1
Increasing Competitive Advantage
and Agility through Lean Operations
APICS Seminar: May 20, 2011
Lean Overview
 What is Lean all about?
 How many “wastes” can you name?
 How many Lean tools/techniques can you name?
2
Lean Overview
Lean = Eliminating Waste
7 Wastes:
 Transportation
 Over-Production
 Waiting
 Inventory
 Rework
 Over-Processing
 Excess
Motion
 (Unused
3
Intellect)
Lean Overview
Lean Tools & Techniques:
 5S
 Process
Mapping
 Balancing to Takt
 Spaghetti Diagrams
 Visual Management
 Hour-by-Hour Boards
 VSM
 Kaizen
 Pull
Systems
 5 Whys
 Presentation Focus: Over-Production, Inventory,
Pull Systems
4
Setting The Stage (Q1/2010)
 Recession ending or over; slow growth ahead
 APICS and ISM indices showing growth
 Inventory levels near historic lows
 Production increasing (at least to match demand)
 Future volumes and mix uncertain (forecasting
challenge)
 Where are we (you!) today?
 Agility will be a key competitive advantage
5
Balancing Key Metrics
Service Level

Optimal Target

Assigned by ABC
Productivity
Inventory Turns

Right Product

Utilization

Right Time

Efficiency
P&IC Challenge: Finding the Optimal Balance
 Discuss inventory first, then capacity utilization
 See how each affects ability to best-serve customers
& business needs.
6
Components of Inventory
 Safety Stock – Protects
against variability
 Demand through Lead Time
 Determines
 But…
Order Point
minor contributor
to inventory
 Lot Size – Major contributor
to inventory
Average Inventory = SS + ½ Lot Size
Focus Here…
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Lot Sizing Debate
Fulcrum: Setup Time *
Traditional Operations
Lean Advocates
 Inventory is an Asset
 Inventory is Muda (Waste)
 Larger Lot Sizes
 Smaller Lot Sizes
 Minimize No. Setups
 Minimize Setup Time
 Maximize Capacity
 Use Capacity to Maximize
Agility
Common Objectives:
Minimize Cost and Maximize Customer Service
* As setup times approach zero, the differences
between the two views diminish or disappear.
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Total Cost View
Example:
A=
S=
C=
I =
EOQ =
10000
$ 50
$ 100
11%
302
Total Annual Cost
$14,000
2AS
IC
EOQ =
$12,000
$10,000
$8,000
Inventory
Carrying Cost
Assumption
of 11%...
Reasonable?
EOQ
$6,000
$4,000
$2,000
$0
1
101
201
301
401
501
Total Cost
601
701
Setup Cost
801
901
1001
1101
1201
Carrying Cost
 Lean Direction: Choose lot size around 200
 Caution: Don’t arbitrarily cut LS too far (cost penalty)
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1301
1401
1501
Class Exercise
 Create EOQ Calculator – Table Version
A=
S=
c=
i=
EOQ =
 Create EOQ Calculator – Worksheet Version
Part Number
Annual
Demand
(A)
Setup
Cost (S)
Part Cost
(C)
Carrying
Cost (i)
EOQ
EOQ
(Rounded)
 Open “EOQ Calculators.xls”… Follow Demo
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Inventory Carrying Cost
Audience feedback to Inventory Carrying Cost
questionnaire.
Count of Participant Responses to Carrying Cost Question
Count of Name
What inventory carrying cost rate does your company use?
No Response
< 10%
10-15%
15-20%
20-30%
> 30%
Grand Total
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Total
7
50
28
16
13
3
117
71%
Annual Inventory
Carrying Cost Elements
Category
Interest/opportunity cost
Percentage
10-15%
Handling and storage (people and space)
4-8%
Damage and shrinkage (scrap and obsolescence)
1-2%
Taxes and insurance
1-2%
Redistribution cost (in the wrong location)
1-2%
Transactions
(counting, moving, planning, issuing, reconciling)
General and administrative staff
(managers, planners, physical mgmt.)
Total
Source: SC Council, APICS, Best Practice and Industry Experience
Inventory – How Do You Attack It?
Used with permission: RSM McGladrey 12
5-10%
5-7%
27-46%
Revised Total Cost (I=35%)
Example:
A=
S=
C=
I =
EOQ =
10000
$ 50
$ 100
35%
169
Validate EOQ
Calculation…
Setup Cost…
(Return
Can it beto EOQ
reduced?
Calculator.xls)
Total Annual Cost
$14,000
$12,000
$10,000
Old EOQ
$8,000
EOQ
$6,000
$4,000
$2,000
$0
1
101
Total Cost
201
301
Setup Cost
401
Carrying Cost
 Increase carrying cost from 11% to 35%; better
represents total costs.
13
501
Setup Reduction Impact
Example:
A=
S=
C=
I =
EOQ =
10000
$ 15
$ 100
35%
93
Total Annual Cost
$10,000
$9,000
EOQ
(I = 11%)
$8,000
$7,000
$6,000
2/3 Reduction
in Setup Cost
EOQ
Old
EOQ
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1
101
201
Total Cost
Setup Cost
301
401
Carrying Cost
 Setup and inventory carrying costs have a significant
impact on total cost and lot sizing decisions.
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501
“Homework” Challenge
 Take the Inventory Carrying Cost Study to your
management
 Evaluate
each element for your business
 What
is the true cost of carrying inventory?
 What
Lot Sizing decisions might need to be re-
evaluated?
 What
are the potential savings? (Cash Flow and
recurring annual cost)
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Stretch
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Available Capacity
 Considerations (Q1/2010):
 Structural
capacity… likely exceeds current demand
 Staffing…
layoffs, furloughs, reduced hours
 Recent
cross-training
 Enables
flexibility and/or surge capability
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Capacity Utilization
Audience feedback to capacity questionnaire
Count of Participant Responses to Two Capacity Questions
Do you anticipate
the need to add
capacity during
2010?
What percentage of
your capacity is
consumed by current
(Q1/2010) demand?
No Response
< 50%
50-60%
60-70%
70-80%
80-90%
90-100%
Grand Total
No
Strongly
Response Agree Agree
7
12
1
14
1
1
5
1
2
3
1
1
8
4
5
21
9
36
38%
18
Disagree
Strongly
Disagree
12
5
6
10
3
3
39
5
2
2
2
1
12
44%
Grand
Total
7
44
14
9
15
15
13
117
70%
Capacity Utilization
 Step 1: Understand and quantify current capacity
Capacity Variables
1 Shift (40 Hrs/Wk)
Wkly Maint (4 Hrs/Wk)
Annual Maintenance
Available Capacity
Hrs/Yr
2080
208
40
1832
Exercise: Open “EOQ Capacity Exercise.xls”
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Capacity Utilization (Before)
EOQ Variables
Setup Time Minutes
SU Cost ($/Hr)
$
Setup Cost: (S)
$
Production Cost ($/Hr)
$
Inv. Carrying Cost: (I)
90
50.00
75.00
25.00
11%
Part
Demand
Run Time Material
Number Forecast (A)
(Hrs)
Cost
A
45,000
0.0042
$0.10
B
12,000
0.0167
$0.25
C
60,000
0.0083
$0.12
D
35,000
0.0133
$0.05
E
16,000
0.0167
$0.15
Avg. Inv. (1/2 EOQ):
Calculations:
1. Setup Cost = 1.5 hrs x $50/hr
= $75 (Assumed fixed for each PN)
2. Cost/Part = Run Time x $25/hr
3. EOQ = Sqrt(2AS/IC)
4. Ann. Load = Sum of S/U + (Run x EOQ)
Cost
/Part
(C)
$0.21
$0.67
$0.33
$0.38
$0.57
27,715
Setups
EOQ
/Year
17,300
2.6
4,950
2.4
15,810
3.8
11,170
3.1
6,200
2.6
Total Load:
Annual
Load
(Hrs/Yr)
193
204
504
470
271
1,642
Cap: 1,832
 Inflexible work center; no more than 2 jobs/month
 Poorly positioned to meet unexpected demand
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Total Run
Time (Hrs
per Job)
Days
74.16
9.3
84.17 10.5
132.72 16.6
150.06 18.8
105.04 13.1
Avg Days
13.7
Capacity Utilization (After)
New EOQ Variables
New Setup Time (Mins)
15
New Setup Cost
$ 12.50
New Inv. Carrying Cost
35%
Part
Number
A
B
C
D
E
Demand
Run Time Material
Forecast
(Hrs)
Cost
45,000
0.0042
$0.10
12,000
0.0167
$0.25
60,000
0.0083
$0.12
35,000
0.0133
$0.05
16,000
0.0167
$0.15
Avg. Inv. (1/2 EOQ):
Similar setup and carrying
cost assumptions as before.
Cost
/Part
$0.11
$0.42
$0.21
$0.33
$0.42
7,945
Setups
EOQ
/Year
5,530
8.1
1,430
8.4
4,540
13.2
2,740
12.8
1,650
9.7
Total Load:
Annual
Load
(Hrs/Yr)
191
202
501
469
270
1,633
Cap: 1,832
 More agile… able to run every PN every month.
 Virtually no change in load… ample capacity.
 Inventory reduced from 27,715 to 7,945
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Total Run
Time (Hrs
per Job)
24.73
25.38
39.18
37.94
29.06
Avg Days
Days
3.1
3.2
4.9
4.7
3.6
3.9
Class Exercise
Create Capacity Utilization Worksheets
 Current State (Before)
 What-If Revised States (After)
 Graph Results
Return to “EOQ Capacity Exercise.xls”
 Follow Demo…
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Assembling the Pieces
 Ample structural capacity
 Flexible, cross-trained workforce
 Properly accounting for carrying cost
 Lot sizes reduced
 Setup times reduction… further LS reduction
… Operation now capable of greater agility
 How do we capture that agility?
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Additional Keys to Agility
 Sales and Operations Planning (S&OP)

Forecast consensus… Plans flow from the forecast

Capacity ahead of demand

Adequate financial inventory plan

Purchase orders for long lead items…

But… Execute by PULL
 Pull Systems linked across the supply chain

Discard long firm-planning and order-release horizons

Execute to actual demand, not forecast

Execute by hours or shifts, not days or weeks
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25
Kanban Basics
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The Missing Link
 Need a mechanism to start pull
 Key is to synchronize pull signals

Based on real customer demand (not forecast)

Prioritized to maximize customer service
 Recommend two mechanisms (similar but not identical)

One for Make To Stock (MTS)

One for Make To Order (MTO)
ASAPS:
Assembly Scheduling And Prioritization System
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Assembly Scheduling &
Prioritization (ASAPS)
 Make to Stock

Prioritize by relative inventory position
and ABC
MTS
OP
SS
In-Tran
Zero
MTO
Do Not Produce
Low Priority
Moderate Priority
High Priority
Urgent
> 10 Days
6 – 10 Days
3 – 5 Days
0 – 2 Days
Past Due
 Make to Order
 Prioritize by Due Date and ABC
 Pass priority codes to ERP for scheduling
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ASAPS
Priority Matrix: Make to Stock
(MTS)
MTS Priority – By ABC and Relative Inventory Position
ABC
>Max
>OP
>=SS
<SS
<0
A
10
6
3
2
1
B
10
7
4
3
2
C
10
8
5
4
3
D
10
9
6
5
4
 Priority Scores: 1 = Highest, 10 = Lowest.
 Top priority assigned to stocked out A-Items
 Next priority is for stocked-out B-Items AND A-Items below
Safety Stock.
 Similar prioritization rules apply, working right-to-left
through the matrix.
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Priority Matrix: Make to Order
(MTO)
MTO Priority – By ABC and Days to Due Date
ABC
> 10
6 to 10
3 to 5
0 to 2
Past Due
A
10
6
3
2
1
B
10
7
4
3
2
C
10
8
5
4
3
D
10
9
6
5
4
 Priority Scores: 1 = Highest, 10 = Lowest.
 Top priority assigned to A-Items which are past due.
 Next priority is for past due B-Items AND A-items within 2 days of their due
dates.
 Similar prioritization rules apply, working right-to-left through the matrix.
 Priority assignments must consider relative importance of MTS
vs. MTO products
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Pull Systems
(Make to Stock)
Raw
Material
Finished
Goods
Material Flow
SIOP
MTS ASAPS
Supplier
Supplier
Production
Move
Production
Kanban
Kanban
Kanban
Orders
31 others!
NOTE: Each operates independently of the
Customer
Orders
Pull Systems
(Make to Order)
Raw
Material
Finished
Goods
Material Flow
MTO ASAPS
SIOP
Supplier
Supplier
Production
Production
Kanban
Kanban
Orders
NOTE: Each operates independently of 32
the others!
Customer
Orders
Class Exercise
ASAPS Tables (MTO & MTS)
Use VLOOKUP to obtain priority score
Use MATCH to obtain VLOOKUP Column
Reference
Open “ASAPS Tables (MTO & MTS).xls”
Follow Instructor Demo…
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Summary
 Agility will be a competitive advantage
 Keys to agility include:

Full accounting for inventory carrying costs

Quick setups

Small lot sizes

Flexible capacity

Pull systems, synchronized by ASAPS
 Supported by sound S&OP
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Agility Through Lean
Operations
35