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 todays 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 todays 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 (KPIs), 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 (KPIs)..........................................................................................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 Inc16
Figure 5: Strategic Deployment Matrix19
Figure 6: Six Sigma DMAIC.21
Figure 7: Weekly data for on time shipments for different business units25
Figure 8: showing Pareto Analysis for causes in delayed in shipment......26
Figure 9: Analysis of number of days delayed for shipments27
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 program43
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 variance51

Figure 23: Work place before initiating 5S Program...56
Figure 24: 5S Audit findings57
Figure 25: 5S before and after comparison57
Figure 26: Improvement with 5S Program59
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 Inventory61
Figure 30: Push/Pull view of Supply chain cycle at Iron Systems..63
Figure 31: Cycle Process view of Siemens Inc64
Figure 32: Cycle Process view of supply chain activities for Data center..65
Figure 33: Cycle process view of n-appliances model66
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_chart279
Figure 40: Cause and Effect Diagram85
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 Cycle94
Figure 46: Current state of shipping..96
Figure 47: Improved state of shipping..98
Figure 48: A3 Report for Inventory103
Figure 49: VSLs A3 report for Labeling104
Figure 50: Supplier vs % of components failure.106
Figure 51: Part type vs Quantity rejected106
Figure 52: Operations vs Quantity rejected.107
Figure 53: Monthly Cost of goods sold vs Average Inventory111
Figure 54: US manufacturing jobs Labor statistics..117
Figure 55: Break even analysis125
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 (KPIs) with Current and Target values3
Table2: Iron systems Inc product offerings with Business model.15
Table 3: Value added and non value added activities24
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 code44
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 items54
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 forecasting82

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 analysis121
Table 27: Return On Investment Capital.124
Table 28: 5years projected Profit & Loss and Revenue generation statement128
Table 29: Five year Projected Balance sheet ..130
Table 30: 5 years Projected Income statement131
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(KPIs) 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

(KPIs)

Current

Target

(Before
Improvement)

1
2

Annual Inventory Turnover

On Time Shipments (OTS)

7
55%

16
92%

5 S (sort, straighten , shine,

standardize, sustain) Score

18

Physical Inventory accuracy

78%

95%

Service Factor: Kitting

65%

100%

Total Operations hrs/unit

11.4

Table 1: key performance Indicators (KPIs) 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 doesnt add value to it. A lean
systems 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
Harmonics 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 customers 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, buildto-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 Irons 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
1. Data Centers
2. OEMs
2.1 Siemens

Business Model

Approximate Revenue

Build to Customer Orders

15%

Build to Schedule

70%
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 organizations 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 (KPIs)
These data collection is published by key performance indicators (KPIs) 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 problems 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
(VA)activities
Assembly
Testing
Final quality assurance
Packing the systems
Creating work order

Non value added (NVA) activities

Business value added (BVA) Activities

VP. Sales Sign off

Handing over sales order to procurement
Checking the on hand stock

Preparing the sales quotes

Customer Purchase Order Processing
Approval by accounting department
Kitting the required material

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.

OnTimeShipment(OTS) Ontimeshipmentbased

onHistoricaldatafrom
May2011toAugust2011)

s 100%
O
h 80%
n
i 60%
p 40%
t
m 20%
i
0%
e
m
n
e
t

90%
65%

85%
68%

69%

Ontimeshipment
Data
center

N
Harmonic Siemens
appliances

Other
OEMs

BusinessUnit/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

CausesofDelayedShipments
(OTS)
100%
80%
60%
40%
20%
0%

87% 91%
75% 82%
66%
55%
17% 14%31%
13%44%
12% 11% 9% 8% 5% 5% 4%
17%

95% 97% 99% 100%

2%

2%

1%
%oftime
Cumulative

CausesofDelayedShipment

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

26

o
% r
d
o e
f r
s

40%
35%
30%
25%
20%
15%
10%
5%
0%

36%

32%
20%
12%

nodelay

1to4days

5to9days

Morethan9

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
#
1

Days delayed
1 to 4 days

% of time
32%

Causes
Lead time
Material shortage
Tight Shipping schedule
Parts failure
Material not included in BOM

5 to 9 days

20%

Sales hold
Change in product specification
Parts failure
Software issues
Engineering issues

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

% of total

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

80

85

85

90

95

105

75

85

90

65

55

80

SiemensAFCS

56

77

87

92

78

65

HarmonicJBOD

75

80

80

50

HarmonicSBB

78

87

87

55

HarmonicMCP

46

46

46

44

HarmonicDell

103

107

100

192

DC

30

30

30

30

30

30

nAppliances

OtherOEM

20

25

32

45

25

35

Monthly Total

571

318

652

643

299

664

Product

SiemensPARS
Servers
SiemensPARS
Racks

Table 6: Iron Systems Master Production Schedule

34

Total

540
450
455
285
307
206
672
210
56
182
3363

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
No

1
2
3
4
5
6

7
8

9
10

Causes
Material not available
due to credit hold from
supplier
High rate of component
failure
Inventory tags were not
updated
Kitter not able to locate
material location
Material kept on
multiple location
I-Code was showing
wrong quantity of stock
Material consumed in
earlier built due to
failures
Order was not
scheduled
Material did not arrived
on scheduled date from
supplier

Root Cause
Need to have information available
for buyer while procuring material
from supplier

Occurrence

%
of
time

49

16%

Supplier s quality issue

45

14%

Lack of 5S programs

41

13%

Lack of 5S programs

38

12%

Lack of 5S programs

36

12%

Inventory inaccuracy

25

8%

24

8%

23

7%

22

7%

10

3%

Inefficient Material Requirement

planning
Master production schedule/
Uncertain demand from Customer

Supplier relationship
Inefficient Material Requirement
Long Lead time product
planning
Table 7 : Cause and Root Causes Table

38

ParetoChart:CausesofnothavingService
Factor100%
O
c
c
u
r
a
n
c
e

120%
100%
80%
60%
o 40%
f 20%
0%

67%
55%
43%
16% 14%30%
13% 12% 12% 8%
16%

75%
8%

82%
7%

90%

7%

97%

100%

3%

t
i
m
e

%oftime
Cumulative

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 systems 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 systems 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
Cost wise
% of Cost
wise
Qty
$3,988,586.71
971
$3,190,869.37
99
10%
80%
$598,288.01
222
23%
15%
$199,429.34
650
67%
5%
** ABC Analysis as on date 08/01/2011

ABC Analysis
Grand Total
A Items
B Items
C Items
Plan for Cycle
count
Tasks
A, B and C
Counting
A item counting
B Item counting
C item counting

Counting
frequency
Monthly
Quarterly
Semiyearly

Schedule
August
Aug 18, Aug 19,
Aug 20

September

October

November

December

15-Sep

15-Oct
15-Oct

1-Nov

1-Dec

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

Milestoneschedule

Figure 17: Milestone Schedule for Cycle count program

Ganttchart

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

Slno
1
2
3
4

Month
Category
TotalItemsCounted
TotalPiecesCounted
TotalDollarCounted
PieceVariance
NetPieceVariance
NetPieceVariance(%)
AbsolutePiecevariance
AbsolutePiecevariance(%)
DollarVariance
NetDollarVariance
NetDollarVariance(%)
AbsoluteDollarVariance
AbsoluteDollarVariance(%)
ScoreCard
NetDollarAccuracy
AbsolutePieceAccuracy

Aug11
A,B
489
37402
$1,080,886
4324
12%
6598
18%
($74,149)
7%
$98,756
9%
993%
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
Work order status not
changed WIP or Built
Wrong Inventory storage
practices
Debit order not created
Material not received in
system
Material not found in stock
room
In-house borrowed material
list not updated
Total Occurrences

# of Occurrences % of total

cumulative

57

35%

35%

34
30

21%
18%

55%
73%

23

14%

87%

12

7%

95%

9
165

5%

100%

Table 12: Causes of material count variance

ParetoAnalysis:Inventorycyclecount
Variance
120%
o 100%
c 80%
c 60%
40%
% u
20%
r
0%
o r
f e
n
c
e

73%
55%
35%
18%
35% 21%
14%

100%

95%

87%

7%

5%
%oftotal
cumulative

Causesofvariances

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#
1

Cause
Work order status not
changed WIP or Built

Root Cause
Low Service
level, No
responsibility
assignment
No 5 S
programs
Broken MRB
process flow

Wrong Inventory
storage practices
Debit order not
created

Material not received

in system

Training for
receiving and
lack of 5S
Not having
cycle count
programs, lack
of 5S
No material
transaction for
In-House orders

Material not found in

stock room

In-house borrowed
material list not
updated

Action item
increasing product
availability with
MPS and MRP
Need to have 5S
programs
Develop process
flow for MRB by
introducing online
NCR forms
Train the employees
with process flows
Implement scheduled
cycle count programs

Need to transact the

borrowed items with
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

InventoryCycleCountReport
Sr#
1
2
3
4

Month
Category
TotalItemsCounted
TotalPiecesCounted
TotalDollarCounted
PieceVariance
NetPieceVariance
NetPieceVariance(%)
AbsolutePiecevariance
AbsolutePiecevariance(%)
DollarVariance
NetDollarVariance
NetDollarVariance(%)
AbsoluteDollarVariance
AbsoluteDollarVariance(%)
ScoreCard
NetDollarAccuracy
AbsolutePieceAccuracy

Aug11
A,B
489
37402
$1,080,886

Oct11
A
90
8957
$1,587,325

Nov11
A
93
8465
$1,533,916

Dec11
A,B
424
19760
$1,407,324

730
2%
1900
5%

1607
18%
1607
18%

1393
16%
1393
16%

895
5%
1253
6%

($24,149)
2%
$59,616
6%

($46,744)
3%
$46,744
3%

($80,092)
5%
$80,092
5%

$26,006
2%
$58,478
4%

98%
98%

97%
82%

95%
84%

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

98%
95%

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 teams 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
employees 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 organizations 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
organizations 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
12.0
10.0
8.0
6.0
4.0
2.0
0.0

14.2

13.3

12.9 12.3

10.7 10.2
5.4 5.1

6.8 7.8

7.3
4.5 4.9

Monthly Inv Turns

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

Costofgoodssold

$1,000,000

AverageINV

$0

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)

CustomerOrder
Cycle

Customer

Cycleprocessviewof
supplychainalongwith
differentstagesatIron
Systems

Newdemand/
Updatedforecast
ReOrdercycle

ProductionCycle
(Assembly/
Testing/Packing)

Deliverytocustomer/
IronFGI/CustomerFGI

IronSystemsInc

IronProduction
ProcurementCycle
Push/
PullView

ActivityCyclein
Supplychain

Supplier

Stagesin
SupplyChain

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

63

Lets 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 Siemenss demand according to schedule of purchase orders
received; hence this model is most profitable from Iron Systems point of view.
Customer
CustomerOrder
Cycle
Pull

Newdemand/
Updatedforecast
ReOrdercycle

Cycleprocessview
ofSupplychainfor
BusinessModel
withSiemens
Inc(Buildto
Schedule)along
withdifferent
stagesatIron
Systems

Deliverytocustomer/
IronFGI/CustomerFGI

IronSystems
Inc

ProductionCycle
(Assembly/
Testing/Packing)
IronProduction

Push

ProcurementCycle

CustomerOrder
arrives
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.

Customer
CustomerOrder
Cycle
Newdemand/
Updatedforecast

Cycleprocessview
ofSupplychainfor
DataCenter(Build
toOrder)along
withdifferent
stagesatIron
Systems

ReOrdercycle
Deliverytocustomer/
IronFGI/CustomerFGI

Pull
ProductionCycle
(Assembly/
Testing/Packing)

IronSystems
Inc

IronProduction
CustomerOrder
arrives

ProcurementCycle

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.
Customer
CustomerOrder
Cycle
Pull

CustomerOrder
arrives
Newdemand/
Updatedforecast

ReOrdercycle
Deliverytocustomer/
IronFGI/CustomerFGI
ProductionCycle
(Assembly/
Testing/Packing)

Cycleprocessview
ofsupplychainfor
BusinessModel
withharmonic
Inc(Buildto
Forecast)along
withdifferent
stagesatIron
Systems
IronSystems
Inc

IronProduction

Push

ProcurementCycle
Supplier

Figure 34: Cycle process view of supply chain for Harmonic Inc
In order to sustain todays competitive market companied needs to understand customers
requirement and fulfill customers 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, companys 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
Month

Q1 2011
January
February
March
End of
Q1

Qty
Built /
Ready
to ship

Units
Sold to
Harmonic

Iron
FGI

65
25
18
22

25
18
22

13
5
18

12
13
4

65

65

36

29

Forecasted
Demand

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 Harmonics 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. Todays 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 customers 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 nAppliance) 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 systems
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-appliances
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
(1)

Ft+l= [L+(t+l) T] St+l

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
Constant

Value
S.E.
9.785714

T-STAT

Notes

H0: 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
Beta

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
Quarter
1
2
3
4
1
2
3
4
1
2
3
4

Period Demand
Deseasonalized
Deseanalized demand Dbar
t
Dt
Demand
for any period
1
8
11
2
11
11
3
13
12
12
4
14
13
13
5
12
14
14
6
15
15
15
7
16
16
15
8
17
16
16
9
16
17
17
10
17
18
18
11
19
19
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

Deseanalized
Deseaso
Seasona
Period Demand
nalized demand Dbar for
l factor
(t)
(Dt)
any period
Demand
0.8
1
8
11

Year

Quarter

11

1
1

3
4

3
4

13
14

12

11

12
13

12
13

1.1
1.1

14

14

0.9

Seasona
l factor
S1
Average
of all

0.9

st

years1
quarter

S2
Average
of all
years

nd

2
quarter
2
2

2
3

6
7

15
16

15
16

15
15

1
1

17

16

16

3
3

1
2

9
10

16
17

17
18

17
18

0.9
0.9

11

19

19

S3
Average
of all
years
3nd
quarter

S4
Average
of all
years

1.1

th

4
quarter
3

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).

81

Period
(t)

Year

4
4
4
4

13
14
15
16

Forecasted
demand
(according to
forecasting
Model)
17
20
21
22

Planned Demand
Inventory cost savings
(without
achieved for # of Units per
Forecasting
quarter
Model)
26
25
29
31

9
5
8
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.

82

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%
Reduction in inventory carrying cost. Reduction in labor hours per systems.
Payback:

Approval:
Aziz Khan

83

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 Systems account.

84

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.

85

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

Sr#

Area of
improvement

Receiving

Receiving

Accounting

Procurement

Finance

Sales

Operations

Vendor relations

Cause
Employees failed to receive the
material in the system.
Converting purchase receipts to
purchase invoices as soon as
receiving the packing slips and
Invoices from suppliers
Information on available credit with
supplier is not shared with buyer on
daily basis
Procurement not informing
accounting about high amount
purchases with suppliers
Not having quarterly budgets
need to have monthly and quarterly
forecast from Sales for key
customers
High Inventory levels affecting Cash
flows
Lack of clarity and leverage on
vendor and suppliers

Action item
Train receiving employees
and Audit the process

Assigned to
Adwait

Train receiving employees and Adwait

Publish the report on credit
availability with key supplier
on daily basis
Gurvi
Notify accounting about
before hand when ever
purchase is going over credit
limit
Alexis
Finance to come up monthly
and quarterly budget plans
Gurvi / Bob
Develop MPS according to
forecasts from sales

Adwait

Develop EOQ policy for A itemVishal/ Sonu

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 (VSLs) 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 nonconformities 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.

There can be more than one cause for nonconformity.

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

prevent occurrence.

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 Harmonics 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 customers 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.
CurrentState
WhileconvertingCSSsystemintoMGBASE
packinformationonlabelgetschanged

InCurrentstate:WhileshippingCSS
systemasMGBASEpack,label
indicateitasMGBASE

CSSSystem

MGBASESystem

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 Incs
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 manufacturers 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 (VSLs) to come up with 1 improvement idea in their area (ex: production,
assembly line, Inventory management etc) and team worked with VSLs 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 VSLs to establish the proposal for improvement.
Plan: Team encourages VSLs to plan their project ahead of time to have efficient
resource utilization. ("A3 reports," 2012)
Follow up: Team took feedback from every VSLs 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: VSLs 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%
20%

3%
3%

9%

4%

ATP ELECTRONICS, INC.

DELL INC

10%

INGRAM MICRO, INC.

4%
45%

MALABS, INC
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%

2%

1%

6%

Assembly

6%

Customer Returns
23%

Functional Testing
Packaging
Quality Assurance
Reliability Testing

60%

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 havent 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.
Implemented By: Aziz Khan

107

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
8/1/11
8/8/11
8/15/11
8/22/11
8/29/11
9/5/11
9/12/11
9/19/11
9/26/11
10/3/11
10/10/11
10/17/11
10/24/11
10/31/11
11/7/11
11/14/11
11/21/11
11/28/11
12/5/11
12/12/11
12/19/11
12/26/11
1/2/12
1/9/12
1/16/12

TotalUnits TotalHours Hrs/Units Currentcost Projectedcost SoftSavings

173
1736
11.0
$47,858
$49,289
$1,431
229
1783
9.2
$52,865
$65,122
$12,257
219
1817
10.2
$55,896
$62,308
$6,412
195
2082
10.7
$52,046
$55,287
$3,241
173
1587
9.2
$39,670
$49,175
$9,505
228
1419
6.2
$35,464
$64,809
$29,345
281
1560
5.6
$39,002
$79,874
$40,872
331
1821
5.5
$45,527
$94,087
$48,560
309
1623
5.3
$40,587
$87,833
$47,247
263
1522
5.8
$38,058
$74,758
$36,699
399
1842
4.6
$46,050
$113,416
$67,365
190
1587
5.8
$27,550
$54,008
$26,458
260
1562
6.0
$39,038
$73,990
$34,952
247
1542
6.2
$38,553
$70,210
$31,657
191
1577
5.6
$26,740
$54,292
$27,552
131
1273
7.1
$23,270
$37,265
$13,995
97
880
6.5
$15,763
$27,572
$11,810
241
1352
5.6
$33,804
$68,504
$34,700
261
1466
5.6
$36,660
$74,189
$37,530
252
1481
5.9
$37,026
$71,631
$34,605
180
1515
5.4
$24,300
$51,165
$26,865
120
1296
5.3
$15,750
$34,110
$18,360
132
1283
4.7
$15,475
$37,436
$21,961
167
1339
4.5
$18,754
$47,384
$28,631
152
1167
4.1
$15,580
$43,206
$27,626
TotalCostsavings
$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.

Month
January-11
February-11
March-11
April-11
May-11
June-11
July-11
August-11
September-11
October-11
November-11
December-11

Cost of
Monthly
goods sold
Average INV Inv Turns
$913,940
$2,013,100
5.4
$881,613
$2,088,060
5.1
$1,478,514
$2,421,609
7.3
$906,814
$2,412,354
4.5
$1,069,399
$2,618,155
4.9
$3,181,141
$2,866,157
13.3
$2,993,854
$3,367,676
10.7
$3,136,896
$3,691,196
10.2
$3,727,579
$3,160,295
14.2
$1,963,531
$3,477,543
6.8
$2,443,917
$3,756,958
7.8
$4,250,515
$3,951,636
12.9

110

January-12

$3,198,319

$3,118,958

12.3

Table 24: Monthly Inventory Turnover

Month
January11
February11
March11
April11
May11
June11
July11
August11
September11
October11
November11
December11
January12

AverageInv Inventorycarrying
Costofgoods
MonthlyInv
Couldhave costcouldhave
ActualInventory
sold
AverageINV
Turns
been
been
carryingcost
Costsavings
$913,940
$2,013,100
5.4 AverageInventory
$881,613
$2,088,060
5.1 turnoverJan2011
toJuly2011
$1,478,514
$2,421,609
7.3
$906,814
$2,412,354
4.5
$1,069,399
$2,618,155
4.9
$3,181,141
$2,866,157
13.3
$2,993,854
$3,367,676
10.7
7.3
$5,038,082
$83,968
$56,128
$27,840
$3,136,896
$3,691,196
10.2
$4,741,469
$79,024
$61,520
$17,505
$3,727,579
$3,160,295
14.2
$4,968,010
$82,800
$52,672
$30,129
$1,963,531
$3,477,543
6.8
$5,903,495
$98,392
$57,959
$40,433
$2,443,917
$3,756,958
7.8
$3,109,712
$51,829
$62,616
($10,787)
$4,250,515
$3,951,636
12.9
$3,870,515
$64,509
$65,861
($1,352)
$3,198,319
$3,118,958
12.3
$6,731,687
$112,195
$51,983
$60,212
TotalCostSavings
$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:PLANTOREDUCETHELIKELIHOODOFTHEOCCURRENCEOFA
PROBLEMORPOTENTIALPROBLEM.

Problem:GigasecondInc'sOrderforsystemgotcanceledinMonthof
October2011,butstillsystemissittingonproductionfloor;insteaditshould
becreditedbackinthesystem(Inventory)assoonasthisOrdergotcanceled
Effectoftheproblem:
WearenotabletousecomponentsofthissystemforotherCustomers,asnot
creditedyet,alsoitwillaffectInventoryaccuracy.
Cause:Theordergotcanceledandnoinstructionsaregiventoproduction
ratherthannottoshiptheorder.
Suggestedcorrectiveaction:Salesshouldprovideareprintwithcancellation
notesanddispositionofthesystem.
ThisexceptionneedstobeaddedtomanufacturingSOP.
CorrectiveactionTaken:SystemDisassembledandindividualpartsmovedto
inventory.
ImplementedBy:AzizKhan

Date:11/21/2011

ResultofActiontaken:SOPiscreatedandcommunicated
ActionEffective(chooseone):YesDateCARClosed: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
businesss 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 companys 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 todays 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 todays 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 todays 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
magazines 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
Assets:
Current Assets
Cash
Accounts receivable
Professional Membership
Long Term Assets:
Furniture/Fixture
Software / Hardware
Investment
Accumulated Depreciation:
Furniture
Software / Hardware
Total Assets
Liabilities:
Accounts payable
Long term liabilities
Bank Loan payable
Commissions payable
Total Liabilities

2011

2012

2013

2014

2015

2016

$173,100
$43,056
$42,500

$95,738
$202,916
$42,500

$331,217
$335,060
$60,500

$1,176,148
$749,869
$72,505

$1,111,766
$975,028
$75,218

$1,127,500
$1,084,627
$86,020

$35,000
$56,000
$91,000

$24,650
$61,000
$85,650

$60,661
$66,000
$126,661

$106,614
$71,000
$177,614

$106,614
$94,000
$200,614

$106,614
$105,000
$211,614

($7,000)
($11,200)
$331,456

($14,800)
($44,400)
$367,604

($23,400)
($57,600)
$772,438

($32,800)
($68,800)
$2,074,536

($43,000)
($80,000)
$2,239,626

($54,000)
($56,000)
$2,399,761

$30,056

$25,016

$32,115

$50,285

$160,152

$215,025

$180,000
$0
$210,056

$325,000

$450,000

$1,500,000

$1,000,000

$500,000

$350,016

$482,115

$1,550,285

$1,160,152

$715,025

$17,588
$367,604
-79%

$290,323
$772,438
129%

$524,251
$2,074,536
195%

$1,079,474
$2,239,626
438%

$1,684,736
$2,399,761
696%

Owner's equity:
Retained earnings
$121,400
Total Liabilities+ Owner's equit $331,456
ROI
33%

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
Fixed Cost
Variable Cost
Total Revenue
# of Customers

2012
$396,500
$117,313
$ 410,000
3

2013
$397,380
$319,885
$ 990,000
7

2014
$398,961
$589,185
$ 1,300,050
11

2015
$399,561
$697,762
$ 1,890,500
35

2016
$402,995
$1,021,834
$ 2,356,000
60

Breakeven Analysis

US Dollars

$2,500,000

60

$2,000,000
35

$1,500,000
$1,000,000
$500,000

11

$0
2012

2013

2014
Year

2015

70
60
50
40
30
20
10
0

# of
Customers
Fixed Cost
Variable
Cost
Total
Revenue

2016

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 CEOs 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
Assets:
Current Assets
Cash
Accounts receivable
Professional Membership
Long Term Assets:
Furniture/Fixture
Software / Hardware
Investment
Accumulated Depreciation:
Furniture
Software / Hardware
Total Assets
Liabilities:
Accounts payable
Long term liabilities
Bank Loan payable
Commissions payable
Total Liabilities

2011

2012

2013

2014

2015

2016

$173,100
$43,056
$42,500

$95,738
$202,916
$42,500

$331,217
$335,060
$60,500

$1,176,148
$749,869
$72,505

$1,111,766
$975,028
$75,218

$1,127,500
$1,084,627
$86,020

$35,000
$56,000
$91,000

$24,650
$61,000
$85,650

$60,661
$66,000
$126,661

$106,614
$71,000
$177,614

$106,614
$94,000
$200,614

$106,614
$105,000
$211,614

($7,000)
($11,200)
$331,456

($14,800)
($44,400)
$367,604

($23,400)
($57,600)
$772,438

($32,800)
($68,800)
$2,074,536

($43,000)
($80,000)
$2,239,626

($54,000)
($56,000)
$2,399,761

$30,056

$25,016

$32,115

$50,285

$160,152

$215,025

$180,000
$0
$210,056

$325,000

$450,000

$1,500,000

$1,000,000

$500,000

$350,016

$482,115

$1,550,285

$1,160,152

$715,025

$17,588
$367,604
-79%

$290,323
$772,438
129%

$524,251
$2,074,536
195%

$1,079,474
$2,239,626
438%

$1,684,736
$2,399,761
696%

Owner's equity:
Retained earnings
$121,400
Total Liabilities+ Owner's equit $331,456
ROI
33%

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
$500,000
l
u D $400,000
e o $300,000
s l
$200,000
l
i a $100,000
$0
n r

Revenue
Profit
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Q214
Q314
Q414
Q115
Q215
Q315
Q415
Q116
Q216
Q316
Q416

($100,000)
U
S

Cost

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
Assets:
Current Assets
Cash
Accounts receivable
Professional Membership
Long Term Assets:
Furniture/Fixture
Software / Hardware
Accumulated Depreciation:
Furniture
Software / Hardware
Total Assets

2011

2012

2013

2014

2015

2016

$173,100
$43,056
$42,500

$95,738
$202,916
$42,500

$331,217
$335,060
$60,500

$1,176,148
$749,869
$72,505

$1,111,766
$975,028
$75,218

$1,127,500
$1,084,627
$86,020

$35,000
$56,000

$24,650
$61,000

$60,661
$66,000

$106,614
$71,000

$106,614
$94,000

$106,614
$105,000

($7,000)
($11,200)
$331,456

($14,800)
($44,400)
$367,604

($23,400)
($57,600)
$772,438

($32,800)
($68,800)
$2,074,536

($43,000)
($80,000)
$2,239,626

($54,000)
($56,000)
$2,399,761

Liabilities:
Accounts payable
Long term liabilities
Bank Loan payable
Commissions payable
Total Liabilities

$30,056

$25,016

$32,115

$50,285

$160,152

$215,025

$180,000
$0
$210,056

$325,000

$450,000

$1,500,000

$1,000,000

$500,000

$350,016

$482,115

$1,550,285

$1,160,152

$715,025

Owner's equity:
Retained earnings
Total Liabilities+ Owner's equity

$121,400
$331,456

$17,588
$367,604

$290,323
$772,438

$524,251
$2,074,536

$1,079,474
$2,239,626

$1,684,736
$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)
Revenue:
Service Revenue
Training Charges
Total Revenue

2011

2012

2013

2014

2015

2016

$ 112,500
$ 37,500
$ 150,000

$ 307,500
$ 102,500
$ 410,000

$ 520,000
$ 247,500
$ 990,000

$ 980,245
$ 325,013
$ 1,300,050

$ 1,417,875
$ 472,625
$ 1,890,500

$ 1,767,000
$ 589,000
$ 2,356,000

$ 9,000
$ 35,000

$
$

16,500
90,000

$ 52,500
$ 150,000

$ 90,000
$ 200,000

$ 18,000

$ 150,000
$ 18,360

$ 150,000
$ 160,000
$ 18,911

$ 160,000
$ 180,000
$ 19,478

$ 170,000
$ 220,000
$ 224,000

$ 380,000
$
$ 8,000
$ 41,000
$ 20,000
$ 12,000
$ 2,500
$ 14,000
$ 500,000

Selling Expenses:
Sales commission
Office Staff
Marketing/ Advertising
Expenses
Technical Staff
Travel Expense

4,500

General and Admin:

Officer's Fixed Salary
Interest Expenses
Software
Depreciation Expense
Other overheads
Utilities
Janitorial
Rent
Total Expenses

$ 175,000
$
$ 1,000
$ 18,200
$ 1,000
$ 2,000
$ 1,500
$ 3,000
$ 201,700

$ 380,000
$
$ 8,160
$ 48,000
$ 20,000
$ 12,240
$ 3,100
$ 14,280
$ 698,140

$ 380,000
$
$
8,405
$ 48,000
$ 21,012
$ 12,607
$
4,253
$ 14,708
$ 924,396

$ 380,000
$
$
8,657
$ 50,000
$ 21,642
$ 12,985
$
4,411
$ 15,150
$ 1,054,823

$ 380,000
$
$
8,917
$ 52,000
$ 22,292
$ 13,375
$
5,573
$ 17,422
$ 1,403,579

Net Income before taxes

Income Tax
Net Income / (Loss)

$ (51,700) $ (90,000) $ 291,860

$
$
$
$ (51,700) $ (90,000) $ 291,860

$ 375,654
$ 93,914
$ 281,741

$ 835,677
$ 250,703
$ 584,974

$ 952,421
$ 333,347
$ 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
OEM
MRB
KPI
ERP
5S
BU
OTS
RMA
OM
SCM
RASCI
CAR
CAPA
SCAR
WIP
FGI
VSL
SCM
COGS

Definition
Original Equipment Manufacturing
Material Review Board
Key Performance Indicator
Enterprise Resource Planning
Sort, Straighten, Shine, Standardize, Sustain
Business Unit
On Time Shipment
Return Material Authorization
Operations Management
Supply Chain Management
Responsible, Accountable, Support, Consult and Inform
Corrective Action Requirement
Corrective And Preventive Action
Supplier Corrective Action Request
Work In Progress
Finished Goods Inventory
Value Stream Mapping
Supply Chain Management
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
Masters 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

References

(Khan, Z, 2010)
Alsmadi, M.; Khan, Z.; , "Lean sigma: The new wave of business excellence, literature
review and a framework," Engineering Systems Management and Its Applications
(ICESMA), 2010 Second International Conference on , vol., no., pp.1-8, March 30 2010April 1 2010
URL:http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5542688&isnumber=55
42651

y (Iron Systems, 2012)

About us (2012). Retrieved May 08, 2012 from
http://www.ironsystems.com/aboutus.asp
y

("Six sigma dmaic ," )

Six sigma dmaic . (n.d.). Retrieved from http://www.orielstat.com/lean-six-sigma/sixsigma-dmaic/overview

(Martin, 2007)
Martin, J. (2007). Lean six sigma for supply chain management the 10-step solution
process. New York: McGraw-Hill Companies.

(CSCMP)
Supply Chain Management Definitions. (n.d.). Retrieved from [9]
http://cscmp.org/aboutcscmp/definitions.asp

(Chen, 2010)
Joseph C Chain; Ye Li; Brett D Shady, From Value Stream Mapping towards a
Lean/sigma Continuous Improvement Process: An Industrial Case Study, International
Journal of production research volume 48 issue 4 page 1069.

(Brassard, 2002)
Brassard, M. (2002). The six sigma memory jogger 2. GOAL / QPC.

(Maclnnes, 2002)
Maclnnes, R. (2002). The lean enterprise memory jogger. GOAL / QPC.

(Sirkin, Keenan & Jackson, 2003)

Harold L. Sirkin, Perry Keenan, and Alan Jackson, The Hard Side of Change
Management, the Harvard Business Review, page 4,5,6 and 7.

137

(Babcock & Morse, 2002)

Babcock, D., & Morse, L. (2002). Managing engineering and technology. Prentice Hall
international series.
(Cowher, A, 2010)
Aime E. Cowher (n.d.). A Practitioner's Guide to Strategy Deployment By . Retrieved
from http://www.gpsqtc.com/APractitionersGuidetoStrategyDeployment
http://asq.org/learnabout-quality/six-sigma/overview/overview.html

(Piasecki, 2003)
Piasecki, D. (2003). Inventory accuracy people, processes & technology. OPS
Publishing.

("Inventory turnover," )
Inventory turnover. (n.d.). Retrieved from
http://en.wikipedia.org/wiki/Inventory_turnover

(Chopra, Meindl & Kalra, 2006)

Chopra, S., Meindl, P., & Kalra, D. (2006). Supply chain management strategy, planning
and operation. Pearson Education.

("six sigma," 2012)

six sigma. (2012, May). Retrieved from http://asq.org/learn-about-quality/sixsigma/overview/overview.html

("Linear regression solver," )

Linear regression solver. (n.d.). Retrieved from http://www.wessa.net/slr.wasp

("Company overview of," 2012)

Company overview of iron systems, inc.. (2012, may). Retrieved from
http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=31023
982

("A3 reports," 2012)

A3 reports. (2012, May). Retrieved from
http://www.coe.montana.edu/ie/faculty/sobek/a3/index.htm

(Whoriskey, 2012)

138

Whoriskey, P. (2012, january 19). Us loses hi-tech manufacturing jobs to

asia. hindustantimes. Retrieved from http://www.hindustantimes.com/worldnews/NorthAmerica/US-loses-hi-tech-manufacturing-jobs-to-Asia/Article1-799108.aspx

(walker, 2012)
walker, L. (2012, may 05). [Web log message]. Retrieved from
http://larrymwalkerjr.blogspot.com/

(matheson, 2009)
matheson. (2009, April). Improving customer satisfaction with lean six sigma. Retrieved
from http://www.mathesongas.com/pdfs/PressCenter/LeanSixSigma.pdf

("About us," 2012)

About us. (2012, May2). Retrieved from http://www.bmgi.com/about-us

("our people," 2012)

our people. (2012, May). Retrieved from http://www.tbmcg.com/about-tbm/ourpeople.html

("what we do," 2012)

what we do. (2012, May). Retrieved from
http://www.ssaandco.com/index.php?option=com_content&view=article&id=79&Itemid
=75

("Corrective and preventive," )

Corrective and preventive action. (n.d.). Retrieved from
http://en.wikipedia.org/wiki/Corrective_and_preventive_action

("Guidelines for making," 2012)

Guidelines for making lean six sigma work in sales. (2012, May). Retrieved from
http://www.isixsigma.com/operations/marketing-and-sales/guidelines-making-lean-sixsigma-work-sales/

("Exit strategy for," 2011)

Exit strategy for your business plan. (2011, june 10). Retrieved from
http://investengine.com/blog/exit-strategy-business-plan/

(Stamford, 2011)
Stamford, C. (2011, December 8). Gartner says worldwide semiconductor spending to
reach $309 billion in 2012, a 2.2 percent increase from 2011. Retrieved from
http://www.gartner.com/it/page.jsp?id=1869717

139

(Antony,2003)
Antony, J.; Escamilla, J.L.; Caine, P.; , "Lean Sigma [production and supply chain
management]," Manufacturing Engineer , vol.82, no.2, pp. 40- 42, April 2003
doi: 10.1049/me:20030203
URL:
http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=1199793&isnumber=27008

(Wang,2010)
Wang Yingchun; Liu Weiwei; Tong ling; Liu Yongxian; , "Research on the Lean Six
Sigma supplier recovery management," Industrial and Information Systems (IIS), 2010
2nd International Conference on , vol.2, no., pp.278-281, 10-11 July 2010
doi: 10.1109/INDUSIS.2010.5565705
URL:
http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5565705&isnumber=5565633

(Debra, 2010)
Debra, T. (2010, February 26). What small business ceos must know to start six sigma.
Retrieved from http://www.isixsigma.com/new-to-six-sigma/getting-started/what-smallbusiness-ceos-must-know-start-six-sigma/

(wolf, 2005)
wolf, C. (2005, September). A bptrends overview of the lean six sigma market. Retrieved
from http://www.bptrends.com/publicationfiles/09-05 TB Six Sigma Market Overview Wolf Harmon2.pdf

140

Appendix
1. 5S Audit Form

5S Audit Form
Level 0
No system in
existence that
improves and
monitors 5S
rating.
Score 0

Level 1
5S rating exists,
supervisors are
trained,
awareness
training complete
and program is in
beginning stages.
Score 1 - 4

Level 2
5S rules and
standards are
implemented.
Score 4.5 - 8

Level 3
Level 4
A standard
5S rules and standards
are becoming a daily
practice for
habit with room for
maintaining
improvement.
levels 1,2,& 3
exists and is
Score 8.5 - 12
adhered to
daily.
Score 12.5 16

Date:

Area:

5S Culture
1

Level 5
The area has the
ability to
continually
sustain the 5S
program and are
tour ready at all
times.
Score 16.5 - 20

Evaluator(s)
Green
(1)

Yellow
(0.5)

Red
(0)

Comments/Suggestion

5S shared leadership roll defined, posted, pass-down up to date

and adding value.
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.

All floors are clean and free of debris and dirt.

All aisles are free of objects, obstructions, trip hazards, and carts
do not have parts hanging off.
No damaged walls, ceilings, doors, and/or floors.

Facilities
6

Visual Management
8 Identified
9
10
11
12
13

mobile equipment, mobile storage or mobile work

stations are in prescribed, taped locations.
Production control boards are visible, complete, labeled, and if
not in use labeled appropriately. (5S, Hour by Hour, etc.)
Bulletin/announcements upto date and displayed neatly.
Labels/stickers are in good condition, no peeling or residue
All binders, documents, processes labeled, stored neatly & easily
accessible.
All visual displays/controls meet standards and in good condition.

Storage and Arrangement

14 All workstations
15
16

Equipment
17
18
19
20

and equipment are clearly labeled.

All items are clearly labeled and have a home. (nothing leaning
against walls or columns)
Tool and fixtures are arranged on shadow boards or identified so
they can be easily accessed.

All equipment, tables, and chairs are kept clean and in good
working condition.
All cleaning equipment is available and stored in a neat manner.
All visible maintenance issues are being addressed.
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