Chapter 8
PROCESS MANAGEMENT:
LEAN & SIX SIGMA IN THE
SUPPLY CHAIN
LEARNING OBJECTIVES
You should be able to:
 List & discuss the major elements of lean production & Six Sigma
quality
 Describe why lean production & Six Sigma quality are integral
parts of SCM
 Discuss the Toyota Production System & its association with lean
production
 Discuss the linkage between lean production & environmental
protection
 Describe the historical developments of lean production & Six
Sigma
 Describe & use the various tools of Six Sigma
 Understand the importance of statistical process control for
improving quality
2
CHAPTER OUTLINE
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Introduction
Lean Production & the Toyota Production System
Lean Thinking & Supply Chain Management
The Elements of Lean Production
Lean Systems & the Environment
The Origins of Six Sigma Quality
Comparing Six Sigma & Lean
Six Sigma & Supply Chain Management
The Elements of Six Sigma
The Statistical Tools of Six Sigma
3
Introduction
In 1990s, supply chain management combined:
 Quick response (QR) - speed & flexibility
 Efficient Consumer Response (ECR) - speed &
flexibility
 JIT - Continuous reduction of waste
 Keiretsu Relationships - Including suppliers in
JIT/TQM efforts
These approaches have emerged as philosophies
& practices known as Lean Production (or Lean
Manufacturing) & Six Sigma
4
Lean Production & the Toyota
Production System
JIT emphasizes –
 Reduction of waste
 Continuous improvement
 Synchronization of material flows within the
organization
 Channel integration- extending partnerships in the
supply chain
Stage 1- Firm is internally focused & functions managed separately.
Silo effect is reactive & short-term goal oriented.
Stage 2- Firm integrates efforts & resources among internal functions.
Stage 3- Firm links suppliers/customers with firm’s processes.
Stage 4- Firm broadens supply chain influence beyond immediate or
first-tier suppliers & customers.
5
Lean Production & the Toyota
Production System
(Continued)
Lean Production
an operating philosophy of waste reduction & value
enhancement & was originally created as Toyota
Production System (TPS) by key Toyota executives
 Early versions were based on Ford assembly plants & U.S.
supermarket distribution systems
 Key concepts incorporated in TPS are –
• Muda - waste in all aspects of production
• Kanban - signal card & part of JIT
• Statistical process control (SPC) as part of TQM efforts
• Poka-Yoke - error or mistake-proofing
6
Lean Production & Supply
Chain Management
 Supply chain management (SCM) seeks to incorporate
Lean elements using –
 cross-training,
 satisfying internal customer demand
 quickly moving products in the production system
 communicating demand forecasts & production
schedules up the supply chain
 optimizing inventory levels across the supply chain
 Channel integration - extending alliances to suppliers’
suppliers & customers’ customers
 The silo effect works against channel integration
7
Lean Production & Supply
Chain Management
(Continued)
Stages of SCM Evolution
1: Internal
Focused
functional silos
top-down
management
internal
performance
measures
reactive, shortterm planning
no internal
integration
2: Functional
Integration
internal flow of
goods
emphasis on
cost reduction
efficiencies
gained by
internal
integration
3: Internal
Integration
4: External
Integration
integration of
flow in firm
lean activities
for goods &
information
measurement
of supplier
performance &
customer
service
integration with
suppliers &
customers
integration
explored w/ 2nd &
3rd tier suppliers &
customers
alliance
development
(Table 8.1)
8
The Elements of Lean Production
The Elements of Lean
 Waste Reduction
 Lean Supply Chain Relationships
 Lean Layouts
 Inventory & Setup Time Reduction
 Small Batch Scheduling
 Continuous Improvement
 Workforce Empowerment
9
The Elements of Lean Production
(Continued)
Waste (Muda) Reduction
 Firms reduce costs & add value by
eliminating waste from the productive
system.
 Waste encompasses wait times, inventories,
material & people movement, processing
steps, variability, any other non-value-adding
activity.
 Taiichi Ohno described the seven wastes
10
The Elements of Lean Production
(Continued)
The seven wastes
Wastes
Description
Overproducing
Unnecessary production to maintain high utilizations
Waiting
Excess idle machine & operator & inventory wait time
Transportation
Excess movement of materials & multiple handling
Over-processing
Non-value adding manufacturing & other activities
Excess Inventory
Storage of excess inventory
Excess Movement
Unnecessary movements of employees
Scrap & Rework
Scrap materials & rework due to poor quality
(Table 8.3)
11
The Elements of Lean Production
(Continued)
The Five-S’s
Japanese S-Term
English
Translation
English S-Term
Used
1. Seiri
Organization
Sort
2. Seiton
Tidiness
Set in order
3. Seiso
Purity
Sweep
4. Seiketsu
Cleanliness
Standardize
5. Shitsuke
Discipline
Self-discipline
(Table 8.4)
12
The Elements of Lean Production
(Continued)
Lean Supply Chain Relationships
 Suppliers & customers work to remove waste,
reduce cost, & improve quality & customer service
 JIT purchasing includes delivering smaller
quantities, at right time, delivered to the right
location, in the right quantities
 Firms develop lean supply chain relationships with
key customers. Mutual dependency & benefits
occur among these partners.
13
The Elements of Lean Production
(Continued)
Lean Layouts
 Move people & materials when & where needed,
ASAP
 Lean layouts are very visual (lines of visibility are
unobstructed) with operators at one processing
center able to monitor work at another
 Manufacturing cells
 Process similar parts or components saving duplication of
equipment & labor
 Are often U-shaped to facilitate easier operator & material
movements
14
Manufacturing Cell
15
The Elements of Lean Production
(Continued)
Inventory & Setup Time Reduction
 Excess inventory is a waste
 Reducing inventory levels causes production
problems
 Once problems are detected, they can be solved.
 The end result is a smoother running organization
with less inventory investment.
16
The Elements of Lean Production
(Continued)
Relationship between Order Quantity, Lot Size, and
Average Inventory
When order quantity/lot size Q = 100, avg. inventory = 50; when Q is
reduced to 50, avg. inventory falls to 25.
100
avg. inventory
for Q=100
50
25
avg. inventory
for Q=50
Time
(Figure 8.1)
17
JIT & Supply Chain Management
Small Batch Scheduling
 Small batch scheduling drives down costs by –
 Reducing purchased, WIP, & finished goods inventories
 Makes the firm more flexible to meet customer demand
 Small production batches are accomplished with the
use of kanbans
 Kanbans generate demand for parts at all stages of
production creating a “pull” system
18
JIT & Supply Chain Management
(Continued)
Small Lot Size Increases Flexibility
Small Lot Size Approach
Short setup times
AAA BBB CCC DDD AAA BBB CCC DDD AAA 9 product changes
Large Lot Size Approach
Long setup times
AAAAAAAA-----BBBBBBBB ------CCCCCCCC----- 3 product changes
Time
(Figure 8.2)
19
JIT & Supply Chain Management
(Continued)
A Kanban Pull System
Final assembly line
Input area
External
supplies
Output area
Mfg. Cell A
Mfg. Cell B
Work cell A
Movement of matl.
into Work cell A
creates a movement
kanban to the
external supplier
Movement of matl. to
input area of Work cell B
creates a production
kanban to Work cell A
Movement of matl. into
Work cell B creates a
movement kanban to
Work cell A
(Figure 8.3)
Movement of finished
component to assembly
line creates a production
kanban to Work cell B
20
JIT & Supply Chain Management
(Continued)
To determine the number of containers or kanban card
sets:
# of containers =
DT(1 + S)
C
Where: D = the demand rate of the assembly line;
T = the time for a container to make an entire circuit
through the system, from being filled, moving,
being emptied, and returning to be filled again;
C = the container size, in number of parts; and
S = the safety stock factor, from 0 to 100 percent.
21
JIT & Supply Chain Management
(Continued)
Continuous Improvement (Kaizen)
 Continuous approach to reduce process, delivery, &
quality problems, such as machine breakdown
problems, setup problems, & internal quality
problems
Workforce Commitment
 Managers must support Lean Production by
providing subordinates with the skills, tools, time, &
other necessary resources to identify problems &
implement solutions
22
Lean Production & the
Environment
Lean green practices –
 Reduce the cost of environmental management
 Lead to improved environmental performance.
 Increase the possibility that firms will adopt more
advanced environmental management
Carbon-neutral- offsetting the carbon footprint of
a firm’s operations
23
The Origins of Six Sigma Quality
Six Sigma
 Near quality perfection (the statistical likelihood
of non-defects 99.99966% of the time)
 Pioneered by Motorola in 1987
 A statistics-based decision-making framework
designed to make significant quality
improvements in value-adding processes
24
The Origins of Six Sigma Quality
Six Sigma Metrics
# of std dev
above the mean
% of defect-free
output
DPMO
2
69.15
308,537
2.5
84.13
158,686
3
93.32
66,807
3.5
97.73
22,750
4
99.38
6,210
4.5
99.865
1,350
5
99.977
233
5.5
99.9968
32
6
99.99966
3.4
Note: standard deviations include 1.5 sigma “drift”
(Table 8.5)
25
Six Sigma & Lean Production
Lean Six Sigma (Lean Six σ)
 Describes the melding of lean production and
Six Sigma quality practices.
 Both use –
 High quality input materials, WIP, and finished goods
 Continuous Improvement (Kaizen)
 Lean and Six Sigma use complementary tool
sets and are not competing philosophies
26
Six Sigma & Supply Chain
Management
 Process integration & communication lead to
fewer negative chain reactions along the supply
chain, such as greater levels of safety stock, lost
time & less productivity
 Six Sigma is an enterprise and supply chain-wide
philosophy, that emphasizes a commitment
toward excellence & encompasses suppliers
employees, and customers
27
Elements of Six Sigma
Deming’s Way
1. Create constancy of
purpose to improve product
& service.
2. Adopt the new philosophy.
3. Cease dependence on
inspection to improve
quality.
4. End the practice of
awarding business on the
basis of price.
5. Constantly improve the
production & service
system.
6. Institute training on the job.
7. Institute leadership.
8. Drive out fear.
9. Break down barriers
between departments.
10. Eliminate slogans &
exhortations.
11. Eliminate quotas.
12. Remove barriers to pride of
workmanship.
13. Institute program of selfimprovement
14. Put everyone to work to
accomplish the
28
transformation
Elements of Six Sigma
(Continued)
Crosby’s Way
Four Absolutes of Quality
1. The definition of quality is conformance to
requirements
2. The system of quality is prevention.
3. Performance standard is zero defects.
4. The measure of quality is the price of
nonconformance
29
Elements of Six Sigma
(Continued)
Juran’s Way
 Quality Planning- Identify internal/external customers
& their needs, develop products that satisfy those
needs. Mangers set goals, priorities, & compare results
 Quality Control- Determine what to control, establish
standards of performance, measure performance,
interpret the difference, & take action
 Quality Improvement- Show need for improvement,
identify projects for improvement, implement remedies,
provide control to maintain improvement.
30
Elements of Six Sigma
(Continued)
Malcolm Baldrige National Quality Award
Objectives
• Stimulate firms to
improve
• Recognize firms for
quality
achievements,
• Establish guidelines
so that organizations
can evaluate their
improvement &
provide guidance to
others
Categories Measured
1. Leadership
2. Strategic planning
3. Customer & market
focus
4. Information & analysis
5. Human resource
focus
6. Process management
7. Business Results
31
Elements of Six Sigma
(Continued)
ISO 9000 and ISO 14000 Families of
Management Standards
 International Organization for Standardization
(ISO) located in Switzerland has > 155
member countries.
 ISO 9000 and 14000 govern quality and
environmental certification standards of
production, respectively.
 The ISO 9000 standards were adopted in the
US by ANSI and ASQC.
32
Elements of Six Sigma
(Continued)
The DMAIC Improvement Cycle
Define
Measure
Analyze
Improve
Control
(Fig. 8.4)
33
Elements of Six Sigma
(Continued)
Six Sigma Training Levels
Levels
Description
Yellow Belt
Basic understanding of Six Sigma Methodology and
tools in the DMAIC problem solving process. Team
member on process improvement project.
Green Belt
A trained team member allowed to work on small,
carefully defined Six Sigma projects, requiring less than
a Black Belt’s full-time commitment.
Black Belt
Thorough knowledge of Six Sigma philosophies and
principles. Coaches successful project teams. Identifies
projects and selects project team members.
Master
Black Belt
A proven mastery of process variability reduction, waste
reduction and growth principles and can effectively
present training at all levels
34
Statistical Tools of Six Sigma
 Flow Diagrams - Annotated boxes representing
process to show the flow of products or
customers.
 Check Sheets - to determine frequencies for
specific problems.
 Pareto Charts - for presenting data in an
organized fashion, indicating process problems
from most to least severe.
 Cause and Effect Diagrams (Fishbone or
Ishikawa diagrams) - used to aid in brainstorming
& isolating the causes of a problem.
35
Statistical Tools of Six Sigma
(Continued)
Process Map for Customer Flow at a Restaurant
(Figure 8.5)
36
Statistical Tools of Six Sigma
(Continued)
Check Sheet for a Restaurant
Problem
M
Tu
W
Th
F
Sa
Su
Tot
%Tot
long wait
//////
/////
////////
//////
////////
/
//////////
////
48
34.0
//
/
/
///
//
9
6.3
cold food
wrong food
/////
//
/
//
/////
///
/
19
13.5
bad server
//////
///
/////
/
//////
//
/
24
17.0
/
//
/
///
/
8
5.7
/////
/////
15
10.6
/////
///////
14
9.9
/
4
2.9
141
100
bad table
room temp
//
No parking
//
other
Totals
17
/
//
14
23
///
13
34
(Figure 8.6)
33
7
37
Statistical Tools of Six Sigma
(Continued)
Pareto Chart for Restaurant Problems
60
50
40
30
20
10
0
Series1
long
wait
bad
server
wrong
food
48
24
19
room
no
temp. parking
15
(Figure 8.7)
14
cold
food
bad
table
Other
9
8
4
38
Statistical Tools of Six Sigma
(Continued)
Cause and Effect Diagram for the Long Wait
Problem
Material
Run out of food
Machinery
Washing machine breaks
Not enough tables
Late deliveries
Needs frequent maintenance
Cooking delays
Inadequate waiting area
Credit card scanner breaks
New automated cooking bays
LONG
WAIT
Too much overbooking
Untrained servers, cooks
Preference to VIPs
Can’t find customers
No supervision
No system for food or
drink pickup
Methods
Understaffed shifts
High turnover
Poor hiring practices
Manpower
(Figure 8.8)
39
Statistical Tools of Six Sigma
(Continued)
Statistical Process Control
 Allows firms to –
 visually monitor process performance
 compare the performance to desired levels or standards
 take corrective action
 Firms –
 gather process performance data
 create control charts to monitor process variability
 then collect sample measurements of the process over
time and plot on charts.
40
Statistical Tools of Six Sigma
(Continued)
Statistical Process Control
Natural variations
 expected and random (can’t control)
Assignable variations
 have a specific cause (can control)
Variable data
 continuous, (e.g., weight)
Attribute data
 indicate some attribute such as color & satisfaction,
or beauty.
41
Statistical Tools of Six Sigma
(Continued)
Statistical Process Control
Variable Control Charts (2 types):
 x-bar chart tracks central tendency of sample means
 R-chart tracks sample ranges
Steps –
1. Gather data when the process is in control.
2. Calculate the mean & the range for each sample.
3. Calculate the overall mean and average range of all
the samples. Use the x-means to calculate the upper &
lower control limits.
4. Use the means & control limits to construct x-bar and R
control charts.
42
5. Collect samples over time and plot.
Statistical Tools of Six Sigma
(Continued)
Formula’s
k
R
k
x
x
UCL
LCL
i 1
=
x
x
i
R
k
=
i 1
i
k
=
x
+ A2
R
UCLR
=
D4 R
=
x
- A2
R
LCLR
=
D3 R
43
Statistical Tools of Six Sigma
(Continued)
Statistical Process Control
x chart for the Hayley Girl Soup Co.
12.2
12.1
12
11.9
11.8
ounces
11.7
11.6
11.5
1
3
5
7
9
11
13
15
17
19
21
23
hours
(Figure 8.9)
44
Statistical Tools of Six Sigma
(Continued)
Process Capability
 The current process variation & future changes can be
monitored using a process capability index, Cpk.
 Cpk is the ratio of the desired process variation to the actual
process variation.
 The process must be under control (only natural variations)
 Cpk = 1.0 - process is capable of producing within the control
limits 99.73 percent of the time.
 Cpk > 1.0 - even fewer defects.
 Cpk < 1.0 - process may be incapable of producing within
control limits.
Cpk=
Smallest difference between
UCL or LCL & center line
3σ
45
Statistical Tools of Six Sigma
(Continued)
Acceptance Sampling
 When shipments are received from suppliers, samples are
taken and measured against the quality acceptance
standard. Shipment is assumed to have the same quality.
 Sampling is less time-consuming than testing every unit but
can result in errors
Producer’s risk- A buyer rejects a shipment of good quality
units because the sample quality level did not meet
standards (type I error)
Consumer’s risk- Buyer accepts a shipment of poor-quality
units because the sample falsely provides a positive
answer (type II error)
46