Lean Six Sigma

Reducing Street Light Inventory

Rick Orr, Finance Manager Public Works
 Project Objectives
Work Towards Achieving Mayor Richards City Goals
-Safe City
-Quality jobs
-Improved customer service - B.E.S.T.
Demonstrate how Lean Six Sigma Improves Customer
Service and Saves Resources
Improve Customer Service by Reducing Capital
Investment in Street Light Inventory
 What Is Lean Six Sigma?
Systematic approach to reducing process defects that
produce undesired outcomes - in our case, improving the
decision making regarding inventory purchases

DMAIC Define, Measure, Analyze, Improve, Control

Team focus to problem solving - each of us are experts in

certain areas of the inventory process and each have
specialized knowledge of portions of the process
 Project Description

Problem Street light inventory seems

Statement: excessive relative to usage

Objective: Reduce inventory to optimum level

 Cost of Poor Quality
External Customers Internal Customers
Citizens City Staff
Carrying excessive Uncertain ordering
inventory ties up schedules makes it
capital that can be difficult to anticipate
used elsewhere ordering needs
Lost capital Inaccurate inventory
opportunities cause records
unnecessary high tax
Inaccurate damage
rates
recoveries
Inaccurate materials
billing
 Benefits

Frees capital funds to be redirected

towards other use and helps maintain low
taxes
 The Y

The Y: the total value of street light inventory, measured

monthly

Y = f(x1,x2,x3,
,xk)
 Why Minimize Inventory?

Minimizing Inventory:
Increases flexibility in asset management
Makes it easier to control
Reduces the need for space
Makes it easier to count
Reduces aged inventory

Inventory is an asset, but it is a non-productive asset.

It earns no interest but costs City in handling, shrinkage, and space.
 Definition of the Y

The Defect: excessive street light inventory

The Y: the total value of street light inventory, measured monthly

Y = f(x1,x2,x3,,xk)

The Project Plan: examine the factors that drive inventory levels
on various items and appropriately reduce the level of individual
street light items

The Goal: Reach optimal levels of inventory to reduce the

invested capital
 Project Team
Champion: Greg Meszaros
Assisting: Michele Hill, Roger Hirt
Team Members:
Rick Orr, Project Leader/Black Belt
Dave Pepper, St Light Warehouse
Nate Parker, St Light Warehouse
Lori Dekoninck, St Light Warehouse
Phyllis Davis, St Light Engineering Admin
Steve Davis, Assistant Traffic Engineer
Tracy Neumeier, Internal Audit/Black Belt
 Project Schedule

Define March April 2003

Measure May Sept 2003
Analyze Oct March 2004
Improve Apr Jun 2004
Control Jun 2004 +
 Street Lighting System

Number of Street Lights (Approx) 27,500

Number of Alley Lights (Approx) 3,100

Energy Expense, 2003 $453,367

Department Expense, 2003 $2,743,285

Estimated Value of Network $8,500,000

 Process Map

Material Needs Determined

Materials Ordered

Materials Delivered

Materials Stored

Materials Depleted
 Cause
Cause and effect and
matrix: Effect Matrix
Rating of
Importance to 10 8 6 4
Customer

in v e s tm e n t le v e l

e ffe c tiv e

re s p o n s iv e n e s s
m in im iz e to ta l

(m a in te n a n c e ,
c o n s tru c tio n ,
p u rc h a s e s

a e s th e tic s
lig h ts o u t)
in v e n to ry

p le a s in g
c os t
Process Step Process Inputs Total

needs budget
1 5 10 5 10 195
determined availability
materials time, order to
2 10 5 10 0 190
delivered delivery
materials
materials requested by
3 10 5 5 5 185
depleted maintenance
crews
materials
materials requested by
4 5 10 5 1 159
depleted construction
contractors
needs past usage
5 10 5 1 0 145
determined considerations
needs staff inventory
6 10 5 1 0 145
determined experience

Important Factors: demand, lead time, order interval, level of safety stock
 How Can Our Processes Fail?
How can our process fail?
As ranked with FMEA, failures can result if:

historical usage data is not maintained and monitored

inventory usage is not recorded by maintenance crews
material usage is not recorded on work order tickets
expensive in-stock items are substituted for out of
stock items
vendor states inaccurate delivery time on bid
poor analysis done in budgeting cycle
 Budget
BudgetVs.
vs Actual
actual: Costs
20002000-2003
- 2003

$900,000
$800,000
$700,000
$600,000
$500,000 budget
$400,000 expenditure
$300,000
$200,000
$100,000
$0
2000 2001 2002 2003 2004

In May of 2003, the inventory budget was reduced by $100,000 in

anticipation of project success. Approximately $80k less was spent on
materials than modified budget would have allowed for 03.
Estimated savings to date (March 04), $180,000.
 Has All the Data Been Captured?
Has all data been captured?

Actual material expense 2001 $636,865

Actual material expense 2002 $584,287
Actual material expense 2003 thru 9-30 $320,199
Total $1,541,351

Historical usage captured

Jan 01 Sept 03, valued at $966,547

Current inventory value as of

Sept 30, 2003 $630,806

*Note that recorded usage does not total the amount expended
 Has All the Data Been Captured?
Has all data been captured?
All recorded historical usage was collected
Work orders
Re-lamping lists
Proactive maintenance files
Capital project files

Historical inventory values were not kept. It can not be

determined if some usage was not recorded or if the
differences shown on the previous slide are attributable to
changes in the value of inventory on January 1, 2001 as
compared to the value of inventory on September 30, 2003.

What can be done to insure data integrity, going forward?

 Lowhanging
Low Hanging Fruit-Data
fruit Source
data source

Implementation of an inventory tracking database

Material usage recorded as it leaves warehouse
Information readily available to all staff
Facilitates data collection going forward
Improves accuracy of recorded usage

Accomplished without adding any additional tasks not

already being performed by warehouse personnel

Data base implementation should help address 2 factors

identified in the C&E matrix: availability of historical data
and reliance on staff experience
 Key
Key Problem-Poor
problem Record
poor record keeping Keeping
Modified Microsoft Office Template: In-house expertise without
added cost
Inventory Turn-Annual Inventory Use
Inventory Turn: A common method of measuring inventory
management

Calculated by dividing the average inventory level ($) into the annual
inventory usage ($)

2003 material usage $450,539

2003 average inventory value $682,441

*For 2003, Street light inventory turned only .66 times

*For 2004, Street light inventory turned 1.124 times
Inventory Records-Inventory Accuracy
At the start of this project, 165 items were identified with
specific item numbers
Shortly after implementation of database, an additional 88
inventory numbers were assigned to materials not previously
carried on the books
4% inventory 10/20 ($)
"new" items ($)
*Value of items not
previously accounted for
totaled $26,581 or 4% of
inventory on hand as of Oct
21, 2003
96%
Inventory accuracy -
Inventory Accuracy

Accuracy Benefits
Enhance Customer Service
Reduce Stock Outs
Production is not jeopardized
 Inventory Accuracy
Past: Historically, a physical inventory count was conducted once per
year. Accuracy statistics were not maintained, and the existing stock
record was over-written with updated counts.
Effective 2004, implemented Cycle Counting

Current: Inventory items are now differentiated and counted multiple

times per year, depending on usage-value (inventory classification)

Class A items, count 6 times/year 80% of $ spent over 33 months

Class B items, count 2 times/year 15% of $ spent over 33 months
Class C items, count 1 time /year 5% of $ spent over 33 months
 Inventory Accuracy Rates
Inventory accuracy rates
After annual 2003 inventory count, error rates were established.
An error occurs whenever an item count differs from the
inventory record, while considering +/- 5% as an acceptable
tolerance.
Class A items 27.3% error rate
Class B items 35.7% error rate
Class C items 26.1% error rate

All items 27.3% error rate, 12-31-03

Error rates will be tracked with control charts, going forward. If

the use of the inventory data base and the implementation of cycle
counting fail to improve this error rate, this problem could be
investigated further as a Green Belt project.
 Defective rate: Class A inventory items
0.5

0.4 UCL=0.3992
Proportion

0.3

_
0.2 P=0.1860

0.1

0.0 LCL=0

dec03 feb04 apr jun aug oct dec04

Sample
5% allowable tolerance
Tests performed with unequal sample sizes
 Defective rate: Class B inventory items
0.5

UCL=0.4271
0.4

0.3
Proportion

_
P=0.2353
0.2

0.1

LCL=0.0435
0.0

dec'03 jun'04 dec'04

Sample
5% allowable tolerance
Tests performed with unequal sample sizes
 Defective rate: Class C inventory items
0.35
UCL=0.3369

0.30
Proportion

_
0.25 P=0.245

0.20

0.15 LCL=0.1531

dec03 dec04
Sample
5% allowable tolerance
Tests performed with unequal sample sizes
 Show Me the Money!
3 yrs of expense, 165 item numbers

material usage expense by item, jan '01 - sep '03

100
150
80

Percent
100 60
Count

40
50
20

0 0

143 item numbers 22 item numbers

19.18 % of dollars expended 80.82 % of dollars expended
($185,430) ($781,117)

Most of the project effort and analysis will be directed at the 22 items comprising 80% of the
expenditures. These top 22 items are designated as class A items.
Ranked listing of high expense items
(class A) Jan 01-Sept 03
33 month expense item # description % total cost cumulative %
$206,919.72 14-120 100w HPS Town & Country fixture 21.41% 21.41%
$85,283.37 14-105 150w cobrahead fixture 8.82% 30.23%
$77,538.34 16-200 30' embedded aluminum pole 8.02% 38.25%
$49,688.52 13-503 100w HPS bulb 5.14% 43.39%
$47,504.40 16-400 16' black metal pole 4.91% 48.31%
$42,803.20 14-151 100w alley fixture 4.43% 52.74%
$40,236.56 17-205 #6 3 conductor uf 600v tray cable 4.16% 56.90%
$31,433.04 13-504 150w HPS bulb 3.25% 60.15%
$27,884.22 16-209 30' aluminum bolt down pole 2.88% 63.04%
$19,740.00 16-210 35' aluminum pole single bracket 2.04% 65.08%
$16,926.90 18-116 1 1/2" pe tubing 1.75% 66.83%
$16,213.00 14-122 250w HPS Town & Country fixture 1.68% 68.51%
$15,702.57 16-100 35' wood pole 1.62% 70.13%
$12,751.83 14-203 250w HPS power door 1.32% 71.45%
$12,324.00 14-106 250w cobrahead fixture 1.28% 72.73%
$12,060.00 16-410 Fort Wayne standard post 1.25% 73.98%
$12,056.65 14-131 100w PMA fixture 1.25% 75.22%
$11,711.10 16-291 transformer base, small 1.21% 76.43%
$11,546.00 14-205 750w power door 1.19% 77.63%
$10,873.50 14-107 400w HPS fixture with photo cell 1.12% 78.75%
$10,831.59 16-213 35' bronze painted aluminum pole 1.12% 79.87%
$9,088.00 14-500 300v photo cell 0.94% 80.82%
 Poles Jan
Poles used: Used: Jan
2001 2001-Sept
Sept 2003 2003
$ ranking % of 33 33 month 33 month quantity
33 33 month month usage usage on hand
months expense description expense maintenance capital 10-1-03
3 $77,538.34 30' embedded aluminum pole 8.02% 132 94 152
5 $47,504.40 16' black metal pole 4.91% 43 425 444
9 $27,884.22 30' aluminum bolt down pole 2.88% 33 45 13
10 $19,740.00 35' aluminum pole single bracket 2.04% 28 19 18
13 $15,702.57 35' wood pole 1.62% 45 72 77
16 $12,060.00 Fort Wayne standard post 1.25% 10 8 27
18 $11,711.10 transformer base, small 1.21% 9 43 6
21 $10,831.59 35' bronze painted aluminum pole 1.12% 21 0 29
23 $8,531.00 30' big top pole 0.88% 20 0 11
24 $8,246.00 Broadway post 0.85% 7 0 5
29 $5,964.00 35' aluminium pole double bracket 0.62% 12 0 18
39 $4,213.82 20' aluminum bolt down (Tower Heights) 0.44% 13 0 13
41 $3,858.00 S Calhoun pole 0.40% 3 0 7
47 $2,588.75 12' aluminum bolt down 0.27% 19 0 7
52 $1,922.20 22' fiberglass embedded 0.20% 14 0 56
56 $1,445.00 50' aluminum 2-piece 0.15% 1 0 2
61 $1,247.34 8' arm 4'upsweep wood pole 0.13% 6 0 19
74 $836.00 35' alum box fixture 0.09% 2 0 48
75 $776.00 24' alum bolt down 0.08% 2 0 5
76 $720.00 casing for FW standard 0.07% 8 0 0
82 $613.00 T base large 0.06% 1 0 6
98 $305.37 16' fiberglass silver 0.03% 3 0 27
100 $286.60 40' wood pole 0.03% 1 0 6
$0.00 35' alum big top 0.00% 0 0 3
Fixturesused:
Fixtures Used: Jan
Jan 2001-Sept
2001 2003
Sept 2003
$ ranking % of 33 33 month 33 month quantity
33 33 month month usage usage on hand
months expense description expense maintenance capital 10-1-03
1 $206,919.72 100w HPS Town & Country fixture 21.41% 988 425 240
2 $85,283.37 150w cobrahead fixture 8.82% 633 240 119
6 $42,803.20 100w alley fixture 4.43% 593 15 108
12 $16,213.00 250w HPS T/C (discontinue) 1.68% 25 0 2
15 $12,324.00 250w cobrahead fixture 1.28% 59 20 96
17 $12,056.65 100w PMA fixture 1.25% 67 0 3
20 $10,873.50 400w HPS fixture with photo cell 1.12% 36 30 84
26 $7,573.53 400w HPS box fixture 0.78% 37 0 23
34 $5,202.00 400w HPS cutoff fixture 0.54% 15 19 11
51 $1,938.00 150w cutoff 0.20% 19 0 17
55 $1,677.95 250w T/C 0.17% 5 0 24
64 $1,135.40 100w HPS downtown fixture 0.12% 2 0 5
66 $1,048.00 250 W MH fixture S Calhoun 0.11% 2 0 4
67 $1,021.93 250w cutoff fixture 0.11% 7 0 27
71 $980.00 150w HPS wallmount fixture 0.10% 7 0 11
77 $710.22 250w HPS box fixture 0.07% 3 0 18
78 $695.00 bollards for mall 0.07% 1 0 3
84 $574.00 150w HPS downtown fixture 0.06% 1 0 10
93 $380.00 150w HPS ornamental fixture 0.04% 1 0 12
115 $108.89 special fixture type 5 t/c 0.01% 1 0 0
$0.00 250w Hadco W Central 0.00% 0 0 0
$0.00 250w wall mount 0.00% 0 0 9
$0.00 175w MH Allen Co fixture 0.00% 0 0 1
$0.00 welcome marker fixtures 0.00% 0 0 7
BulbsBulbs
used: Used: Jan 2001-Sept
Jan 2001 Sept 2003 2003
$ ranking % of 33 33 month 33 month quantity
33 33 month month usage usage on hand
months expense description expense maintenance capital 10-1-03
4 $49,688.52 100w HPS bulb 5.14% 5012 333 2173
8 $31,433.04 150w HPS bulb 3.25% 3516 0 2028
27 $6,687.12 250w HPS bulb 0.69% 748 0 1378
37 $4,925.94 400w HPS lamp 0.51% 551 0 645
63 $1,185.45 250w MH 0.12% 103 0 137
69 $1,000.58 175w MH 0.10% 94 0 8
73 $864.82 750w HPS lamp 0.09% 22 0 22
81 $614.79 1000w HPS lamp 0.06% 23 0 27
91 $411.60 400w MH 0.04% 42 0 36
102 $268.78 189w Edison base 0.03% 129 0 80
122 $88.40 69w Edison bulb 0.01% 121 0 67
126 $75.00 special bulb 310 0.01% 1 0 18
143 $32.05 150w MH lamp 0.00% 4 0 31
$0.00 1000w MH lamp 0.00% 0 0 11
$0.00 70w MH lamp 0.00% 0 0 13
$0.00 100w MH lamp 0.00% 0 0 24

In early October 2003, 48 250w bulbs and 48 400w bulbs were ordered!
Why? Because we need them!
 Purchase Decisions Made On Usage
Differences in usage values and dollars spent each month could mean
that not all material usage was recorded or more inventory is being
purchased than is being used.
$180,000 material usage
invoices paid
$160,000

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

$0

Total $ value of materials used = $1,034,998

Total $ expended = $1,577,055 *34 months examined
 Correlation of Funds and Usage
Regression Plot
mat used (y) = 32355.5 - 0.0412731 spending (x) If R-Sq > 80%,
S = 13907.1 R-Sq = 1.2 % R-Sq(adj) = 0.0 % then
70000 correlation is
significant
material usage ($)

60000

50000 R-Sq = 1.2%

40000

30000

Regression
20000
95% CI

10000

0 50000 100000 150000

monthly expenditures ($)

* With monthly measurements, there does not appear to be a

significant linear correlation between material usage and the
amount of funds spent for inventory acquisition.
 Changes to Bidding Specifications
Additional bidding expectations were requested of
vendors bidding on poles, mast arms, and fixtures

Informed all bidders of our goal to minimize inventory

carrying costs
Required bidders to list best price at minimum quantity
levels, price at lesser quantity order levels, and worst
price if only 1 unit ordered
Required vendors to list the length of time between
order placement and order delivery (lead time)

*This information will be critical in determining

optimal inventory levels and reorder points
 Purchase Decision: What Bulb is the
Most Cost Effective to Purchase?
Beginning in 2000, Street Light Engineering began testing the
longevity of various bulb manufacturers
ORIGINAL
COST 1 YR 2 YR 3 YR 4 YR
G. E. $ 8.97 $ 8.97 $ 9.72 $ 10.84 $ 16.07
PHILIPS $ 8.95 $ 9.18 $ 10.10 $ 11.70 $ 12.62
SYLVANIA $ 10.15 $ 10.15 $ 10.67 $ 10.93 $ 11.19

FAILURES AND RATES

TEST FAILED FAILED FAILED FAILED
MFGR SAMPLE BY YR 1 BY YR 2 BY YR 3 BY YR 4
G.E. 24 0 0% 2 8.3% 5 20.8% 19 79.2%
PHILIPS 39 1 2.60% 5 12.8% 12 30.8% 16 41.0%
SYLVANIA 39 0 0% 2 5.1% 3 7.7% 4 10.3%
 Low Price Best Price
Sylvania bulbs are the
$18.00
most cost effective for
$16.00
the City
$14.00
Without the
Cost per Lamp

$12.00
G. E.
$10.00
PHILIPS
cost/lifespan analysis,
$8.00
SYLVANIA former procedures
$6.00
would have directed us
$4.00
to purchase Phillips
$2.00
$-
bulbs
ORIGINAL COST

1 YR

2 YR

4 YR
3 YR

The addition of bulb

replacement labor costs
to the analysis, would
further expand the cost
Test Time
differences
 Changes to Ordering Procedures
Material ordering procedures were tightened
for all inventory purchases

order form initiated by warehouse personnel or engineers

order requires sign-off by department director
order requires sign-off by finance manager

First time the procedure was used, an order of

photo cells was reduced from 500 (4-5 month
supply) originally requested to 200 ordered
 Purchase/Replenish Pull System
Purchase/Replenish Pull System

Implemented a widely recognized

inventory system, developed by Toyota
Motor Corp, known as Kanban

Kanban is an empirically driven method

of both signaling the need for inventory
and controlling inventory levels

Kanban Japanese word for sign

 Purchase/Replenish Pull System
4 Variables for an Effective Purchase/Pull System
Demand the average monthly usage amount
Lead Time length of time expired between placing
order and receiving goods, measured in monthly
units
Order Interval how often orders are anticipated, in
monthly units
Safety Stock amount of inventory to be held to
compensate for demand variability and/or lead time
variability
 Historical Demand
Historical Demand
Estimate Future Costs By Analyzing Past Material Usage

4 Uses of Materials
Maintenance Repair to Damaged Facilities
Re-lamping Activities Based on Light-Out Lists
Proactive Replacement of Aged Facilities and/or Bulbs
Capital Construction Project
Capital projects are known prior to construction. By meeting
minimum requirements, capital materials can be ordered on a
project by project basis. On appropriate projects, capital
needs will now be segregated from other material needs.

Recall that some of the historical data might be suspect

 Demand Analysis
Demand analysis
Demand Analysis = Compare means, standard deviations,
and medians for each item
Pre data base implementation
Post data base implementation

If similar, conclude historical usage was accurately collected

use data collected since January 2001 for a specific item

If different, conclude historical usage was not accurately collected

use data collected since October 2003 for a specific item
100 HPS Town & Country Fixture
21.41% of material expense
14-120: 100w Town & Country fixture
< oct 1 '03 > oct 1
100 1

80
+1SL=72.5
Quantity used

60
+1SL=49.4
_
X=44.4
40
X=29.9

20
-1SL=16.3

0
4 8 12 16 20 24 28 32 36
Observation, per month
 100 HPS Town & Country Fixture
(Continued) Should all data be
Test for Equal Variances for 14-120nc
used to estimate
monthly demand?
est StDevs=26.62 F-Test
< oct 1 '03 Test Statistic 1.43
Difference in
factor

P-Value 0.801
est StDevs=22.23 Levene's Test means
> oct 1 Test Statistic 0.18
P-Value 0.671

10 20 30 40 50 60 70 80
Difference in
95% Bonferroni Confidence Intervals for StDevs
medians

< oct 1 '03

Similarity in
Standard
factor

> oct 1
Deviations

0 20 40 60 80 100 Inconclusive to
14-120nc
not under estimate,
use data since Oct
1, 2003
 150w Cobra Head Fixture
8.82% of material expense
14-105: 150w cobra head fixture
< oct 1 '03 > oct 1
60
1 +1SL=56.83

50
_
X=44.2
40
Quantity used

30 -1SL=31.57

X=19.18
20

10

0
4 8 12 16 20 24 28 32 36
Observation, per month
 150w Cobra Head Fixture
(Continued) Large difference
in means
Test for Equal Variances for 14-105nc
F-Test
est StDevs= 9.22 Test Statistic 1.00
Large difference
< oct 1 '03 P-Value
Levene's Test
0.849
in medians
factor

est StDevs= 9.20 Test Statistic 0.10

P-Value 0.757
> oct 1
Similar standard
5 10 15 20 25 30 35 deviations
95% Bonferroni Confidence Intervals for StDevs

Conclusion
< oct 1 '03 Including data
prior to Oct 03
factor

> oct 1
might result in
under estimation
0 10 20 30 40 50 60 of usage
14-105nc
 100w Alley Fixture
Demand Analysis Lots of Variability

14-151: 100w cobra head alley fixture

< oct 1 '03 > oct 1

40

30 +1SL=29.83
X=18.42
Quantity used

20
_
X=15.2

10

0 -1SL=0.57

4 8 12 16 20 24 28 32 36
Observation, per month
 100w alley fixture (continued) 100w Alley Fixture
(Continued) Similar Means
Test for Equal Variances for 14-151
F-Test Similar Medians
est StDevs = 9.78 Test Statistic 0.44
< oct 1 '03 P-Value 0.166
Levene's Test Similar Standard
factor

est StDevs = 14.74 Test Statistic 0.01

> oct 1
P-Value 0.934 Deviations

10 20 30 40 50 Conclusion
95% Bonferroni Confidence Intervals for StDevs
Including data
back to Jan 01
< oct 1 '03 should not result
in under
factor

> oct 1
estimated demand

0 10 20 30 40
14-151

This methodology was used to analyze demand for all class A and class B items
lead time Lead Time
Lead Time - Time Expired From Order
Initiation to Receipt of Goods

stated in bid specifications for

poles, fixtures, bulbs
include City staff time for
requisition preparation and sign-off
 Lead
lead time analysisTime Analysis

lead time in days: vendor Graybar

Anderson-Darling Normality Test

A -Squared 5.73
P-Value < 0.005

Mean 10.296
StDev 7.222
V ariance 52.161
Skewness 1.44571
Kurtosis 2.68320
N 81

Minimum 1.000
1st Q uartile 6.000
0 10 20 30 40 Median 7.000
3rd Q uartile 16.000
Maximum 41.000
95% Confidence I nterval for Mean
8.699 11.893
95% Confidence I nterval for Median
95% Confidence I ntervals 7.000 8.000
95% Confidence I nterval for StDev
Mean
6.256 8.545

Median

7 8 9 10 11 12
 items
different
There is

between
lead time
too much
variation in

Conclusion:
Mean of days

0
10
20
30
14-120 40
14-500
14-502
14-505
14-520
14-557
14-700
14-701
17-112
17-113
17-114
17-116
17-118
17-120
17-122
17-123
17-300
17-301
17-306
17-309
lead time analysis

17-331
17-332
17-333

item
17-340
17-399
17-503
17-505
17-506
18-103
18-112
18-113
18-114
18-201
18-202
18-203
18-205
18-210
Lead Time on Graybar Items

18-706
18-707
19-603
20-221
20-222
20-242
Main Effects Plot: lead time (in days) for Graybar, by item number

20-244
20-246
Lead Time Analysis must be done at the item level not the vendor level
Lead Time Analysis
 Order Interval
Order Interval- Frequency of Placing Orders for Each part
Trade-off between the level of inventory quantities carried per item and
the frequency of ordering the item.

If ordering often, can order less quantities per order. But there are
overhead and administrative costs for
initiating order, processing requisition, purchase order
contacting the vendor and placing the order
receiving the goods, re-stocking the shelves
processing the payable
Pareto analysis used to establish order frequencies. Class A items are few
but are 80% of the dollars in inventory. Class C items are numerous, but
only a small part of total inventory value.

Order class A items frequently, and order class C items infrequently

 Order Interval
Preferred Products: Poles, Mast Arms, Transformer Bases
Poles/Mast Arms: charged a 13 14 % premium for orders totaling less than
$11,000 / order, effective 2004. Various types of poles/mast arms can be mixed
per minimum $11,000 purchase.

Preferred Products purchases, October 2003 - February 2004 averaged $7,429

per month. To avoid paying an average premium of $1,003 per month (if the
interval is 1), the order interval should be at least 2 months.

This results in an inventory that is larger than would be necessary otherwise, for
items that are relatively expensive.

But in effect, the excess inventory carried is returning approximately 13.5% in

avoided expense.

Recall the Cause & Effect Matrix the process output cost effective purchases
was ranked at 8 out of 10 in importance to the customer.
 Order Interval
GE Supply Fixtures & Power Doors
Order Requirements: Lots of 25
Orders less than the per fixture price increases by 10%, or on
average, $9 more per item.

Again, the result is inventory that is larger than would be

necessary otherwise if cost effective purchasing is to be
achieved.

But some fixtures used infrequently,

anticipate paying premium charge.
 Safety Stock Safety Stock
Safety Stock: inventory stock required to guard against
process variability
demand variability
lead time variability
quality variability

Safety Stock Quantity: dependent on desired service level

service level 1, on average no stock outs 84% of the time
service level 2, on average no stock outs 98% of the time
service level 1, 1 standard deviation of safety stock carried
service level 2, 2 standard deviations of safety stock carried

High Service Levels Need More Inventory/Safety Stock

 Safety Stock-Level of Service
Safety Stock= Standard Deviation * Service Level * (Lead Time ^ .7)

Materials for capital projects are known in advance and

ordered on a project by project basis. Capital projects are not
impacted by the service level choice.

For the cause & effect matrix, process outcomes were ranked
by the Division Director
minimizing total inventory carried ranked at 10 (high)
responsiveness to calls, light outs ranked at 6 (medium)
Street lights are not a critical service, so a service level of 1
will be used to establish inventory re-ordering points and
optimal inventory levels.
Inventory Level/Order Triggering Formulas
Kanban System
Establish inventory levels and calculate reorder points for each
carried stock item.

Kmax = Max on-hand quantity for an item

(lead time * demand) + (order interval * demand) + safety
stock
Kmin = Re-ordering trigger point for an item
(lead time * demand) + safety stock

Order more stock when (balance on hand + items on order) is less

than the trigger point

Order Quantity = Kmax (balance on hand + items on order)

 Controlling the Xs (Demand)

Inventory fills demand (after considering the acceptable

level of risk of running out, i.e., safety stock).

Demand is monitored not controlled. Demand affects

inventory level, inventory level does not affect demand.

Modified data base- demand transactions and values are

monthly calculated and updated with changes.

Materials for capital projects are bid and supplied by the

successful bidder, not by the Citys inventoried stock
 Controlling the Xs (Lead Time)

The database was modified to better capture lead time

changes. As orders are filled and the database updated,
the received date is recorded and compared to other order
dates. The difference in dates is converted to monthly
units. The database prints lead time reports that list the
average lead time value by item and by vendor to update
lead time fields.
 Control PlanControl
SummaryPlan Summary
Process Specification (LSL, %R&R Sample Sample
Process Process Step Output Input Cpk /Date Measurement Technique
USL, Target) P/T Size Frequency

In 2004,
materials for
all bid
projects
supplied
from 1st project
inventory. bid each
lower optimal changed project project bid specs require For 2005, review 1 construction
eliminate need inventory level, bidding specs material acquisition by no materials examine project bid project for season until
optimizing for capital reduced demand (contractor to successful contractor for from specifications for inclusion of compliance procedures
inventory project for stocked supply 100% of bid street light inventory for materials as pay items in with are
levels inventory inventory materials) projects bid projects project bids objectives embedded

100% of transactions posted

daily for accurate kmax, kmin demand means and standard
value re-calculations monthly. deviations automatically
Demand calculations done for calculated and kmax, kmin
optimizing calculate all 'a items' and 'b items' values automatically adjusted all usage
inventory demand for accurate kmax, posted every month. Usage based on new metrics. Dtb examined for
levels stock items kmin values transactions updated daily. auto runs on 1st of month all items monthly

Finance Manager to review

lead time re- lead time summary report and
analysis and compare new values with
determination, values listed on product examine
optimizing re-calculate necessary for summary report. Update dtb 100% of 'a
inventory lead-times and valid kman, kmin lead time dtb with any changes. Perform comparision of database values items' and 'b semi-
levels update dtb calculations summary report task on a semi-annual basis. to lead time summary report items' annually

comparison of
optimal order the cost of order
interval processing to
optimizing determine established for the cost of
inventory order intervals, each inventory carrying
levels item by item item inventory not yet established not yet determined
 Control
Control Plan Summary(Continued)
Plan Summary (cont)
Process Specification (LSL, %R&R Sample Sample
Process Process Step Output Input Cpk /Date Measurement Technique
USL, Target) P/T Size Frequency

Stock out reports sent to PW

Finance Manager. Finance
stock out frequency rept Manager compiles information
reviewed by Division Director and reports to Director. Stock
analyze stock who makes determination if out occurance rate tracked
optimizing out reports for the costs of stock-outs with control charts (see also 100% of
inventory service level service level service level exceed the costs of carrying 2004 service material requistion process stock out
levels determination determined decision more inventory level = 1 step) reports annually

At least weekly, run 'Materials compare stock out occurances

Needed?' rept and 'Product to total number of items
Materials Summary' rept to spot any ordered on a monthly basis,
Needed?' report, items below kmin values. as of dec with stock out event classified 100% of
material updated material 'Product Process material requisition '04, not yet as defective occurance. Chart orders
acquisition order materials req sheet Summary' report sheet initiated quarterly performance placed quarterly

submit material req list to

supervisor for review. Upon
return, check dtb for each
item, noting price, vendor, and
any special ordering compare material req sheet to
considerations. Confirm dtb and ascertain random, as
prices, and order goods. Input completeness of form. determined
material materials order material order information into the dtb Determine if request seems by
acquisition order materials processed requisition sheet by creating a purchase order reasonable. supervisor

restocked oversee deliverly and whenever

shelves, unloading of materials. Verify payable clerk to monitor for payments
receive receiving confirmed receipt reciept of all goods with stock person's signature on 100% of are
materials goods of materials order arrival packing slip. Update dtb. packing slip packing slips processed
Control Plan Summary (cont)
Control Plan Summary (Continued)
Process Specification (LSL, %R&R Sample Sample
Process Process Step Output Input Cpk /Date Measurement Technique
USL, Target) P/T Size Frequency

print cycle counting through Nov

worksheet, physically count '04, ave a items'
stock, update dtb with correct defective count every
counts, turn in completed rate a items other month,
cycle count worksheet to office staff for = 19.7%, b 'b items'
worksheet, defective computations. items = count 2
reconcile actual physical Investigate causes for 27.6%, c differences between actual 100% of times/year,
inventory inventory to record counting of defectives. Update control items not count and recorded count each item 'c items'
record of inventory, selected stock charts and post to network yet considered defective only if classification count
accuracy cycle counting control charts items drive computed difference exceeds 5% category once/year

Pareto items by spending level.

Sort and order items according
comparison of to dollars spent, highest to
dollars spent on lowest. Add highest items total spent
each item as run usage report, calculate until reaaching 80% of total for all items
item compared to item classifications, compare dollars spent and designate in given time
inventory classifications total dollars new classifications to old these items as 'a items'. The period.
record determined for spent for all classifications and update dtb next set of items totalling 15% Minimum
accuracy cycle counting cycle counting items accordingly (pareto analysis) of total dollar period is 1 yr annually
Product summary report run on
monitor last work day of month, and
inventory 5-15-03 total inventory value reported to
process $772,000. PW Finance Manager.
output - updated I chart of 12-31-03 Finance Manager adds aggregate
(monitoring monitor dollar value of $568,250. monthly data to minitab file and value of all
the project monthly vale of month end monthly usage statistical control limits as 12-31-04 produces I-chart. I chart items in
Y) inventory inventory report designated on I-chart $411,796 pasted to file on shared drive. inventory monthly

At year end, a usage report is

run to determine the total value 100% annual
of inventory used in the past usage
monitor year. The average monthly spending/ave
inventory total value of realistic target not yet known inventory value is computed month end
process monitor long inventory used in because many items still from data used to build I-chart. value of
efficiency - term changes past year, overstocked (dec 2004). Goal The total value of inventory inventory
inventory in system average monthly is to continue to increase turn 2003 = .69 used in the past year is then carried over 1
turn rate efficiencies inventory turn rate value of inventory rate going forward 2004 = 1.12 divided by th yr annually
 Controlling the Process

1. Prior to this project, procedures were not standardized or

documented. As part of the control plan, inventory procedures
were spelled out, documented and distributed.

2. The Street Light Inventory Procedures manual will facilitate

implementation of the control plan, project understanding for all
personnel and staff training in inventory control.

3. Inventory control still needs more work. Cycle counting will be

examined in detail and order intervals will be further analyzed.
 Methodology is Working
Methodology is Working!

To date,
$400,000
of funds
released
can be
redirected
towards
better use
 Inventory Levels, March 2005

I Chart: St Light inventory values at month end

baseline improvements control
800000

700000
1
1
Inventory values, $

600000

500000
1 1

_
+1SL=410481
400000 X=399026
-1SL=387570

300000
jun'03 6 9 12 jun'04 18 21 mar'05
 Methodology is Working
Methodology is Working!
I Chart: St Light inventory monthly values, all items
2003 2004 2005 2006
800000

700000
Individual Value ($)

600000
1
1
1
500000

1
400000 1
11 1

300000 1
11
1 _
+1SL=251156
X=244336
-1SL=237516

200000 1
jul nov mar jul nov mar jul nov mar jul nov
Observation

Since project inception, $400,000 of funds have been made

available for use elsewhere. Without this project, inventory
values would likely be at the level they were in early 2003.
 Street Light Maintenance Contract
ACTUAL VS 3% ANNUAL INCREASE
Annual Budget

$1,341,000 of
Accumulated Savings

BID YEAR BID YEAR