Inventory takes up a significant amount of cash flow at IBM and many other companies. Due to fast depreciation in technology products, machines that are inventoried are not worth as much as they age. To combat this loss in value, practitioners at an IBM warehouse conducted a Six Sigma project to reduce their hardware inventory. They learned that it is possible to change patterns and behavior by implementing and maintaining a measurement system.
In the IBM global supply chain, when salespeople make a deal or anticipate the closing of a deal, they will ask the customer fulfillment team to place an order on their behalf. The plant will then process the order and ship the product to the country from which it was ordered. The machine will then stay in that country’s warehouse until it is shipped to the end customer. The process map is shown in Figure 1.
Root Cause Analysis
There are many reasons why inventory stays in the warehouse. Unfortunately, most of these factors are outside the reach of the customer fulfillment team.
Some of these factors are:
- The customer delays the delivery date.
- The deal is not closed at the time anticipated by the sales person.
- The salesperson brings a machine into the country early to secure supply.
- The customer changes configuration requirements, thus the existing machine in the warehouse is no longer needed.
- The salesperson wants to keep the inventory in hope of selling it to another potential customer.
In this whole process, the customer fulfillment team is only the execution arm. It fully relies on the sales team’s decisions to manage country inventory. Because many of the root causes for high inventory are related to the sales team, the Black Belts completed a deep dive on the sales team’s behaviors and their impact on inventory (Figure 2). One key root cause identified was lack of motivation in lowering inventory in a country’s warehouse.
Figure 2: Sales Team’s Behavior and Attitudes and Its Impact on Inventory
Sales Behavior and Attitudes Affecting Inventory
|Afraid of losing supply or missing delivery date when deal is closed if hardware isn’t ordered early||Over-confident in closing deals||Not aware of cost associated with inventory||Lack of motivation to lower inventory||Unfamiliar with customer fulfillment processes||Inventory management is a low priority compared to sales|
The customer fulfillment team already had regular meetings with the sales and finance teams to review inventory status. During these meeting, the teams would discuss how to manage existing inventory in the warehouse. These discussions turned into a plan for the following month. However, from data analysis, the Black Belts could see that a large amount of inventory was not managed according to the plan and remained in the warehouse at the end of the month.
Finding a Solution
Based on their analysis, the Black Belt team developed the following improvement plan:
1. Agree on Importance
During review meetings, sales managers, the CFO and customer fulfillment teams came to an agreement on the importance of lowering inventory. The CFO played a key role in this meeting as she was highly concerned about the financial impact from high inventory.
It is important to get all key stakeholders to share the same vision and objective when implementing a solution. In this case, although the customer fulfillment team does not have direct influence over the sales team, they leveraged the CFO’s authority to get the sales managers’ commitment. With this high-level management commitment, they can carry out the rest of the plan.
2. Keep Records
The customer fulfillment team decided to keep records of sales commitments for inventory management. The CFO also aggressively requested that the sales team should either deliver products to customers within 30 days or return the product to the plant for reutilization to prevent the sales team from keeping inventory in a country for a long period.
Putting the product information on paper helped the sales team become more serious about their commitment because the records can be traced and reviewed. The 30-day short-term commitment also is important. This discouraged the sales team from bringing machines into the country too early. From now on, if they bring machines early, they have to explain the plan for the machines during next review.
3. Increase Follow-up
The customer fulfillment now completes a close follow-up on execution with the sales team throughout the month.
This continuous follow-up effort helps keep inventory management on the sales team’s agenda. By maintaining a close working relationship between customer fulfillment and sales, both teams can better understand each others’ processes and their impacts on inventory. Of course, better relationships usually bring more effective communication and business results in general.
4. Reporting Measurements
By the end of each month, the customer fulfillment team produces a measurement on how well the plan has been executed. Performance is measured for each sales team member, providing benchmarks and goals to meet.
Data can be very convincing and can effectively catch management’s attention. With the measurements from the customer fulfillment team, it is easy to see how well the inventory management commitment is kept. By breaking down the measurement, the performance – good or bad – is clearly associated with a responsible person. This is the key to driving behavior changes; the benchmarks create a competitive mindset because nobody wants to be deemed as low-performing during the review meeting.
5. Focusing on Trouble Areas
Based on the measurement reports, management can focus on bringing corrective action to the low-performing teams. This is an effective approach, as a majority of the inventory is often caused by a small group.
6. Rewarding High Performers
Credit is given to the team with the highest execution rate to inspire them to keep up the good work. Recognition is a powerful way to maintain motivation and build relationships. Therefore, it is important to make the extra effort to reward good behavior when it occurs.
When this measurement system was first implemented, there was a 50 percent failure rate on commitment in the largest inventory-contributing country, and an 80 percent failure rate in another large country. After just two months, the failure rates dropped to below 20 percent for both countries. Thanks to this Lean Six Sigma project, in combination with other improvement actions, there has been a total inventory reduction of more than 50 percent.
From this case study, the Black Belts concluded that some simple measurements can drive positive human behavior changes and bring significant business results.
To make measurements useful, improvement teams must consider these factors:
- Is the measurement aligned with business objectives?
- Is the measurement easy to understand?
- How is the measurement related to people’s accountability?
- Is there a good management system around the new measurement?
In some Black Belt projects, practitioners do not have all the necessary authority to change a process. However, they can be more innovative to leverage their expertise, data and measurement in order to achieve their objectives.