1. 08-01-2014
Lean Inventory
Management
Girish Bhatnagar
Director General - Indian Railways Institute of Logistics and
Materials Management
Adviser - GrowthStreet
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
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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
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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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Factory
MOVE
KANBAN
IN
BOUND
MOVE KANBAN
POST
PRODUCTIO
N KANBAN
CONTAINE
R WITH
MOVE
KANBAN
CONTAINER
WITH
PRODUCTION
KANBAN
Store
IN
BOUND
MOVE KANBAN
POST
Supplie
r
PRODUCTION
KANBAN POST
OUT
BOUND
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JIT Concept
• PRODUCE AND DELIVER FINISHED GOODS JUST IN
TIME TO BE SOLD, FABRICATED PARTS JUST IN
TIME TO GO INTO SUB-ASSEMBLIES AND
PURCHASED PARTS JUST IN TIME TO BE
TRANSFORMED INTO FABRICATED PARTS.
• Schonberger
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JIT Concept
• THE PURPOSE OF JIT IS PRODUCTION OF THE
SMALLEST POSSIBLE QUANTITY AT THE LATEST
POSSIBLE TIME USING A MINIMUM OF RESOURCES
AND
ELIMINATION
OF
WASTE
IN
THE
MANUFACTURING PROCESS.
• Hay
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JIT Concept
• THE OBJECTIVE OF JIT IS THE CREATION OF
SMOOTH AND RAPID FLOW OF ALL PRODUCTS
FROM THE TIME THE RAW MATERIAL IS
PURCHASED TO THE TIME THE FINAL PRODUCT IS
SHIPPED TO THE CUSTOMERS WITH ZERO
DEFECTS.
• Harris
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JIT Concept
• JUST IN TIME IS A PHILOSOPHY OF ORGANISING
WORK WITH THE ULTIMATE AIM OF INCREASING
PRODUCTIVITY AND FLEXIBILITY THROUGH
ELIMINATION OF WASTE AND CONSEQUENT
IMPROVEMENT IN QUALITY.
• Padukone and Suba Roa
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Benefits of JIT
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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
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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
INVENTORY: HIDES PROBLEMS
PROBLEMS COSTS
PROBLEMS EXPOSED
REDUCED
INVENTORY
JIT: EXPOSES PROBLEMS
PROBLEMS COSTS
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PROBLEMS EXPOSED
REDUCED
INVENTORY
JIT: EXPOSES PROBLEMS
PROBLEMS MINIMIZED
PROBLEMS COSTS
REDUCED
INVENTORY
Reducing 8 Wastes (or "muda,")
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Overproduction – inflexible/ unreliable processes
Unnecessary/excess motion
Unnecessary transportation
Inappropriate process - Simplification
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
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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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JIT conditions & Problems
• Difficulties:
▫ Delivery uncertainty
▫ Shorter product life cycles and Customization
▫ Dispersed supply base.
▫ Adversary buyer-seller relationships.
▫ Number of suppliers.
▫ Supplier quality performance
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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 timeframes.
▫ Verifying Countermeasures & monitor Quality performance.
▫ Taking up with vendor for further improvement.
• Vendor identification
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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
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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
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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 eNagare (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
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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
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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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