LEAN SIX SIGMA TO IMPROVE SUPPLY CHAIN MANAGEMENT AT IRON SYSTEMS

Transcription

1 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

2 2012 Subramanyam Chalamcharla Adwait Kunte ALL RIGHTS RESERVED

3 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

4 ABSTRACT LEAN SIX SIGMA TO IMPROVE SUPPLY CHAIN MANAGEMENT AT IRON SYSTEMS In today s 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 today s 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 (KPI s), 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

5 Contents 1. Introduction Overview Company Background Objective Hypothesis Project Scope Supply Chain Overview Six Sigma Lean Management Literature Review Lean Six Sigma framework Integrating Value Stream mapping with Lean Six Sigma Continuous Improvement Process Change Management Iron Systems Inc (Industrial Sponsor) Iron Systems Business Models OEM Customers n-appliances Data Center Work flow Overview of Iron system operations Strategy Deployment Matrix (X-Matrix) Top level Improvement priorities Annual Objectives Key performance Indicators (KPI s) Resource allocation Proposed Methodologies DMAIC Methodology Improvement in On Time Shipment Improvement in Service Factor (Kitting) Physical Inventory Accuracy... 40

6 S Program Annual Inventory Turnover Improving Total Operational hours per system Demand Forecasting Mathematical model (n appliances Business model) Liner regression Result Table for Linear regression analysis Estimating Seasonal Factors Project Charter Cause and effect diagram Rapid improvement Kaizen event for redefining roles and responsibilities Corrective and Preventive Action (CAPA) Process / Corrective Action Request (CAR) Objective Types of CAR Categories of CAR Error Proofing (Poka Yoke) Process Improvement approach A3 Reports for Labeling and Inventory management Improvements in Yield (Yield report) Iron Systems Cost Savings with Lean Six Sigma implementation Direct cost savings visible on profit and loss statement Incremental margin on current or improved sales Lower Inventory carrying cost associated with Inventory Investment Significant cost avoidance with CAR and CAPA Economic Justification Executive Summary Problem Statement Solution and Value Proposition Market Size Competitors Customers

7 5.7 Price Point SWOT Analysis Investment Capital Requirement and Break Even Analysis Personnel Business Revenue Model Profit and Loss and Forecasted Return On Investment Balance Sheet Income Statement Exit Strategy Glossaries of Terms Project Schedule Team and Committee Members Conclusion References Appendix S Audit Form Value Stream mapping before Value Stream mapping - Improved

8 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 Inc 16 Figure 5: Strategic Deployment Matrix 19 Figure 6: Six Sigma DMAIC.21 Figure 7: Weekly data for on time shipments for different business units 25 Figure 8: showing Pareto Analysis for causes in delayed in shipment...26 Figure 9: Analysis of number of days delayed for shipments 27 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 program 43 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

9 Figure 22: Pareto Analysis of Inventory cycle count variance 51 Figure 23: Work place before initiating 5S Program...56 Figure 24: 5S Audit findings 57 Figure 25: 5S before and after comparison 57 Figure 26: Improvement with 5S Program 59 Figure 27: Other application improved with 5S Program..59 Figure 28: Monthly Inventory turnover: January 2011 to January Figure 29: Monthly trend of Cost of goods sold and Average Inventory 61 Figure 30: Push/Pull view of Supply chain cycle at Iron Systems..63 Figure 31: Cycle Process view of Siemens Inc 64 Figure 32: Cycle Process view of supply chain activities for Data center..65 Figure 33: Cycle process view of n-appliances model 66 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_chart2 79 Figure 40: Cause and Effect Diagram 85 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

10 Figure 44: OEM Purchasing Future state..91 Figure 45: CAPA (Corrective and Preventive Action) Life Cycle 94 Figure 46: Current state of shipping..96 Figure 47: Improved state of shipping..98 Figure 48: A3 Report for Inventory 103 Figure 49: VSL s A3 report for Labeling 104 Figure 50: Supplier vs % of components failure.106 Figure 51: Part type vs Quantity rejected 106 Figure 52: Operations vs Quantity rejected.107 Figure 53: Monthly Cost of goods sold vs Average Inventory 111 Figure 54: US manufacturing jobs Labor statistics..117 Figure 55: Break even analysis 125 Figure 56: 5 years Projected Quarterly profit & Loss and Forecasted ROI Figure 57: 5 Years Projected Income statement..130 Figure 58: Project Schedule.133

11 List of Tables Table 1: key performance Indicators (KPI s) with Current and Target values 3 Table2: Iron systems Inc product offerings with Business model.15 Table 3: Value added and non value added activities 24 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 code 44 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 items 54 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= Table 19: Showing de seasonalized demand for any period..80 Table 20: Showing demand and seasonal factors..81

12 Table 21: Difference in demand forecasting 82 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 Table 25: cost savings on based on reduction in inventory holding cost.111 Table 26: Customer segments market analysis 121 Table 27: Return On Investment Capital.124 Table 28: 5years projected Profit & Loss and Revenue generation statement 128 Table 29: Five year Projected Balance sheet..130 Table 30: 5 years Projected Income statement 131 Table 31: Definitions and Acronyms...132

13 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

14 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) 1

15 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 2

16 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(KPI s) 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 2

17 the target. Team worked to improve following supply chain management Key Performance Indicators (KPIs). Sl. No Key Performance Indicators (KPI s) Current Target (Before Improvement) 1 Annual Inventory Turnover On Time Shipments (OTS) 55% 92% 3 5 S (sort, straighten, shine, standardize, sustain) Score Physical Inventory accuracy 78% 95% 5 Service Factor: Kitting 65% 100% 6 Total Operations hrs/unit Table 1: key performance Indicators (KPI s) 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 3

18 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 4

19 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 doesn t add value to it. A lean system s 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 5

20 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 6

21 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) 7

22 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 5 th 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: 8

23 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) 9

24 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

25 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

26 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 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

27 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 Harmonic s 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 customer s requirements are diverse and Iron systems Inc considers those together under category of Other OEMs. 13

28 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 Data Center Iron system serves their customers with requirement of Data Centers with Buildto-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

29 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 Iron s 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 Business Model Approximate Revenue 1. Data Centers Build to Customer Orders 15% 2. OEMs 70% 2.1 Siemens Build to Schedule 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

30 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

31 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

32 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 organization s mission and vision for 2 to 3 years top level breakthrough objectives. (Cowher, A, 2010) 18

33 Figure 5: Strategic Deployment Matrix 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

34 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 Key performance Indicators (KPI s) These data collection is published by key performance indicators (KPI s) 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

35 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 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

36 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 problem s 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

37 that case improvement team should be able to analyze the changes for further improvements. (Brassard, 2002) 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

38 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 Non value added (NVA) activities Business value added (BVA) Activities Assembly VP. Sales Sign off Preparing the sales quotes Testing Handing over sales order to procurement Customer Purchase Order Processing Final quality assurance Checking the on hand stock Approval by accounting department Packing the systems Kitting the required material Creating work order 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

39 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. On Time Shipment (OTS) On time shipment based on Historical data from May 2011 to August 2011) O n t i m e s h i p m e n t 100% 80% 60% 40% 20% 0% 65% Data center 90% N appliances 68% 85% 69% Harmonic Siemens Other OEMs Business Unit/ product On time shipment 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

40 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. Causes Occurrence % of 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 time of shipping 4 1% 100% Total 326 Table 4 : Showing the causes for delayed in shipment and their occurrence 100% 80% 60% 40% 20% 0% Causes of Delayed Shipments (OTS) 55% 66% 75% 82% 87% 91% 95% 97% 99% 100% 17% 14% 13% 44% 31% 12% 11% 9% 8% 5% 5% 17% 4% 2% 2% 1% % of time Cumulative Causes of Delayed Shipment Figure 8: showing Pareto Analysis for causes in delayed in shipment 26

41 % o f o r d e r s 40% 35% 30% 25% 20% 15% 10% 5% 0% 36% 32% 20% 12% no delay 1 to 4 days 5 to 9 days More than 9 Delayed Days % of total 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 # Days delayed % of time Causes 1 1 to 4 days 32% Lead time Material shortage Tight Shipping schedule Parts failure Material not included in BOM 2 5 to 9 days 20% Sales hold Change in product specification Parts failure Software issues Engineering issues 3 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

42 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

43 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