Inventory and Lean

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• Inventory and Lean

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• Inventory Management

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Types of Inventory

• Raw Materials/Components
• Work-in-Process
• Finished Goods
• In-transit inventories

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Why Carry Inventory?

• As a buffer against uncertainty.
• Raw Materials/Components supply uncertainty
• Work-in-Process process uncertainty
• Finished Goods demand uncertainty

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Why Carry Inventory?

• Cycle stocks
• Typically constant across multiple cycles of
  production and ordering.
• Capture scale economies associated with bulk
  purchases or shipment size
• Reduce set-up expense

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Why Carry Inventory?

• In-transit inventories
• Caused by need to disperse goods throughout a
  system.
• Volume determined by location, delivery speed and
  shipping costs.

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What Costs Are Associated with Inventory?

• Storage
• Management
• Tracking
• Moving
• Obsolescence
• Spoilage
• Theft
• Cost of inventory itself
• Opportunity cost of capital

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Types of Demand

• Lets say you have a favorite food you fall
  back on whenever you dont know what to make
  pasta!
• Lets also say that on rare occasions when you
  make a particular specialty, bouillabaisse, you
  purchase mussels.

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Pasta

• What factors do you consider when you shop for
  Pasta?
• Is pasta on sale or bulk-discounted?
• How much room do you have to store pasta?
• How much money do you have to spend?
• How long can pasta be stored?
• How often do you make pasta and for how many?
• What might you buy if you dont stock up on
  pasta?

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Mussels

• What factors do you consider when you shop for
  mussels?
• When will you be making bouillabaisse?
• How much will you make?

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Pasta and Mussels

• The demand for pasta is independent demand you
  make pasta often and whenever it makes sense to
  do so.
• The demand for the mussels is dependent demand
  you only need mussels when you make
  bouillabaisse.
• Note the demand for bouillabaisse is
  independent

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Managing Inventory for Independent Demand

• Where Q order quantity
• D Demand
• S set-up cost (ordering cost) H holding
  cost

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Managing Inventory for Dependent Demand

• Manage dependent demand inventory using
• Materials Requirements Planning (MRP)
• Bill of Materials (BOM)
• Lists all the parts in a unit
• Shows parent relationships
• Master Production Schedule
• Details how many end items will be produced in a
  period
• Produces specific production schedule
• Inventory Record Records movement of
  components/parts into and out of inventory

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Managing Different Types of Inventory

• Lets say you manage a car dealership and you
  have inventories of cars, transmissions, and
  automotive fuses.
• How do you manage each of these categories?

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Managing Different Types of Inventory

• Cars You track each individual car (A)
• Transmissions You count the number on hand (B)
• Automotive fuses You buy a box or two and make
  sure theres always a box on the shelf! (C)

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Managing C-Level Inventory

• Re-order point (quantity) re-order when
  inventory gets to a certain level.
• Re-order period re-order at some fixed
  interval.
• One-bin system have a bin of items and order
  when inventory gets low.
• Two bin system pull inventory from one bin
  when the first bin is empty, bring forward the
  second bin and place an order.

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Lean Systems

• Lean systems minimize waste.
• Wasted time
• Wasted effort
• Wasted materials

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Just-In-Time Systems
Inventory
Order entry backlog
Machine problems
Process Problems
Decision backlog
Change orders
Supplier problems
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Just-In-Time Systems
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Just-In-Time Systems
Inventory
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Just-In-Time Systems
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Just-In-Time Systems
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Operations Strategy

• Too much inventory
• Tends to hide problems.
• Results in Its easier to live with problems
  than to eliminate them attitude.
• Is costly to maintain.
• Wise strategy
• Reduce lot sizes
• Reduce safety stock

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History

• Frederick Taylor
• 1890s studies of work methods
• Developed scientific methods for doing work.
• Established goals for productivity.
• Established systems of rewards for meeting the
  goals.
• Trained workers in how to meet the goals by using
  the methods.

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History

• Henry Ford
• Developed first assembly line for automobiles.
• Very efficient, but not very flexible.
• Alfred P. Sloane
• Introduced more flexible line.

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History

• Inventory used to buffer against uncertainty.
• Raw material/components supply uncertainty
• WIP process uncertainty
• Finished goods demand uncertainty

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History

• WWII
• Quality gurus develop methods to analyze and
  improve processes.
• Juran, Deming, Ishikawa spread the word in Japan.

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History

• 1950s Toyota
• Taiichi Ohno, VP Manufacturing, and Shigeo Shingo
  head of industrial engineering and factory
  improvement training, developed the Toyota
  Production System.
• They emphasized
• The minimization of all waste.
• Doing it right the first time.

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Seven Deadly Wastes

• Overproduction producing more than is required
  by the market.
• Waiting time workers who are idle because they
  have completed their work or who watch machines
  but cannot prevent problems.
• Transportation moving materials between
  workstations without adding value.
• Processing downtime because machines need
  maintenance or repair.
• Inventory the costs associated with loss,
  obsolescence and damage to inventories, as well
  as the cost of excess inventory itself.
• Motion movement that is not related to adding
  value to the product.
• Waste from product defects the costs of scrap,
  rework and, most important of all, the costs
  associated with defective output reaching the
  customer.

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Six Core Methods of Lean (1)

• Kaizen Rapid improvement process
• Focuses on eliminating waste and achieving
  sustained continual improvement.
• Implies that small, incremental changes routinely
  applied and sustained over a long period result
  in significant improvements.
• Involve workers from multiple functions and
  levels in the organization in working together to
  address a problem or improve a particular
  process.
• Works to rapidly implement chosen improvements.

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Six Core Methods of Lean (2)

• 5S System to reduce waste and optimize
  productivity through maintaining an orderly
  workplace and using visual cues to achieve more
  consistent operational results.
• Sort (Seiri).
• Set in Order (Seiton).
• Shine (Seiso).
• Standardize (Seiketsu).
• Sustain (Shitsuke).

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Six Core Methods of Lean (3)

• Total Productive Maintenance (TPM) involves
  workers in all departments and levels to ensure
  the effective operation of equipment. Focuses on
• Having workers take care of the equipment and
  machines with which they work.
• Preventing breakdowns (preventive maintenance).
• Mistake-proofing" equipment (or poka-yoke).
• Designing and installing equipment that needs
  little or no maintenance (maintenance
  prevention).
• Quickly repairing equipment after breakdowns
  occur (breakdown maintenance).

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Six Core Methods of Lean (4)

• Cellular Manufacturing/One-Piece Flow Systems
  work units arranged in a sequence that supports a
  smooth flow of materials and components through
  the production process with minimal transport or
  delay.
• Aims to move products through the manufacturing
  process one-piece at a time, at a rate determined
  by customers' needs.
• Provides flexibility to vary product type or
  features on the production line in response to
  specific customer demands.
• May require
• Replacing large, high volume production machines
  with small, flexible, "right-sized" machines.
• Modifying equipment to stop and signal when a
  cycle is complete or when problems occur, using a
  technique called autonomation (or jidoka).
• Shifting workers from watching a single machine,
  to managing multiple machines in production cell.

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Six Core Methods of Lean (5)

• Just-in-time (JIT) Production Systems/Kanban
• Relies on the use of physical inventory control
  cues (or kanban) to signal the need to move or
  produce new raw materials or components from the
  previous process.
• Often requires suppliers to deliver components
  using JIT. The company signals its suppliers,
  using computers or delivery of empty containers,
  to supply more of a particular component when
  they are needed.
• Results in significant reduction in waste
  associated with unnecessary inventory, WIP, and
  overproduction

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Six Core Methods of Lean (6)

• Six Sigma Quality Management
• Equates to approximately 3.4 defects per million
  opportunities.
• Includes methods for implementing and maintaining
  performance of process improvements.

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Elimination of Waste

• Focused factory networks.
• Group technology.
• Jidoka quality at the source.
• Just-in-time production.
• Uniform plant loading.
• Kanban production control system.
• Minimized setup times.

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Focused Factory Networks

• Small, focused plants are more productive.
• The bigger the plant, the more bureaucratic it
  is.
• When a plant is designed for one purpose, it can
  be constructed and operated very economically.

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Jidoka

• Jidoka means
• Stop everything when something goes wrong"
• Controlling quality at the source.
• The worker becomes his or her own inspector.
• Autonomation (automated inspection).

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Just-In-Time Production
What It Is Management philosophy "Pull" system through the plant What It Does Attacks waste (time, inventory, scrap) Exposes problems and bottlenecks Achieves streamlined production
What It Requires Employee participation Industrial engineering/basics Continuing improvement Total quality control Small lot sizes What It Assumes Stable environment (production linearity)
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Inventory Reduction

• Inventory is costly
• and it can mask problems in the process.
• By reducing inventory, we bring the problems to
  the surface we lower the river to find the
  rocks.

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Other Important Elements

• Kanban production system
• Uniform plant loading
• Reduced set-up times
• Workforce involvement

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Set-Up Time Reduction

• Organize the workspace and time setups.
• Remove unneeded equipment and clutter.
• Design a system for storing tools and hardware
  within reach.
• Time each event in the setup process.
• Separate internal from external setup operations.
  
• Internal operations can be performed only when a
  machine is stopped.
• External operations can be performed while the
  machine is running.
• Convert internal to external setup.

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Set-Up Time Reduction

• Standardize Use simple systems such as
  color-coding all of the equipment used at a
  workstation.
• Simplify clamps and eliminate adjustments
  Identify ways to reduce the time used to fasten
  parts to the machine.
• Continue to improve. Continuously look for
  opportunities to reduce setup times.

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Issues Related to Lean

• Quality Management
• Supply Chain Management
• Product Design
• Performance Measurement

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Results of Lean Implementations

• Study of 80 plants in Europe
• Average reduction in inventory of about 50
  percent.
• Reduction in throughput time of 50 to 70 percent.
• Reduction in setup times of as much as 50 percent
  without major investment in plant and equipment
• Increase in productivity of between 20 and 50
  percent.
• Payback time for investment in JIT averaging less
  than nine months.
• Amrik Sohal and Keith Howard, "Trends in
  Materials Management," International Journal of
  Production Distribution and Materials Management
  17, no. 5 (1987), pp. 3-11.

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Results of Lean Implementations
Traditional Manufacturing Lean Manufacturing
Scheduling Forecast - push Customer Order - pull
Production Stock Customer Order
Lead Time Long Short
Batch Size Large - Batch Queue Small - Continuous Flow
Inspection Sampling - by inspectors 100 - at source by workers
Layout Functional Product Flow
Empowerment Low High
Inventory Turns Low - lt7 turns High - 10
Flexibility Low High
COGS High and Rising Lower and Decreasing
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Lean Services

• Lean Services.
• Add value for customers by improving response
  time and customer service.
• Reduce labor costs by driving higher levels of
  productivity that enable growth without adding
  people.
• Eliminate frustrations by resolving chronic
  problems that irritate customers and employees.
• Save money by reducing overhead costs and
  generating greater profits.

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Lean Services

• Lean may be powerful in service operations than
  in manufacturing.
• Average project value is higher savings are
  often replicable across a large volume of users
  (millions of banking customers, insurance
  subscribers, etc).
• Approximately 30-50 of the cost in a service
  organization is caused by costs related to slow
  speed or performing rework to satisfy customer
  needs.
• Reduce your company's service costs by 30-60
• Improve service delivery time by 50
• Expand capacity by 20 - without adding staff