scm project

LEAN SIX SIGMA TO IMPROVE SUPPLY

CHAIN MANAGEMENT

Prepared by Julian Kalac, P.Eng and Robert Czuma

May 2014

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1. Introduction

1.1 Objective

The objectives are to improve supply chain management related Key Performance

Indicators(KPI’s) such as On Time Shipments (OTS), Material availability, Inventory

management; Inventory Turnover, Reducing total costs associated with products,

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. Currently the work place environment

is not organized so things need to get clean up and organized in organization.

Sl. No Key Performance Indicators

(KPI’s)

Current Target

(Before

Improvement)

1 Annual Inventory Turnover 7 16

2 On Time Shipments (OTS) 55% 92%

3 5 S (sort, straighten , shine,

standardize, sustain) Score 8 18

4 Physical Inventory accuracy 78% 95%

5 Service Factor: Kitting 65% 100%

6 Total Operations hrs/unit 11.4 4

Table 1: key performance Indicators (KPI’s) with Current and Target values

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Causes

Occurrence

% of

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

Time

90% O

n

s

h

i

p

m

e

n

t

100%

80%

60%

40%

20%

0%

85%

65% 68% 69%

t

i

m

e

On time shipment

Data center

N appliances

Harmonic Siemens Other OEMs

Business Unit/ product

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% 13 % 12

Figure 8: showing Pareto Analysis for causes in delayed in shipment

Figure 21: Value Stream map for Supply chain management

100% 91% 95% 97% 99% 75%

87% 66%

1% 4 4% 5 5%

9% 5% 5% 4% 2% 2% 1% % 11% 17%

100% 80% 60% 40% 20%

0%

e

82%

17% 14 3 8%

% of time

Cumulative

Causes of Delayed Shipment

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SR# Cause Root Cause Action item

1

Work order status not

changed WIP or Built

Low Service

level, No

responsibility

assignment

increasing product

availability with

MPS and MRP

2 Wrong Inventory

storage practices

No 5 S

programs

Need to have 5S

programs

3

Debit order not

created

Broken MRB

process flow

Develop process

flow for MRB by

introducing online

NCR forms

4

Material not received

in system

Training for

receiving and

lack of 5S

Train the employees

with process flows

5

Material not found in

stock room

Not having

cycle count

programs, lack

of 5S

Implement scheduled

cycle count programs

6

In-house borrowed

material list not

updated

No material

transaction for

In-House orders

Need to transact the

borrowed items with

either DO and SO

Table 13: Further causes, root causes, and action items

95% 73%

55% 35% 35%

re ve r cycle c r ce

120% o

c

c

u

r

r

e

n

c

e

100% 80% 60% 40% 20%

0%

87% 100%

% 21% 18% 14% 7% 5%

o

f

% of total

cumulative

Causes of variances

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3.4.1 5S Program

Figure 24: 5S Audit findings

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Figure 25: 5S before and after comparison

Figure 26: Improvement with 5S Program

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Figure 27: Other application improved with 5S Program

Figure 29: Monthly trend of Cost of goods sold and Average Inventory

16.0 14.0 12.0 10.0

8.0 6.0 4.0 2.0 0.0

Monthly Inv Turns

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$0

Cost of goods sold

Average INV

71

Figure 36: Value stream map for Build, Pick, and Ship

72

83

3.5.1 Liner regression

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," )

73

3.6.1 Cause and effect diagram

Figure 40: Cause and Effect Diagram

Figure 41: Cause and Effect diagram with potential quick wins

74

3.6.2 Rapid improvement Kaizen event for reducing labour costs

Date Total Units Total Hours Hrs/Units Current cost Projected cost Labour Savings Savings 8/1/11 173 1736 11.0 $47,858 $49,289 $1,431

8/8/11 229 1783 9.2 $52,865 $65,122 $12,257

8/15/11 219 1817 10.2 $55,896 $62,308 $6,412

8/22/11 195 2082 10.7 $52,046 $55,287 $3,241

8/29/11 173 1587 9.2 $39,670 $49,175 $9,505

9/5/11 228 1419 6.2 $35,464 $64,809 $29,345

9/12/11 281 1560 5.6 $39,002 $79,874 $40,872

9/19/11 331 1821 5.5 $45,527 $94,087 $48,560

9/26/11 309 1623 5.3 $40,587 $87,833 $47,247

10/3/11 263 1522 5.8 $38,058 $74,758 $36,699

10/10/11 399 1842 4.6 $46,050 $113,416 $67,365

10/17/11 190 1587 5.8 $27,550 $54,008 $26,458

10/24/11 260 1562 6.0 $39,038 $73,990 $34,952

10/31/11 247 1542 6.2 $38,553 $70,210 $31,657

11/7/11 191 1577 5.6 $26,740 $54,292 $27,552

11/14/11 131 1273 7.1 $23,270 $37,265 $13,995

11/21/11 97 880 6.5 $15,763 $27,572 $11,810

11/28/11 241 1352 5.6 $33,804 $68,504 $34,700

12/5/11 261 1466 5.6 $36,660 $74,189 $37,530

12/12/11 252 1481 5.9 $37,026 $71,631 $34,605

12/19/11 180 1515 5.4 $24,300 $51,165 $26,865

12/26/11 120 1296 5.3 $15,750 $34,110 $18,360

1/2/12 132 1283 4.7 $15,475 $37,436 $21,961

1/9/12 167 1339 4.5 $18,754 $47,384 $28,631

1/16/12 152 1167 4.1 $15,580 $43,206 $27,626

Total Cost savings $679,634

Table 3: Weekly production data labour savings

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3.8.1 Lower Inventory carrying cost associated with Inventory Investment

Table below shows the actual Cost of Goods Sold and Average Inventory for

January 2011 to September 2011. Monthly inventory turnover are calculated.

Month

Cost of

goods sold

Average INV

Monthly

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

January-12 $3,198,319 $3,118,958 12.3

Table 24: Monthly Inventory Turnover

Figure 53: Monthly Cost of goods sold vs Average Inventory

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Return on Investment Capital

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

Long Term Assets: Furniture/Fixture $35,000 $24,650 $60,661 $106,614 $106,614 $106,614

Software / Hardware $56,000 $61,000 $66,000 $71,000 $94,000 $105,000

Investment $91,000 $85,650 $126,661 $177,614 $200,614 $211,614

Accumulated Depreciation: Furniture ($7,000) ($14,800) ($23,400) ($32,800) ($43,000) ($54,000)

Software / Hardware ($11,200) ($44,400) ($57,600) ($68,800) ($80,000) ($56,000)

Total Assets $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761

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 equi $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761

ROI 33% -79% 129% 195% 438% 696%

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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 making profit in the second

quarter of the year 2013.

Year 2012 2013 2014 2015 2016

Fixed Cost $396,500 $397,380 $398,961 $399,561 $402,995

Variable Cost $117,313 $319,885 $589,185 $697,762 $1,021,834

Total Revenue $ 410,000 $ 990,000 $ 1,300,050 $ 1,890,500 $ 2,356,000

# of Customers 3 7 11 35 60

Five years Projected ROI

Year 2011 2012 2013 2014 2015 2016






Investment $91,000 $85,650 $126,661 $177,614 $200,614 $211,614



Total Assets $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761





Total Liabilities+ Owner's equi $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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:

Balance Sheet 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.

Five years Projected Balance Sheet

Year 2011 2012 2013 2014 2015 2016








Total Assets $331,456 $367,604 $772,438 $2,074,536 $2,239,626 $2,399,761





$700,000

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0

($100,000)

Cost

Revenue

Profit

Quarter of Year

Q1

‐

Q2

‐

Q3

‐

Q4

‐

Q1

‐

Q2

‐

Q3

‐

Q4

‐

Q1

‐

Q2

‐

Q3

‐

Q4

‐

Q1

‐

Q2

‐

Q3

‐

Q4

‐

Q1

‐

Q2

‐

Q3

‐

Q4

‐16

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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

5.1 Income Statement Five years Projected Income statement:

5 Years Projected Income statement

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

General and Admin: Officer's Fixed Salary $ 175,000 $ 380,000 $ 380,000 $ 380,000 $ 380,000 $ 380,000

Interest Expenses $ - $ - $ - $ - $ - $ -

Software $ 1,000 $ 8,000 $ 8,160 $ 8,405 $ 8,657 $ 8,917

Depreciation Expense $ 18,200 $ 41,000 $ 48,000 $ 48,000 $ 50,000 $ 52,000

Other overheads $ 1,000 $ 20,000 $ 20,000 $ 21,012 $ 21,642 $ 22,292

Utilities $ 2,000 $ 12,000 $ 12,240 $ 12,607 $ 12,985 $ 13,375

Janitorial $ 1,500 $ 2,500 $ 3,100 $ 4,253 $ 4,411 $ 5,573

Rent $ 3,000 $ 14,000 $ 14,280 $ 14,708 $ 15,150 $ 17,422

Total Expenses $ 201,700 $ 500,000 $ 698,140 $ 924,396 $ 1,054,823 $ 1,403,579

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

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5 years Projected Income statement

scm project

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