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Please use the following two slides as a template for your presentation at NES. Lean Six Sigma Techniques for Inventory Management Norman Pugh-Newby, CPPA,

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Presentation on theme: "Please use the following two slides as a template for your presentation at NES. Lean Six Sigma Techniques for Inventory Management Norman Pugh-Newby, CPPA,"— Presentation transcript:

1 Please use the following two slides as a template for your presentation at NES. Lean Six Sigma Techniques for Inventory Management Norman Pugh-Newby, CPPA, PMP Manager Deloitte FCC NPMA MEETING March 27 th 2012

2 Outline Lean Six Sigma - Short Overview Inventory Management Issues Excess & Obsolete Inventories 10-Step Solution Process Conclusion

3 Lean Six Sigma is a combination of two separate but complementary process improvement methodologies with an Enterprise Level perspective What is Lean Six Sigma

4 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 Requires process mapping –ID value added step in process –ID non-value added steps What is Lean  Simplicity  Waste Reduction  Efficiency

5 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 –Reduce variation in process –Reduce defects –Produce consistently good product  Consistency  Reduced Variability  Effectiveness

6 Six Sigma DMAIC Approach ControlImproveAnalyzeMeasureDefine 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

7 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

8 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

9 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 causes –Excess & obsolete inventory quickly return to former levels –Endless cycle of building up excess and disposing of excess Multi-billion dollar problem

10 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

11 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 form “Lean Six Sigma for Supply Chain Management”, James W. Martin, 2007. * Adapted from, Martin, J. W. (2007). Lean Six Sigma for supply chain management. New York, NY: McGraw-Hill.

12 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

13 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

14 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

15 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)]

16 16 Demand rate 0Time Lead time Lead time Order Placed Order Placed Order Received Order Received Inventory Level Reorder point, R Order qty, Q 4. Identify Variables ( EOQ MODEL)

17 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

18 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

19 6. Identify Root Causes Fishbone Diagram Problem: Excess & Obsolete Inventory

20 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

21 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

22 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: –Build a team –Get organizational support –Review and test SOP –Ratify and approve SOP

23 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

24 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

25 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

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

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28 8. Develop SOP


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