David Kiger is crazy for everything that has to do with logistics, six sigma and just in time production. We have seen many cases of either approach and we have seen cases where the strategy has gone wrong and others where the strategy works as expected.
This time we are going to take a look at a company that had to implement six sigma in order to survive and continue being leaders in the market. As in every other case, companies have to reach a point where they cannot handle inventory to understand that they need to look at new approaches to survive in this ever changing world. Unison Industries is our patient today and we are going to analyse how this huge company managed to change their beliefs in order to achieve excellency and manage their inventory.
A lot of businesses use the following systems: Enterprise Requirement Planning (ERP) systems to manage raw materials, work in progress (WIP), and finished goods. Unison Industries (UI) is also in this trend and they have their own information systems.
For those who don’t know, Unison is a worldwide provider of electrical and mechanical aviation components and systems that can be found in trainer planes, jumbo jets, and even spacecraft. Back in 2007, Unison Industries had the brilliant idea of changing to the very well-known ERP system called ORACLE. They did this with success but they found out they were having excess inventory.
Two years later, Unison inventory was labelled as excess inventory throwing consequences such as constraining working capital, resources, and capacity. In average, categories had Excess inventory around 20% in production that backed up products that were already in production, and 65% in engineering that worked directly producing new products. It seemed normal, but the 65% of excess engineering had a cost of almost 20% of the company’s 2009 engineering budget.
So the excess inventory had to be addressed before it was too late. Unison started by creating two teams that looked directly at the excess inventory and prevented future excess growth. The first team focused on the production inventory as mentioned before and the other team focused on the engineering inventory. The Six Sigma strategy was applied in order to stop the growth of excess engineering inventory.
This is what started happening: the Vice President of engineering selected the Six Sigma methodology to address the problems. Unison already had seen six sigma because the Six Sigma methodology had been spread within the company after General Electric Engine Services acquired Unison Industries in 2002. The first step was to collect all the possible data about the problem. Then this base-line data was compared with the amount of excess engineering inventory growth during and after the implementation of Six Sigma. Six Sigma was the winner.
The measurement instrument was verified with a Gage R&R test and then everything was written down on EXCEL and a subset of 30 data lines were selected. These 30 lines were given to two independent inspectors who reviewed the data lines and recorded a status of excess or not excess in a Gage R&R template. This process was repeated two times and the results exceeded the 90% threshold. This meant that the team could continue with the selected measurement instrument. After applying the measurement instrument and finishing the analysis, a month on month increase in excess engineering inventory of approximately $200,000 could be seen.
The main problems were the received purchase orders (PO) so they were the ones that acted as the Guinea pigs. Other problems included the following categories that were set by the teams: P.O.s, Internal Sales Orders, WIP, Finished Goods, Raw Material, and Obsolete. Then, each category was seen as an individual area to apply an individual Six Sigma DMAIC project.
The six Sigma methodology got completed and the results were the following: poor physical inventory management was one of the biggest problems. Engineering inventory is written down on the books as a receipt and it is not seen as an asset and not shown on the annual physical inventory counts. Another cause of excess inventory was the poorly defined business metric.
Conclusions can be drawn from this case. First, the Six Sigma methodology can be used to identify root causes, propose corrective actions, and provide improvements for business critical issues, such as excess inventory growth. Another conclusion is that inventory accuracy within an ERP system is important, very important. The ERP system is a powerful advantage but can become a karma that will only give you excess inventory input is not right.
This case in Unison shows the world that Six Sigma methodology can be used in almost any aspect of the business and corporate world. The idea is to clearly define the problem, strategically align key business resources, and follow the methodical Six Sigma approach and any company can reduce problems in inventory and in many more areas.
Take look at this amazing article on the Kaizen Institute