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

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

Questions?
Please Contact:
Norman A. Pugh-Newby CPPA, PMP
Deloitte Financial Advisory Services
(m) 240-460-4499
npughnewby@deloitte.com

8. Develop SOP