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Improving Inventory Performance

Through Lean Six Sigma Approaches


Jung-Lang Cheng*

Lean Six Sigma (LSS) aims to assist enterprises in improving the production
process, quality, efficiency and effective status, and is regarded as the latest
trend in Six Sigma. The purpose of the paper is to build the LSS framework
and show how to use LSS to reduce the stock cost. To achieve the research
objectives, the paper reviewed the literature on LSS. By integrating Six Sigma
DMAIC implementation with the lean concept, the three inventory models
(basic fixed-order-quantity model, Economic Order Quantity (EOQ) model and
two-bin approach) are compared with regard to reducing stock cost in a case
study of Taiwanese enterprises which were able to develop and judge the LSS
that best allocates organizational resources to solve this critical business
problem. The EOQ model has better inventory management and is thus able
to reduce the stock cost better. The organization may depend on off season
and busy season demand to judge what EOQ quantity to purchase, and this
EOQ model can effectively control the stock cost and meet the improvement
goals of LSS. The value of the paper lies in its observation of the improvement
steps following LSS implementation. It is also found that as a strategy-oriented
initiative of LSS, Six Sigma activities must be adapted and modified to fit the
lean management environment.

Introduction
Six Sigma and lean concept have become two of most popular methodologies for
improving productivity, quality and business performance. Lean concept has received
a lot of attention from line professionals and managers because of the performance
of the Toyota Production System (TPS). The purpose of TPS is to eliminate waste and
improve cycle time and upgrade quality. TPS aims to characterize lean concept efforts
focused on the reduction of wastes through Kaizen (or continuous improvement)
events as well as basic improvement activities (Womack and Jones, 1996). Six Sigma
resembles a philosophy more than just a few tools and techniques (Coronado and
Antony, 2002).

* Associate Professor, Department of Industrial Engineering and Management, College of


Engineering, Cheng Shiu University, Taiwan. E-mail: ChengLL@gcloud.csu.edu.tw

Improving
2017 IUPInventory Performance
. All Rights Reserved.Through Lean Six Sigma Approaches 23
Todd (2005) defines lean concept as an initiative whose goal is to reduce the waste
in human effort, inventory, time to market, and manufacturing space, and thus to
become more highly responsive to customer demand. Lean concept is a more macro
approach in dealing with eliminating waste and single-piece flow which allows all
activities along the value-added process (Pannell, 2006). The lean concept approach
encompasses various practices to improve efficiency, quality, and responsiveness to
customers. Some core lean concepts include knowledge of the people working in the
process, the idea that improvement imperfectly done today is better than the perfect
solution done later, that there is always a need for further continuous improvement,
that inventory is not an asset but a cost or waste, and that there is power in teamwork
and consensus through brainstorming (Alukal, 2006).
Lean Six Sigma (LSS) which integrates lean concept and Six Sigma, that is, the Six
Sigma implementation improvement concepts and methodologies from the lean concept.
The key methodology of LSS thus implements DMAIC process which uses lean concept
in decision making to achieve better business performance. LSS stresses data-driven
methodologies in all decision making, strives to minimize variations in quality, and
designs and implements a company-wide and highly structured education and training
regimen. The training courses in LSS also include lean concept and related
improvement methods, such as continuous improvement, eliminating all forms of waste,
reducing setup times, and mapping the value stream.
However, LSS program is not just about doing things better, it is a way of doing
better things (Byrne et al., 2007). We need to explore what process steps of the LSS
framework improve inventory performance, and what inventory models are there for
using LSS to achieve business profit. How is LSS implementation to improve inventory
management defined in enterprises in Taiwan? This paper builds LSS framework which
integrates lean concept and Six Sigma DMAIC and outlines LSS improvement steps,
and finally uses a case study to explore the LSS framework and how it can be used to
improve inventory stock cost.

Literature Review
Six Sigma
Pande et al. (2000) indicated that the Six Sigma system is a set of management-oriented
concepts, and that implementing the system requires not only the application skills of
quality management, but also the development of an appropriate business strategy.
Six Sigma is also a business strategy and systematic methodology, the use of which
often leads to breakthroughs in profitability through significant gains in product/service
quality, customer satisfaction and productivity. Six Sigma represents a conceptual
change in organizational culture and emphasizes customer orientation, and the process
improvement must be based on business strategy. Strategy factors must be integrated
into Six Sigma to increase the probability of successful implementation (Sandholm
and Sorqvist, 2002).

24 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


The process of business management is one in which the links between a firms
quality objectives and business strategy should be identified (Bauelas and Antony,
2002). Six Sigma programs are designed to achieve a competitive advantage, and
thus should be clearly linked to business priorities, as reflected by a firms strategic
and action plans (Snee, 2001). Pearson (2001) indicated that the key to Six Sigma
success is to optimize overall business results by balancing cost, quality, features and
availability considerations for products and their production into an optimum business
strategy. A Six Sigma business strategy relies on statistical tools and specifically
designed processes and methods in order to achieve measurable goals to pursue
increasing efficiency and productivity, reducing waste and enhancing products and
processes.
Figure 1 displays the essential focus on customer, process and employees to maintain
Six Sigma core quality.

Figure 1: Core Quality of Six Sigma

Customer
Process
Quality

Employee

Six Sigma Is Customer-Oriented


Six Sigma can be defined as a customer-driven approach, a focus on customer satisfaction
or customer sigma (Hahn et al., 1999). With this knowledge of customer feelings,
upper management can add value chain to improve customers perspectives, integrating
human and process improvement aspects (Snee, 1999).

Six Sigma Is Process-Oriented


Six Sigma core quality requires business management to look at process from the
customer s perspective, including customer expectation regarding performance,
reliability, rational price and on-time delivery.

Six Sigma Is Employee-Oriented


Full involvement of employees is essential to Six Sigma quality approaches.
Consequently, the management level must commit to provide opportunities and
incentives for total employee involvement (Harry, 2000).

Improving Inventory Performance Through Lean Six Sigma Approaches 25


Antony et al. (2005) stated that the most important factors for successful Six Sigma
implementation are management involvement and participation, linking Six Sigma to
customers and the business strategy of the organizations. Six Sigma approach helps
top management to carry out appropriate strategies by selecting strategically-related
projects. From this perspective the decision rights to initiate a project are allocated to
senior managers (Schroeder et al., 2008). The potential of Six Sigma to help companies
formulate and deploy a business strategy and bring about broad transformational change
implies that it can be seen as a high-order leadership approach, philosophy, and
methodology for change.

DMAIC
DMAIC methodology includes Definition of Measurement, Analysis, Improvement,
and Control, thus providing a structured framework for solving business problems by
effective process execution (Pressly, 2001). Horel (2001) described that the DMAIC
quality technique was first applied in manufacturing operations and rapidly expanded
to different functional areas such as marketing, engineering, purchasing and servicing.
Anthony and Banuelas (2002) conducted a case study on bulb manufacturing company
to reduce the shell cracking during the manufacturing of bulbs and achieved dramatic
improvements in defects by using DMAIC quality technique. Kim et al. (2010)
conducted a case study into a corporate research library of a telecom company in
Korea to identify and remove ineffective components and unnecessary steps in library
works and services.
Figure 2 displays a breakthrough strategy and the activities necessary to achieve
the goals of each phase. The DMAIC methodology involves the following phases:
Define: Teams work to clearly define those problems that are business-related
or essential to customer satisfaction.
Measure: Baselines for measuring the current defects and goals for improving
are established.
Analyze: The analytical phase is set with the aim to understand the root
causes of why defect occurs and to identify the key process variables that
cause defects.
Improve: During the improvement phase, teams seek optimal solutions, and
develop and test action plans for implementation.
Control: Control planning and verifying long-term capability are performed.
Lean Six Sigma
LSS is a combination of two continuous improvement programs, lean concept and Six
Sigma, with lean creating the standard and Six Sigma investigating and resolving
any variation from it (Breyfogle III and Meadows, 2001). George (2002) states that the
purpose of LSS is twofold, to transform the CEOs overall business strategy from vision

26 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


Figure 2: DMAIC Methodology Phase

Continuous
Improvement
Mobilize
Change
Problems
Control
Margin of ROI

Analysis
Focusing on
Improve
Measuring
Defining Analyze
Problems

Measure

Define

Time

to reality by the execution of appropriate projects, and to create new operational


capabilities that will expand the CEOs range of strategy choices to go forward. An
LSS methodology follows the primary tenets of both lean concept and Six Sigma,
capitalizing on the strengths of both. Lean concept creates the standard and Six Sigma
investigates and resolves any variation from the standard (Breyfogle III, 2003). LSS
has been defined as an approach that synthesizes the use of established tools and
methods. The tools and methods of the LSS practitioner encompass the tool sets of
both lean production and Six Sigma. Antony et al. (2005) concluded that LSS is the
systematic methodology of Six Sigma combined with the speed and agility of lean
methodology to produce greater solutions in the search for business and operational
excellence. The lean methodology includes a lean process which seeks to maximize
the value-added content of all operations, evaluate all incentive systems in place to
ensure that it results in global optimization instead of local optimization, and implement
a decision-making process based on the voices of customers.
The function of LSS is to reduce production costs, increase productivity, improve
safety, shorten time to market, and enhance product quality and yields. Harvey (2004)
outlines that any organization that wants to improve a process must identify the type
of process improvement problem it is facing. The main principles of LSS include
lean prioritization, training, stakeholder involvement, quantifying the impact of
just-in-time and creating a culture for success. LSS methodology has been used to
streamline records and management processes and to improve the ways information
flows into, through and out of organizations. Managing records has become an
enterprise endeavor, with diverse teams formed to work on structures and solutions
(Brett and Queen, 2005). Mader (2007) interpreted that LSS is a powerful method
for improving the existing products, processes and services. LSS effectively combines
the principles of Six Sigma with lean to spur a relentless pursuit of sustained

Improving Inventory Performance Through Lean Six Sigma Approaches 27


improvement. Lawson (2007) interpreted that lean manufacturing causes products
to move through processes faster, and Six Sigma improves quality, so integrating
the two complementary methodologies can yield even greater benefits than
implementing them separately.

Inventory Management
Inventory process is important to any trading or manufacturing company. The
organization should work and communicate properly to address the inventory problems.
If we do not know what or how much is in the warehouse, or whether it is in a usable
state or not, we will have a tough time meeting production schedules and performing
to meet our customers expectations (Wayman, 1995). An inventory system is the set of
policies and controls that monitor levels of inventory and determines what levels should
be maintained, when stock should be replenished, and how large orders should be.
The purposes of inventory management are to maintain independence of operations,
to meet variation in product demand and to take advantage of economic purchase-
order size.
There are three basic systems of multi-period inventory models to implement control.
The multi-period inventory models include the basic fixed-order-quantity model,
Economic Order Quantity (EOQ) model and two-bin system.

Fixed-Order-Quantity Model
The fixed-order-quantity model determines both the specific inventory point at which
an order will be placed and the size of that order. The fixed-order-quantity model
provides a good starting point for coverage of the inventory model.

Economic Order Quantity Model


The calculations to obtain the EOQ model would be divided into the off season and
busy season. The orders quantity in the busy season will be double that of the off
season. EOQ model assumes that the demand for the product is constant and uniform
throughout the period and price per unit of product is constant.

Two-Bin System
The purpose of classifying items into two-bin is to establish the appreciation of each
item. The order period of the two-bin system is bimonthly. The assumptions of the
two-bin system are: inventory holding cost is based on average inventory, ordering or
setup costs are constant, and all demands for the product will be satisfied.

Constructing a Lean Six Sigma Framework


The paper constructs an LSS framework based on the DMAIC methodology that
facilitates the waste elimination associated with lean concept. Figure 3 shows the LSS
process framework, and includes the three primary processes of Six Sigma interpreted
as follows:

28 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


Figure 3: Lean Six Sigma Framework

Process 1
Implementation 1. Transportation
Principle 2. Defects
Customer 3. Unnecessary Motion
Requirements Process 2
The Waste 4. Delays
Elimination of Lean
5. Setup Time
Concept
6. Overstock
Organizational 7. Processing
Capacity

Process 3 Lean Improvement


Methodology
Step 1
Subject Evaluation Definition

Step 2
Goal Setting
Measurement
Step 3
Situational Survey
Step 4 Analysis
Cause Finding
Step 5
Implementing Strategy
Step 6 Improvement
Results Confirmation
Step 7
Maintaing Standardization

Step 8 Control
Future Projects

Process 1 Implementation Principle


The implementation principle of LSS is to use organizational capacity to meet customer
requirements. The organization then needs to look at the flexible methodologies of the
available process and process improvement tools to meet varied customer requirements.
Finally, it needs to take a look at the different capacities of process change available.

Process 2 The Waste Elimination of Lean Concept


The purpose of waste elimination is to find non-value-added activities during process
flow and then to eliminate them. There is some waste of non-value-added activities
which increases the management costs and decreases business profit. The waste
includes defects, transportation, unnecessary motion, delays and waiting, setup time
and overproduction. These waste sources must be eliminated before implementing
LSS to smoothen the process.

Improving Inventory Performance Through Lean Six Sigma Approaches 29


Process 3 Lean Improvement Methodology Steps
The lean improvement methodology draws value process maps to analyze flows and
find problems. The aim of the improvement methodology steps is to integrate DMAIC
methodology with lean concepts. The definitions of eight steps are as follows:
D: Define
Step 1: Subject Evaluation To confirm the main problem and define what are
the priorities for improvement.
M: Measure
Step 2: Goal Setting To set up the baseline on management criterion and check
points of the improvement project.
A: Analyze
Step 3: Situational Survey To explore the environment situations, factors and
root causes of the problems being considered. Situational surveys are
not only to understand the related critical and influential factors, but
also may uncover key points and concepts for the improvement process.
Step 4: Cause Finding To use cause-and-effect approach to find problems
(inconsistencies between actual results and anticipated performance),
and thus to discover opportunities for improvement while looking for
root problems.
I: Improve
Step 5: Implementing Strategy To use the LSS approaches and methodologies
to achieve greater quality performance.
Step 6: Results Confirmation To examine corrective actions and see if actual
results really do lead to the anticipated performance goals.
C: Control
Step 7: Maintaining Standardization To validate the improvement action so
that it becomes a standard of procedure (SOP).
Step 8: Future Projects To apply the concept of continuous improvement inherent
in LSS improvement cycle.

An Empirical Study of the Lean Six Sigma


Although the literature contains many accounts of successful applications of Six Sigma,
few studies have examined the LSS system in a Taiwanese context. In Taiwan, there
are a few enterprises that have implemented the LSS system, and the author selected
Fount-Lea (FL) as a case study to consider. FLs business includes gardening materials
and equipment, leisure furniture, imported sandstone material from Bali, construction
engineering of thatched huts and pavilions, and Southern Yellow Pine from America.
The reason why FL implemented LSS was to meet the requirements of its main buyers.
Being a medium-to-small firm, the stock cost is very important to the management
performance of FL.

30 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


FLs main business is to import lumber from America and sell it to wood construction
companies in Taiwan. If FL cannot control the inventory cost, the management cost
will be higher and the profit will fall or even become a loss. Consequently, FL decided
to implement the LSS to control costs and avoid losing orders. Before adopting LSS,
the material control department was recording a high rate of delivery delays, and
customer complaints were frequent. FL thus decided to implement LSS to benefit from
its relationship with the buyers and to improve its competitiveness.

Process 1 Implementation Principle


The implementation principle is to explore the balance between customer requirements
and organizational capacity, and thus FL conducted a marketing survey to explore both
these elements. The product requirements in FLs business environment are in high-
mix and low-volume, and if customer requirements and organizational capacity are not
in balance, then the firm may have overstock cost or a stock shortage, representing non-
value-added activities. A Six Sigma team of FL was chartered to accomplish the following:
Increase the value-added activities in the process via eliminating the case of
overstock cost or shortage of stock.
Improve business process to support increased throughout.
Seek for quality assurance of materials to increase package efficiency.
Eliminate waste through LSS stock design.

Process 2 The Waste Elimination of Lean Concept


Since LSS activities are based on waste elimination, this step of improvement action to
exclude non-value-added activities must be clear, quantifiable and concrete. There
are seven waste sourcing in the FLs business process. Analysis shows that they can be
clubbed into six groups in the FLs business process, as described in Table 1. LSS
approaches to eliminate seven waste sources enable the FL to use its essential resources
to manage stock cost and achieve the highest possible profitability.

Table 1: Waste Elimination Methodology

Waste Sources Waste Description LSS Approaches

1. Transportation The lumber may be damaged Automation of transportation


while being transported to and greater protection while
customers. moving for the lumber.

2. Defects The supplier has the Double-checking when


preliminarily audit quality, but material is received and if
the material is unable to defects are found, then the
achieve 100% acceptable material must be replaced
quality level in Taiwan. If the immediately.
process has some defects, the
stock cost will increase.

Improving Inventory Performance Through Lean Six Sigma Approaches 31


Table 1 (Cont.)

Waste Sources Waste Description LSS Approaches

3. Unnecessary motion Additional processing of the The discarded parts of


lumber will increase wear on processed lumber may be
the equipment and thus raise reused in the other
the demand for spare parts products.
cost.

4. Delays The lead time of orders from If the material is not in


5. Setup time abroad is too long, and so stock, FL may source the
domestic orders will be material from elsewhere in
cancelled. Taiwan to avoid losing the
order.

6. Overstock Some semi-finished goods are FL tries harder to balance


being kept in stock to meet the organizational capacity
emergency orders, but and customer requirements.
sometimes is not necessary and
results in overstock.

7. Processing The lumber will require further Installing equipment to


processing because climatic maintain a constant
factors affect quality over the temperature in the
long term, and will raise warehouse to prevent
operational costs. damage to the lumber.

Process 3 Lean Six Sigma Methodology


Step 1: Subject Evaluation
LSS team survey and Figure 4 list all cost items to evaluate improvement in the subject.
The receiving cost and stock cost are 40% and 30% respectively of the total cost . The
receiving cost and stock cost mainly increase the management cost.
Figure 4: Total Cost Percentage of Different Cost Items
Other Cost 4%

Personnel Cost 20%


Stock Cost 30%

Transporation Cost 6%

Receiving Cost 40%

32 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


Step 2: Goal Setting
The main cost which affects the product quality performance is stock cost and receiving
cost. Goal setting assumes baseline period of stock quantity (QTY) is 8,300 units (one
year baseline of historical experience). The improvement goal is set at 1,000 units.
Stock cost will be reduced at 87.5% [8,000(QTY baseline)1,000(goal setting QTY)/
8,000(QTY baseline)].
Step 3: Situational Survey
The selling data of previous years show that the stock cost is increasing because the
quantity of monthly purchase is fixed, but the monthly sales is variable. Figure 5
displays the accumulated stock, purchasing quantity and sales quantity in a year.

Figure 5: Relationship Among Purchasing Quantity, Sales Stock


and Accumulated Stock

10,000

8,000
On Hand Stock
6,000
Quantity

Purchasing Qty
4,000
Sales Qty
2,000 Accumulated
Stock
0
1 2 3 4 5 6 7 8 9 10 11 12
2,000
Month
Note: On Hand Stock = Purchased Quantity Sales Quantity

Step 4: Cause Finding


The LSS team used the five Whys exercise activities to search for the solutions:
1. Why: The materials stored in the warehouse need to be reduced.
2. Why: The maintenance of equipment needs to be regularly done.
3. Why: Product characteristics need to meet customer requirements.
4. Why: The lead time of orders from abroad needs to be shortened.
5. Why: The defects of the process need to be reduced.
The five Whys exercise activities help the LSS improvement team to conclude that
the control of stock cost is the key factor because by controlling stock flow profit can be
improved. Table 2 displays the total cost percentage of stock, including materials,
equipment maintenance, return of products and purchase of indirect materials. The

Improving Inventory Performance Through Lean Six Sigma Approaches 33


Table 2: Cost Percentage of Stock Items
Item Reason Total Cost Percentage

Materials The materials are stored in a warehouse. 75


Equipment The equipment maintenance cost is 12
maintenance excessively high because equipment is not
regularly maintained.
Returns of Products are returned and stored in a 9
products warehouse because they do not meet
customer requirements.
Indirect material The indirect materials such as spare parts 4
are stored in the warehouse.

main cause of high stock cost is material cost (Total cost percentage = 75%). The LSS
must present an alternative implementation strategy for solving the stock cost problem.
There are three alternative implementation strategies to be considered: the basic fixed-
order-quantity model, EOQ model, and the two-bin system.
Step 5: Implementation Strategy
There are three alternative implementation models to solve the stock cost problem.
Step 5.1 Alternative 1: Basic Fixed-Order-Quantity Model The fixed-order
quantity model has to determine both the specific inventory points, R = 2,500
units, at which an order will be placed and the size of that order, Q = 3,000
units.
Step 5.2 Alternative 2: EOQ Model The calculations to obtain the EOQ model
would be divided into off season and busy season. The orders quantity in the
busy season will be double that of the off season.
Step 5.3 Alternative 3: Two-Bin System The purpose of classifying items into
two-bin is to establish the appreciation of each item. The order period of the
two-bin system is bimonthly. Based on the decision of the two-bin system, the
purchasing quantity of the first period is 18,000 units, and the seventh period is
also 18,000 units.
Step 6: Results Confirmation
Based on the results presented in Table 3, alternatives 1 and 2 are viable action plans.
Alternative 2 is the best available action plan, because it has a lower total cost and higher
profit than alternative 1.
When the LSS project and corrective actions are effective, they complete the LSS
methodology step cycle. The process results of the corrective action will be used for
performance benchmarking and standardization in future improvement activities. To
ensure that higher level of performance is maintained, the principle of continuous

34 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


Table 3: Comparison of the Alternatives
Alternative Total Cost Profit Analysis Evaluation
($) ($)
1 683,950 701,050 Becomes profitable from Viable
the fifth period.
2 640,330 744,700 Becomes profitable from the Viable
fourth period.
3 889,450 495,550 The investment cost is high Nonviable
and the profit is low as
compared to the original cost.

improvement should be established for future projects. This principle of future LSS
should embrace everything, including initial product designation, design proposals,
production process and after-service guarantees.

Conclusion
The assumptions of the fixed-order-quantity model are to release orders when the stock
is below specific units and the customer order is confirmed. Although the profit gained
from the fixed-order-quantity model is almost the same as in the EOQ model, the firms
may lose orders or face increased inventory cost because of the variability of customer
order.
The EOQ model has better inventory management, and inventory cost does not
rise so rapidly because orders are released each month. The firm may depend on the
off and busy seasons to judge what EOQ quantity to purchase. The EOQ model easily
controls inventory cost and enhances product quality since it is able to control the
quantity received in each period.
The two-bin system is not considered a viable methodology. To implement the two-
bin system, the firm must invest a huge amount of capital to purchase material in the
initial period, and thus the profit turnover will be very slow.

Suggestions
If organizations want to implement LSS, then there are four suggestions for its success.

Knowing What to Do in Implementing LSS


The firm should conduct a detailed audit of enterprise in the present environment
before taking the decision to implement LSS. Top management must develop their
leadership talents, and they must share the vision of LSS with all employees. LSS
approaches are to understand customer requirements and develop project management
by a process of Total Employee Involvement (TEI). The employee must know how to
use the appropriate quality tools to implement the LSS project.

Improving Inventory Performance Through Lean Six Sigma Approaches 35


Employee-Involvement is the Key Critical Success Factor
TEI is necessary to implement LSS successfully. There are some guidelines for TEI,
e.g., communication and project implementation, MBB, BB and GB certifications, top
management support, performance appraisal, praise and reward, process improvement,
and self-control of employees.

Based on Customer Orientation


Based on the concept that the product is finally intended for a customer, LSS must
pursue customer satisfaction and loyalty. It is necessary to collect, analyze and judge
the Voice of Customers (VOC) in the initial period of LSS. The VOC then identifies
the key quality requirements within the organization.

Using Process Orientation


Implementation of LSS must be based on process orientation. Through the process
flow of the lean project, LSS can analyze the hindrances and bottlenecks during process
management. The LSS project can achieve process optimization once there is an
understanding of the root problems within the process.

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Improving Inventory Performance Through Lean Six Sigma Approaches 37


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Reference # 07J-2017-08-02-01

38 The IUP Journal of Operations Management, Vol. XVI, No. 3, 2017


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