This comes from the fact that whenever an order is received the goods can be dispatched without delay. But this often gives rise to a scenario of piling up of inventory, unless good sales are achieved – or the stock becomes outdated.
There are projects undertaken to improve this situation, but often end up giving short-term results. The better solution is implementing Lean tools to reduce excess and obsolete inventory.
Lean Six Sigma can be highly effective in bringing down huge losses suffered due to excess and obsolete inventory.
Analyzing Root Causes
The first step is to undertake the analysis of excess and obsolete inventory that an organization has. The DMAIC methodology can be very useful in bringing the overall improvement in the inventory scenario.
Often, the root causes of this results from long lead times, poor forecasting and quality issues. Further analysis will show that there are smaller reasons linked with each other that lead to the problems.
For example, large lead times may be caused due to larger lot sizes. Even if the order cycle time is of 30 days, if the lot size for purchase is 90 days, then this gives rise to a huge amount of inventory. Though this may not be the only reason, it can be a major reason along with the cause being one of complicated processes.
There could be other reasons that lead to obsolete stock. If lead time is great and there happens to be some rework needed, then the by time the stock is ready the utility of the stock may be reduced.
For example, in a pharmaceutical company, if such large lead times exist, then the stock could be obsolete if the product has expired or is not very far off from doing so.
In such a situation, the customer may reject the product.
Dealing with Poor Demand, Supply, and Forecasting
Another root cause may be due to poor management of the demand and supply process. If there is poor forecasting, or inaccuracy of data on the demand side and over-projecting sales on the part of the sales team, then inventory levels can be overwhelming.
Rework caused due to defects is another major factor that leads to obsolete inventory as well as the increase in the lead times. Lean Six Sigma tools can be used very carefully in dealing with this situation.
The phases of DMAIC allow for defining the project goals, plan the data collection in the measure phase, and carrying out a physical count in the Measure phase. This helps in understanding the value of the stock better than the book value. Value stream mapping in the Analyze phase helps in understanding how the input variables are affecting the inventory levels.
It can form the basis for an inventory model. Other areas are also identified where the inventory is built up unnecessarily. Lean tools like 5S can be very useful in sorting out such a situation. Other improvement areas are also identified.
The Control phase can be an ongoing one, which can ensure sustained improvements.
Lean can prove to be highly useful in addressing the issues of excess and obsolete inventory using tools and techniques to identify root causes and designing Lean solutions to streamline the process.