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LEAN SIX SIGMA TO IMPROVE SUPPLY CHAIN MANAGEMENT AT


IRON SYSTEMS

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

ALL RIGHTS RESERVED

 
 
APPROVED FOR THE DEPARTMENT OF GENERAL ENGINEERING

Dr. Ming Zhou


Technical Advisor,
Assistant Professor, Department of Organization and Management,
College of Engineering, San Jose State University

Mr. Aziz Khan


Industrial Advisor,
Director, Quality and Performance Excellence at Iron Systems Inc. 

Dr. Leonard Wesley


Associate Professor, Department of Computer Engineering,
San Jose State University

 
 
ABSTRACT

LEAN SIX SIGMA TO IMPROVE SUPPLY CHAIN MANAGEMENT AT IRON SYSTEMS

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

Systems cost savings with Lean Six Sigma implementation.

By

Subramanyam Chalamcharla & Adwait Kunte

 
 
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 1: From Total Quality Management to Lean Management (LM) ………………..7

Figure 2: Lean Six Sigma proposed Frame work ………………………………………..9

Figure 3: Iron Systems ………………………………………………………………….12

Figure 4: Workflow of Operations at Iron Systems Inc…………………………………16

Figure 5: Strategic Deployment Matrix…………………………………………………19

Figure 6: Six Sigma DMAIC…………………………………………………………….21

Figure 7: Weekly data for on time shipments for different business units………………25

Figure 8: showing Pareto Analysis for causes in delayed in shipment………………......26

Figure 9: Analysis of number of days delayed for shipments……………………………27

Figure 10: Iron Systems Business Processes……………………………………………..29

Figure 11: Iron Systems Improved Business Processes flow………………………….....30

Figure 12: Improved Iron Systems Purchasing Business Process flows………………….31

Figure 13: Improved OEM Business Process……………………………………………..31

Figure 14: Improved OEM Purchased order process…………………………………… 32

Figure 15: Demand aggregation System Overview……………………………………......33

Figure 16: Pareto Chart for causes of not having service factor 100%.................................39

Figure 17: Milestone Schedule for Cycle count program…………………………………..43

Figure 18: Gantt chart for Cycle count program……………………………………………43

Figure 19: Item profile in the I Code………………………………………………………..45

Figure 20: I Code transactions……………………………………………………………...46

Figure 21: Value Stream map for Iron Supply chain management………………………....48

 
 
Figure 22: Pareto Analysis of Inventory cycle count variance…………………………51

Figure 23: Work place before initiating 5S Program…………………………………...56

Figure 24: 5S Audit findings……………………………………………………………57

Figure 25: 5S before and after comparison………………………………………………57

Figure 26: Improvement with 5S Program………………………………………………59

Figure 27: Other application improved with 5S Program………………………………..59

Figure 28: Monthly Inventory turnover: January 2011 to January 2012……………….....61

Figure 29: Monthly trend of Cost of goods sold and Average Inventory…………………61

Figure 30: Push/Pull view of Supply chain cycle at Iron Systems………………………..63

Figure 31: Cycle Process view of Siemens Inc……………………………………………64

Figure 32: Cycle Process view of supply chain activities for Data center………………..65

Figure 33: Cycle process view of n-appliances model……………………………………66

Figure 34: Cycle process view of supply chain for Harmonic Inc………………………..67

Figure 35: Cost-Responsiveness as per Business model at Iron Systems………………..68

Figure 36: Value stream map for Harmonic-Iron Build, Pick, and Ship……………….....71

Figure 37: Total Operations Hours/Unit………………………………………………….74

Figure 38: Simple linear regression analysis chart………………………………………..79

Figure 39: Showing regression analysis with calculation of L and T_chart2……………79

Figure 40: Cause and Effect Diagram……………………………………………………85

Figure 41: Cause and Effect diagram with potential quick wins……………………….....86

Figure 42: Current state of roles and responsibilities for SCM team……………………...89

Figure 43: OEM Purchasing current state………………………………………………...90

 
 
Figure 44: OEM Purchasing Future state………………………………………………..91

Figure 45: CAPA (Corrective and Preventive Action) Life Cycle………………………94

Figure 46: Current state of shipping……………………………………………………..96

Figure 47: Improved state of shipping…………………………………………………..98

Figure 48: A3 Report for Inventory……………………………………………………103

Figure 49: VSL’s A3 report for Labeling………………………………………………104

Figure 50: Supplier vs % of components failure……………………………………….106

Figure 51: Part type vs Quantity rejected………………………………………………106

Figure 52: Operations vs Quantity rejected…………………………………………….107

Figure 53: Monthly Cost of goods sold vs Average Inventory…………………………111

Figure 54: US manufacturing jobs Labor statistics……………………………………..117

Figure 55: Break even analysis…………………………………………………………125

Figure 56: 5 years Projected Quarterly profit & Loss and Forecasted ROI …….……...129

Figure 57: 5 Years Projected Income statement………………………………………..130

Figure 58: Project Schedule…………………………………………………………….133

 
 
List of Tables

Table 1: key performance Indicators (KPI’s) with Current and Target values……………3

Table2: Iron systems Inc product offerings with Business model……………………….15

Table 3: Value added and non value added activities……………………………………24

Table 4: Showing the causes for delayed in shipment and their occurrence…………….26

Table 5: Analysis of number of days delayed and Causes……………………………….27

Table 6: Iron Systems Master Production Schedule……………………………………..34

Table 7: Cause and Root Causes Table ………………………………………………….38

Table 8: Proposed plan for ABC Inventory count……………………………………….42

Table 9: Type of inventory in the I code…………………………………………………44

Table 10: Work order Status……………………………………………………………..45

Table 11: Inventory accuracy Score card (Aug 2011)…………………………………...50

Table 12: Causes of material count variance…………………………………………….51

Table 13: Further causes, root causes, and action items…………………………………54

Table 14: Inventory Cycle Count Report………………………………………………...55

Table 15: Quarterly Demand Forecast by Harmonic…………………………………….69

Table 16: Historical demand for n-appliance products for last 3 years………………….77

Table 17: Showing demand with deseasonalized demand……………………………...78

Table 18: Calculation of values L= Constant= 9.7 and T= Beta= 0.82………………….78

Table 19: Showing de seasonalized demand for any period……………………………..80

Table 20: Showing demand and seasonal factors………………………………………..81

 
 
Table 21: Difference in demand forecasting……………………………………………82

Table 22: Post Blitz areas of improvement with action items…………………………...87

Table 23: Weekly production data and soft cost savings……………………………….109

Table 24: Monthly Inventory Turnover………………………………………………...111

Table 25: cost savings on based on reduction in inventory holding cost……………….111

Table 26: Customer segments market analysis…………………………………………121

Table 27: Return On Investment Capital……………………………………………….124

Table 28: 5years projected Profit & Loss and Revenue generation statement…………128

Table 29: Five year Projected Balance sheet …………………………………………..130

Table 30: 5 years Projected Income statement…………………………………………131

Table 31: Definitions and Acronyms…………………………………………………...132

 
 
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 Dr Ming Zhou (Department of Organization and


Management) College of Engineering, San Jose State University for his support and guidance in
achieving our goal.

We would like to thank Dr.Ali Zargar, Professor, Department of Aviation and


Technology, San Jose State University for his encouragement and guidance throughout the ENGR281
course.

We would like to thank Dr. Leonard Wesley, Associate professor, Department of


Computer Engineering, San Jose State University for his guidance and suggestions throughout the
ENGR 298 course.

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

China. (Khan, Z, 2010) Now-a-Days due to an increased competition companies are

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

organizations. Lean Six Sigma approach to business process improvement helps

companies distinguish themselves from competitors by manufacturing products with less

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

achieve these improvements can be addressed by kaizen event. (Chen, 2010)


 
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

of waste, and increased the profit.

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

constraints such as capacity, budget, and business model of each product.

1.2 Company Background

Iron Systems, Inc., is founded in 1996 in San Jose, CA. Iron Systems, Inc.

provides network system solutions, original equipment manufacturers (OEM) appliance

platforms, and information technology (IT) infrastructure management services. It offers

rack mount servers, blade servers, network storage products, OEM appliance platforms

and services, and network security appliances. (Iron Systems, 2012)

Iron Systems Inc is an expert in manufacturing storage appliances, data centers,

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


 
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

are assembly and testing.

Iron Systems Customers: Harmonic Inc, Siemens, Nimble Storage, Azul Systems,

Matrix stream, Tegile etc

1.3 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; Purchasing procedures for different business units, Work standardization,

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


 
the target. Team worked to improve following supply chain management Key

Performance Indicators (KPIs).

Sl. No Key Performance Indicators Current Target


(KPI’s)
  
(Before
Improvement)

1 Annual Inventory Turnover 7 16


2 On Time Shipments (OTS) 55% 92%

3 5 S (sort, straighten , shine, 8 18


standardize, sustain) Score

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

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.

Implementing process improvements suggested by Lean Six Sigma to improve supply

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

will improve inventory turnover, on time shipments, inventory management, purchasing


 
procedures for different business units, work standardization, reducing total costs

associated with products and it will address the supplier issues and customer issues.

1.5 Project Scope

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

capacity, cost, and budget constraints.

According to lean concept every business process improvement opportunity has

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

labor hours per system.

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

sustaining the change. The improvement opportunities like improving business models


 
with customers or improving the supplier's purchasing contracts will be out of scope of

this project.

1.6 Supply Chain Overview

According to the Council of Supply Chain Management Professionals, “supply

chain management encompasses the planning and management of all activities involved

in sourcing, procurement, conversion, and logistics management. It also includes the

crucial components of coordination and collaboration with channel partners, which can

be suppliers, intermediaries, third-party service providers, and customers.” (CSCMP)

1.7 Six Sigma

“Six Sigma is a fact-based, data-driven philosophy of quality improvement that

values defect prevention over defect detection.” (Brassard, 2002) Six Sigma is also

business philosophy of focusing on continuous improvement by understanding customer

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

process in the organization would be benefited most due to improvement effort.

1.8 Lean Management

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


 
delivered at right time in right quantity at right location at right time with minimum costs

incurred. A lean system allows production of a wide variety of products or services,

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

requirements. (Maclnnes, 2002)

2. Literature Review

The purpose of the Literature Review is to analyze relevant journals, books,

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

increase the profit.

2.1 Lean Six Sigma framework

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. The first objective is linkage between LM and SS with other management

theories such as Total Quality Management (TQM). The Second objective is integration

between Lean Management and Six Sigma. (Khan, Z, 2010)

Figure 1: From Total Quality Management to Lean Management (LM)

Source (Khan, Z, 2010)

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

suggestions offered by this article as follow:

5Ss: One of the improvement suggestions and it stands for: Sort, Straighten, Shine,

Standardize, and Sustain. (Maclnnes, 2002)

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

management. (Brassard, 2002)


 
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

the problem, identify gaps for improvements.

Improve: Measure and Evaluate Improvement. Continuous Improvement

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

effort and delays''

Integrating Lean Management and Six Sigma: The new wave of business excellence will

be the integration of Lean Management and Six Sigma.

The Proposed Frame work:


 
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

organization to improve their operations. The obstacles in achieving these

improvements can be addressed by KAIZEN events. This will help the companies in

organizing the different work flows, business units, and resources. (Chen, 2010)


 
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

continuously improve. Some of the constraints are capabilities and educational

background of current employees, the use of IT infrastructure and technology and most

importantly their attitude towards the change management. (Chen, 2010)

2.3 Change Management

The success of any improvement project is depending upon how top

management is implementing a change. To predict a success Sirkin, Keenan and

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

called as performance integrity of individual employee, considering the abilities, skills,

and traits, required for improvement project. The commitment of the top management

10 
 
and employees to change lays important role and most importantly the effort

requirements for every employee in the company.

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 implying change considering an above mentioned factors. 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)

3. Iron Systems Inc (Industrial Sponsor)

Iron Systems Inc is an expert in manufacturing storage appliances, data centers,

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,

11 
 
capacity planning, packing and shipping. The operations under Production are assembly,

test, and reliability testing. ("Company overview of," 2012)

Figure 3: Iron Systems

3.1 Iron Systems Business Models

3.1.1 OEM Customers

Iron systems serve many customers with OEM product offerings namely

Harmonic, Siemens, and other OEM customers. In OEM business model, Iron systems

manufacture the products on behalf of their customers. Product specifications, suppliers,

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

build plans are communicated to production.

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

12 
 
customers, the critical part of business comes under how efficiently Iron can manage

Inventory levels, Production efficiencies and service levels to achieve customer

satisfaction. Iron systems faced the challenges in terms of uncertain build to forecasts,

variability of demand and business contracts.

Harmonic Business model is based on make to forecast, Harmonic Inc provides

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

(FGI) as these products are not invoiced, it affects inventory turnover.

Siemens business model is based on make-to-schedule where Siemens has

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

systems Inc considers those together under category of Other OEMs.

13 
 
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

to ship systems to have immediate response to customer demands.

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

obsolete are more.

3.1.3 Data Center

  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

levels and hence inventory holding costs or inventory carrying cost.

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.

14 
 
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.

Iron systems faced challenges in delivering the build-to-orders products on time or

scheduled date committed to customers. Quality improvement team will analyze these

challenges considering process flows (value stream maps), process gaps and lead times.

Product Business Model Approximate Revenue


1. Data Centers Build to Customer Orders 15%

2. OEMs 70%
2.1 Siemens Build to Schedule 25%

2.2 harmonic Build to Forecasts 25%


2.3 Other OEMs Customers Build to orders / Contracts 20%
3. n-Appliances Build from Inventory 15%
Table2: Iron systems Inc product offerings with Business model

3.2 Work flow Overview of Iron system operations

Iron Systems serves their customers with products like servers, security devices,

Data center, and OEMs for companies like Harmonic, Siemens and many more. Iron

Systems has following major departments.

1. Sales and marketing

2. Operations and supply chain management

3. Production department

4. Accounting and Finance

15 
 
 

Figure 4: Workflow of Operations at Iron Systems Inc.


1. Sales and Marketing: This department is responsible for bringing the customers to Iron

systems. Once order from customer got approved, Sales creates the Sales order and

forwards it to operations department for fulfillment.

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,

testing and shipping.

16 
 
Following are the main activities carried out in supply chain department.

2.1 Procurement: It is activity by which required material is purchased from supplier or

vendors. This department issues purchase orders, keeps track of Earliest Time of Arrival

(ETA), and informs the operations department.

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

Inventory stockroom in to designated place.

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

orders or Sales order.

3. Scheduling: Operations and supply chain management department schedules the

procurement and receives the material according to production schedule for assembly,

testing, burn in, packing and shipping as per customer requirements.

4. Production Department: Production department assembles the systems according to

standard operation procedures, carry out testing and configuration, and make systems

ready to pack and ship.

5. Accounting and Finance: This department is responsible for carrying out financial

transaction from customer side and supplier side. They publish Income statement and

Balance sheet for company.

17 
 
3.3 Strategy Deployment Matrix (X-Matrix)

The basic functions of the management are commonly identified as Planning,

Organizing, leading (motivating) and controlling of which Planning has a prime

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

procedure to achieve these objectives.

Strategy deployment is one of the most important elements of total quality

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

on timely manner. Strategy deployment helps to keep improvement team aligned to

objectives which is also aligned to organization’s mission and vision for 2 to 3 years top

level breakthrough objectives. (Cowher, A, 2010)

18 
 
Figure 5: Strategic Deployment Matrix

3.3.1 Top level Improvement priorities

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

business objectives organization should be able to prioritize the improvements

considering the business model, level of competition, market shares, and future of

business environment along with growth plans of company.

At Iron systems, team has identified improvement priorities on top level as Quality

improvement, customer service, quality management, organizational development, and

housekeeping work place.

19 
 
3.3.2 Annual Objectives

Annual objectives for improvements are identified as Cost, Quality, and Delivery.

Cost is important to sustain in competitive market. Quality of product is also important to

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

required to keep a focus of every employee involvement. It helps to add creativity to

major change management. It also helps to understand how to collect and measure data

points to achieve the objectives.

3.3.3 Key performance Indicators (KPI’s)

These data collection is published by key performance indicators (KPI’s) on

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

have impact on improvement priorities.

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

Time Delivery and indirect impact on quality.

20 
 
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

top management initiative and it is considered in strategy deployment matrix.

3.4 Proposed Methodologies

3.4.1 DMAIC Methodology

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)

Figure 6: Six Sigma DMAIC ("Six sigma dmaic ," )


Define Phase: The goal of define phase is to define the project scope by understanding

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

best representation of define phase can be established by Hoshin planning or x matrix.

21 
 
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

occurrence is required to decide the improvement priority and problem’s location. In

measure phase team can gather Historical data to come up with baseline for

improvement. Measure phase data collection effort leads to more focused problem

statement. (Brassard, 2002)

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

of the improvement. (Brassard, 2002)

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

improvements. (Brassard, 2002)

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

22 
 
that case improvement team should be able to analyze the changes for further

improvements. (Brassard, 2002)

3.4.2 Improvement in On Time Shipment

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

Time Shipments (OTS).

Define Phase: The team has defined the criteria for the On Time Shipments is in terms of

customer perspective data; if operations department shipped products on same date as

committed to customer then it will considered as on time. If it is shipped after scheduled

date, then shipment will not be considered as on time shipment.

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

Mapping Before and Value Stream Mapping Improved charts.

23 
 
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

simplified and tries to eliminate these activities by recommending efficient order

management software and IT infrastructure. (Martin, 2007)

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

Table 3: Value added and non value added activities

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

analysis and 5W (What, Why, When, Where and How) techniques.

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

24 
 
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)

s 100% 90% 85%


O 68% 69%
h 80% 65%
n
i 60%
p 40%
t On time shipment
m 20%
i
e 0%
m Data  N  Harmonic Siemens Other 
n
e center appliances OEMs
t
Business Unit/ product

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

92% (according to X-Matrix developed for improvement planning).After carrying out

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

publishing the KPIs for each business unit on weekly basis.

25 
 
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

shipment and their occurrence.

% 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

Figure 8: showing Pareto Analysis for causes in delayed in 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

Figure 9: Analysis of number of days delayed for shipments

Team started collecting the data on causes of delays along with number of days it got

delayed.

Analysis of # of days delayed and Causes


Sr 
#  Days delayed % of time Causes
1  1 to 4 days 32% Lead time
   Material shortage
   Tight Shipping schedule
   Parts failure
   Material not included in BOM
  
2  5 to 9 days 20% Sales hold
   Change in product specification
   Parts failure
   Software issues
   Engineering issues
  
3  More than 9 days 12% Sales Hold
   Accounting Hold due to payment
   Long lead times
Table 5: Analysis of number of days delayed and Causes

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

flows to address the causes of delays.

28 
 
Current process flows:

Figure 10: Iron Systems Business Processes


Areas of improvement in current process are as follows:

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

times based on the customer requirement of customization.

29 
 
3. Engineering and configuration issues occurred where sales team is not knowledgeable

about compatibility of system component hence review from technical team or

engineering team was required.

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

purchasing process flow.

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.

Improved process flows:

Figure 11: Iron Systems Improved Business Processes flow

30 
 
Figure 12: Improved Iron Systems Purchasing Business Process flows
OEM Business:

Figure 13: Improved OEM Business Process

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

Sales and Operational planning (iii) Material requirement planning

Demand Management: In order to improve On Time Shipment (OTS), service levels

and Inventory turnover required efficient demand planning. Quality improvement team

introduces concept of Master production schedule (MPS) and Material Requirement

32 
 
planning (MRP) in to Iron systems based on improvement and creating the cross

functional workflows for different products and business units.

Demand estimation, including quantitative forecasting models which directly

impacts supply chain performance and inventory investment. (Martin, 2007) Demand

management is an important topic for efficient supply chain management since inaccurate

estimates of demand results in to too much of inventory (reducing inventory turnover) or

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

to demand management, purchase order processing and sales order processing.

Figure 15: Demand aggregation System Overview


Source (Martin 2007)

33 
 
Sales and Operational planning (S&OP): Quality improvement team identified need of

efficient S&OP planning to improve performance of supply chain by taking into

consideration the requirements of business models and products. Quality improvement

team suggested the importance of S&OP meetings to understand customer requirements

from sales team, financial constraints, supply, demand, and production planning to fulfill

the customer demands. (Martin, 2007)

Quality improvement team introduces Master Production Schedule (MPS) which

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

OEM customers, quantitative demand forecasting for n-Appliances and quantitative

forecast from Data center to predict the capacity requirements.

Iron Systems Master Production Schedule


Month 11-Aug 11-Sep 11-Oct 11-Aug 11-Nov 11-Dec Total 
Product   
Siemens‐PARS 
Servers  80 85 85 90 95 105 540 
Siemens‐PARS 
Racks  75 85 90 65 55 80 450 
Siemens ‐AFCS  56 77 87 92 78 65 455 
Harmonic JBOD  75 0 80 80 0 50 285 
Harmonic SBB  78 0 87 87 0 55 307 
Harmonic MCP  46 8 46 46 8 44 206 
Harmonic Dell  103 0 107 100 0 192 672 
DC  30 30 30 30 30 30 210 
nAppliances  8 8 8 8 8 8 56 
Other OEM  20 25 32 45 25 35 182 
Monthly Total 571 318 652 643 299 664 3363 

Table 6: Iron Systems Master Production Schedule

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.

MRP uses Bill of Material information (BOM) to calculate material requirement by

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

needed. (Martin, 2007)

Quality improvement team understands the importance of IT infrastructure and

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

reduce the rework labor hours per system.

Define and Measure phase:

Service factor is an indicator of percentage of material available at scheduled

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

increases average inventory for given month.

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

purchasing. There is communication between Accounting and finance department of Iron

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

information on credit limits either from supplier or Internal finance/ accounting

37 
 
department. Quality improvement team carried out Blitz event to improve the process of

procurement to increase the material availability.

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

these issues in front of customers in quarterly performance meetings.

%
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

supplier. Quality improvement team decided to have Blitz event to improve

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

due to the lack of 5S program, where improvement in 5S score and employee

involvement in program will help to improve the service factor score.  

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

consumed in production. Production planning should have real data on material

availability to schedule the production and other activities like procurement, RMA and

MRB etc. Physical inventory accuracy means keeping the available stock in Inventory

and Everest system stock are equal.

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

Requirement Planning system.

Cycle counting programs

  Cycle counting is a process which verifies the accuracy of the inventory data. As

part of Supply chain management improvement, Inventory accuracy plays an important

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

hours per system(time spent to build one unit).

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

was matching with the ERP system’s available stock.

Objective of cycle counting program

The Primary objective of Inventory cycle counting project is to achieve

excellence in customer service and optimize the effectiveness of internal operations and

processes. ( Piasecki, 2003)

Specific Objectives:

1. Identify process problems

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

inaccuracy. ( Piasecki, 2003)

2. Narrow down the improvement effort in supply chain activities

3. Correct on hand balances of the material 

41 
 
 

Cycle count program:

Proposed plan for ABC Inventory count


Quantity % Of Counting
ABC Analysis Cost wise % of Cost
wise Qty frequency
Grand Total $3,988,586.71 971
A Items $3,190,869.37 99 10% 80% Monthly
B Items $598,288.01 222 23% 15% Quarterly
C Items $199,429.34 650 67% 5% Semiyearly
** ABC Analysis as on date 08/01/2011
Plan for Cycle
Schedule
count
Tasks August September October November December
A, B and C Aug 18, Aug 19,
Counting Aug 20
A item counting 15-Sep 15-Oct 1-Nov 1-Dec
B Item counting 15-Oct
C item counting

Table 8: Proposed plan for ABC Inventory count

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

counting the inventory. 

Cycle counting Schedule: Cycle counting programs requires engagement of many

business activities with many business processes involved and affected. Hence team

decided to have systematic approach to achieve the excellent performance in project.

42 
 
Milestone schedule 

 
Figure 17: Milestone Schedule for Cycle count program

Gantt chart 

 
 

Figure 18: Gantt chart for Cycle count program

Setting up and running cycle count program


Inventory analyst and operations manager are responsible for this program for its

scheduling, execution and reporting.

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

items etc with symbols.

Types of the Inventory in I Code

 
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 shows all the quantities of material at Iron Systems.

Total stock= quantity on Sales Order (SO) + Available stock+ Quantity on Debit Order

(DO)

Total stock shows entire picture of stock quantities.

Available stock= Given moment it is the stock available for production

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

systems right now.

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.

Getting system ready for cycle counting program

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

Schedule and preparation of first cycle count program

Team decided to have cycle count program for 3 days and it includes following

components

1. Cycle count preparation meeting

2. Cycle count readiness meeting (control transactions) transactions which can affect the

inventory physically and in the system should be stopped.

3. Actual cycle counting

4. Reporting, Recounting variance and reconciliation

48 
 
5. Post analysis for improvement

Cycle count program report Score card

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:

1. Net piece accuracy= ([sum of pieces on hand]-[sum of net piece variances])/[sum of

pieces on hand] ( Piasecki, 2003)

2. Net dollar accuracy= ([sum of dollar on hand]-[sum of dollar variances])/[sum of

dollar on hand] ( Piasecki, 2003)

3. Absolute piece accuracy= ([sum of pieces on hand]-[sum of absolute piece

variances])/[sum of pieces on hand] ( Piasecki, 2003)

4. Absolute piece accuracy= ([sum of dollar on hand]-[sum of absolute dollar

variances])/[sum of dollar on hand] ( Piasecki, 2003)

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

in to the processes affecting the inventory count.

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

• Work order status not changed WIP or Built

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.

• Wrong inventory storage practices

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.

• Material not received in system

Whenever receiving guys receives material physically, it needs to be received in the

system; many times kitter (person who kits) was forwarding material for production

without receiving it in the system (I-code)

• Material not found in stock room

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.

• In-house borrowed material list not updated

Material which is utilized by in-house projects should be transacted on debit order or

sales order to keep track of material count in inventory stockroom.

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

and workplace efficiency. 5S is a Lean engineering technique which helped in identifying

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

increased efficiency and work place efficiency. (Maclnnes, 2002)

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:

1. 5S culture is defined and adding value

2. 5S audit tour readiness

3. Overall facility

4. Storage and arrangement for equipment and devices

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

progress of the program.

Figure 23: Work place before initiating 5S Program


Phase 2:
Team decided to develop the team of employees working in department and

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

conducting weekly 5S meeting to discuss the improvement opportunities according to 5S

audit by auditor. During the meetings we encourage everyone to proactively participate

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

employees for 5S.

Figure 24: 5S Audit findings

Figure 25: 5S before and after comparison

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’s responsibility it adds value when somebody is kept responsible. Designated

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

Figure 27: Other application improved with 5S Program

3.4.6 Annual Inventory Turnover

“Annual inventory turnover is defined as number of times Inventory sold or used in

year.” ("Inventory turnover," )Inventory turnover is calculated by dividing the Cost of

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

service levels, and business models.

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

inventory levels effectively. It increases the organization’s responsiveness to changing

customer demands or product specifications. Organization can launch new product with

high response which leads to increased profitability.

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

organization’s ability to quickly manage changing customer demands. It also increases

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

Figure 28: Monthly Inventory turnover: January 2011 to January 2012

From the chart, the inventory turnover values are not stable. As per KPI Improvement we

need to improve Inventory turnover to 16. The variation in inventory turnover is

depending mainly on cost of goods sold (COGS). If cost of goods sold increases, average

inventory also increases to serve the demand. Improvements in inventory control

management, material requirement planning, and efficient purchasing practices are

identified as primary factors to increase inventory turnover.

Monthly Cost of goods sold VS Average Inventory


$5,000,000 
$4,000,000 
$3,000,000 
$2,000,000 
Cost of goods sold
$1,000,000 
$0  Average INV

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

of supply chain along with Push / Pull process execution.

Cycle view of processes of supply chain at Iron systems

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

at Iron Systems Inc.

Procurement Cycle

Procurement cycle initiates after receiving the order, forecast or delivery schedule

from customer. Accordingly procurement department purchases required material to

build the product.

Production Cycle

Once required material arrived at Iron Systems, Production cycle initiated for

assembly, testing and packing according to scheduled date of the product.

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.

3.4.6.1 Push/ Pull view of supply chain processes at Iron Systems

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

in response to customer demand (customer confirmed order or purchase order), where as

in Push process purchasing process is initiated in anticipation of customer orders. Pull

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

are certain processes. (Chopra, Meindl & Karla, 2006)

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

Figure 30: Push/Pull view of Supply chain cycle at Iron Systems

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

Figure 31: Cycle Process view of Siemens Inc

Data Center:

These products follows make-to-order business scenario where the procurement

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

more concern about the customized product rather than responsiveness.

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:

These products follows make-to-stock business scenario where the procurement

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 occurs. Re-Order cycle initiated by material availability compared to forecasted

demand and customer order cycle initiated by comparing available material with

forecasted demand. As customer order is fulfilled by ready to ship inventory hence

greater responsiveness to customer order can be achieved.

Figure 33: Cycle process view of n-appliances model


OEM Business model with Harmonic Inc:

These products follows make-to-forecasts business scenario where the

procurement cycle is initiated by demand forecasts provided by Harmonic Inc.

Production cycle initiated to fulfill monthly forecasted demand by Harmonic Inc.

Re-Order cycle initiated by material availability compared to forecasted demand and

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

to customer order can be achieved.

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

In order to sustain today’s competitive market companied needs to understand customers

requirement and fulfill customer’s demand in more efficient way compared to

competitors.

Causes of high Inventory turnover:

Inventory is necessary to meet customer demand on time as production capacities

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

their suppliers to be responsive to changing demand. In order to achieve strategic fit

between two strategies quality improvement team decided to develop responsiveness

matrix at Iron Systems.

Figure 35: Cost-Responsiveness as per Business model at Iron Systems

Understanding customer and supply chain uncertainty:

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.

Quarterly Demand Forecast by Harmonic


Qty
Units
Forecasted Built / Iron
Month Sold to
Demand Ready FGI
Harmonic
to ship
Q1 2011 65
January 25 25 13 12
February 18 18 5 13
March 22 22 18 4
End of
Q1 65 65 36 29

Table 15: Quarterly Demand Forecast by Harmonic


Here total quarterly demand for Harmonic product was 65 divided into monthly

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

69 
 
has increased turnover at the end of each quarter. One of the reasons for having high

levels of average inventory turnover is due to inefficient demand forecasting for

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

based on responsiveness and Inventory turnover.

Harmonic expects high responsiveness from Iron Systems to changing demand

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

with expectation of high responsiveness.

Application of Lean systems to improve Inventory Turnover

Iron systems - Harmonic (supplier-customer) collaborative initiative is to improve the

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

70 
 
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

and suppliers. Today’s business practices exploit the IT infrastructure to share

information which can enhance the communication between supplier and customer.

Developing the Value stream map was helpful in getting insights about the way

Harmonic expects business practices with Iron Inc.

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

71 
 
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

goods inventory is form of waste.

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.

72 
 
Other Solutions for Improving Inventory Turnover

Iron Systems was carrying 10 to 15% worth of total inventory as obsolete

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

processing of scarp inventory. Implementation of 5S program along with inventory cycle

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

of MPS, MRP, proactive approach for inventory management, implementation of 5S,

improvement in service levels, and continuous improvement approach will improve,

eliminate, and explore the causes of high levels of inventory in future.

3.4.7 Improving Total Operational hours per system


Total operational hour takes into consideration direct and indirect labor hours,

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

73 
 
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

average rate per labor hour was calculated as $ 25.

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

3.5 Demand Forecasting Mathematical model (n appliances Business model)

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.

74 
 
(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.

n-Appliances is software security product developed by Iron Systems Inc having

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

amount of inventory was consumed by n-Appliance material, hence decided to develop

the demand forecasting model and appropriate inventory model for the business unit to

lower the inventory levels by improving material availability and service levels.

Objective of the Demand Forecasting for n-Appliance: The objective of demand

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

inventory levels for n-appliance product by addressing following questions in most

effective way.

1. How much qty of n-Appliance product to keep ready to ship (shelves quantity)?

75 
 
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

component do not vary as new demand is observed.

Basic Definitions:

L= Estimate of level at t=0 (deseasonalized demand estimate during period t=0)

T=Estimate of trend (Increase or decrease in demand per period)

St= Estimate of seasonal factor for period

Dt= Actual demand observed in period t

Ft=Forecast for demand for period t

In static forecasting method, the forecast in period t for demand t+l is given by the

following formula

Ft+l= [L+(t+l) T] St+l (1) 

 
 
 
 
 
 
 
 
 
 

76 
 
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.

3.5.1 Liner regression

In statistics linear regression is an approach to model or establish relationship between

dependent variable (y) and explanatory variable (x). Linear regression analysis focuses on

conditional probability distribution of y given x. In linear regression data is modeled

using linear predictor functions and unknown model parameters can be estimated from

the data.

77 
 
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

demand. We used liner regression with de-seasonalized demand as dependent variable

and time as independent variable.

 
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

Source: Solved on free online tool for linear regression http://www.wessa.net/slr.wasp

78 
 
 
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," )

79 
 
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

depersonalized before we run the linear regression.

3.5.3 Estimating Seasonal Factors

The seasonal factor St = Di / Dt further Seasonal factor for each quarter can be calculated

using the average of All the respective quarters of year.

80 
 
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
 

Table 20: Showing demand and seasonal factors 

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

analysis which has following meaning:

If a time series exhibits regular seasonal fluctuations then for the purposes of analysis (for

example, to estimate an underlying trend) it is often necessary to remove

the seasonality to leave deseasonalized data.

Source: ("Answers.com," )

3.6 Project Charter

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

Sponsor Name: Harvey Bath

Facilitator Name: Aziz Khan, Vishal Sood

Team leader Name: Aziz Khan

Start date: 09/20/211

Duration: 1 Month

Host Location:

Process Name: Supply chain management and Purchasing.

Process Owner: Vishal Sood

Team Members: Adwait, Sonu, Davinder, Alexis, Jinny

Process Boundaries: Managing the inventory, starting form decision on purchasing


the material through its EOL.

Verify link tie to strategy deployment: Inventory turns, 5S, On time shipments and
labor hours per system.

Problem Statements: Improvement in inventory turns, reducing the standard labor


hours waiting for parts also reducing the hours paid on managing the inventory
.Establishing the EOL procedure for inventory items.

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.

Following are the Metrics/ goals this team is to achieve.

Sr. No Metric Target % change


1. Improvement in Inventory turns by 4 46%
2. Decrease stock out 20%

  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

material availability was discussed as “Credit holds from Suppliers.”Team decided to

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.

3.6.1 Cause and effect diagram

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

these causes in to main categories as Management, Information, People, and Process.

Process: This category belongs to implementing industry standard practices of having

production planning and scheduling.

• The process of receiving the material, physically and in the system,

• Developing supplier score cards.

People: This category identifies the issues related to employees by identifying need of

training and cross functional communication initiative taken by employees working in

different functions of organization.

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,

make to schedule and make to purchase orders.

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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

be communicated to buyer on timely manner.

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

86 
 
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

87 
 
top management decided to redefine job profiles, roles, and responsibilities of the

existing employees. Team decided to follow approach discussed in Harvard business

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

of the highlights of Kaizen event are introduction of Master production schedule,

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

88 
 
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

the inventory accuracy and workplace efficiency.

 
Figure 42: Current state of roles and responsibilities for SCM team

89 
 
 
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

borrowed items in inventory, and informing inventory analyst regarding material

90 
 
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.

Figure 44: OEM Purchasing Future state

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

91 
 
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-

conformities in any process in any organization. It is the systematic investigation of the

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,”)

CAR (Corrective Action Request):

Corrective Action Request (CAR) is a procedure used in response to a non conforming

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

eliminate the cause of a detected nonconformity or any other undesirable situation.

ƒ There can be more than one cause for nonconformity.

ƒ Corrective action is taken to prevent recurrence whereas preventive action is taken to

prevent occurrence.

ƒ There is a distinction between correction and corrective action

3.7.2 Types of CAR

1) Internal CAR:

92 
 
Internal CAR is for internal customers, it is issued to address the inter-department non

conformities related to product or processes.

2) External CAR:

Whenever we want to issue a CAR to either customer or suppliers for non conformities

related to processes or product then it is called External CAR.

Whenever a CAR is issued to a supplier for non conformities related to a product or

service then it is called as SCAR i.e. Supplier Corrective Action Request.

3.7.3 Categories of CAR

I. Process Corrective Actions: Designed to capture corrective/preventive information

related to products, parts, or processes. They are intended for tracking of internal product

failures.

II. Vendor Corrective Actions: Designed to capture corrective/preventive information

related to vendor supplied component parts, sub-assemblies or services. They are

intended for tracking of supplier related failures and can be a tool for communication

with your supplier.

III. Audit Corrective Actions: Designed to document corrective/preventive information

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

severity of the CAR.

93 
 
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

which is international shipment. (Maclnnes, 2002)

94 
 
  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.

  2. It costs harmonic inc to pay charges of logistics for international shipment

  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

95 
 
to prevent this kind of errors from happening. Quality improvement team decided to use

systematic approach of collecting background information before implementing the

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

with MG-BASE pack.

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

96 
 
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

to ship by starting at 5.00 pm.

5. After few weeks Harmonic issued CAR to Iron Systems for implementing Preventive

Action and Corrective Action.

3.7.5 Process Improvement approach

Brainstorming: Quality improvement team called a meeting to discuss about this issue

with the stake holders and conclude following points

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

checkpoints for applying label.

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

errors and defects in future.

97 
 
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.

5. Team requested Harmonic Inc to allow to give more lead time

 
Figure 47: Improved state of shipping

98 
 
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

the systems in harmonic FGI and non-invoiced systems in Iron FGI.

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.

3.8 A3 Reports for Labeling and Inventory management

A3 reports is structured quality improvement and problem solving tool developed

by Toyota manufacturing company. A3 the name of the report represents the size of

99 
 
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

statement in concise manner that can be explained on small piece of paper.

Implementation of A3 reports required collaborative approach when lead or supervisor or

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

improvement project. A3 reports foster learning, team building, and personal

development amongst employees. ("A3 reports," 2012)

Project team was working on different improvement opportunities based on fact

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

opportunity for improvement starts working collaboratively to work on improvement

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

works with his own team to the completion of A3 project.

100 
 
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

meaning. ("A3 reports," 2012)

Current Condition: Current condition explains the problem with data analysis like

Pareto charts histograms etc. Current condition makes problem statement clearer with the

data points. ("A3 reports," 2012)

Goal: Set the measurable target for improvement; for example improve labor efficiency

by 50% or reduce cycle time by 20% etc.

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

down the problem statement. ("A3 reports," 2012)

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

resource utilization. ("A3 reports," 2012)

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

101 
 
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

reduced customer complaints regarding the wrong labeling by 80%.

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

due to improved efficiency were $250 per month. 

102 
 
 
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, testing burn in, and quality assurance.

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. Assembly at Iron Systems is done in Assembly line mechanism, where

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

104 
 
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

component failures only by excluding material shortage issue to service levels. If

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

failed) and testing and burn- in yield becomes 70%.

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

phases it becomes total production yield or cumulative yield in this case

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

105 
 
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

related to material failures.

Supplier vs % of componets Failure


2% 3% ATP ELECTRONICS, INC.

3%
20% 9% DELL INC

4% 10% INGRAM MICRO, INC.

4% MALABS, INC
45%
MICROLAND
ELECTRONICS
 
Figure 50: Supplier vs % of components failure

Part Type Vs. Quantity rejected


3% 2% DIMM Modules

14% Enclosure
25%
Hard Disk Drive

5%
11% 40% Motherboard

Networking
Equipment
 
Figure 51: Part type vs Quantity rejected
 

106 
 
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.

  Problem: Valmark Industries shipped the part# 24-1425 with wrong


background color.
 
  Effect of the problem:
We haven’t received the parts as scheduled. Harmonic shipments got
  delayed. Assembly had to wait till we received the new labels. Sending
  back wrong parts and preparing documents for that is non value added
activity.
  Cause: It is a Valmark Industries fault that, they shipped the part with
  wrong specifications. The document of product specifications is
  available on Harmonic Agile and they are supposed to follow the
  specifications.

  Suggested corrective action: We should address this issue with

  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.
107 
 
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,

also CAR document becomes evidence of Iron quality policy.

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,

and pack-out are necessary to improve the reliability of the products.

3.10 Iron Systems Cost Savings with Lean Six Sigma implementation

Quality improvement team showed the improvements in key performance

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

Iron Systems Inc. Every company in business wants to be successful by continuously

lowering the total costs to increase the profit and competitive edge over the competitors.

Project financial benefits can be categorize in to four major areas.

108 
 
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

units. Projected cost can be calculated on basis of previous # of hours (before

improvement). Soft cost savings is the difference of projected costs and current costs.

Date Total Units Total Hours Hrs/Units Current cost Projected cost Soft 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 23: Weekly production data and soft cost savings

109 
 
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

which improved customer satisfaction and improved sales.

3.10.3 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.

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

110 
 
January-12 $3,198,319 $3,118,958 12.3

Table 24: Monthly Inventory Turnover

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

Table 25: cost savings on based on reduction in inventory holding cost


The benefit analysis is based on what if project team did not carry out any improvements

in Inventory turns. And it depends upon the average inventory for that month and cost of

goods sold.

Figure 53: Monthly Cost of goods sold vs Average Inventory

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

111 
 
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

in inventory holding cost

3.10.4 Significant cost avoidance with CAR and CAPA

Team developed the concept of Corrective Acton Request (CAR) and Corrective

And Preventive Action (CAPA) to address the Internal and External Issues occurred in

organization. Internal issues could be related to lack of documentation or insufficient

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

can be avoided in future.

112 
 
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 

113 
 
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

conformance and forced not to repeat the error in future.

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

conformance with agreement and procedure could be brought up to avoid it in future.

5. Economic Justification

5.1 Executive Summary

  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

business’s processes to identify inefficiencies and areas needing improvement. We

typically deliver business process improvement recommendations within 2-3 months, that

if implemented can yield an 8-fold return on a company’s investment in our consulting

services. We also provide training and instructional services to allow clients to continue

with success.

114 
 
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

process improvement approach revolutionizes traditional process improvement to deliver

results quickly. LSC delivers results in 2 to 3 months and typically produces a 4x – 8x

return on investment.

In today’s economic environment many organizations are turning to Lean Six

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

financial benefit through sustainable productivity and efficiency improvements obtained

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

breakthrough performance improvements.

The LSC view is managing the client relationship is critical to the success of

process improvement program. We do quick implementation and generating continuous

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

115 
 
customers better, Focus on problem solving and result oriented project execution. We are

focusing to establish our services in USA and mainly in California.

Our purpose is to help company increase in business excellence and efficiency by

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

players in these services in Silicon valley, California, USA.

LSC Company has a distinctive way to serve customers, combines process

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

• Measurable value in predictable way and shows sustainable business growth

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.

116 
 
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

foreign countries. Due to advancement in telecommunication and rapid growth in the

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

opportunities particularly in field of manufacturing.

117 
 
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

oriented Lean and Six Sigma tools and techniques.

5.3 Solution and Value Proposition

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

advantage and revenue growth.

Focus on Mass customization rather than Mass production

Application of Lean and six sigma tools and techniques will enable our customers to offer

more product or service customization in today’s competitive market. Previous

improvement philosophies were focused on achieving Mass production which is not

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.

118 
 
Focus on continuous improvement by understanding customer needs

Lean and Six Sigma consider customer satisfaction as prime objective of the business and

helped organizations to understand their customers by continuous improvement in

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.

Driving Improvements with Speed, quality, cost and flexibility

Lean and Six Sigma will develop the framework where firms can achieve the

improvements with speed, improved Quality, and flexibility.

5.4 Market Size

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

sigma companies help companies to accomplish improvement in process and providing

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

that are used by six sigma practitioners.

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

119 
 
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

million to $900 million.

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

opportunities. The market is available on different segments like Semiconductor

manufacturing, Retail, Hi-tech, Packaging, Pharmaceuticals, consumer goods, Food and

Beverage, and Garment manufacturing etc. The market size for each segment is related to

the demand. For Semiconductor industry “Gartner Says Worldwide Semiconductor

Spending to reach $309 billion in 2012, a 2.2 Percent Increase from 2011.” There is lot of

potential to grow in this market (Stamford, 2011).

5.5 Competitors

There are several consulting companies providing Lean Six Sigma services to optimize

supply chain activities. Main Competitors are listed below.

TBM consulting group

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,

120 
 
and implementation time also more. This makes their services are not reachable to many

medium and small scale businesses. (“our people,”2012)

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

are not reachable their services.(“About us,”2012)

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

management. Only upper level management can take decision on implementing

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

121 
 
5.7 Price Point

Currently we have two employees. We are charging $100 per hr for CEO/Expert and $90

per hr for VP/Expert.

Six Sigma training fee – $3000 per person

Lean Training fee - $2000 per person

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

variability in the company process. We have practices in Projects, Consultancy and

training.

5.8 SWOT Analysis

The SWOT analysis is very useful tool for understanding and making decision for all

sorts of situations in an organization. SWOT means Strength, Weakness, Opportunities,

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

for LS Consulting Inc.

Strengths

• Quick Results – We understand the need to deliver results quickly.

• Highly Experienced Staff – Our consultants have an average of 10 years of industry

experience

122 
 
• Understand customer and deliver meaningful Results – We implement process

improvements with agreed up on company financial goals and improvements.

• Technological and Experienced skill set

• Good customer relationship

Weakness

• We are small company hence we have to work hard to gain customer confidence and

sustain in the business.

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

without compromising quality.

y Since we already implemented in manufacturing industry, we will target on this industry

to get clients

Threats

• Maintain Creativity and innovation. You have to be innovative with your solution to

sustain in cut throat market

• Keep changing customer base

• Technology advances

5.9 Investment Capital Requirement and Break Even Analysis

Based on LSC cost estimation and revenue projection we will require an

investment capital of 850 thousand dollars. If we get $850k from Investor we can recruit

123 
 
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.

Return on Investment Capital

LSC expects Return On Investment over five year period is like below:

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 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                                                       
       
 

124 
 
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  

Breakeven Analysis
$2,500,000 60 70
# of
60
$2,000,000 Customers
50
US Dollars

$1,500,000 35 Fixed Cost


40
$1,000,000 30
Variable
11 20 Cost
$500,000 7
3 10 Total
$0 0 Revenue
2012 2013 2014 2015 2016
Year
 
Figure 55: Break even analysis
 

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

development, Account Manager, Human Resource Manager, and an Administrative

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

125 
 
to hire three more Lean Six Sigma Consultants reporting to the VP of Business

development.

Chief Executive Officer

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.

Vice president of Business Development

Vice President of Business Development is responsible for the business development of

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

meeting with customers to get new business.

5.11 Business Revenue Model

Our company plans to sell services using below methodology:

• 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

meet market leaders to get opportunities

y Sales Force Efficiency and effectiveness – Existing employees will play sales roles until

we grow in terms of revenue.

126 
 
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

market, following ways could help to get potential customer:

- Participate in Industry related articles

- Use Blog to get latest information about industry changes

- Participate in Industry discussion events

5.12 Profit and Loss and Forecasted Return On Investment

  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

solutions quickly, show the value to customers, and retain customers.

In the year 2011, Six Sigma Consulting successfully completed the “Lean and Six

Sigma improvement project” related to Supply chain management in manufacturing

where organization saved $843,612. The project was tremendous success where team got

opportunity to improve every aspect of business starting from process improvement by

taking in to consideration business models and organization development.

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

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 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

128 
 
5 years Projected Quarterly profit& Loss and Forecasted Return on Investment are shown
below:

Quarterly Profit and Loss statement


$700,000
V
$600,000
a
l $500,000
u D $400,000
e o $300,000 Cost
s l Revenue
$200,000
l
Profit
i a $100,000
n r $0
Q1‐12
Q2‐12
Q3‐12
Q4‐12
Q1‐13
Q2‐13
Q3‐13
Q4‐13
Q1‐14
Q2‐14
Q3‐14
Q4‐14
Q1‐15
Q2‐15
Q3‐15
Q4‐15
Q1‐16
Q2‐16
Q3‐16
Q4‐16
($100,000)
U
S Quarter of Year
 

 
Figure 56: 5 years Projected Quarterly profit & Loss and Forecasted ROI
 

5.13 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. By 2016 the

organization would be $2.4 million dollars Revenue Company with more than 60

customers.

129 
 
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

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
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 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

Five years Projected Income statement:

Figure 57: 5 Years Projected 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

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

Table 30: 5 years Projected Income statement

The company monthly profit and loss for the past 6months are shown below.

5.16 Exit Strategy

We want to start selling our services to manufacturing, packaging, Hi-tech, and

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

131 
 
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

132 
 
7. Project Schedule
 
Project Name: Lean Six Sigma to Improve Supply Chain Management at Iron Systems

Client: Iron Systems Inc, San Jose, CA

Project Lead: Subbu Chalamcharla & Adwait Kunte

Start Date: 08/26/2011

Figure 58: Project Schedule


8. Team and Committee Members

The team consists of four members. Their background, expertise, and responsibilities

towards the project are listed below.

133 
 
Dr. Ming Zhou

Dr. Ming Zhou is an assistant professor in the Department of Organization &

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

Knowledge in the supply chain area helped us to complete this project.

Mr. Aziz Khan

Aziz Khan is Director, Quality, and performance excellence at Iron Systems Inc. He

provides training, consulting services, and shop-floor implementation support to

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

manufacturing. He holds BS in Industrial Engineering from San Jose State University,

MBA in operations and material management from California state university-Hayward.

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

Subramanyam Chalamcharla is Principal Software QA Engineer in Trilliant Networks

Inc. He has been in the field of quality and testing for the past 10 years. He is pursuing

Master’s Degree in Engineering Management.

134 
 
Adwait Kunte

Adwait Kunte is pursuing Masters Degree in Engineering Management. He is working as

Supply chain intern to implement Lean Six Sigma at Iron systems Inc, San Jose, CA.

9. Conclusion

The companies recognized the significance of improving supply chain, production

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

improve customer satisfaction.

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

chain activities at Iron Systems.

135 
 
Improved supply chain activities have improved following:

9 Increase customer Confidence: Increase in on time shipments will increase customer

confidence.

9 Reduce product development cost: Increased Inventory turnover, Increased Physical

Inventory accuracy and reduce supply chain hrs/unit will reduce product development

cost.

9 With 5S program, things get cleaned up and organized in organization

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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140 
 
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

Area: Date: Evaluator(s)

Green Yellow Red


Comments/Suggestion
5S Culture (1) (0.5) (0)
1 5S shared leadership roll defined, posted, pass-down up to date
and adding value.
2 All correctable past Red's and Yellow's been addressed.
Audit Tour Readiness
3
No handwritten work instructions/notes on the production floor.
4 Overall facility is clean, organized, and maintained or otherwise
labeled clearly.
Facilities
5 All floors are clean and free of debris and dirt.
6 All aisles are free of objects, obstructions, trip hazards, and carts
do not have parts hanging off.
7 No damaged walls, ceilings, doors, and/or floors.
Visual Management
8 Identified mobile equipment, mobile storage or mobile work
stations are in prescribed, taped locations.
9 Production control boards are visible, complete, labeled, and if
not in use labeled appropriately. (5S, Hour by Hour, etc.)
10 Bulletin/announcements upto date and displayed neatly.
11 Labels/stickers are in good condition, no peeling or residue
12 All binders, documents, processes labeled, stored neatly & easily
accessible.
13 All visual displays/controls meet standards and in good condition.
Storage and Arrangement
14 All workstations and equipment are clearly labeled.
15 All items are clearly labeled and have a home. (nothing leaning
against walls or columns)
16 Tool and fixtures are arranged on shadow boards or identified so
they can be easily accessed.
Equipment
17 All equipment, tables, and chairs are kept clean and in good
working condition.
18 All cleaning equipment is available and stored in a neat manner.
19 All visible maintenance issues are being addressed.
20 Cord management up to standards. (all unused cords are bundled and
out of the way, no cords are drooping, or laying on the floor)

5S Score is:
Note: Green = 1 Yellow = .5 Red = 0  
 

141 
 
2. Value Stream mapping before

 
 

142 
 
3. Value Stream mapping - Improved

143