Many scale production enterprises face high inventory costs as the current worldwide financial crisis has led to a significant production volume drop. This problem of high inventory cost of key materials can be approached with Lean and Six Sigma.

By Zhonghong Liu

Presently many scale production enterprises are facing high inventory costs. The external environment is a key catalyst for this issue, as the current worldwide financial crisis has led to a significant production volume drop in many industries.

This problem of high inventory cost of key materials can be approached with Lean and Six Sigma. Manufacturers can use Lean to transform their processes from making for stock to making to order. To do this, production lead time should be less than the customer’s expectation for delivery time. After implementing Lean tools, practitioners can use Six Sigma to reduce variation in the inventory process.

Looking at Time

To solve any problem, practitioners first must be able to measure it. In a project to decrease inventory levels, cycle time is the key metric. Cycle time is a non-financial, all-encompassing measure for supply chain management. Lead time reduction results in reduced inventory, a speedy response from the supplier and increased quality. Little’s Law can be used to describe cycle time’s influence on inventory:

Inventory = Flow Rate x Flow Time

Following the Lean Roadmap

To begin a material inventory reduction project, manufacturers first must determine the project’s scope. Through cost analysis, practitioners can find the dollar value of the total volume of a product, as well as the cost per item. Based on the 20:80 principle of a critical few and trivial many, they can identify projects to select by material category, by supplier or by functional process.

After specifying the process to improve, practitioners should adopt this roadmap to Lean the process flow:

Define value -> Identify value stream -> Project the future process -> Implement action -> Pull flow

By using the seven wastes of Lean (defects, overproduction, transportation, waiting, inventory, motion and processing) practitioners can identify the waste areas in the flow and make quick changes using more mature Lean tactical tools, such as 5S, the 5 Whys, brainstorming, Kanban, commonality, queue or batch size reduction or total production management. Practitioners should evaluate the result of process improvements, including the impact on primary metrics and savings.

During this roadmap, practitioners also need to pay attention to risk. Process changes may result in policy restriction, differences in workload increments and even a decrease in headcount. These types of conflicts should be addressed with executives.

Using Data Analysis for Inventory Assessment

In the following case study, practitioners gathered cost, quantity and relative time data by process location for the inventory of a specific part. Because time is the direct measure for inventory, any inventory can be seen as waste. Therefore, where the stay time for a part is short, less value is lost. To use the time data to identify inventory status, practitioners plotted a distribution diagram, shown in the figure below. The diagram is a summary of the days that the particular kind of part stays in the warehouse.

Summary of Days in the Warehouse for Sample Part

The distribution shows non-normality and huge variance, with time in the warehouse falling into three general groups. By questioning shop-floor employees, practitioners determined the reasoning behind the three lengths of stay:

  1. More than 400 days – Some of the parts stay in the warehouse for more than a year because of a fixed order from an engineer.
  2. Between one and 150 days – Some parts stay in warehouse about 150 days before they are called up for action as part of a material request plan. After they take action, normal parts stay in the warehouse for five weeks, following a first in, first out process.
  3. Zero days – Some parts had just arrived at the warehouse.

From here, practitioners will work to determine if they can reduce the five-week supply of the part in order to reduce inventory while still satisfying customer need. Further analysis may expose a quality problem in the upper or lower reaches of the flow, which could be resolved through a Six Sigma project.

Using Six Sigma to Reduce Flow Variation

Six Sigma can be applied to solve specific, chronic manufacturing quality issues, such as defect rate. Once practitioners set up the model for time forecast, they can implement a robust process time control, thus removing the shop floor noise. If practitioners can control the time of flow, they can cut down inventory cost.

About the Author: Zhonghong Liu is a Six Sigma Master Black Belt at Hitachi Global Storage Technologies in Shenzhen China. She can be reached at [email protected].

About the Author