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Lean Inventory

Management

Girish BhatnagarDirector General - Indian Railways Institute of Logistics and Materials Management

Adviser - GrowthStreet

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Traditional Inventory Management

• Based on Historical Forecasting Push System

• Batch Productions, longer runs

• Replenishment Systems

▫ Fixed Quantity (EOQ)

▫ Fixed Interval

• Receipt and Inspection

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Problems With Traditional Inventory

• Uncertainty in Time of Demand & Supply

• Uncertainty in Quantity and Quality

• Always Overstocks or Stock out with Costs

• Wasteful Transportation & Multiple Handling

• Large Space and Overheads Requirements

• Lack of Visibility across the Chain

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Problems With Traditional Inventory

• Lack of Flexibility in Product, Quantity and Time

• Inability to compete on Quality & Price

• Slow response to Rapid Product Changes

• Slow response to Customer Needs

• Little Collaboration between Production, Inventory, Vendors and Customers

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Attributes of Lean Inventory Management

• Pull Demand: Providing inventory when requested by the customer – Pull demand signal

• Costs and waste reduction

• Flow standardization: continuous inventory flow –perfection in quality, Cycle Time, efficiency, Cost

• Responsiveness: Being able to adapt to change.

• Cultural change: Team Work, Customer Focus

• Cross-enterprise collaboration Teams

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Lean Inventory Management Benefits

� Speed To Market� Competitive Superior Value� New Products & Services� New Channels of Distribution� Completely Visible Supply Chain� Superior Customer Service� Savings in Capital due to Less Inventory, Space,

Staff, Machines, System Costs� Economies of Faster & Simplified Systems� Better Leakage Control

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Kanban (signboard or billboard)

• A scheduling system for lean and just-in-time (JIT) production.

• Kanban is a system to control the logistical chain from a production point of view, and is not an inventory control system

• Taiichi Ohno, at Toyota - from Super Malls – customers pick when they need – Signboards

• A signal (pull) is sent to produce and deliver a new shipment when material is consumed.

• These signals are tracked through the replenishment cycle, bringing visibility to both the supplier and the buyer

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Toyota's Six Kanban Rules

1. Later process picks up the number of items indicated by the kanban at the earlier process.

2. Earlier process produces items in the quantity and sequence indicated by the kanban.

3. No items are made or transported without a kanban.

4. Always attach a kanban to the goods.

5. Defective products are not sent on to the subsequent process. The result is 100% defect-free goods.

6. Reducing the number of kanban increases the sensitivity.

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Kanban Example: Three-bin system

• Three bins + Kanban Cards - factory floor; store; supplier.

• Kanban card contains the product details and other relevant information. Just enough Cards available on coloured board system (heijunka box) - Inventory

• factory floor Bin empty – move to store

• store moves full bin to factory floor + kanban card.

• store moves empty bin to supplier.

• Supplier moves full bin to the store

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IN BOUND

MOVE KANBAN

PRODUCTION KANBAN

CONTAINER WITH MOVE KANBAN

CONTAINER WITH

PRODUCTION KANBAN

IN BOUND

PRODUCTION KANBAN POST

MOVE KANBAN POST

MOVE KANBAN POST

Factory

Store

Supplier

OUT BOUND

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JIT Concept

• PRODUCE AND DELIVER FINISHED GOODS JUST INTIME TO BE SOLD, FABRICATED PARTS JUST INTIME TO GO INTO SUB-ASSEMBLIES ANDPURCHASED PARTS JUST IN TIME TO BETRANSFORMED INTO FABRICATED PARTS.

• Schonberger

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JIT Concept

• THE PURPOSE OF JIT IS PRODUCTION OF THESMALLEST POSSIBLE QUANTITY AT THE LATESTPOSSIBLE TIME USING A MINIMUM OF RESOURCESAND ELIMINATION OF WASTE IN THEMANUFACTURING PROCESS.

• Hay

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JIT Concept

• THE OBJECTIVE OF JIT IS THE CREATION OFSMOOTH AND RAPID FLOW OF ALL PRODUCTSFROM THE TIME THE RAW MATERIAL ISPURCHASED TO THE TIME THE FINAL PRODUCT ISSHIPPED TO THE CUSTOMERS WITH ZERODEFECTS.

• Harris

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JIT Concept

• JUST IN TIME IS A PHILOSOPHY OF ORGANISINGWORK WITH THE ULTIMATE AIM OF INCREASINGPRODUCTIVITY AND FLEXIBILITY THROUGHELIMINATION OF WASTE AND CONSEQUENTIMPROVEMENT IN QUALITY.

• Padukone and Suba Roa

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Benefits of JIT

• Rapid Response to customer needs

• Compete on Quality

• Compete on Price

• Rapid Product Change

• Flexibility in Product, Time and Quantity

• WIP Reduction

• Increased Quality

• Inventory Reduction

• Increased Productivity

• Reduced Space Requirements

• Lower Overheads

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Just-in-Time (JIT) is a philosophy

• planned elimination of all waste: "any activity that does not add value to the good or service in the eyes of the consumer."

• continuous improvement of productivity • have only the required inventory when needed; • to improve quality to zero defects; • to reduce lead times by reducing setup times,

queue lengths, and lot sizes; • to eliminate all forms of uncertainty• accomplish these activities at minimum cost.

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JIT Stabilizes uniform load on all work

centres through

• Reduce or eliminate setup times (SMDE)

• Reduce lot sizes

• Preventive maintenance

• Flexible work force

• Reduce production costs.

• Reduce overcapacity

• Improvement of the ordering system.

• Reduce lead times

• Require supplier quality assurance and implement a zero defects quality program

• Small-lot (single unit) Transportation

• Reduce Inventory

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INVENTORY: HIDES PROBLEMS PROBLEMS COSTS

INVENTORY

JIT: EXPOSES PROBLEMS PROBLEMS COSTS

REDUCED INVENTORY

PROBLEMS EXPOSED

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PROBLEMS MINIMIZEDREDUCED

INVENTORY

JIT: EXPOSES PROBLEMS PROBLEMS COSTS

REDUCED INVENTORY

PROBLEMS EXPOSED

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Reducing 8 Wastes (or "muda,")

1. Overproduction – inflexible/ unreliable processes

2. Unnecessary/excess motion

3. Unnecessary transportation

4. Inappropriate process - Simplification

5. Waiting - inefficient layouts or mismatch demand and output levels.

6. Unnecessary inventory - uncertainty - quality levels, delivery lead times

7. Defects

8. Underutilization of Workers

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JIT transportation

• Reduce the number of carriers

• Use longer-term contracts

• Establish electronic linkages & Tracking

• Implement a closed-loop system

• Efficiently handle material.

• Specialized vehicles - easy loading and unloading of smaller quantities

• Returnable plastic or steel containers

• Dock to Floor Deliveries

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Just-in-Time Purchasing

• A commitment to zero defects by the buyer and seller

• Frequent shipment of small lot sizes

• Closer, even collaborative, buyer-seller relationships

• Stable production schedules sent to suppliers on a regular basis

• Extensive electronic commerce and sharing of information between supply chain members

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JIT Suppliers

• Few, nearby suppliers

• Long-term contract agreements

• Steady supply rate

• Frequent deliveries in small lots

• Buying firm helps suppliers meet quality

• Suppliers use process control charts

• Buying firm schedules inbound freight

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JIT conditions & Problems

• Favourable Conditions:

▫ Relatively large, Steady volumes

▫ Low Variety

▫ Reliable Vendors

▫ Short lead times

▫ Repetition of work tasks

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• Difficulties:

▫ Delivery uncertainty

▫ Shorter product life cycles and Customization

▫ Dispersed supply base.

▫ Adversary buyer-seller relationships.

▫ Number of suppliers.

▫ Supplier quality performance

JIT conditions & Problems

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Lean Inventory Management – Quality

• Vendor Systems Audit

• Tier-2 Vendor Upgradation

• Vendor Productivity Improvement

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Quality: Vendor Systems Audit

• Objective▫ Defect should not get generated in the system▫ If by any chance they do get generated, they should not pass

down to the customer• Methodology

▫ Identifying vendors to be audited▫ Carrying out the Audits & deciding Countermeasures with time-

frames.▫ Verifying Countermeasures & monitor Quality performance.▫ Taking up with vendor for further improvement.

• Vendor identification▫ Component Class – A Category, Vital▫ Vendor ISO Certification Status & last Audit rating▫ Warranty & Quality ratings▫ Chronic problems with the vendor.

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Tier 2 Vendor Upgradation (MUL)

• Chain only as strong as its weakest link.• Maruti Centre for Excellence established with

corpus from Maruti and suppliers• Maruti started involving tier 2 supplier into the

main stream activities to ensure▫ Better Quality Levels▫ Timely Delivery▫ Optimum Capacity planning▫ Cost Efficiency for the entire value chain

• The activity is guided and monitored by Maruti.

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Lean Inventory Management –Vendor

Costs & Collaboration

• Vendor Productivity Improvement

• Value Analysis & Cost Workshop

• Vendor Finance Cost Reduction

• Proximal Location of Vendor

• Dealer and Vendor Extranet

• Advanced Supply Order Scheduling

• Automated Material Receipt

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Vendor productivity Improvement

(MUL)• MPS Implementation procedure

▫ Training to vendor’s core team members at MUL.▫ Plant visit by Maruti team and pilot project selected.

▫ Pilot project completion along with Maruti team.▫ Target setting for the year and selection of further MPS projects

▫ Periodical review by Maruti

• Savings (Manhr/day) 7724• Savings (Rs Cr.) 5.86 a year

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Value Analysis/ Cost Workshops

• Teams comprising members of supply chain, product engineering, quality, cost mgmt dept., supplier, supplier’s collaborator visit the supplier’s factory for 2-3 day cost workshop and brainstorm together.

• At the end of the session, cost reduction ideas are selected and action points frozen.

• These ideas are fed into the database and monitored by top management.

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Vendor Finance Cost Reduction

• Joint scheme made involving Bank, Supplier and Buyer

• Pre-shipment working capital made available to suppliers (specially small suppliers) at better rates.

• Scheme gives banks high comfort without recourse to Buyer

• Reduced cost of funds for suppliers by 40 to 50%• Program helps in streamlining suppliers' cash flow• MUL: Total savings Rs 4 Crore, achieved across 31 suppliers, availing about Rs 120 Crore in Working Capital limit

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Proximal Location of Vendors

• Encourages suppliers to set up their manufacturing / distribution centres in and around

• Savings due to reduction in transportation, transaction costs and tax benefits.

▫ MUL: Savings on account of taxes itself is 4.65% of component cost.

▫ Savings on freight and power are additional.

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Dealer and Vendor Extranet

• Extranet - Permits direct limited access to Buyer’s servers

• All dealers and suppliers linked through extranet

• On-line information about

▫ Dealer Indents

▫ Sales Forecasts

▫ Production plans

▫ Actual production

▫ Schedule v/s supply status for components

▫ Information about component rejections

▫ Payment status

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Supply Order Scheduling through e-

Nagare (Serve Hot and Fresh)

• Traditional scheduling system

• Monthly Scheduling - Traditional system of scheduling. Vendors given orders for monthly requirement. No date specified for delivery

• Advanced Shared scheduling system

• Daily Instruction (DI) System - Vendors given firm fortnightly requirement and daily production plan. Date of delivery specified.

• Electronic Shared Scheduling System - Vendors given daily production plan. Date and time of delivery specified

• Supply schedule generated and communicated electronically and automatically to all vendors each day for next day’s supplies, every two hours for supplies through the day.

• Supply timings spaced out equally to maintain uniform flow.

• Bar Code based document processing to minimize document handling cost and time

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Benefits of Advanced Scheduling

• Reduced Inventory• Better Planning for Vendors• Reduced Manpower• Reduced Vendor Personnel• Fewer Production Disruptions• Space Saving• Improved Quality• Reduction in Inventory Variance• Near Zero Obsolescence• Agility – Improved Responsiveness to Market

Fluctuations• Better Distribution of Business for Common Parts

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Automated Material Receipt System

• Old system - One invoice per component. Manual document entry.

• New system -One invoice for multiple components. Automated data updation in the system. Stock receipt documents generation automated

• Benefits of the new system▫ Ease of document generation by vendor▫ Reduce no of invoices in the system▫ Reducing total time taken at entry gate▫ Paper movement minimized▫ Instantaneous receipt acknowledgement

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