Documente Academic
Documente Profesional
Documente Cultură
A Project Report
Presented to
The Faculty of Department of
General Engineering
San Jose State University
In Partial Fulfillment
Of the Requirements for the Degree
Master of Science in Engineering
By
Subramanyam Chalamcharla
Adwait Kunte
May 2012
© 2012
Subramanyam Chalamcharla
Adwait Kunte
APPROVED FOR THE DEPARTMENT OF GENERAL ENGINEERING
ABSTRACT
In today’s competitive market, companies are looking for top line growth and
opportunities to reduce their total cost structure. The senior management of such companies
would like to increase quality, efficiency, and capability without increasing capital investment.
The Six Sigma DMAIC problem solving methodology and Lean thinking offers the greater
efficiency and capability to write the company processes of business. To achieve continuous
growth and success in today’s market nearly every business process needs improvement.
Improvement means increasing On Time Shipment (OTS), increasing inventory turnover, reduce
total operational hours per unit, reduce process variation and cost, and improving the quality. By
improving the business processes we can achieve these changes. The practice of Lean methods
targets to waste reduction, Six Sigma methodology targets to reduce process variation.
This project explores and implements the Lean Six Sigma methodologies, tools, and
techniques in supply chain within Electronic devices manufacturing environment. The advantage
of implementation of our solution is that it will reduce total cost of operation, improve supply
chain efficiency, and increase customer satisfaction. The project discusses the implementation of
DMAIC methodology to improve Key Performance Indicators (KPI’s), Lean tools such as 5S
program, Value Stream mapping and also discussed Kaizen for redefining roles and
responsibilities, Corrective and Prevention Action Process, improvements in yield and Iron
By
Contents
1. Introduction ............................................................................................................................................... 1
1.1 Overview ............................................................................................................................................. 1
1.2 Company Background ........................................................................................................................ 2
1.3 Objective ............................................................................................................................................. 2
1.4 Hypothesis ........................................................................................................................................... 3
1.5 Project Scope ...................................................................................................................................... 4
1.6 Supply Chain Overview ...................................................................................................................... 5
1.7 Six Sigma ............................................................................................................................................ 5
1.8 Lean Management ............................................................................................................................... 5
2. Literature Review ...................................................................................................................................... 6
2.1 Lean Six Sigma framework................................................................................................................. 6
2.2 Integrating Value Stream mapping with Lean Six Sigma Continuous Improvement Process ............ 9
2.3 Change Management ........................................................................................................................ 10
3. Iron Systems Inc (Industrial Sponsor) .................................................................................................... 11
3.1 Iron Systems Business Models ......................................................................................................... 12
3.1.1 OEM Customers ......................................................................................................................... 12
3.1.2 n-Appliances .............................................................................................................................. 14
3.1.3 Data Center ................................................................................................................................ 14
3.2 Work flow Overview of Iron system operations ............................................................................... 15
3.3 Strategy Deployment Matrix (X-Matrix) .......................................................................................... 18
3.3.1 Top level Improvement priorities .............................................................................................. 19
3.3.2 Annual Objectives ...................................................................................................................... 20
3.3.3 Key performance Indicators (KPI’s) .......................................................................................... 20
3.3.4 Resource allocation .................................................................................................................... 21
3.4 Proposed Methodologies ................................................................................................................... 21
3.4.1 DMAIC Methodology ................................................................................................................ 21
3.4.2 Improvement in On Time Shipment .......................................................................................... 23
3.4.3 Improvement in Service Factor (Kitting) ................................................................................... 36
3.4.4 Physical Inventory Accuracy ................................................................................................... 40
3.4.5 5S Program ................................................................................................................................. 55
3.4.6 Annual Inventory Turnover ....................................................................................................... 59
3.4.7 Improving Total Operational hours per system ......................................................................... 73
3.5 Demand Forecasting Mathematical model (n appliances Business model) ...................................... 74
3.5.1 Liner regression ......................................................................................................................... 77
3.5.2 Result Table for Linear regression analysis ............................................................................... 78
3.5.3 Estimating Seasonal Factors ...................................................................................................... 80
3.6 Project Charter .................................................................................................................................. 82
3.6.1 Cause and effect diagram ........................................................................................................... 84
3.6.2 Rapid improvement Kaizen event for redefining roles and responsibilities .............................. 87
3.7 Corrective and Preventive Action (CAPA) Process / Corrective Action Request (CAR) ................ 92
3.7.1 Objective .................................................................................................................................... 92
3.7.2 Types of CAR ............................................................................................................................ 92
3.7.3 Categories of CAR ..................................................................................................................... 93
3.7.4 Error Proofing (Poka Yoke) ....................................................................................................... 94
3.7.5 Process Improvement approach ................................................................................................. 97
3.8 A3 Reports for Labeling and Inventory management ....................................................................... 99
3.9 Improvements in Yield (Yield report) ............................................................................................ 104
3.10 Iron Systems Cost Savings with Lean Six Sigma implementation ............................................... 108
3.10.1 Direct cost savings visible on profit and loss statement ........................................................ 109
3.10.2 Incremental margin on current or improved sales .................................................................. 110
3.10.3 Lower Inventory carrying cost associated with Inventory Investment .................................. 110
3.10.4 Significant cost avoidance with CAR and CAPA .................................................................. 112
5. Economic Justification .......................................................................................................................... 114
5.1 Executive Summary ........................................................................................................................ 114
5.2 Problem Statement .......................................................................................................................... 117
5.3 Solution and Value Proposition ...................................................................................................... 118
5.4 Market Size ..................................................................................................................................... 119
5.5 Competitors ..................................................................................................................................... 120
5.6 Customers ....................................................................................................................................... 121
5.7 Price Point ....................................................................................................................................... 122
5.8 SWOT Analysis .............................................................................................................................. 122
5.9 Investment Capital Requirement and Break Even Analysis ........................................................... 123
5.10 Personnel ....................................................................................................................................... 125
5.11 Business Revenue Model .............................................................................................................. 126
5.12 Profit and Loss and Forecasted Return On Investment ................................................................. 127
5.13 Balance Sheet ................................................................................................................................ 129
5.14 Income Statement .......................................................................................................................... 130
5.16 Exit Strategy .................................................................................................................................. 131
6 Glossaries of Terms ............................................................................................................................... 132
7. Project Schedule .................................................................................................................................... 133
8. Team and Committee Members ............................................................................................................ 133
9. Conclusion ............................................................................................................................................ 135
References ................................................................................................................................................. 137
Appendix ................................................................................................................................................... 141
1. 5S Audit Form ................................................................................................................................... 141
2. Value Stream mapping before ........................................................................................................... 142
3. Value Stream mapping - Improved ................................................................................................... 143
List of Figures
Figure 7: Weekly data for on time shipments for different business units………………25
Figure 16: Pareto Chart for causes of not having service factor 100%.................................39
Figure 21: Value Stream map for Iron Supply chain management………………………....48
Figure 22: Pareto Analysis of Inventory cycle count variance…………………………51
Figure 29: Monthly trend of Cost of goods sold and Average Inventory…………………61
Figure 32: Cycle Process view of supply chain activities for Data center………………..65
Figure 34: Cycle process view of supply chain for Harmonic Inc………………………..67
Figure 36: Value stream map for Harmonic-Iron Build, Pick, and Ship……………….....71
Figure 41: Cause and Effect diagram with potential quick wins……………………….....86
Figure 42: Current state of roles and responsibilities for SCM team……………………...89
Figure 44: OEM Purchasing Future state………………………………………………..91
Figure 56: 5 years Projected Quarterly profit & Loss and Forecasted ROI …….……...129
List of Tables
Table 1: key performance Indicators (KPI’s) with Current and Target values……………3
Table 4: Showing the causes for delayed in shipment and their occurrence…………….26
Table 16: Historical demand for n-appliance products for last 3 years………………….77
Table 21: Difference in demand forecasting……………………………………………82
Table 28: 5years projected Profit & Loss and Revenue generation statement…………128
ACKNOWLEDGEMENT
We would like to express our respect and sincere appreciation to Mr. Aziz Khan
Director of Quality and Operational Excellence, Iron Systems Inc for his guidance, encouragement,
support, and direction.
We would like to thank to our friends and family members who continuously gave their
support and encouragement.
- Subramanyam Chalamcharla
- Adwait Kunte
1. Introduction
1.1 Overview
Today many of the small scale manufacturing companies in United States are
facing problems in order to become competitive in global market. One of the reasons is
the manufacturing activities are outsourced to low labor cost countries like India and
looking forward to reduce total cost, lead times and increasing the product quality. This
has created a need to implement lean and six sigma strategies in manufacturing
waste, faster, better and at lower cost. Lean Six Sigma is a methodology, when it
implemented properly the company improves efficiency and gain competitive edge.
Today organizations are using different tools and techniques to improve and sustain in
the market. Currently, Six Sigma tools and Lean Management are recognized as most
popular continuous improvement initiatives and companies are using them widely. Lean
Six Sigma project initiatives start with understanding the current state of the Business
processes in organization, then setting up targets for future state of all activities. Six
Sigma uses DMAIC (Define, Measure Analyze Improve and Control) framework and
Lean uses tools like value stream mapping,5S program, Single piece flow etc. Using
these tools and techniques organization can improve business processes, the obstacles to
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This project shows the improvement in the supply chain activities at Iron Systems
Inc. These improvements were established, measured, and tracked by Key Performance
Indicators (KPIs). Team made an improvement in KPIs by application of Lean Six Sigma
tools such as Cause and Effect diagrams, Pareto charts, Kaizen, 5S program and Value
stream mapping etc. This Project addressed the root causes of problems in the process of
Iron Systems Inc supply chain and recommended solutions and alternatives which led to
more optimized processes and enhanced the operational system, eliminate different type
This project is sponsored by Iron Systems Inc; San Jose CA. Team worked with
existing employees of the company and implemented the solution considering the
Iron Systems, Inc., is founded in 1996 in San Jose, CA. Iron Systems, Inc.
rack mount servers, blade servers, network storage products, OEM appliance platforms
OEMs (Original equipment Manufacturer), and custom servers. The operations of Iron
Systems can be divided into supply chain, operations, and production. The supply chain
and operations side, procures the material, stores the material in inventory, then as per the
schedules, kit the parts to Assembly. Assembly line is 90% manually operated, where
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assemblers assembled the products as per the standard operations procedure. The
activities under supply chain and operations are procurement, logistics, resource
allocation, capacity planning, packaging and shipping. The operations under production
Iron Systems Customers: Harmonic Inc, Siemens, Nimble Storage, Azul Systems,
1.3 Objective
The objectives are to improve supply chain management related Key Performance
Inventory Turnover, Reducing total costs associated with products, and address the
supplier quality issues to enhance customer experience at Iron Systems. The project
focuses on increasing On Time Shipments from 55% to 92% hence it improves customer
confidence and reduce product development cost with increasing inventory turnover from
7 to 16, increase physical inventory accuracy from 78% to 95% and reduce total
operational hours per unit from 11.4 hrs to 4 hrs at Iron Systems. Currently the work
place environment is not organized so things need to get clean up and organized in
organization. This Project addresses the root causes of problems in the process of Iron
Systems supply chain and recommends solutions and alternatives which should lead to
more optimized business processes and enhance operational system, eliminate different
type of waste, and increase the profit. This project publishes the Key Performance
Indicators (KPIs) on weekly basis to track and review the process improvements against
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the target. Team worked to improve following supply chain management Key
Table 1: key performance Indicators (KPI’s) with Current and Target values
1.4 Hypothesis
Lean Six Sigma to improve supply chain management will help Iron Systems to
develop and run their supply chain activities in the most effective and efficient way.
chain management can address the root causes of problems in the process of Iron System
supply chain and recommend solutions and alternatives which should lead to more
optimized business processes. It will enhance the operational system, eliminate different
type of waste, reduce cost, and increase the profit. The proposed new business processes
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procedures for different business units, work standardization, reducing total costs
associated with products and it will address the supplier issues and customer issues.
The scope of the project is to improve the supply chain activities at Iron Systems
to more efficient lean systems by application of Lean Six Sigma tools and techniques.
Iron Systems serves their customers with servers, data center, security appliances, and
Original Equipment Manufacturer (OEM). The products offered by Iron Systems have
different business models. Improvement team will consider the requirements of each
business model and will implement the feasible solutions to that model; by considering
relationship as Y= F(x). (Martin, 2007) Team will first define measure and analyze the
process Inputs (x) as demand, lead time, and service levels to improve and sustain the
process outputs (Y) as Inventory turnover, On Time Shipment (OTS) and improvement in
Team will implement the Lean Six Sigma solutions at Iron systems in given set up
of IT Infrastructure and ERP systems. Also Team will work as facilitator for
improvement project rather than driving the improvements. Team will help the existing
employees and value stream leaders to better understand the improvement opportunities
and will document the progress where they will be responsible for carrying out and
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with customers or improving the supplier's purchasing contracts will be out of scope of
this project.
chain management encompasses the planning and management of all activities involved
crucial components of coordination and collaboration with channel partners, which can
values defect prevention over defect detection.” (Brassard, 2002) Six Sigma is also
needs, understanding current business processes, and applying data collection methods. It
is also methodology for organization to make sure those improvements done to improve
the key processes. Six sigma tools and techniques also used to identify which business
A lean system emphasizes the prevention of waste in terms of any extra time,
labor, or material spent producing a product or service that doesn’t add value to it. A lean
system’s unique tools, techniques, and methods can help organization to reduce costs,
achieve just-in-time delivery, and shorten lead times. As Lean systems are customer
focused and driven this approach makes sure that products or services produced and
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delivered at right time in right quantity at right location at right time with minimum costs
efficient and rapid changeover among them as needed, efficient response to fluctuating
demand, and increased quality. Lean approach encourages the rapid response to customer
ever changing demands with focus on mass customizations rather than mass production.
Lean systems make the work flow more efficient, productive, and flexible to changes in
2. Literature Review
related researches, and then made improvements by applying Lean Six Sigma approach
to improve supply chain management. From the Literature survey we have found many
articles which are related to using Lean Six Sigma to improve supply chain system. We
got an insight in to the Lean Manufacturing and Six Sigma methodologies. Based on
observation of the team and with assistance of above mentioned guidelines, team able to
address the root causes of problems in the process of Iron Systems supply chain, and
recommended some solutions and alternatives which lead to more optimized processes
hence it will enhance the operational system, eliminate different type of waste, and
Today organizations are using different tools and techniques to improve and
sustain in the market. Currently, Six Sigma tools and Lean Management are recognized
as most popular continuous improvement initiatives and companies are using them
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widely. The first objective is linkage between LM and SS with other management
theories such as Total Quality Management (TQM). The Second objective is integration
For improving the processes of any manufacturing environment and having lean
production system which leads to more profit and less waste, there are some valuable
5Ss: One of the improvement suggestions and it stands for: Sort, Straighten, Shine,
Kanban system: Kanban means signal or card that used for communication between
different production lines. In this system a card is used to respond to real needs in the
production system.
Six Sigma Principles the DMAIC Improvement process: The DMAIC process consists of
five phases which are Define, Measure, Analyze, Improve, and Control.
Define: Understand the each cross functional process related to Supply chain
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Measure: Decide: what to measure. Establish baseline (use historic data).
Analyze: Root cause analysis (Lean-Six sigma Tools).Collect data to find root cause of
Control: Monitor the newly identified process and keep the process and improvements on
track.
The concept of Lean Management can be summarized as identifying the value and make
it flow without interrupting by a pull signal from customer is embedded in the 5th step of
Motorola Six Sigma which states that “mistake- proof the process and eliminate wasted
Integrating Lean Management and Six Sigma: The new wave of business excellence will
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Figure 2: Lean Six Sigma proposed Frame work (IEEE Explore, 2010 Int. Conf)
Source (Khan, Z, 2010)
2.2 Integrating Value Stream mapping with Lean Six Sigma Continuous
Improvement Process
Lean and Six Sigma improvement initiatives start with understanding the
current state, then setting up targets for achievement and create the future state of all
activities. Six Sigma quality improvement projects uses a strong framework DMAIC
(Define, Measure Analyze Improve and Control) and lean tools like value stream
mapping, kanban and single piece flow. These techniques and strategies helped
improvements can be addressed by KAIZEN events. This will help the companies in
organizing the different work flows, business units, and resources. (Chen, 2010)
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The KAIZEN events and Lean tools help organization to identify value-added,
non value-added and non value-added but required activities. The improvement team
will work to simplify and then to eliminate non value-added activities. This help in
streamline the value chains and standardizing the work flow. The KAIZEN events need
cross functional efforts and team work to address the issue on hand, so the improvement
projects not only bring employees from different department together but also motivate
the effort. In define phase improvement team need to identify the area of improvements
that could be any business unit, any product, or any process within the organization.
The company can form improvement teams to address the issue under the capable
guidance of Six Sigma black belts. Initially improvement team need to identify
workflows in the company and then establish the current and develop the future state to
background of current employees, the use of IT infrastructure and technology and most
Jackson came up with the structured approach for the change management called as
DICE SCORES. (Sirkin, Keenan & Jackson, 2003) The four key factors which
determine scores are duration (D) given to the change to happen. The next factor is
and traits, required for improvement project. The commitment of the top management
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and employees to change lays important role and most importantly the effort
In order to get good score its top management responsibility that the DICE
SCORE is in good range. As existing employees are the one who brought the change,
the effort largely depend upon the existing role and responsibilities of the employee and
the required involvement to make that change happen. So analysis of efforts give inputs
to redesigning the duties, responsibilities, and job profiles of the existing employees and
i.e. called as a hard size of change management. The success depends upon how the
improvement team should be critical analyze this factors and should also be able to
improve this factor over the period to sustain that change. (Sirkin, Keenan & Jackson,
2003)
OEMs (Original equipment Manufacturer), and custom servers. The operations of Iron
systems can be divided into supply chain, operations, and production. The supply chain
and operations side procures the material, stores the material in inventory, and as per the
schedules kit the parts to Assembly. Assembly line is 90% manually operated, where
assemblers assembled the products as per the standard operations procedure. Then
carryout testing, configuration, reliability check, and final quality check. The operations
under supply chain and operations are procurement, logistics, resource allocation,
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capacity planning, packing and shipping. The operations under Production are assembly,
Iron systems serve many customers with OEM product offerings namely
Harmonic, Siemens, and other OEM customers. In OEM business model, Iron systems
testing and operating procedures are developed and controlled by OEM customers. The
commercial terms or sales terms are decided by sales contracts and requirement of
products and their schedules are communicated via program manager to supply chain and
Iron has two major customers for OEM business namely Harmonic and Siemens,
where Iron manufactures range of products for their customers. This OEM business
model has huge revenue potential and volume work. As Suppliers are pre-decided by
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customers, the critical part of business comes under how efficiently Iron can manage
satisfaction. Iron systems faced the challenges in terms of uncertain build to forecasts,
quarterly forecast breakdown into monthly demand to Iron systems; based on forecast
Iron systems procures and manufactures the products. These forecast provided by Iron
systems may change on monthly basis because these forecast are depend upon
Harmonic’s customers demand around the globe. The challenge Iron faces here is that,
according to contract it is required for Iron systems to follow the forecast for given
quarter but if there is no demand for product Iron Systems cannot sale these finished
products to Harmonic Inc before the end of quarter. The accumulation of finished
products up to the end of quarter increases the level of Iron finished goods inventory
provided the schedule along the purchase order so that it becomes easy to optimize
supply chain management and inventory levels. The challenge Iron systems faced here is
getting products ready on time when they are scheduled and material availability as per
the schedules.
Other OEM customers consist of pool of small customers considering the order
book with Iron systems. These multiple customer’s requirements are diverse and Iron
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3.1.2 n-Appliances
n-Appliances are high end network security products owned by Iron Systems Inc.
These products follow the business model of Make from Inventory, Iron systems Inc
always keep stock of raw material for these products also Iron carries Inventory of ready
A challenge Iron systems faces in these business model is that it requires high inventory
levels as sales does not have forecasting mechanism in place to predict the demand for
these products. Due to high levels of inventory holding cost and cost of material become
Iron system serves their customers with requirement of Data Centers with Build-
to-Order business model, where customer order triggers all the activities like
procurement, assembly, testing and delivery. Considering the sales point of view, build-
to-order business model allows mass customization and increased product offering to
serve the customers better, while supply chain point of view, It reduces the inventory
Quality improvement team analyzed the importance of build-to –order model where Sales
team at iron systems can serve the customers with customized products rather than selling
standard product configurations. Sales team concluded that if Iron keep on serving
standard configuration offering for Data centers the profit margins are low, whereas for
customized products profit margins are high. Also successful offering of customized
product insures more future sale and increase supplier loyalty in the eyes of customers.
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Iron systems has core competency in assembling and testing of customized products with
strong team of engineers but on supply chain side firm has some challenges considering
leverage on Iron’s suppliers being in small business with small orders for data centers.
scheduled date committed to customers. Quality improvement team will analyze these
challenges considering process flows (value stream maps), process gaps and lead times.
2. OEMs 70%
2.1 Siemens Build to Schedule 25%
Iron Systems serves their customers with products like servers, security devices,
Data center, and OEMs for companies like Harmonic, Siemens and many more. Iron
3. Production department
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systems. Once order from customer got approved, Sales creates the Sales order and
2. Operations and Supply chain management: Operations Management (OM) and SCM
department receives the order and procures the parts of the orders from suppliers. In case
of OEMs, Supply chain department has to procure the parts from the specified vendors as
decided by OEM customers. Operations department schedules the job for production,
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Following are the main activities carried out in supply chain department.
vendors. This department issues purchase orders, keeps track of Earliest Time of Arrival
2.2 Receiving: Receiving department receives the procured material physically and in the
ERP system. Receiving department is also responsible for storing the material in the
2.3 Kitting: Kitting is an activity by which person called Kitter, who Kits the required parts
and hand over it to production for assembly. Kitting is the process where Kitter collects
all the material required to build the product as per bill of material (BOM) or Work
procurement and receives the material according to production schedule for assembly,
standard operation procedures, carry out testing and configuration, and make systems
5. Accounting and Finance: This department is responsible for carrying out financial
transaction from customer side and supplier side. They publish Income statement and
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3.3 Strategy Deployment Matrix (X-Matrix)
importance and it comes first. (Babcock & Morse 2002) Planning establishes focused
objectives and goals to be achieved. In order to achieve the improvements in supply chain
management at Iron systems; team has indentified the need of planning for
improvements. Team has considered the requirement of resources, capacity, and time
horizons for change to happen. Planning provides the method of identifying the goals,
objectives, and targets for improvements. It also decides the sequence or step by step
management. This tool enables the quality improvement team to establish the objectives
and targets on top level and set the plans on annual basis. Once objectives are identified
improvements can be rolled out on monthly basis to keep a track of improvement project
objectives which is also aligned to organization’s mission and vision for 2 to 3 years top
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Figure 5: Strategic Deployment Matrix
Top level improvement priorities are aligned to mission and vision of the company. It
helps to build the image of the organization in market place. In order to achieve long term
considering the business model, level of competition, market shares, and future of
At Iron systems, team has identified improvement priorities on top level as Quality
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3.3.2 Annual Objectives
Annual objectives for improvements are identified as Cost, Quality, and Delivery.
keep a trust and long term relationships with the customer and On Time Delivery is
required to keep a customer happy with product and service. These annual objectives
major change management. It also helps to understand how to collect and measure data
weekly basis. Team has created Key Performance Indicators commonly known as KPIs,
to keep the track of improvements and to review it on weekly, monthly, and annual basis
to come up with the solutions and to identify the areas of more improvements. KPIs are
the numerical values measured against the target set by organization. KPIs differ by
business unit, business model or area of improvement such as sales and marketing
department and production or support department should have different KPIs. KPIs may
impact the annual objectives of the organization directly or indirectly. Also they should
For example Inventory turnover will impact productivity improvement and Cost as
annual objective. On Time Shipment or delivery will have direct impact on customer
service as improvement priority, also it will have direct impact on annual objective of On
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3.3.4 Resource allocation
Improvement team has developed RASCI model with assigned responsibilities for
employees. To achieve successful change it requires top level employee engagement and
DMAIC methodology involves 5 steps Define, Measure, Analyze, Improve, and Control.
This method can be used to improve the current capabilities of current process where
based on data driven conclusions future state can be established. (Brassard, 2002)
background information about the process and its customers. (Brassard, 2002) Tools used
in define phase as voice of customer, project charter are used decide the scope of project
and define boundaries of improvement effort. It also identifies key stakeholders, time
lines, improvement priorities, and improvement targets at the beginning of project. The
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Measure Phase: The goal of measure phase is to focus on improvement effort by
gathering information about current state of the process. Team has created data collection
templates according the area of improvement and worked on getting first hand data.
Measuring the right data which can pin point location, occurrence point and rate of
measure phase team can gather Historical data to come up with baseline for
improvement. Measure phase data collection effort leads to more focused problem
Analyze Phase: The goal of analyze phase is to establish the root causes of the problem
and confirm them with the data points. Analyze phase helps in collecting causes of the
problem to come up with root causes. Braining storming, cause and effect diagram,
histogram and fishbone diagram are some of the tools which can be used in analyze phase
Improve Phase: The goal of improve phase to work on improvement solutions based on
define, measure and analyze phase outputs. Improve phase compares before and after
process status to develop and implement the process improvements. Improve phase not
only generates the solutions but also give feedback mechanism check the effectiveness of
Control Phase: The goal of the control phase is to maintain and standardize the gains of
the improvements. Control phase also require a continuous improvement effort to sustain
the change. Customer changing requirements need major changes in process flows; in
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that case improvement team should be able to analyze the changes for further
Improvements in On Time Shipments directly impact the delivery and customer service
objectives of the Iron systems. Team is measuring each product group for on time
shipments. Business work flows for each product is different according to their business
models. Quality improvement team followed the DMAIC approach to improve the On
Define Phase: The team has defined the criteria for the On Time Shipments is in terms of
Quality improvement team collected historical data for on time shipment for each
business model and product, and defined the approach of improvement. Team has
analyzed the work flows for customer order process, starting from order confirmation
until it gets shipped. Team also analyzed the work flows by applying lean tools as value
stream mapping; where non-value added activities, value added activities are identified.
As per lean concept, any activities not adding value to product or service is considered as
waste. Team has simplified and then eliminates the non value added activities in the
value stream to improve the on time shipments. Please see Appendix for Value Stream
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The operations within the process can be divided in to Value added, non value
added and business value added activities. Value adding operations create the product;
service attributes and features the product as per the customer requirement. Value added
activities can also be defined as activities for which customer is willing to pay. Non value
added activities results in higher cost and cycle time. Team decided to eliminates the non
value added activities in the order processing, to reduce the cost and cycle time. Business
value added activities are required to deliver product as per customer requirements. Team
Value Added
Non value added (NVA) activities Business value added (BVA) Activities
(VA)activities
Assembly VP. Sales Sign off Preparing the sales quotes
Testing Handing over sales order to procurement Customer Purchase Order Processing
Final quality assurance Checking the on hand stock Approval by accounting department
Packing the systems Kitting the required material
Creating work order
Measure Phase: Team has measured and analyzed each product differently considering
the business model like make to inventory, make to order, make as per schedule or
forecasts from customer. The solution and analysis for each business model require
different approach to improve the on time shipments. Team has created the Pareto chart
of issue for not having on time shipments and will eliminate those causes by root cause
Team started publishing weekly on time shipments for each business unit to
review each data points for different solutions. Team has collected and published the
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historical data starting from May 2011 to August 2011 to come up with current state of
On Time Shipment. Team has counted the number of orders for each unit and published
the data based on how many orders were shipped late than committed to customer.
On Time Shipment (OTS) On time shipment based
on Historical data from
May 2011 to August 2011)
Figure 7: Weekly data for on time shipments for different business units
The chart above shows the current state of on time shipment for each product and
business unit. The target to be achieved for improvement in On Time Shipment is set to
define phase where team has set the criteria for measuring the on time shipment; team has
published the communication plan to inform the stake holders regarding improvement
project. Team has started the measure phase by developing the template to capture the
data points for shipment, starting from sales order got approved from customer to
shipping to analyze the areas of improvements, and quick wins. Team has started
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Analyze phase: Team started analyze phase by gathering the data the causes on delayed
shipments. Team has collected the causes from Value stream leaders and operations
manager for the delayed shipments. Below table shows the causes for delayed in
% of
Causes Occurrence time Cumulative
Sales-SCM Lead time not
considered 54 17% 17%
Material shortage 47 14% 31%
Parts failure 41 13% 44%
BOM issue 38 12% 55%
Configuration issue 35 11% 66%
Rework 28 9% 75%
Shipping Schedule 25 8% 82%
Sales Issue 15 5% 87%
Engineering 15 5% 91%
S/W Issues 12 4% 95%
Sales hold 7 2% 97%
Project manager's Sign Off 5 2% 99%
Not Invoiced @ time of shipping 4 1% 100%
Total 326
Table 4 : Showing the causes for delayed in shipment and their occurrence
Causes of Delayed Shipments
(OTS)
100% 95% 97% 99% 100%
87% 91%
80%
66% 75% 82%
60% 55%
40% 13%44%
17% 14%31% 12% 11% 9% 8% 5% 5% 4% 2% 2% 1%
20% 17%
0% % of time
Cumulative
Causes of Delayed Shipment
26
40% 36%
35% 32%
o
30%
% r
25% 20%
d 20%
o e 15% 12%
% of total
f r 10%
s 5%
0%
no delay 1 to 4 days 5 to 9 days More than 9
Delayed Days
Team started collecting the data on causes of delays along with number of days it got
delayed.
27
Team focused on quick wins where order got delayed by 1 to 4 days. The delays
occurred more than 9 days can be considered as out of scope for this project, as causes of
delays are related to commercial terms of the business and special material or component
requirement with long lead times where Iron Systems is importing special components
from abroad. Also delayed due to 5 to 9 days can be reduced by applying lean six sigma
improving techniques and efficient process flow, production planning and scheduling.
Improve phase: Iron systems has established cross functional process flow for fulfilling
the customer orders, starting from sales, accounting and production. Based on current
process flow, team came up with the improved process flows. According to Pareto chart
55% of the causes are related to lead times, material shortages, and part failures, bill of
material issues, configuration, and engineering issues, so team has decided to improve
these problems by understanding current process flows and developing improved process
28
Current process flows:
1. Need to have different process flows for different products considering their business
models.
2. Data center products have standard configuration and custom configuration. As per data
most of the delayed orders were belongs to customized configurations. Need to have lead
29
3. Engineering and configuration issues occurred where sales team is not knowledgeable
4. In cases, where system failed on testing due to material or component failure, that
part needs to be replaced and new part need to get procured, that caused delays too.
Hence team has developed improved version of process flow to address the causes
occurred by lead times, material failures, engineering, and compatibility issues and
5. Developed different process flows for OEM customers where team improved the
process of forecast and developed the process flows for procurement and sales orders.
30
Figure 12: Improved Iron Systems Purchasing Business Process flows
OEM Business:
31
Figure 14: Improved OEM Purchased order process
Control phase: Based on the Analyze and Improve phases, Team has concluded that in
order to sustain improvement in On Time Shipment, Iron System should have (i)efficient
demand management tool for plan and schedule customer orders effectively (ii) effective
and Inventory turnover required efficient demand planning. Quality improvement team
32
planning (MRP) in to Iron systems based on improvement and creating the cross
impacts supply chain performance and inventory investment. (Martin, 2007) Demand
management is an important topic for efficient supply chain management since inaccurate
too little inventory (reducing service factor). Quality improvement team used Inventory
turnover as barometer to identify the process breakdowns within supply chain. According
to improved cross functional process flows team analyzed the process breakdowns related
33
Sales and Operational planning (S&OP): Quality improvement team identified need of
from sales team, financial constraints, supply, demand, and production planning to fulfill
aggregates demand information from across the organization. Team has came up with
template where demand data can be posted according to forecast from OEM and Other
34
Material Requirement Planning (MRP): The Master Production Schedule (MPS)
aggregates the demand data for each product according to sales forecast and on hand
business with the customers. (Martin, 2007) Team has developed the template for MPS
along with the product configuration with scheduled date; using Supply chain manager
can effectively manage the supply of material, scheduled dates, and capacity constraints.
The most updated MPS schedule can be used as reference to calculate the material
requirement to have material availability as per the scheduled built date of the product.
subtracting the on hand stock from inventory. MPS determines what and how much to
produce and MRP extracts information from MPS and calculates how much and when to
procure material from supplier/ vendor to have availability of the material when it is
more efficient ERP systems to effectively calculate and implement the Material
Requirement Planning (MRP). Iron systems Inc is currently using Everest ERP systems
which does not have Planning and MRP module, also this system is not effective to
transact inventory data on real time. Hence team found some constraints in effectively
implementing MRP in Iron systems, but implementation of MPS and excel based MRP
system definitely improved the planning and scheduling which reflected positively in
Service factor for kitting, On Time Shipments (OTS) and Inventory turnover.
35
3.4.3 Improvement in Service Factor (Kitting)
Service factor is an internal metrics for measuring efficiency of the Kitting process.
Kitting is the process by which material required to build the product is put together as
per Bill of Material file (BOM) in Bin and hand over to production for assembly. Service
factor represents the availability of stock of raw material to fulfill the internal customer
requirement when it is needed or as per the scheduled production. High level of service
factor for kitting will improve the Yield or first time through of production. It will also
production. Service factor is important to increase the production efficiency. If all the
material required to build the product is available at time of assembly then only it can be
tested and done quality assurance check on it. If the material is partially available it will
not make assembly of the product complete. Typically assembler will assemble partial
assemblies and keep the semi finished products on the production floor waiting for rest of
the components or parts. According to Lean concepts, it is non-value added activity and
causes a waste as work in process waiting for rest of parts. It also increases operational
labor hours per system as assembler need to work on the system one more time when
material becomes available to complete the assemblies. It also creates bottlenecks in the
downstream operations like testing, Quality Assurance and packing. The bottleneck also
leads to imbalance in process of testing, packing, shipping and in many cases require the
over time to finish the job due to uneven and uncertain incoming of products for testing
36
and other operations. These often results in delays in testing and hence affects the On
Time Shipments of product. Service levels also affect Inventory Turnover where 80% to
90% of the cost of the material is waiting for 10% of material and due to delays it
Project team started collecting the data on percent of orders kitted to production on daily
basis and started to collect the causes of not having complete kit on weekly basis. Quality
improvement team defined the criteria for measuring the service factor by setting up the
target for improvement to 100%. For Data collection template please refer Appendix
Service factor= Total number of orders kitted with shortages (for all products)
%
Total numbers of Orders (for all products)
Analyze phase
Quality improvement team analyzed the data gathered to come with root causes
of the problem and developed the Pareto chart to address the issues on priorities. As per
the table below foremost important cause for not having 100% material availability is due
to the credit holds from suppliers. At Iron systems whenever buyer procures the material
supplier the information on available credit is not available with the buyer at the time of
Systems and supplier or vendor, but not with the Iron Systems buyer. In current state of
Iron systems purchasing process, there is no mechanism available for buyer to get
37
department. Quality improvement team carried out Blitz event to improve the process of
Supplier quality issue is second important cause for not having material availability; team
has developed the solution to address these issues like issuing CAR and CAPA, but this
can be considered as out of scope for this project. Since OEM customers selects the
suppliers based on their criteria, Iron systems do not have right to change the supplier as
per the contracts. Quality improvement team can issue SCAR to supplier and can put
%
Sl of
No Causes Root Cause Occurrence time
Material not available Need to have information available
due to credit hold from for buyer while procuring material
1 supplier from supplier 49 16%
High rate of component
2 failure Supplier ‘s quality issue 45 14%
Inventory tags were not
3 updated Lack of 5S programs 41 13%
Kitter not able to locate
4 material location Lack of 5S programs 38 12%
Material kept on
5 multiple location Lack of 5S programs 36 12%
I-Code was showing
6 wrong quantity of stock Inventory inaccuracy 25 8%
Material consumed in
earlier built due to Inefficient Material Requirement
7 failures planning 24 8%
Order was not Master production schedule/
8 scheduled Uncertain demand from Customer 23 7%
Material did not arrived
on scheduled date from
9 supplier Supplier relationship 22 7%
Inefficient Material Requirement
10 Long Lead time product planning 10 3%
Table 7 : Cause and Root Causes Table
38
Pareto Chart: Causes of not having Service
Factor 100%
120%
O 100% 97% 100%
80% 82% 90%
c 67% 75%
60% 55%
c o 40% 43%
16% 14%30%
13% 12% 12% 8% 8% 7% 7%
u f 20% 16% 3%
r 0% % of time
a t Cumulative
n i
c m
e e
Causes
%
Figure 16: Pareto Chart for causes of not having service factor 100%
Improve Phase
After analyzing the Pareto chart, team decided to improve the top level causes of
not having 100% kits. The root causes of not having 100% of material availability from
procurement perspective is that buyer is not aware of the credit availability with the
communication between the buyer and finance at Iron Systems and address related causes
in the improvement event. Component and material failure during assembly, testing,
functional test, burn in and final quality inspection were also analyzed and documented in
later part of project under improving the first time through yield. Some of the causes were
39
3.4.4 Physical Inventory Accuracy
Iron Systems works on Everest ERP software system. All the material purchase
and accounting is done through this software. When receiving department receives the
material from supplier or vendor, they receive the material physically and then enter in to
the Everest system. It helps to keep track of material quantity available on hand or
availability to schedule the production and other activities like procurement, RMA and
MRB etc. Physical inventory accuracy means keeping the available stock in Inventory
Team has decided to improve the current scenario of inventory management and
will work to reduce the defects and errors. We implemented process to make sure data
shown in the system will match physical count of data in inventory stock room. Currently
the physical Inventory accuracy is 78% but the target for accuracy is 95%. Team is
carrying out ABC cycle counting events to reconciliation of inventory data. A type items
are 20% of total items with 80% of total cost. B type items are 30% of items while C
items are 50% of items with cost only 20% of total cost.
The introduction of inventory cycle count programs will ensure the correctness of
the inventory data which is very important factor to get excellent results by Material
Cycle counting is a process which verifies the accuracy of the inventory data. As
40
role in achieving efficient production planning and scheduling. If required material for
production is not available in right quantity at right time, it affects On Time Shipment,
Service level, resource utilization, production yield and most importantly total operation
Improvement team did random audit to check the accuracy of inventory data,
effort was made to check whether ERP system’s material count matches with on hand
material count or not. Team audited 10 items randomly and found that, none of the item
excellence in customer service and optimize the effectiveness of internal operations and
Specific Objectives:
Improvement team indentified the process related problems associated with receiving,
receiving in the system, material borrowed for engineering or testing purpose and
Material Review Board (MRB) and issues related to Bill of Material (BOM), work order
and overall transactions carried out as part of supply chain and material management
processes. Cycle counting programs helped to indentify the root causes of inventory
41
Improvement team started cycle count program according to the dollar value associated
with the items and categorized it as Items A, B and C. Improvement team decided to have
systematic approach for having cycle count programs with pre decided schedule for
business activities with many business processes involved and affected. Hence team
42
Milestone schedule
Figure 17: Milestone Schedule for Cycle count program
Gantt chart
43
About the inventory system
Iron Systems uses Everest (I code) as Inventory management system. Items in I-code
have I code part number and also manufacturer part number (called as Model number).
The item profiles in i-code are set as inventoried items, assembly items, non-inventoried
Table 9: Type of inventory in the I code
I code maintains quantity and cost data only for inventoried items and assembly items.
Other item types such as Kit and non-inventoried items quantities are not recorded by I
code. The reason is, these items are low dollar value items, and Kit items can be used as
customized components which can be added on any work order/ BOM as needed.
Work order/ BOM may contain inventory items, assembly inventoried items, Kit and non
inventoried items. When we transact the work order, only inventoried and assembly
inventoried items get transacted, that was one of major challenge in getting high level of
accuracy.
44
Table 10: Work order Status
Figure 19: Item profile in the I Code
Transactions: I code has its own features of keeping a stock of the items.
45
Figure 20: I Code transactions
Total stock:
Total stock= quantity on Sales Order (SO) + Available stock+ Quantity on Debit Order
(DO)
Sales order committed: Buyer may commit material quantities to specific sales order as
reserved for particular sales order and hence not available for any other use
PO (Purchase Order): Material quantity under PO shows that, material ordered from
supplier or vendor and Purchase order is still open, means material is not with Iron
46
DO (Debit Order): Material quantity under DO shows that material is owned by Iron
systems, but for given instance it is not available for any order, generally it shows that
MRB coordinator requested RMA number for replacement or repair with supplier.
In order to isolate the inventory stock room with the material quantities from all
production floor (In process Work Orders) and MRB units (Debit Order) preparation was
necessary to keep material stock with only available stock quantities. Debit order can be
used for material being used by Iron Systems in house projects, typically borrowed
material by engineers, sales, and support department. All receiving in the systems should
be done before cycle counting program. No transaction should be done which can affect
the inventory quantities. Team created the value stream map to understand the inventory
transaction which can affect the quantity of the stock in the inventory.
47
Figure 21: Value Stream map for Iron Supply chain management
Team decided to have cycle count program for 3 days and it includes following
components
2. Cycle count readiness meeting (control transactions) transactions which can affect the
48
5. Post analysis for improvement
The score card of Inventory cycle count program measures the outcome of the inventory
accuracy on basis of piece accuracy and dollar amount accuracy. ( Piasecki, 2003)
The formulas:
49
Month Aug‐11
Sl no Category A, B
1 Total Items Counted 489
2 Total Pieces Counted 37402
3 Total Dollar Counted $1,080,886
4 Piece Variance
Net Piece Variance ‐4324
Net Piece Variance (%) ‐12%
Absolute Piece variance 6598
Absolute Piece variance (%) 18%
5 Dollar Variance
Net Dollar Variance ($74,149)
Net Dollar Variance (%) 7%
Absolute Dollar Variance $98,756
Absolute Dollar Variance (%) 9%
6 Score Card
Net Dollar Accuracy 993%
Absolute Piece Accuracy 888%
Table 11: Inventory accuracy Score card (Aug 2011)
Brainstorming
Based on the score card above for inventory cycle count for A and B items, team has
decided to analyze the causes of inaccuracy in process point of view. Team has collected
the causes for more than 50 item variances to come to conclusion. Team decided to look
50
Causes # of Occurrences % of total cumulative
Work order status not
changed WIP or Built 57 35% 35%
Wrong Inventory storage
practices 34 21% 55%
Debit order not created 30 18% 73%
Material not received in
system 23 14% 87%
Material not found in stock
room 12 7% 95%
In-house borrowed material
list not updated 9 5% 100%
Total Occurrences 165
Table 12: Causes of material count variance
Pareto Analysis: Inventory cycle count
Variance
120%
o 100% 95% 100%
87%
c 80% 73%
c 60% 35% 55%
40% 35% 21% 18%
% u 14% 7%
20% 5%
r 0% % of total
o r
cumulative
f e
n
c
e
Causes of variances
Figure 22: Pareto Analysis of Inventory cycle count variance
51
Analysis of Causes
As per the I-code, if all the material required to build the system is not available at
time of kitting, system will not allow to convert the status of Work Order/ BOM to Work
In progress (WIP). We had seen instances where partially kitted orders are forwarded to
assembly and technicians are building partial units. Once rest of the material arrives they
start rebuilding those half completed units. This scenario create waste of semi finished
systems, as these systems cannot be forwarded to next stage of process of testing and
Burn-In.
Data center have some common BOMs and as per customer requirements we add items
on sales orders. When we built the BOM, we are not able to convert the items on SO to
WIP, we need to invoice the sales order to flush it out of the inventory. At time of
inventory cycle count project we are able to segregate the material quantities which are
on production floor.
Material storage has one primary location with the bin, but due to size and volume
of the products, kitters are using more than 2 locations to store the material in inventory
storeroom. It leads improvement team to start more rigorous 5S program for inventory
store room, with considering the requirement of material storage (size and volume),
implementation of “Tags” for keeping inventory count and secondary storage location
and discipline.
52
• Debit order not created
This process flow comes under the responsibility of MRB co-coordinator. We need to
have process where we need to have debit order created for failed components returned to
supplier.
system; many times kitter (person who kits) was forwarding material for production
Material falls under this category was with aging more than 6 years and can be
considered as scrap any ways, considering life of electronic component and the pace
with which technology is changing we can discard this material and take loss on balance
sheet.
53
Further guidelines and opportunities for improvement:
SR# Cause Root Cause Action item
Work order status not Low Service increasing product
changed WIP or Built level, No availability with
1
responsibility MPS and MRP
assignment
Wrong Inventory No 5 S Need to have 5S
2
storage practices programs programs
Debit order not Broken MRB Develop process
created process flow flow for MRB by
3
introducing online
NCR forms
Material not received Training for Train the employees
4 in system receiving and with process flows
lack of 5S
Material not found in Not having Implement scheduled
stock room cycle count cycle count programs
5
programs, lack
of 5S
In-house borrowed No material Need to transact the
material list not transaction for borrowed items with
6
updated In-House orders either DO and SO
Table 13: Further causes, root causes, and action items
As per the schedule we carried out Inventory cycle count program. We implemented
action items for causes of variances and achieved the target result of 95% of inventory
accuracy. Please see below for Inventory Cycle Count Report details.
54
Inventory Cycle Count Report
Month Aug‐11 Oct‐11 Nov‐11 Dec‐11
Sr # Category A, B A A A, B
1 Total Items Counted 489 90 93 424
2 Total Pieces Counted 37402 8957 8465 19760
3 Total Dollar Counted $1,080,886 $1,587,325 $1,533,916 $1,407,324
4 Piece Variance
Net Piece Variance ‐730 ‐1607 ‐1393 ‐895
Net Piece Variance (%) ‐2% ‐18% ‐16% ‐5%
Absolute Piece variance 1900 1607 1393 1253
Absolute Piece variance (%) 5% 18% 16% 6%
5 Dollar Variance
Net Dollar Variance ($24,149) ($46,744) ($80,092) $26,006
Net Dollar Variance (%) 2% 3% 5% 2%
Absolute Dollar Variance $59,616 $46,744 $80,092 $58,478
Absolute Dollar Variance (%) 6% 3% 5% 4%
6 Score Card
Net Dollar Accuracy 98% 97% 95% 98%
Absolute Piece Accuracy 98% 82% 84% 95%
Table 14: Inventory Cycle Count Report
3.4.5 5S Program
5S is visual management technique used to keep work area organized all the time.
We had Implemented 5S program in three phases. (Maclnnes, 2002) In first phase team
organized the work place using 5S as (Sort, Shine, Set in Order, Standardize and Sustain).
Second phase ensures that all the work areas are organized according to quality policy
and standards. Third phase is sustaining the change so that errors or waste will not occur
and errors are getting prevented. 5S is powerful tool which helps to increase employee
the waste so that it can be eliminated and prevent it from reoccurring. It also makes
company operations standards known to all the employees, which could leads to
55
Phase 1:
Team has developed the 5S Audit form to carry out the audit and started publishing the
5S score for each area in supply chain. Team started auditing receiving, Inventory
storeroom, and shipping department. The criteria for measuring 5S score is as follows:
3. Overall facility
Team has created audit form with maximum points as 20 based on above mentioned
criteria. Team has created 5S assessment board to share visual information related to
identified the leader to carry out improvements. We allocated the areas for each employee
and asked them to self score their area on daily basis with the condition that they have
56
score them regularly until their self score reaches to 16 out of 20. Team started
and share their concerns. Project team started publishing the pictures of best
performances of the week by comparing before and after pictures to motivate the
57
Phase 3:
Team decided to address the issues of not having good score on 5S by addressing
the process related issues. 5S implementation is long process and it takes team’s effort to
achieve the success in the program. One of the important points in achieving long term
success is improving the processes to sustain long term changes in work place. Generally
it takes lot of effort to change the current state for betterment; employee involvement and
training plays a crucial role in getting success. Once 16 out of 20 score is achieved then
team will creatively work to reduce any extra material movement. It will reduce waste of
labor and energy to make it more efficient. Team has developed the concept of 5S self
scoring by allocating area to each employee; now that particular area becomes
employee will self score his area every day so that employee will understand where they
are lacking and what will make their score better and better.
Implementing 5S culture improved the first time through quality of products and service
by preventing the errors and defects before they occur. Establish and maintains the
standards for organization by eliminating errors, waste and defects. It also improved
employee involvement, health, and safety and reduces hazards in the organization.
58
Figure 26: Improvement with 5S Program
goods sold by average inventory. The baseline for inventory turnover is different for
59
different industry segments. It also depends upon seasonality factor of demand, desired
Annual Inventory turnover = $ value of Cost of Goods Sold (COGS) / $ value of Avg.
Inventory
High inventory turnover is always desirable as it shows the company efficiency to use the
customer demands or product specifications. Organization can launch new product with
Low Annual inventory turnover could be a result of over stock or slow demand for
product or even over production. Low inventory turnover value means company has high
average inventory levels at given instance. High average inventory levels reduce the
the inventory carrying costs of the company. According to Lean enterprise culture high
levels of inventory is not desirable as it has cost associated with it, such as inventory
holding costs, storage costs, operations costs etc. In special cases low inventory levels are
desirable where organization keeps stock of raw material during high demand or seasonal
demand to have high availability of product or during the forecasted price rise in future.
Team has calculated and studied the monthly inventory turnover pattern for Iron systems.
60
Monthly Inventory Turnover
16.0
14.0 13.3 14.2
12.0 12.9 12.3
10.0 10.7 10.2
8.0
6.0
7.3 6.8 7.8
5.4 5.1 4.5 4.9
4.0 Monthly Inv Turns
2.0
0.0
From the chart, the inventory turnover values are not stable. As per KPI Improvement we
depending mainly on cost of goods sold (COGS). If cost of goods sold increases, average
Figure 29: Monthly trend of Cost of goods sold and Average Inventory
61
In order to improve the annual Inventory turnover KPI, quality improvement team
decided to do research on business models at Iron systems by considering the cycle view
Supply chain made of series of stages where respective processes are carried out
to fulfill the customer order in most efficient way. The stages identified at Iron Systems
supply chain are Supplier or Vendor, Iron Systems Inc and Customer. Iron Systems deals
directly with the customers hence network of retailers and distributors is not present in
any business model. The processes carried out to fulfill customers demand can be called
as activity cycles of supply chain. Quality improvement team identified following cycles
Procurement Cycle
Procurement cycle initiates after receiving the order, forecast or delivery schedule
Production Cycle
Once required material arrived at Iron Systems, Production cycle initiated for
Re-Order Cycle
In this cycle, the material that needs to be replenished considers the availability of
raw material for next builds. It will checked by running MRP report.
62
Customer Order cycle
Customer order cycle satisfies the customer demand by actually delivering the
unit.
All processes in supply chain falls under two broad categories as Push system and
Pull systems depending on execution of the business process, business model, and
customer demand management technique. In Pull process the purchasing process initiated
process can also be called as reactive processes since process reacts to customer order.
Push process can be called as speculative process because processes trigger by customer
forecasts rather than confirmed purchase orders by customers. Push process works in
uncertain environment where purchase from customer is not known, but Pull processes
Cycle process view of
Customer supply chain along with
Customer Order different stages at Iron
Cycle Systems
New demand /
Updated forecast
Re‐Order cycle
Delivery to customer/ Iron Systems Inc
Iron FGI/ Customer FGI
Production Cycle
(Assembly/
Testing/ Packing)
Iron Production
Procurement Cycle
Supplier Stages in
Push/ Activity Cycle in
Pull View Supply chain Supply Chain
63
Let’s have close look at business models at Iron Systems considering Push and Pull
Inventory strategy, supply chain cycle processes and responsiveness to customer demand.
OEM Business model with Siemens Inc:
These products follows make-to-schedules business scenario where the
procurement cycle is initiated by schedule of purchase order provided by Siemens Inc.
Production cycle initiated to fulfill monthly firm orders already received by Iron systems
Inc. Re-Order cycle initiated by material availability compared to fulfilled demand and
customer order cycle initiated once periodic purchase orders from customers are received.
Iron Systems serves Siemens’s demand according to schedule of purchase orders
received; hence this model is most profitable from Iron Systems point of view.
Cycle process view
Customer of Supply chain for
Customer Order Business Model
Cycle with Siemens
Inc(Build to
Pull New demand / Schedule) along
Updated forecast with different
stages at Iron
Re‐Order cycle Systems
Delivery to customer/ Iron Systems
Iron FGI/ Customer FGI Inc
Production Cycle
(Assembly/
Testing/ Packing)
Iron Production
Push
Customer Order
arrives
Procurement Cycle
Supplier
Data Center:
cycle is initiated by firm customer order. Production cycle initiated to fulfill demand once
64
the procured material is available at Iron Systems. Re-Order cycle initiated either in
response to new customer order or material or component failure during any stage of
production cycle. Iron Systems do not keep material stock in the inventory for Data
centers. Iron Systems serve customer requirement on order basis without storing material
in the inventory, hence it improves the average inventory levels and inventory turnover.
But small order quantities can hamper the responsiveness to customer order but as Iron
Systems serves most of the customers with customized product offerings, customer is
Cycle process view
Customer of Supply chain for
Customer Order Data Center (Build
Cycle to Order) along
with different
New demand / stages at Iron
Updated forecast Systems
Re‐Order cycle
Delivery to customer/ Iron Systems
Pull Iron FGI/ Customer FGI Inc
Production Cycle
(Assembly/
Testing/ Packing)
Iron Production
Customer Order
arrives
Procurement Cycle
Supplier
Figure 32: Cycle Process view of supply chain activities for Data center
n-Appliances:
cycle is initiated by demand forecasts provided by sales team. Production cycle initiated
65
to have shelf inventory to have availability of the all n-Appliances products when ever
demand and customer order cycle initiated by comparing available material with
customer order cycle initiated, once confirmed order from customer is received. As
66
customer order is fulfilled by ready to ship inventory (FGI) hence greater responsiveness
Cycle process view
Customer
Customer Order of supply chain for
Cycle Business Model
Customer Order
with harmonic
arrives
Inc(Build to
Pull
New demand / Forecast) along
Updated forecast with different
Re‐Order cycle stages at Iron
Systems
Delivery to customer/
Iron FGI/ Customer FGI Iron Systems
Inc
Production Cycle
(Assembly/
Testing/ Packing)
Iron Production
Push
Procurement Cycle
Supplier
Figure 34: Cycle process view of supply chain for Harmonic Inc
competitors.
are limited. Inventories are also assets on balance sheet, but on the other hand it is one of
the major causes of high holding / carrying costs. In order to become successful in long
run, company’s competitive strategy should be optimizing the supply chain strategy of
the organization. (Chopra, Meindl & Karla, 2006) Quality improvement team has
67
identified that customer is looking for low cost production on other hand and also expects
Considering the business model used for Harmonic; Iron Systems procures the
material by using Push systems after receiving the forecasts from Harmonic. As per the
sales contract with harmonic, it is mandatory for Iron Systems to assemble the units as
per the forecast for given month. But it is not mandatory for Harmonic to purchase these
many systems each month. As result, ready to ship units becomes the part of FGI. FGI
68
are two types here, the units which are invoiced and kept at Iron Systems are called as
Customer FGI, and Units which are not invoiced but ready to ship are called Iron FGI.
The way the Harmonic forecast process works can be explained by following example.
breakdown as shown in above table. As per column 2, it is mandatory for Iron Systems to
built and keep units ready to ship as per monthly forecast. But if Harmonic does not have
demand from its customers as per the demand forecast they will not buy the units and
hence it becomes part of Iron Systems FGI (not Invoiced). Because of this Iron Systems
suffers from high level of average inventory where inventory accumulates from previous
months because of no demand for Harmonic. At the end of quarter, Harmonic will buy all
the Iron Systems FGI and then Iron Systems can deliver these units to Harmonic
warehouse or can be stored at Iron Systems as Harmonic’s FGI (Invoiced) at Iron systems
warehouse. Iron Systems applied service charges for storing Harmonic FGI units at Iron
Systems. This can easily see from monthly inventory turnover chart where Iron Systems
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has increased turnover at the end of each quarter. One of the reasons for having high
n-Appliance product. High dollar value of inventory gets consumed in raw material
inventory and ready to ship (shelf) Inventory. Here Iron Systems have crucial decision
and forecasts, hence Iron Systems Inc has high inventory to achieve the high
responsiveness. Harmonic also want to reduce the uncertainty in supply chain considering
the material availability of the raw material, long lead time material and availability of
finished goods to increased responsiveness to their customers. Iron Systems consider the
cost of high average inventory as strategic compromise to get more business from
harmonic. Harmonic considers Iron as local supplier (4 to 5 miles away) and hence
expects greater responsiveness. If Harmonic has certain demand for their products then
they have opportunity to seek low cost supplier from third world countries like India and
China, but demand for the product is not certain so they are looking for local supplier
supply chain benefits and responsiveness. Quality improvement team got opportunity to
work with Harmonic to develop the value stream map for performing Gap analysis.
It was effort made by our Industry adviser Mr. Aziz Khan to learn more about the
business model of Harmonic related to build, Pick and shipping the units to Harmonic
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warehouse located in Milpitas CA. Iron Systems and Harmonic developed the Value
Stream map to understand more about the Voice of customer. Any business strategy
works efficiently only if it has strategic fit and alignment with the strategy of customer
information which can enhance the communication between supplier and customer.
Developing the Value stream map was helpful in getting insights about the way
Figure 36: Value stream map for Harmonic-Iron Build, Pick, and Ship
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Improvement team carried out the gap analysis and is working with harmonic in getting
some of the things improved on priority which has direct potential impact on Inventory
Turnover and operational labor hour per systems. As per the value stream map, Harmonic
releases monthly build plan to Iron Systems, based on their requirement Harmonic
expects Iron to share their build plan so that their buyer will have all the updates.
As per the Lean initiative between Iron Systems Inc and Harmonic Inc, Iron expects
Harmonic to issue weekly build plans instead of monthly plans. Short term planning of
production and supply chain activities will reduce the waste in production as finished
As discussed in business model with Harmonic, Iron systems Inc produces the
units in absence of confirmed orders or purchase orders from Harmonic. This causes Iron
Systems to work in Push process rather than Pull process, hence to transform current
scenario of business Iron would like to have confirmed purchase orders from harmonic.
So that Iron will procure, produce and deliver the orders with Pull process which will
improve annual inventory turnover objective, reduce labor hours per unit, and help to
reduce and eliminate waste of over production, waiting and finished goods inventories.
Implementation of Lean production and delivery system will reduce the cost associated
with storing the finished goods Inventory; it also reduces the risk of products becoming
obsolete due to advent of new technology. Iron systems is working with harmonic
warehouse team to streamline the process of proof of deliveries (PODs), where lot of
non-value added activities are involved which can cause confusion in FGI transactions.
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Other Solutions for Improving Inventory Turnover
inventory which was discovered during first few Inventory cycle count programs. As
Inventory is asset of the company, accounting department cannot write of the old, slow
moving, scrap inventory, and take losses on balance sheet. Hence quality improvement
team developed the plan and submitted it to accounting department regarding further
count program helped project team to analyze the causes of high inventory turnover.
Improper buying practices, lack of demand planning and forecasting and improper set up
of business processes are the main causes of having high level of average inventory.
Team worked on 5 days long Kaizen event to redefine roles and responsibilities of supply
chain employees where team addressed the causes of high inventory levels. Application
starting from procurement through assembly, testing, packing, and shipping. Operational
hours per system gives top level view of the number of hours spent per system in the
organization. Before starting any improvement effort it was taking 11.4 hours/ system.
The target for this KPI is 4 hours per system. It will impact the annual objective of
reducing cost and increasing on time delivery. It will increase the overall work efficiency
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and will lead to having maximum utilization of available resources. In terms of lean it
will reduce any material, labor costs, and waste in operations of organization. The
Below chart shows that number of hours per system is decreasing which shows cost
saving indicator. There are some variations due to uncertainty of demand. The quality
team will take these improvements and determines the improvement outcome.
Figure 37: Total Operations Hours/Unit
Forecasts of the future demand are essential for making supply chain decisions.
(Chopra, Meindl & Karla, 2006) Demand forecast also forms basis for supply chain
planning as all push processes in supply chain are performed in anticipation of demand so
demand forecast gives manager a tool to plan a strategy to fulfill a customer demand by
planning production, inventory levels, and finished goods inventories for the product.
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(Chopra, Meindl & Karla, 2006)
Organizations can serve their customer’s needs and requirements in most efficient
way by keeping operating costs as low as possible, if the firm knows more accurate
demand forecasts for the products. Quality improvement team decided to develop the
demand forecasting model for one of the Iron Systems business Unit (Called as n-
Appliance) to have efficient utilization of inventory which could result into improved
Inventory turnover.
make to stock business model (also called as build to stock) , Iron system carries
Inventory for this product throughout the year. As it is home product of Iron system, its
design; product specifications and requirements are set and controlled by Iron system’s
engineering team.
During the inventory accuracy program, the team concluded that, considerable
the demand forecasting model and appropriate inventory model for the business unit to
lower the inventory levels by improving material availability and service levels.
forecasting model is to forecast demand for future year using the historical data of
previous 3 years. It will give supply chain manager a tool to effectively plan the required
effective way.
1. How much qty of n-Appliance product to keep ready to ship (shelves quantity)?
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2. How much to keep in inventory and how much to order to replenish the stock?
Time Series Forecasting Method is used to predict the future demand for n-appliance’s
products. As time series forecasting method uses historical demand data to make forecast,
these forecasts are based on assumption that past demand history is a good indicator of
future demand.
Static methods assume that, estimates of level; trend and seasonality within systematic
Basic Definitions:
In static forecasting method, the forecast in period t for demand t+l is given by the
following formula
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Quarter Period t Demand Dt
1 1 8
2 2 11
3 3 13
4 4 14
1 5 12
2 6 15
3 7 16
4 8 17
1 9 16
2 10 17
3 11 19
4 12 21
Table 16: Historical demand for n-appliance products for last 3 years
Next step is to estimate Level and Trend by using linear regression by calculating
Depersonalized demand.
dependent variable (y) and explanatory variable (x). Linear regression analysis focuses on
using linear predictor functions and unknown model parameters can be estimated from
the data.
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Period t Demand Dt Deseasonalized Demand
1 8
2 11
3 13 12
4 14 13
5 12 14
6 15 15
7 16 16
8 17 16
9 16 17
10 17 18
11 19
12 21
Table 17: Showing demand with de-seasonalized demand
Now; next step is to determine the values of level (l) and trend (T) for de-seasonalized
3.5.2 Result Table for Linear regression analysis
Simple Linear Regression –
Ungrouped Data
Parameter Value S.E. T-STAT Notes
Constant 9.785714
H0: beta =
Beta 0.821429 0.046107 17.815723 0
- H0: elast. =
Elasticity 0.353011 0.019815 32.652229 1
Table 18: Calculation of values L= Constant= 9.7 and T= Beta= 0.82
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Figure 38: Simple linear regression analysis chart
Source: ("Linear regression solver," )
Figure 39: Showing regression analysis with calculation of L and T_chart2
Source: ("Linear regression solver," )
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Using above calculated values for L and T we can calculate Dt = L + Tt
From the regression analysis L=9.7 and T= 0.8
Period Demand Deseasonalized Deseanalized demand Dbar
Quarter t Dt Demand for any period
1 1 8 11
2 2 11 11
3 3 13 12 12
4 4 14 13 13
1 5 12 14 14
2 6 15 15 15
3 7 16 16 15
4 8 17 16 16
1 9 16 17 17
2 10 17 18 18
3 11 19 19
4 12 21 20
Table 19: Showing de seasonalized demand for any period
Note: It is not appropriate to run a linear regression between the original demand data
and time to estimate level and trend because, the original demand data are not linear and
hence, the resulting linear regression will not be accurate. The demand data must be
The seasonal factor St = Di / Dt further Seasonal factor for each quarter can be calculated
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Deseaso Deseanalized
Period Demand Seasona Seasona
Year Quarter nalized demand Dbar for
(t) (Dt) l factor l factor
Demand any period
1 1 1 8 11 0.8 S1 0.9
Average
of all
1 2 2 11 11 1 st
years’1
quarter
1 3 3 13 12 12 1.1
1 4 4 14 13 13 1.1 S2 1
Average
of all
2 1 5 12 14 14 0.9 years’
nd
2
quarter
2 2 6 15 15 15 1
2 3 7 16 16 15 1 S3 1
Average
of all
2 4 8 17 16 16 1 years’
3nd
quarter
3 1 9 16 17 17 0.9
3 2 10 17 18 18 0.9 S4 1.1
Average
of all
3 3 11 19 19 1 years’
th
4
quarter
3 4 12 21 20 1.1
At this stage we have estimated level, trend, and all seasonal factors using linear
regression so demand forecast for next year (4 quarters) can be calculated according to
equation (1).
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Forecasted
Planned Demand
demand Inventory cost savings
Period (without
Year (according to achieved for # of Units per
(t) Forecasting
forecasting quarter
Model)
Model)
4 13 17 26 9
4 14 20 25 5
4 15 21 29 8
4 16 22 31 9
Table 21: Difference in demand forecasting
Difference in demand forecasting by qualitative forecasting and mathematical static
forecasting model using linear regression and potential cost savings by reducing
inventory levels
Note: As per the Oxford dictionary ”Deseasonalized” is special word used in data
If a time series exhibits regular seasonal fluctuations then for the purposes of analysis (for
Source: ("Answers.com," )
Quality improvement team carried out cross functional Blitz event and Kaizen
event to improve material availability (effort to improve Service factor KPI) and
inventory turnover. Team prepared the charter and communicated to stake holders.
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Project Charter
Date: 09/19/2011
Duration: 1 Month
Host Location:
Verify link tie to strategy deployment: Inventory turns, 5S, On time shipments and
labor hours per system.
Objectives: Improving the inventory turns by 45%, reducing the stock out of material
by 20% and hence reducing the idle labor hours, waiting for parts.
Payback: Reduction in inventory carrying cost. Reduction in labor hours per systems.
Approval: 83
Aziz Khan Harvey Bath
Blitz event attendants:
Supply chain process improvement: Aziz Khan, Adwait, and Subbu
Supply chain and operations management: Vishal Sood (operations manager),
Sonu (Inventory analyst), and Alexis (Sr. Buyer)
Accounting and Finance: Gurvi Singh
Team started with brain storming session to discuss the improvement opportunities for
achieving desired service levels, and one of the main important causes of not having
analyze the root causes by applying “cause and effect diagram (C&E Diagram” also
called as ishikawa diagram or Fishbone diagram) and called a cross functional team
meeting to address and improve the material availability and hence the service levels.
Team encouraged everyone to attend the event with 5 most important causes for having
low material availability due to Supplier credits holds on Iron System’s account.
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Figure 40: Cause and Effect Diagram
After having 5 most important causes from team members, improvement team sorted
People: This category identifies the issues related to employees by identifying need of
Management: This category is for sales department to convey the information from
demand side by providing top level demand forecasting and demand planning from
various customers. It considers their business models as make to stock, make to order,
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Information: This category belongs to inter departmental information sharing and
communication. Information sharing from customer side as firm orders and demand
forecasts must be shared with buyer and operations manger efficiently. Information
related to availability of credit and supplier contracts decided by top management must
Process improvement Team decided to improve “quick wins” first to get fast
improvement and decided to put forward top level management issues for recent future
improvement projects considering their complexity and business models with each
customer.
Figure 41: Cause and Effect diagram with potential quick wins
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Post Blitz Areas of Improvement with Action Items
Area of
Sr# improvement Cause Action item Assigned to
Employees failed to receive the Train receiving employees
1 Receiving material in the system. and Audit the process Adwait
Converting purchase receipts to
purchase invoices as soon as
2 Receiving receiving the packing slips and
Invoices from suppliers Train receiving employees and Adwait
Information on available credit with Publish the report on credit
3 Accounting supplier is not shared with buyer on availability with key supplier
daily basis on daily basis Gurvi
Notify accounting about
Procurement not informing before hand when ever
4 Procurement
accounting about high amount purchase is going over credit
purchases with suppliers limit Alexis
Finance to come up monthly
5 Finance
Not having quarterly budgets and quarterly budget plans Gurvi / Bob
need to have monthly and quarterly
6 Sales forecast from Sales for key Develop MPS according to
customers forecasts from sales Adwait
High Inventory levels affecting Cash
7 Operations
flows Develop EOQ policy for A itemVishal/ Sonu
Lack of clarity and leverage on
8 Vendor relations
vendor and suppliers Develop the score card for sup Vishal/ Adwait
Table 22: Post Blitz areas of improvement with action items
3.6.2 Rapid improvement Kaizen event for redefining roles and responsibilities
Quality improvement team started the project with developing the key
performance indicators and applied the robust Six Sigma DMAIC methodology for
achieving improvements in supply chain management at Iron Systems. Project team was
working with existing employees of company and team was started expecting employees
from all the levels of the organization to have sustained improvement in supply chain
management. It was evident that from weekly quality meetings and weekly Value Stream
Leaders (VSL’s) meeting, some of the employees are not able to finish their action items
within specified period of time. Project team along with industry advisor with approval of
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top management decided to redefine job profiles, roles, and responsibilities of the
article on change management named the hard side of change management. As discussed
in article in order to transform the organization for improvement, one should understand
that employees are already busy with their daily tasks and responsibilities and unable
spare the time or bandwidth for involvement in improvement projects. Team initiated the
4 days Kaizen event to redesign the roles and responsibilities and re organization of
supply chain management team at Iron Systems. In 4 days long event, first 2 days team
discussed with employees to come with current state of process flow and their job
profiles. During day 3 and 4, team established the future state of SCM team with new
roles and responsibilities and on day 5 of event, we discussed the impact of the Kaizen
event on SCM team. Project team re defined the roles and responsibilities by improving
process flows with consider that nobodies workload will increase more than 10%. Some
Material Requirement Planning, Plan for kitting the material, and weekly reporting.
Day 1 and 2:
Project improvement team had meeting with stake holders to establish the current
state of the supply chain management responsibilities. Project team decided to divide the
SCM activities broadly into 2 categories as OEM Purchasing and Inventory Management.
After establishing the current state of the process it is evident that no employee had any
job profile, related to Inventory management (refer to the pic attached where activities
related to Inventory management were not listed). As purchasing is routine job but
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managing the inventory is non-routine job or it takes pro-active approach to carry out
inventory cycle count and controlled inventory transactions. As team started improving
5S score for SCM department but we struggled for couple days for rolling this program
as nobody was responsible for implementing 5S program similar to fact that nobody was
responsible for carrying out inventory cycle count programs for each month to improve
Figure 42: Current state of roles and responsibilities for SCM team
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Figure 43: OEM Purchasing current state
Day 3 & 4:
Quality improvement team established the future state by redefining the roles and
responsibilities where OEM coordinator role get changed to Inventory analyst / planner
for OEM business. Added responsibilities were maintaining and improving 5S culture,
carrying out inventory cycle count programs and preparing and updating inventory
location sheet for accurately locating the inventory items. Receiving and kitting becomes
one department where previously there was no job profile for Kitter was not defined. In
improved job profile, Kitter will be responsible for making kitting plans, transacting
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shortages. Kitter will work closely with inventory analyst for planning and scheduling of
kitting as per the MPS and MRP. He is responsible for improving Service factor for
kitting.
Day 5: After establishing the future state, team worked with individual employee and
drafted daily, weekly, monthly tasks for each employee. In order to have reporting
mechanism and improve communication reports like Open Sales Order, Open Purchase
Orders, and forecast errors were added to improve the annual turnover, service factor and
on time shipment
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3.7 Corrective and Preventive Action (CAPA) Process / Corrective
Action Request (CAR)
3.7.1 Objective
Corrective and Preventive Action are improvements taken for eliminating the non-
root causes of the non-conformities in the process to prevent the reoccurrence (corrective
action) or prevent the occurrence at all (preventive action). ("Corrective and preventive,”)
product, service, or process. CAR implies that you are reporting on a detected Non
Conformance and determined root cause and have taken actions to correct this from
reoccurring. CAR are Actions taken to eliminate the root cause of an existing
nonconformance and to prevent its reoccurrence, or Resolving an actual cause that exists
in direct relation to the problem. From ISO guidelines, CAR is stated as an action to
prevent occurrence.
1) Internal CAR:
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Internal CAR is for internal customers, it is issued to address the inter-department non
2) External CAR:
Whenever we want to issue a CAR to either customer or suppliers for non conformities
related to products, parts, or processes. They are intended for tracking of internal product
failures.
intended for tracking of supplier related failures and can be a tool for communication
related audits conducted internally, by customers or by 3rd parties (i.e. ISO compliance
audit findings). These were intended to document and manage for audit findings.
Quality improvement team developed the process flow for issuing the CAR and
defined the ownership of the CAR. We shared this information on SharePoint for
everyone to have access along with CAR tracker for follow up, Aging, priority and
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Figure 45: CAPA (Corrective and Preventive Action) Life Cycle
3.7.4 Error Proofing (Poka Yoke)
Error proofing is data driven structured approach to prevent the errors from
occurring. Error proofing methods focuses on elimination of errors rather than counting
the errors. Quality improvement team used the error proofing technique as part of
improving the processes of labeling, packaging, and shipping. Harmonic Inc issued a
Corrective Action Request (CAR) to Iron Systems regarding putting wrong labels on
MG-BASE packs. Because of this wrong systems were shipped to Harmonic’s customers
hence it caused confusion at customer end and costs Harmonic to pay charges of logistics
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Corrective Action Request (CAR)
CAR# 23 Date: 09/23/2011
Category (choose one): Process CA
Vendor CA
Audit CA
OBJECTIVE: PLAN TO REDUCE THE LIKELIHOOD OF THE OCCURRENCE
OF A PROBLEM OR POTENTIAL PROBLEM.
Problem: MG-BASE2124 units were incorrectly labeled as CSS-2124-1000 and
MG-BASE2124-36TB and shipped to Customer.
Effect of the problem:
1. 2TB disks systems were labeled as 1TB disks. Did not meet Customer and
Iron Systems label requirements and caused confusion at customer’s end.
Cause: These systems were pulled from FGI and packed as MG-BASE systems. As
MG-BASE has different label requirements while applying new labels error
occurred. These systems were due on 6.00 pm and packing receives the systems on
5.15 pm, the error occurred in making shipment ready to ship during rush hours.
Suggested corrective action: 1. packing and shipping should have cut off time for
in-coming systems.
2. Need have check point on labels so that errors can be prevented.
Corrective action Taken: Modified the Information on Label for MG-Base with
prior approval by Harmonic Inc, new labels will add one more check point and error
will get prevented.
Implemented By: Aziz Khan Date: 10/1/2011
Result of Action taken: Corrective action taken is adding the value and prevented
At Iron Systems for this CAR, Operational excellence team asked quality improvement
team to investigate the root cause of incident and come up with error proofing mechanism
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to prevent this kind of errors from happening. Quality improvement team decided to use
solution.
1. Iron Systems packed the systems individually and make them ready to ship by applying
labels with model#, system serial number, quantity, and hard drive serial numbers. (For
reference see below figure). Whenever Iron Systems receives order for individual units
(not MG-BASE) shipping department pulls the ready to ship units to satisfy the demand.
2. When Iron Systems receives the order for MG-BASE pack, Iron apply 1 more label on
top of existing label with MG-BASE and bundled 5 different systems which go along
Current State
While converting CSS system into MG‐BASE
pack information on label gets changed
In Current state: While shipping CSS
system as MG‐BASE pack, label
indicate it as MG‐BASE
CSS System MG‐BASE System
Figure 46: Current state of shipping
3. Team collected the background information regarding that particular incident when
error in labeling was occurred. When Iron receives the order to ship 3 MG-Base systems
at 4 pm where cut off time for shipping was 5.30 pm, after receiving email from
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Harmonic for MG-BASE system for quantity 3 production supervisor ask shipping guys
to pull 3 MG-BASE systems from FGI and printed the labels at his desk and handed over
to them at 4.15 pm
4.Packing and shipping guys were working on other units which were also due on same
day, so they prioritized the Harmonic MG-BASE shipment and prepared the units ready
5. After few weeks Harmonic issued CAR to Iron Systems for implementing Preventive
Brainstorming: Quality improvement team called a meeting to discuss about this issue
1. Packing and shipping department serve request with few hours of lead time, in order to
keep systems ready for shipping in rush that mistake took place.
2. Team decided to improve the process rather than playing blame game with individual
employee.
3. Team decided to change the format of label where packing and shipping will have more
4. Quality improvement team will come up with improvement plan and take Harmonic Inc’s
approval on change and explain them case to assure that improvement will prevent the
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Solution:
1. Team decided to change the Label format by adding system serial number on MG-BASE
label to have one more check point before applying MG-BASE label on top of existing
one.
2. Team decided to move the label printing station closer to packing and shipping area.
Make process where shipping department prints the label and apply these.
3. Improvement team decided to have level strategy for packing and shipping by collecting
data on service factor for packing and shipping discussed later in report
4. Team decided to initiate 5S program to increase packing and shipping capacity and area
allocations.
Figure 47: Improved state of shipping
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Process scenario at Iron System:
Iron Systems manufacturer’s products for one of major customer called Harmonic
Inc. As the business model with Harmonic Inc, Iron systems manufacturers the systems
according to their schedule. These schedules are further break down into monthly and
weekly build plans. Iron is responsible for manufacturing the systems according to
schedule but harmonic buys those systems whenever they have demand from their
customers, according to contract with Harmonic inc they have to by the manufactured
systems at the end of every quarter (Iron systems can invoice the manufactured goods at
end of quarter). Iron System also has contract with the harmonic for storing finished
goods inventory (FGI) according to whether these systems are invoiced or not we store
Whenever Harmonic has demand they issue purchase order to pull the units from Iron
FGI or Material transfer (MT) from Harmonic FGI at Iron Systems. Iron stores Finish
goods Inventory (FGI) always ready to ship with labeling and packing already done.
Quality improvement team did error proofing for MG-BASE requirement by Harmonic
Inc. Iron systems keeps ready to ship systems by putting labels on individual systems
with their model # and System serial number. Whenever Iron receives requirement for
MG-BASE pack, Iron bundled the package with 5 different systems and change the label
to MG-BASE with same serial numbers and model numbers with MG-BASE label on it.
by Toyota manufacturing company. A3 the name of the report represents the size of
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paper (11” x 17”) also called as a3). It is saying in Toyota manufacturing company that
managers, supervisors, and engineers should be able to present even difficult problem
engineer works with quality improvement team to improve particular process in their own
area. A3 report becomes the responsibility of lead or engineer where he drives the
based data driven, data collection, and data analyses. But this approach is not sufficient to
achieve excellence in operations. In current scenario, project team was identifying the
project, but team wants to increase the overall involvement of rest of employees to look
for improvement opportunities and carrying out improvement project with their team.
This employee involvement and ownership of A3 project was necessary to build strong
culture of operational excellence. A3 project concept helped team to get success in all the
areas of organization. During weekly quality meeting, team asks all the Value Stream
Leader (VSL’s) to come up with 1 improvement idea in their area (ex: production,
assembly line, Inventory management etc) and team worked with VSL’s to develop their
small A3 project. In A3 project a leader is responsible for identifying the opportunity for
improvement where he also take charge in finding out root cause of the problem and
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Organization of A3 reports:
Background: Quality improvement team collected all the information regarding the
problem statement and established the business case which team is going to analyze. A3
reports can be used to improve any operation or process in business unit. The importance
of A3 report is to explain the problem statement briefly and should have single clear
Current Condition: Current condition explains the problem with data analysis like
Pareto charts histograms etc. Current condition makes problem statement clearer with the
Goal: Set the measurable target for improvement; for example improve labor efficiency
Analysis: Use the simplest problem-analysis tool that will be suitable for given range and
type of data points. Analysis tools can be used as Fishbone diagram, five whys to narrow
Proposal: Project team worked with VSL’s to establish the proposal for improvement.
Plan: Team encourages VSL’s to plan their project ahead of time to have efficient
Follow up: Team took feedback from every VSL’s during weekly quality meeting on
progress, constraints and for further guidance or training required for employees.
A3 for Labeling Results: Reduced congestion in Harmonic label printing and scanning
area. Team purchased new scanner and printers and set up different stations for different
customer (considering different label requirement for each customer).The total cost of A3
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calculated to be $1350 and Total cost savings was $550 per month. Total cost savings
was result of reduction in employees waiting time for getting scanners and printers during
rush hours. It avoids the bottlenecks in the process and reduced the in transit time. It
A3 for inventory Results: Sorting the inventory according to customer or business unit
helped to identify correct on hand balances and available stocks. It reduces the effort
required to count the Inventory items during Inventory cycle count program. It
accelerates the speed of kitting, as kitter is able to locate the Items or parts efficiently. It
helped Inventory analyst to prepare the shortage reports while planning for material
availability. As part of 5S program it was value added decision. Cost savings achieved
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Figure 48: A3 Report for Inventory
103
Figure 49: VSL’s A3 report for Labeling
3.9 Improvements in Yield (Yield report)
Improving the overall production yield of the organization is one of the important
KPI for improvement. Team has identified three main areas of the production which are
Assembly: Assembly of the system is very first process of the production where
individual components of the systems are assembled together according to standard work
instructions for each station are displayed on screens with the images of operation and
procedure is available for each operator. When kitting people kits the raw material then
they forward the material for assembly. Last station of each assembly does the hardware
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QA inspection by powering ON the system, team has decided to capture the data of pass
or fail at this station. In yield calculations team has decided to capture issues with
particular assembly line assembled 10 systems in a day and at last station if 1 system
failed due to hardware failure then the assembly yield will become 90%.
Testing-Burn In: All the assembled systems are tested in two sections of tests, called as
functional test and burn in test on same station. If technician receives 10 systems for
burn-in and 3 systems failed any of the tests (due any component it will be considered as
Quality assurance: QA is final check done on the systems with reference to Quality
control check sheets (QA sheets are different for each product and hence each customer
requirements are different for each product) generally QA is carried out once system
passes the tests, before packing and shipping. If technician did QA for 10 systems and all
systems passed then yield becomes 100%.If we multiply yield at all the production
TPY= .9*.7* 1= 63 %
Data collection: Team created the data collection templates for yield reports, team
decided to collect data on daily basis and get the causes of the failures from engineering
and production managers on daily basis. Collecting a first –hand data on daily basis
helped team to understand and address the root cause of the failures.
Data Analysis: As our focus is to improve the Supply chain at Iron systems, we took
different approach to address the causes of yield by addressing the supplier quality issues
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by use issuing CARs to supplier or by making supplier aware of the quality issues faced
by Iron systems.
Based on data collected on weekly basis, team started sharing this data in weekly quality
meeting and asked value stream leaders to come up with solution to address the issues
3%
20% 9% DELL INC
4% MALABS, INC
45%
MICROLAND
ELECTRONICS
Figure 50: Supplier vs % of components failure
14% Enclosure
25%
Hard Disk Drive
5%
11% 40% Motherboard
Networking
Equipment
Figure 51: Part type vs Quantity rejected
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Operation Vs. Quantity Rejected
2%
1%
2%
6% 6% Assembly
Customer Returns
23% Functional Testing
Packaging
Quality Assurance
60% Reliability Testing
Shipping
Figure 52: Operations vs Quantity rejected
Corrective Action Request (CAR)
CAR# 45 Date:
09/19/2011
Category (choose one): Process CA
Vendor CA
Audit CA
OBJECTIVE: PLAN TO REDUCE THE LIKELIHOOD OF THE
OCCURRENCE OF A PROBLEM OR POTENTIAL PROBLEM.
Valmark to make sure that this will not happen hence on.
Corrective action Taken: Valmark industries issued RMA to return the
Labels with wrong background color. Valmark Sales team will make
every effort at their end to prevent these kinds of failures in future.
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Implemented By: Aziz Khan Date:
Analysis of the data: Team encourages the supply chain management team to issue
Corrective Action Request (CAR) to the suppliers to address the quality related issues
with the supplier. In case of OEM business, Iron Systems do not have leverage on
suppliers as Iron systems’ customers decides the suppliers. But issuing of the CAR to
supplier make supplier and customer aware of the quality and reliability related issues,
As per the pie chart above, most of the causes are due to SuperMicro Inc, but fact
is Iron systems procures more than 60% of the components from SuperMicro Inc. But it
gives heads up for future work where Iron Systems can start negotiating with supplier to
have leverage.
Low first pass yield results in increased labor hours per system and hence
increases the total operation cost of Iron Systems, it also affects the Inventory turnover
and on time shipments. In future, team recommends having supplier quality engineer to
address these issues. Also improvements in operations like assembly, testing, inspection,
3.10 Iron Systems Cost Savings with Lean Six Sigma implementation
Indicators (KPIs) by making use of Lean Six Sigma tools and techniques. Here we would
like to take an opportunity to show direct and in direct cost (soft cost) savings achieved at
lowering the total costs to increase the profit and competitive edge over the competitors.
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3.10.1 Direct cost savings visible on profit and loss statement
Before starting any improvements total operations hour per system was 11 hrs.
Following table is showing total units manufactured each week with the total labor hours
spent that week. Current cost is cost of producing units with $ rate multiplied by output
improvement). Soft cost savings is the difference of projected costs and current costs.
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3.10.2 Incremental margin on current or improved sales
The improvements in On Time Shipment (OTS) will help the sales to get new
business from existing as well new customers. Team has identified the Sales order work
flow starting from order confirmation to the shipping the order to customer. Team has
mapped the process flow with operations and people involved in fulfilling the customer
order. Then team analyzed the process for value added and non value added activities.
Team eliminated and/ or simplified the non value added activities which helped to
streamline the processes. The need for training of employees and obstacles are identified.
Conducting Training sessions, documentation, and standard work procedure helped team
to address even more root causes. It helped to achieve higher level of on time shipment
Table below shows the actual Cost of Goods Sold and Average Inventory for
Cost of Monthly
Month goods sold Average INV Inv Turns
January-11 $913,940 $2,013,100 5.4
February-11 $881,613 $2,088,060 5.1
March-11 $1,478,514 $2,421,609 7.3
April-11 $906,814 $2,412,354 4.5
May-11 $1,069,399 $2,618,155 4.9
June-11 $3,181,141 $2,866,157 13.3
July-11 $2,993,854 $3,367,676 10.7
August-11 $3,136,896 $3,691,196 10.2
September-11 $3,727,579 $3,160,295 14.2
October-11 $1,963,531 $3,477,543 6.8
November-11 $2,443,917 $3,756,958 7.8
December-11 $4,250,515 $3,951,636 12.9
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January-12 $3,198,319 $3,118,958 12.3
Average Inv Inventory carrying
Cost of goods Monthly Inv Could have cost could have Actual Inventory
Month sold Average INV Turns been been carrying cost Cost savings
January‐11 $913,940 $2,013,100 5.4 Average Inventory
February‐11 $881,613 $2,088,060 5.1 turnover Jan 2011
March‐11 $1,478,514 $2,421,609 7.3 to July 2011
April‐11 $906,814 $2,412,354 4.5
May‐11 $1,069,399 $2,618,155 4.9
June‐11 $3,181,141 $2,866,157 13.3
July‐11 $2,993,854 $3,367,676 10.7 7.3 $5,038,082 $83,968 $56,128 $27,840
August‐11 $3,136,896 $3,691,196 10.2 $4,741,469 $79,024 $61,520 $17,505
September‐11 $3,727,579 $3,160,295 14.2 $4,968,010 $82,800 $52,672 $30,129
October‐11 $1,963,531 $3,477,543 6.8 $5,903,495 $98,392 $57,959 $40,433
November‐11 $2,443,917 $3,756,958 7.8 $3,109,712 $51,829 $62,616 ($10,787)
December‐11 $4,250,515 $3,951,636 12.9 $3,870,515 $64,509 $65,861 ($1,352)
January‐12 $3,198,319 $3,118,958 12.3 $6,731,687 $112,195 $51,983 $60,212
Total Cost Savings $163,978
in Inventory turns. And it depends upon the average inventory for that month and cost of
goods sold.
The above chart shows that, average inventory is always greater than Cost of Goods Sold
(COGS). As higher cost of goods sold is one of the reasons why organization has high
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average Inventory, hence cost savings on inventory carrying costs equally depends upon
COGS and Average Inventory. Soft cost savings (50%) are dependents on COGS and
50% dependant on Average Inventory; deduct the total soft cost savings by 50% to get
actual soft cost savings of $81989. Above table showing cost savings based on reduction
Team developed the concept of Corrective Acton Request (CAR) and Corrective
And Preventive Action (CAPA) to address the Internal and External Issues occurred in
information exchange within the organization which could harm the quality or create
confusion at customer and impacting customer satisfaction and future business with
customer.
Internal CAR: As seen below team has issued a CAR, in cases where customer order get
canceled when unit has ready to ship, in that case Value stream leader should take a lead
to de assemble the unit and transact the cancelled order unit back to inventory. So
material become available for rest of the units if needed and cost of excessive purchasing
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Corrective Action Request (CAR)
CAR# 51 Date: 11/19/2011
Category (choose one): Process CA
Vendor CA
Audit CA
OBJECTIVE: PLAN TO REDUCE THE LIKELIHOOD OF THE OCCURRENCE OF A
PROBLEM OR POTENTIAL PROBLEM.
Problem: Giga second Inc's Order for system got canceled in Month of
October 2011, but still system is sitting on production floor; instead it should
be credited back in the system (Inventory) as soon as this Order got canceled
Effect of the problem:
We are not able to use components of this system for other Customers, as not
credited yet, also it will affect Inventory accuracy.
Cause: The order got canceled and no instructions are given to production
rather than not to ship the order.
Suggested corrective action: Sales should provide a reprint with cancellation
notes and disposition of the system.
This exception needs to be added to manufacturing SOP.
Corrective action Taken: System Disassembled and individual parts moved to
inventory.
Implemented By: Aziz Khan Date: 11/21/2011
Result of Action taken: SOP is created and communicated
Action Effective (choose one) : Yes Date CAR Closed: 11/25/2011
No
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Supplier CAR (SCAR): Quality improvement team issued a CAR to supplier where
supplier delivers the non-conforming material which affects the production schedule and
further delayed the shipment. In cases like these, supplier should aware of non
External issues with vendors or suppliers can be address by issuing the Corrective
Action Request to respective party in cases like 1) Delivering the products without
specified packing 2) Received material was damaged during transit 3) For any Non
5. Economic Justification
LS Consulting (LSC), Inc., is a startup founded in 2011 in San Ramon, CA. LSC
helps improve business process efficiencies for the manufacturing, packaging, hi-tech and
retail industries up to 70% by our unique and experienced application of Lean Six Sigma
analysis tools and techniques. Most small to medium sized companies lack the resources
to monitor, analyze, and adapt business processes to remain competitive. We have the
Lean Six Sigma knowledge and experience to quickly and in innovative ways analyze a
typically deliver business process improvement recommendations within 2-3 months, that
services. We also provide training and instructional services to allow clients to continue
with success.
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LS Consulting helps companies to become lean originate from our In-depth
knowledge, decades of experience and our timely based strategies. In today market
problem solving in companies is not getting easier. But with the right tools and
techniques and good strategic approach, LSC can help make sense of the data and the
process to find the right approach to solve the problem. LSC can help companies to break
down the existing barriers and to reach high level of productivity and efficiency hence
you can gain new competitive advantages and achieve revenue growth and sustainable
profit. We help our customers using an innovative approach to improve process. LSC
return on investment.
Sigma for first time. Other companies are revisiting their current Lean Six Sigma
programs. Lean Six Sigma is the perfect tool for reducing your operating costs and get
by reducing process variation and waste. Now is a good time to remember that ultimate
goal of Lean Six Sigma is reducing operation cost and save moving abroad jobs through
The LSC view is managing the client relationship is critical to the success of
growth results.LSC deploys Lean Six Sigma programs across organizations to reduce cost
and improve quality. Provide training and coaching for small scale Industries, serving
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customers better, Focus on problem solving and result oriented project execution. We are
providing educational and engaging content. Our focus areas include Six Sigma, Lean
and project management services and trainings for Manufacturing, Packaging and retail
industries. Lean Six Sigma has market between $800 million to $900 million. There is lot
of potential to grow in this market. LSC has deployed Lean Six Sigma services at Iron
Systems Inc, as a result on time shipment improved from 55% to 92% and total
operational hours per unit dropped from 11.4 to 4 hrs. LSC is planning to serve
manufacturing, retail, packaging, and health care industries. Currently there are not many
consulting, and company operations with lean six sigma training and engagement. This
unique model delivers significant value to customers. LSC offering is developed for
client
• Fast deployment results, typically within 100 days or less, with ROIs of typically 12x of
fees
LSC Company is seeking $850k investment from Investors to expand our services
in San Ramon; CA. LSC is expecting to get break even by 2013, after that each year we
are expecting phenomenal growth. By 2016 the company would be around $2.5 million
Revenue Company.
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5.2 Problem Statement
“The number of high-tech manufacturing jobs in the United States has declined by
687,000 or 28% between 2000 and 2010” (Whoriskey, 2012).
Figure 54: US manufacturing jobs Labor statistics
Source: Bureau of Labor Statistics (Whoriskey, 2012)
The statement above and the chart showing decline in the manufacturing job in
United States in the period of year 1988 to 2012. There are many socio-economic reasons
for such declining but one of the reasons is that United States lost its competitive edge to
technology many US based companies exploited the advantage information sharing and
its speed to source the material where it is cheapest and sell the goods where it gets
maximum returns on their purchases. Companies effectively utilized their supply chain
management to make it work but in the process realizes decline in domestic employment
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Six Sigma consulting believes that, US companies should transform their
businesses to more efficient Lean enterprises where we help our customers to eliminate
area of waste, errors and defects by utilizing well known data driven, statistical and result
With our training and consulting services, Clients will be able to attain high levels of
efficiency and productivity, achieve sustainable growth, and exploit new competitive
Application of Lean and six sigma tools and techniques will enable our customers to offer
suitable where customer drives in demand for product and service. Lean and Six Sigma
will offer our customers flexibility in their operations and processes where firms can
launch their product early to market which will help firms to achieve greater market
share.
Empowerment of employees
Lean and Six Sigma follow the organizational structure where employees make a
difference and where employees are valuable players of profit game. Application of lean
and six sigma will boost the in among the employees and their loyalty to employer.
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Focus on continuous improvement by understanding customer needs
Lean and Six Sigma consider customer satisfaction as prime objective of the business and
product or service offerings. In today’s competitive business market place, firm who
understand and satisfy customer requirements and needs able to achieve sustained
growth.
Lean and Six Sigma will develop the framework where firms can achieve the
The Lean and Six Sigma market is around consulting and training. Once
companies commit to implement Lean and Six Sigma, it will accept the idea of training a
number of employees to lean and maintain six sigma projects. Most of the leading six
training and mentoring for employees in Six Sigma practices using six sigma tools and
techniques. Most of the Lean Six sigma consulting companies are small size companies,
there are over 70 Six Sigma consulting and training companies listed per Quality Digest
magazine’s annual list. There are some small software companies that provide products
Mostly each of the leading Lean Six sigma consultancies has between 75 to 125
employees. Each company may give between 300 to 600 training courses a year, usually
along with projects implementation that they help companies to accomplish. There are
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around ten privately held companies are running Lean Six Sigma services, if we
estimate each makes between $20 million to $25 million. Each might grow 10 to 15% a
year. Thus, the ten leading companies, take together are earning between $300 million to
$350 million a year. Assume that all the other Lean Six Sigma consulting companies earn
about $500million a year. That would yield a total Lean Six Sigma market between $800
Lean Six Sigma began in the US for several years ago, but recently lots of foreign
countries are adopting Lean Six Sigma practices in their companies. The most Lean Six
Sigma consulting and training organizations now have a word wide presence and
Beverage, and Garment manufacturing etc. The market size for each segment is related to
Spending to reach $309 billion in 2012, a 2.2 Percent Increase from 2011.” There is lot of
5.5 Competitors
There are several consulting companies providing Lean Six Sigma services to optimize
Over two decades TBM has helped many companies improve their supply chain
activities hence improved their competitive position and grow revenue by reducing waste.
The company is mainly focusing on large customers, their services charges are very high,
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and implementation time also more. This makes their services are not reachable to many
BMGI
BMGI has started in 1999 as a niche consultancy specialized in Lean Six Sigma
and other process improvement methods. It has evolved as a leading firm that helps
clients solves a wide variety of business problems. BMGI is focusing on large and
medium scale organizations, to solve their supply chain problems and reduce waste using
Lean and Six Sigma methodology. Small scale businesses and Private limited companies
5.6 Customers
Our company sells services to senior management. Our solution will implement in
department or across the organization. The project focuses on organization wide solution.
Since this involves the senior management the solution is sells to upper level
improvements across organization. Below are the types of industries that could be our
potential customers.
Industry Percent
Manufacturing 28-30%
Retail 10%
Healthcare 10%
Hi-tech 23-25%
Packaging 10-12%
Food and Beverage 7-10%
Garment Manufacturing 8-10%
Pharmaceuticals 2-3%
Consumer Products 3-5%
Table 26: Customer segments market analysis
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5.7 Price Point
Currently we have two employees. We are charging $100 per hr for CEO/Expert and $90
The Base price for the DMAIC Project is $30,000. The price of our service would vary
based on the critically of the problem and amount of time required to solve the problem.
The Six Sigma methodology DMAIC will improve the process improvement and
training.
The SWOT analysis is very useful tool for understanding and making decision for all
and Threats. It is required for a company to know SWOT attributes since it helps to
understand the areas need to improve and company to grow. Below is the SWOT analysis
Strengths
experience
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• Understand customer and deliver meaningful Results – We implement process
Weakness
• We are small company hence we have to work hard to gain customer confidence and
Opportunities
y We are located in Silicon Valley so we should able to meet clients locally and show our
track record and solutions to improve productivity and quality of the product.
y The market is moving very competitive hence clients are looking ways to reduce cost
to get clients
Threats
• Maintain Creativity and innovation. You have to be innovative with your solution to
• Technology advances
investment capital of 850 thousand dollars. If we get $850k from Investor we can recruit
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more experts, move office to good location where it is more visible. If we get more
clients then we can get more revenue. After five quarters and by 2013 the company
would go in to positive cash flow. By 2016 the company would be in around $2.5 million
dollar Revenue Company. Please see below detailed Return on Investment capital and
Breakeven point.
LSC expects Return On Investment over five year period is like below:
Liabilities:
Accounts payable $30,056 $25,016 $32,115 $50,285 $160,152 $215,025
Long term liabilities
Bank Loan payable $180,000 $325,000 $450,000 $1,500,000 $1,000,000 $500,000
Commissions payable $0
Total Liabilities $210,056 $350,016 $482,115 $1,550,285 $1,160,152 $715,025
Owner's equity:
Retained earnings $121,400 $17,588 $290,323 $524,251 $1,079,474 $1,684,736
Total Liabilities+ Owner's equit $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761
ROI 33% -79% 129% 195% 438% 696%
Table 27: Return On Investment Capital
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Breakeven Analysis
Breakeven point is achieved at Q1 2013. As per break even analysis graph, LSC
generates enough revenue after getting six customers by Q1 2013. The company will start
Breakeven Analysis
$2,500,000 60 70
# of
60
$2,000,000 Customers
50
US Dollars
5.10 Personnel
For setting up a small size company a CEO will be hired. The CEO will hire the
management team. The expected management team will be Vice president of Business
Assistant. The HR Manager will hire the team for business operational activities.
Currently LSC Company has CEO and VP of Business development and we are planning
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to hire three more Lean Six Sigma Consultants reporting to the VP of Business
development.
A CEO is expected to run company with strong leadership skills. He should have sales
and marketing management skill, fiscal control and experience with Profit and Loss
statements and knowledge of daily operations. He should have good communication and
maintain network with CEO’s in Silicon Valley which could help to gain potential
customers.
the company. He will report to CEO and acts as a back up to CEO. He should have good
network with business leaders hence it would help to get customers and spread work
about our company. He will mainly focus on business development, operations, and
• Voice of the Customer (VOC) – Voice of the customer is most effective and attractive
for companies with a concentrated market segment. Using existing client reference and
y Sales Force Efficiency and effectiveness – Existing employees will play sales roles until
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y Internet Advertisement – With Internet advertising we can spread our services and
training services across the globe. Today market this is one of the most effective way to
get customer traction. The Internet advertising creates opportunity to get potential
customers.
y Networking – Our Solution will help business to increase their efficiency. In today
We expect to make no profits during the first 4 quarters of operation (till Dec
2012). Since we are posting losses during first five quarters operation, we will require
additional capital from our investors to account for the negative cash flow in the first five
quarters of operation. The projected profit and loss for the first six years are shown in the
table below. The main revenue sources for the company are selling our Lean Six Sigma
consulting services and providing training. The success of the company is, implement our
In the year 2011, Six Sigma Consulting successfully completed the “Lean and Six
where organization saved $843,612. The project was tremendous success where team got
127
Five years Projected ROI
Year 2011 2012 2013 2014 2015 2016
Assets:
Current Assets
Cash $173,100 $95,738 $331,217 $1,176,148 $1,111,766 $1,127,500
Accounts receivable $43,056 $202,916 $335,060 $749,869 $975,028 $1,084,627
Professional Membership $42,500 $42,500 $60,500 $72,505 $75,218 $86,020
Liabilities:
Accounts payable $30,056 $25,016 $32,115 $50,285 $160,152 $215,025
Long term liabilities
Bank Loan payable $180,000 $325,000 $450,000 $1,500,000 $1,000,000 $500,000
Commissions payable $0
Total Liabilities $210,056 $350,016 $482,115 $1,550,285 $1,160,152 $715,025
Owner's equity:
Retained earnings $121,400 $17,588 $290,323 $524,251 $1,079,474 $1,684,736
Total Liabilities+ Owner's equit $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761
ROI 33% -79% 129% 195% 438% 696%
Table 28: 5 years projected Profit & Loss and Forecasted Revenue generation statement
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5 years Projected Quarterly profit& Loss and Forecasted Return on Investment are shown
below:
Figure 56: 5 years Projected Quarterly profit & Loss and Forecasted ROI
We expect to have a positive cash flow after 4 quarters. During the first four quarters ( in
year 2012) LSC require a cash investment of $850 thousand dollars. By 2016 the
organization would be $2.4 million dollars Revenue Company with more than 60
customers.
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Five years Projected Balance Sheet
Year 2011 2012 2013 2014 2015 2016
Assets:
Current Assets
Cash $173,100 $95,738 $331,217 $1,176,148 $1,111,766 $1,127,500
Accounts receivable $43,056 $202,916 $335,060 $749,869 $975,028 $1,084,627
Professional Membership $42,500 $42,500 $60,500 $72,505 $75,218 $86,020
Liabilities:
Accounts payable $30,056 $25,016 $32,115 $50,285 $160,152 $215,025
Long term liabilities
Bank Loan payable $180,000 $325,000 $450,000 $1,500,000 $1,000,000 $500,000
Commissions payable $0
Total Liabilities $210,056 $350,016 $482,115 $1,550,285 $1,160,152 $715,025
Owner's equity:
Retained earnings $121,400 $17,588 $290,323 $524,251 $1,079,474 $1,684,736
Total Liabilities+ Owner's equity $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761
Table 29: Five year Projected Balance sheet
5.14 Income Statement
130
5 years Projected Income Statement
Period Ended (Year) 2011 2012 2013 2014 2015 2016
Revenue:
Service Revenue $ 112,500 $ 307,500 $ 520,000 $ 980,245 $ 1,417,875 $ 1,767,000
Training Charges $ 37,500 $ 102,500 $ 247,500 $ 325,013 $ 472,625 $ 589,000
Total Revenue $ 150,000 $ 410,000 $ 990,000 $ 1,300,050 $ 1,890,500 $ 2,356,000
Selling Expenses:
Sales commission $ 4,500 $ 9,000 $ 16,500 $ 52,500 $ 90,000
Office Staff $ 35,000 $ 90,000 $ 150,000 $ 200,000
Marketing/ Advertising
Expenses $ 150,000 $ 160,000 $ 170,000
Technical Staff $ 150,000 $ 160,000 $ 180,000 $ 220,000
Travel Expense $ 18,000 $ 18,360 $ 18,911 $ 19,478 $ 224,000
Net Income before taxes $ (51,700) $ (90,000) $ 291,860 $ 375,654 $ 835,677 $ 952,421
Income Tax $ - $ - $ - $ 93,914 $ 250,703 $ 333,347
Net Income / (Loss) $ (51,700) $ (90,000) $ 291,860 $ 281,741 $ 584,974 $ 619,074
The company monthly profit and loss for the past 6months are shown below.
retail industries across USA but initially we will focus in Silicon valley, California. The
success of our company will depend on how successfully our customers would optimize
their supply chain activities and get Return On Investment (ROI) in terms of money
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savings. Our company is planning to sell business by 2015 and cash out. The company
would gain customers in manufacturing industry, retails, hi-tech, Packaging and few
more from private clients. We will have well trained team of managers, specialists, and
established relationships with Industry leaders. By 2015 the company would be in good
position in terms of customers and in cash hence it would be tasty acquisition to Industry
leaders.
In the case of not getting enough customers and not able to capture market, we
would try to join with market leader in this area as a business partners.
6 Glossaries of Terms
Term Definition
OEM Original Equipment Manufacturing
MRB Material Review Board
KPI Key Performance Indicator
ERP Enterprise Resource Planning
5S Sort, Straighten, Shine, Standardize, Sustain
BU Business Unit
OTS On Time Shipment
RMA Return Material Authorization
OM Operations Management
SCM Supply Chain Management
RASCI Responsible, Accountable, Support, Consult and Inform
CAR Corrective Action Requirement
CAPA Corrective And Preventive Action
SCAR Supplier Corrective Action Request
WIP Work In Progress
FGI Finished Goods Inventory
VSL Value Stream Mapping
SCM Supply Chain Management
COGS Cost Of Goods Sold
Table 31: Definitions and Acronyms
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7. Project Schedule
Project Name: Lean Six Sigma to Improve Supply Chain Management at Iron Systems
The team consists of four members. Their background, expertise, and responsibilities
133
Dr. Ming Zhou
Management, San Jose State University. Professor Zhou holds a PhD in Supply Chain
Management from the Robert. H. Smith School of Business, University of Maryland. His
Aziz Khan is Director, Quality, and performance excellence at Iron Systems Inc. He
companies making the transition to lean principles. His Specialties are teaching and
consulting in the field of: Lean Manufacturing Engineering, Quality Eng, Supply chain
management, and six sigma programs. Aziz has direct experience with OEM and EMS
operations in the field of: Computers, Aerospace, Industrial, and Medical Equipment
His vast knowledge on the supply chain management has utilized to understand the
requirements, analyze the data, and to complete the project. He verified the technical
content of the report and helped us to collect required data at Iron Systems Inc.
Subramanyam Chalamcharla
Inc. He has been in the field of quality and testing for the past 10 years. He is pursuing
134
Adwait Kunte
Supply chain intern to implement Lean Six Sigma at Iron systems Inc, San Jose, CA.
9. Conclusion
and manufacturing as a strategic weapon to reduce cost structure. Production and supply
chain plays a significant role in organization growth and sustain in the competitive
market. Through the effective and efficient tools like Lean Six Sigma, organizations can
achieve excellence in quality, customer satisfaction, and sales growth. By eliminating the
waste at different process stages of the product and using the lean six sigma tools and
techniques would bring better products and services to customer at faster and cheaper
manner. Using the Lean Six sigma approach will enable any business to improve product
quality, service quality, on time delivery, reduce waste, shorten delivery time, and
This Project addressed the root causes of problems in the process of Iron Systems
Inc supply chain and recommended solutions and alternatives which led to more
optimized processes and enhanced the operational system, eliminate different type of
waste, and increase the profit. This Project suggested improvements improved the supply
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Improved supply chain activities have improved following:
confidence.
Inventory accuracy and reduce supply chain hrs/unit will reduce product development
cost.
This project shows economic value to Iron Systems on Cost savings of $761,623
occurred during 6months on basis of reduction in total operations hours and improved
inventory turnover.
136
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Appendix
1. 5S Audit Form
5S Audit Form
Level 0 Level 1 Level 2 Level 3 Level 4 Level 5
No system in 5S rating exists, 5S rules and 5S rules and standards A standard The area has the
existence that supervisors are standards are are becoming a daily practice for ability to
improves and trained, implemented. habit with room for maintaining continually
monitors 5S awareness Score 4.5 - 8 improvement. levels 1,2,& 3 sustain the 5S
rating. training complete Score 8.5 - 12 exists and is program and are
Score 0 and program is in adhered to tour ready at all
beginning stages. daily. times.
Score 1 - 4 Score 12.5 - Score 16.5 - 20
16
5S Score is:
Note: Green = 1 Yellow = .5 Red = 0
141
2. Value Stream mapping before
142
3. Value Stream mapping - Improved
143