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

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

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

4. 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
Requires process mapping
ID value added step in process
ID non-value added steps
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
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

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

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. Questions? Please Contact:
Norman A. Pugh-Newby CPPA, PMP Deloitte Financial Advisory Services (m)

27. Body of Presentation Slide

28. 8. Develop SOP