Please use the following two slides as a template for your presentation at NES.

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

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

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

4. What is Lean • Lean Concepts grew out of the Toyota Production System (1960s) • Lean’s goal is to eliminate all forms of waste in the process and engage employee creativity • The currency of lean is time • Requires process mapping • ID value added step in process • ID non-value added steps • Simplicity • Waste Reduction • Efficiency

5. What is Six Sigma • Six Sigma dates back to the 1920’s and work done on Statistical Process Control in the US • Six Sigma’s goal is to understand customer need and deliver perfection every time • Six Sigma’s currency is consistency • Reduce variation in process • Reduce defects • Produce consistently good product • Consistency • Reduced Variability • Effectiveness

6. Six Sigma DMAIC Approach Define Measure Analyze Improve Control • Define: Define the problem • Measure: Gather information on the current system • Analyze: Analyze data and current process to identify root causes • Improve: Develop and implement a solution • Control: Validate results, standardize new process, and monitor results of new process

7. How Do Lean & Six Sigma Blend • Both require an organizational paradigm shift in how we view work • Both aim to reduce operational costs • Lean reduces waste in the process then Six Sigma creates consistency to reduce your defect rate • Together they add both efficiency and effectiveness to a process • Generally you “lean” a process first then apply six sigma tools

8. LSS Inventory Applications • Ensuring system parameters are accurate • Demonstrate relationships between inventory investment and lead time/demand variation • Verify inventory valuation • Identify & eliminate root causes of inventory discrepancies • Elimination of excess & obsolete inventory • Improving cycle counting accuracy & efficiency

9. Excess & Obsolete Inventory • A symptom of issues with inventory management • Improvement strategies often have a short-term focus • Sell below standard cost • Donate to charity • Sell for scrap • Pay to remove • Improvement strategies often fail to identify root causes • Excess & obsolete inventory quickly return to former levels • Endless cycle of building up excess and disposing of excess • Multi-billion dollarproblem

10. Excess & Obsolete Inventory • Benefits of a solution: • Private Sector: Firms that can generate a given level of profit with a lower level of investment in inventory will generate higher cash flows and better ROIs • Federal Sector: Minimizing inventory investment maximizes available funding for executing validated mission requirements • Optimize capital investment of which inventories are a key component

11. 10-Step Solution Process* • Align Project to Business Goals • Clearly Define Project Goals • Ensure Buy-In from Stakeholders • Identify Variables • Collect Data • Identify Root Causes • Develop Improvement Plan • Develop Standard Operating Procedure (SOP) • Implement Improvement Plan • Develop Control Strategies Adapted form “Lean Six Sigma for Supply Chain Management”, James W. Martin, 2007. *Adapted from, Martin, J. W. (2007). Lean Six Sigma for supply chain management. New York, NY: McGraw-Hill.

12. 1. Align Project to Business Goals • Be strategic in marketing your Excess & Obsolete inventory project by focusing on potential long-term business benefits • Align the project with your senior managements’ goals and objectives • Typical business benefits include: • Cost Savings • Cost Avoidance • Benchmarking • All your great work can sometimes be in vain without proper alignment of your project with to your organization’s business goals

13. 2. Clearly Define Project • Project Charter • Objectives • Scope • Overall Approach – to include choice of inventory model for the analysis • Communications plan • Current State Process • Risk Assessment

14. 3. Ensure Buy-In From Stakeholders • Ensure everyone understands the fundamentals of Lean Six Sigma, but vary your focus based on the audience • Executive Training Sessions • Emphasize strategic focus • Emphasize Enterprise benefits • Champion Training • Emphasize Operational effectiveness • Other Stakeholder Training • Emphasize impact on their area of operation

15. 4. Identify Variables • Begin process by asking relevant questions to help you understand how the system works: • How do demand variation and lead time impact inventory? • Is my excess inventory linked to particular suppliers? • How do lot size impact inventory? • What are your current safety levels? • What is my desired target for excess and obsolete inventory? • Define your critical input variables, Xs [Y = f(X)]

16. 4. Identify Variables (EOQ MODEL) Demand rate Order qty, Q Inventory Level Reorder point, R Lead time Lead time 0 Time Order Placed Order Received Order Placed Order Received

17. 5. Collect Data • Develop comprehensive data collection plan • Requirements planning • Inventory record files • Warehouse management system • Current metrics • Extract data from IT system/s • Validate system data by conducting a manual count of inventoried items associated with problem • Collect management data, e.g., lead time, lot size, expected demand and its variation, forecasting accuracy, on-time delivery • Organize/align data with inventory model

18. 6. Identify Root Causes • Construct a value stream map for the entire inventory process • Use an inventory model to analyze inventory population to understand how key process input variables impact excess and obsolete inventory, i.e., key process output variables • Calculate target maximum inventory balance for every item and location in population of interest based on each items safety level, lead time, and demand variation • Develop a fishbone diagram to support the root cause analysis process

19. 6. Identify Root Causes Fishbone Diagram Problem: Excess & Obsolete Inventory

20. 6. Identify Root Causes (continued) Some typical root causes associated with excess and obsolete inventory include: • Long lead times • Large Lot Sizes • Poor forecasting accuracy • Inaccurate historical demand data • Poor forecasting model methodology • Poor management • No early warning mechanism to identify build up of excess • No system in place to ensure oldest inventory issued first

21. 7. Develop Improvement Plan • Develop countermeasures to eliminate root causes • Incorporate countermeasures into implementation alternatives • Use cost benefit analysis to select implementation solution • Test solution • Develop pilot plan • Implement pilot and analyze results • Develop full scale improvement plan

22. 8. Develop SOP • Distill important concepts, techniques, and requirements into a format that can be readily used by supply personnel in their regular work • Clearly delineate the various roles and their associated responsibilities and expected performance standards • Don’trush the SOP! If you do you will have problems during implementation: • Build a team • Get organizational support • Review and test SOP • Ratify and approve SOP

23. 9. Implement Improvement Plan • Leverage SOP to support your implementation plan: • Publicize your SOP and emphasize the significance of the changes being implemented by the SOP • Distribute as needed and make it readily accessible to potential users and stakeholders • Implement change management: • Conduct training classes to ensure personnel understand their roles and have the knowledge and skill to implement • Get buy-in from implementers regarding the change • Develop a mechanism to monitor performance, identify potential problems, and provide support during the implementation process

24. 10. Develop Control Strategies • Monitor and control implementation plan • Sustain monitoring (metrics, control charts) • Show improvement is sustainable. • Assess change effectiveness • Compile before and after operational metrics to validate the success of the implementation • Show impact in senior leader metrics to emphasizes enterprise benefit • Conduct after action review and record lessons learned • Reward key contributors • Builds esprit de corps • Sustains support for the implementation

25. Conclusion • Typical benefits of LSS projects to reduce and eliminate excess and obsolete inventory include: • Accurate demand data • Effective inventory management modeling • Checks to spot and fix excess problems quickly • Effective procedures to issue oldest stock first • Permanent reduction in excess and obsolete inventory • Higher cash flows and better ROIs for private sector firms • Maximizes available funding for executing validated mission requirements in federal sector

26. Norman A. Pugh-Newby CPPA, PMPDeloitte Financial Advisory Services(m) 240-460-4499npughnewby@deloitte.com Questions? Please Contact:

28. 8. Develop SOP