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Lean Six Sigma and the Obsolete Inventory

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Lean Six Sigma methods have been shown to be very effective in finding and eliminating root causes, and thus preventing arbitrary year-end reductions in inventory investment.

What is DMAIC? Define, Measure, Analyze, Improve and Control: The challenge is to control the root cause solution so it maintained.

Higher- and Lower-Level Root Causes

An analysis of excess and obsolete inventory often shows that its major root causes are associated with long lead times, poor forecasting accuracy, quality problems or design obsolescence. However, these higher-level causes can be successively broken down into lower-level root causes as shown in the figure below.

 

S&OP
As the figure suggests, from an inventory investment perspective, a long lead time may be caused, in part, by large lot sizes. For example, if the actual lead time or order cycle time is 30 days, but the required lot size for purchase is 90 days of supply, then this lot size drives a higher average inventory level than lead time by itself.

In this case, the average on-hand inventory (neglecting a safety-stock calculation) increases from 15 to 45 days of supply assuming a constant usage rate. Of course, the actual reasons for large lot sizes would have to be investigated by a Lean Six Sigma improvement team. The root causes of long lead times also could be due to complicated processes having numerous rework loops and non-value-adding operations as well as scheduling problems and/or late deliveries.

The second major cause of excess and obsolete inventory is poor demand management practices. Some lower-level root causes may include inaccurate historical demand data, a poor forecasting modeling methodology or other issues such as overly optimistic sales projections. Lean Six Sigma projects also can be used to attack lower-level root causes in this area.

Lean Six Sigma is frequently used to improve quality levels to reduce waste and rework caused by a multitude of diverse factors within a process workflow. Finally, Design for Six Sigma can be used to improve the design processes for new products or services.

Using DMAIC to Find Root Causes

Lean Six Sigma improvement teams can drive to the root causes of their excess and obsolete inventory problem using the DMAIC problem-solving methodology in conjunction with Lean tools as well as process workflow models. In fact, building simple Excel-based inventory models or using off-the-shelf inventory software, are good ways to identify the key process input variables (KPIVs) or drivers of excess and obsolete inventory problems. Inventory models follow a generalized Six Sigma root-cause philosophy. They also are effective communication vehicles showing sales, marketing, inventory, manufacturing and other supply chain functions, as well as the impact of lead time and demand management practices on excess and obsolete inventory.

Define: In an actual improvement project, the team begins an inventory analysis by defining the project’s goals in the Define phase. Using these goals as guidelines, relevant questions are developed to enable the team to understand how the system operates. Data fields corresponding to these questions are identified and extracted from information technology (IT) systems. The data fields are then organized in the form of an inventory model to provide the information necessary to answer the team’s questions and understand the root causes of the inventory problem.

Measure: After the Define phase, the team begins to evaluate measurement systems and plan data collection activities. This is the Measure phase of the project. An important activity in this phase is an on-site physical count by location of inventoried items associated with the problem. This is done to measure valuation accuracy relative to stated book value.

Analize: Measurement analyses also are conducted of management reports and their related workflow systems. These analyses determine the accuracy of key supply chain metrics such as lead time, lot size, expected demand and its variation, forecasting accuracy (different from demand variation), on-time delivery and other metrics that may be related to an inventory investment problem. Unfortunately, supply chain metrics often are scattered across the several software systems within an organization. These systems include the forecasting module, master production schedule module, materials requirements planning module, inventory record files, warehouse management system module and similar IT systems.

Improvement: After verification of a system’s metrics, the improvement team begins data collection to capture information necessary to answer the team’s questions developed during the Define phase. Relevant information, which may help the team in its root-cause investigation, usually includes suppliers, lead times, expected demand and its variation, lot sizes, storage locations, delivery information, customers and other facts.

Getting close to the customer and ensuring a 98-100% accurate inventory daily are key factors in excess and obsolete inventory analysis. The demand is driven by the customer so his requirement horizon is important in analyzing demand.

Many companies use a Material Review Board (MRB) concept to analyze Excess and Obsolete Inventory. MRB is a cross-functional team made up of Inventory Management, Sales, Production, Warehouse, and Supply Chain people. They review Excess, Slow Moving, and Obsolete Inventory and send disposition suggestions to top management for review and decision making. In this way, a new warehouse space or Third Party Logistics (3PL) Service Provider may not be needed for the Excess and Obsolete Inventory. There are companies that purchase your Excess and Obsolete Inventory and hold this inventory for you if you should have a new product Bill of Material (BOM) that may need this Excess and Obsolete material.

Charles Intrieri
Mr. Charles (Chuck) Intrieri is a highly experienced and credentialed Supply Chain professional and is a recognized thought leader and innovator, primarily in the areas of Supply Chain Optimization, Third Party Logistics (3PL) International Purchasing/Importing, Requests for Quotation (RFQ) generation, Inventory Management and Logistics, Warehousing, strategic sourcing, supplier management, contract negotiations, truckling: TL/LTL/TMS/pooling/consolidation and reviews, and Purchasing operations. He is a motivational team builder with a history of conducting significant organizational transformation and achieving important operational successes at the local, regional and global level. Charles M. Intrieri Consulting LEAN, Inventory Optimization, 3PL, Supply Chain, & Logistics Consulting 714-788-0744 Tustin, CA-PST

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