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 Statement:

Street light inventory seems excessive relative to usage

Objective:

Reduce inventory to optimum level

Cost of Poor Quality

External Customers Citizens Carrying excessive inventory ties up capital that can be used elsewhere Lost capital opportunities cause unnecessary high tax rates Internal Customers City Staff Uncertain ordering schedules makes it difficult to anticipate ordering needs Inaccurate inventory records Inaccurate damage 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: Assisting: 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 Greg Meszaros Michele Hill, Roger Hirt

Project Schedule
Define Measure Analyze Improve Control March April 2003 May Sept 2003 Oct March 2004 Apr Jun 2004 Jun 2004 +

Street Lighting System

Number of Street Lights (Approx) Number of Alley Lights (Approx) Energy Expense, 2003 Department Expense, 2003 Estimated Value of Network 27,500 3,100 $453,367 $2,743,285 $8,500,000

Process Map

Material Needs Determined Materials Ordered Materials Delivered Materials Stored Materials Depleted

Cause and effect matrix: Cause and

R ating of Im portance to C ustom er

Effect Matrix
6 4 (maintenance, construction,

10 investment level effective minimize total

8 responsiveness

Process Step needs determ ined m aterials deliv ered m aterials depleted

Process Inputs budget av ailability tim order to e, deliv ery m aterials requested by m aintenance crew s m aterials requested by construction contractors past usage considerations staff inv entory experience

aesthetics

purchases

lights out)

inventory

pleasing

cost

T otal

1 2

5 10

10 5

5 10

10 0

195 190

10

185

m aterials depleted needs determ ined needs determ ined

10

159

5 6

10 10

5 5

1 1

0 0

145 145

Important Factors: demand, lead time, order interval, level of safety stock

How can our process fail?

As ranked with FMEA, failures can result if:

How Can Our Processes Fail?

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 Vs. actual: Costs 2000-2003 Budget vs Actual 2000 - 2003

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

budget expenditure

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 data been captured? the Data Been Captured? Has all
Actual material expense 2001 Actual material expense 2002 Actual material expense 2003 thru 9-30 Total Historical usage captured Jan 01 Sept 03, valued at Current inventory value as of Sept 30, 2003 $636,865 $584,287 $320,199 $1,541,351 $966,547 $630,806

*Note that recorded usage does not total the amount expended

Has All data been captured? the Data Been Captured? Has all
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?

Low Hanging Fruit-Data Source Low hanging fruit 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 problem poor record keeping Key Problem-Poor Record

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.

Defecti v e r ate: Cl ass A i nv entor y i tems

0.5 0.4 0.3 0.2 0.1 0.0 dec03 feb04 apr jun Sample aug oct LCL=0 dec04 _ P=0.1860 UCL=0.3992

5% allowable tolerance Tests performed with unequal sample sizes

Propor t ion

Defecti v e r ate: Class B i nv entor y i tems

0.5 0.4 0.3 _ P=0.2353 0.2 0.1 LCL=0.0435 0.0 dec'03 jun'04 Sample dec'04 UCL=0.4271

5% allowable tolerance Tests performed with unequal sample sizes

Propor t ion

Defecti ve r ate: Cl ass C i nventor y i tems

0.35 UCL=0.3369 0.30 Proport ion

0.25

_ P=0.245

0.20

0.15 dec03 Sample 5% allowable tolerance Tests performed with unequal sample sizes

LCL=0.1531 dec04

Show Me the Money!

3 yrs of expense, 165 item numbers
material usage expense by item, jan '01 - sep '03
100 150 80

Count

100

60 40

50 20 0
143 item numbers 19.18 % of dollars expended 22 item numbers 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.

Percent

Ranked listing of high expense items (class A) Jan 01-Sept 03

33 month expense
$206,919.72 $85,283.37 $77,538.34 $49,688.52 $47,504.40 $42,803.20 $40,236.56 $31,433.04 $27,884.22 $19,740.00 $16,926.90 $16,213.00 $15,702.57 $12,751.83 $12,324.00 $12,060.00 $12,056.65 $11,711.10 $11,546.00 $10,873.50 $10,831.59 $9,088.00

item #
14-120 14-105 16-200 13-503 16-400 14-151 17-205 13-504 16-209 16-210 18-116 14-122 16-100 14-203 14-106 16-410 14-131 16-291 14-205 14-107 16-213 14-500

description
100w HPS Town & Country fixture 150w cobrahead fixture 30' embedded aluminum pole 100w HPS bulb 16' black metal pole 100w alley fixture #6 3 conductor uf 600v tray cable 150w HPS bulb 30' aluminum bolt down pole 35' aluminum pole single bracket 1 1/2" pe tubing 250w HPS Town & Country fixture 35' wood pole 250w HPS power door 250w cobrahead fixture Fort Wayne standard post 100w PMA fixture transformer base, small 750w power door 400w HPS fixture with photo cell 35' bronze painted aluminum pole 300v photo cell

% total cost
21.41% 8.82% 8.02% 5.14% 4.91% 4.43% 4.16% 3.25% 2.88% 2.04% 1.75% 1.68% 1.62% 1.32% 1.28% 1.25% 1.25% 1.21% 1.19% 1.12% 1.12% 0.94%

cumulative %
21.41% 30.23% 38.25% 43.39% 48.31% 52.74% 56.90% 60.15% 63.04% 65.08% 66.83% 68.51% 70.13% 71.45% 72.73% 73.98% 75.22% 76.43% 77.63% 78.75% 79.87% 80.82%

Poles Used: Jan 2001-Sept Poles used: Jan 2001 Sept 2003
$ ranking 33 months 3 5 9 10 13 16 18 21 23 24 29 39 41 47 52 56 61 74 75 76 82 98 100 33 month expense $77,538.34 $47,504.40 $27,884.22 $19,740.00 $15,702.57 $12,060.00 $11,711.10 $10,831.59 $8,531.00 $8,246.00 $5,964.00 $4,213.82 $3,858.00 $2,588.75 $1,922.20 $1,445.00 $1,247.34 $836.00 $776.00 $720.00 $613.00 $305.37 $286.60 $0.00 description 30' embedded aluminum pole 16' black metal pole 30' aluminum bolt down pole 35' aluminum pole single bracket 35' wood pole Fort Wayne standard post transformer base, small 35' bronze painted aluminum pole 30' big top pole Broadway post 35' aluminium pole double bracket 20' aluminum bolt down (Tower Heights) S Calhoun pole 12' aluminum bolt down 22' fiberglass embedded 50' aluminum 2-piece 8' arm 4'upsweep wood pole 35' alum box fixture 24' alum bolt down casing for FW standard T base large 16' fiberglass silver 40' wood pole 35' alum big top

2003

% of 33 33 month 33 month quantity month usage usage on hand expense maintenance capital 10-1-03 8.02% 132 94 152 4.91% 43 425 444 2.88% 33 45 13 2.04% 28 19 18 1.62% 45 72 77 1.25% 10 8 27 1.21% 9 43 6 1.12% 21 0 29 0.88% 20 0 11 0.85% 7 0 5 0.62% 12 0 18 0.44% 13 0 13 0.40% 3 0 7 0.27% 19 0 7 0.20% 14 0 56 0.15% 1 0 2 0.13% 6 0 19 0.09% 2 0 48 0.08% 2 0 5 0.07% 8 0 0 0.06% 1 0 6 0.03% 3 0 27 0.03% 1 0 6 0.00% 0 0 3

Fixtures Used: Jan 2001-Sept 2003 Fixtures used: Jan 2001 Sept 2003
$ ranking 33 months 1 2 6 12 15 17 20 26 34 51 55 64 66 67 71 77 78 84 93 115 33 month expense $206,919.72 $85,283.37 $42,803.20 $16,213.00 $12,324.00 $12,056.65 $10,873.50 $7,573.53 $5,202.00 $1,938.00 $1,677.95 $1,135.40 $1,048.00 $1,021.93 $980.00 $710.22 $695.00 $574.00 $380.00 $108.89 $0.00 $0.00 $0.00 $0.00 description 100w HPS Town & Country fixture 150w cobrahead fixture 100w alley fixture 250w HPS T/C (discontinue) 250w cobrahead fixture 100w PMA fixture 400w HPS fixture with photo cell 400w HPS box fixture 400w HPS cutoff fixture 150w cutoff 250w T/C 100w HPS downtown fixture 250 W MH fixture S Calhoun 250w cutoff fixture 150w HPS wallmount fixture 250w HPS box fixture bollards for mall 150w HPS downtown fixture 150w HPS ornamental fixture special fixture type 5 t/c 250w Hadco W Central 250w wall mount 175w MH Allen Co fixture welcome marker fixtures % of 33 33 month 33 month quantity month usage usage on hand expense maintenance capital 10-1-03 21.41% 988 425 240 8.82% 633 240 119 4.43% 593 15 108 1.68% 25 0 2 1.28% 59 20 96 1.25% 67 0 3 1.12% 36 30 84 0.78% 37 0 23 0.54% 15 19 11 0.20% 19 0 17 0.17% 5 0 24 0.12% 2 0 5 0.11% 2 0 4 0.11% 7 0 27 0.10% 7 0 11 0.07% 3 0 18 0.07% 1 0 3 0.06% 1 0 10 0.04% 1 0 12 0.01% 1 0 0 0.00% 0 0 0 0.00% 0 0 9 0.00% 0 0 1 0.00% 0 0 7

BulbsBulbs Used: Jan 2001-Sept used: Jan 2001 Sept 2003

$ ranking 33 months 4 8 27 37 63 69 73 81 91 102 122 126 143 33 month expense $49,688.52 $31,433.04 $6,687.12 $4,925.94 $1,185.45 $1,000.58 $864.82 $614.79 $411.60 $268.78 $88.40 $75.00 $32.05 $0.00 $0.00 $0.00 description 100w HPS bulb 150w HPS bulb 250w HPS bulb 400w HPS lamp 250w MH 175w MH 750w HPS lamp 1000w HPS lamp 400w MH 189w Edison base 69w Edison bulb special bulb 310 150w MH lamp 1000w MH lamp 70w MH lamp 100w MH lamp

2003

% of 33 33 month 33 month quantity month usage usage on hand expense maintenance capital 10-1-03 5.14% 5012 333 2173 3.25% 3516 0 2028 0.69% 748 0 1378 0.51% 551 0 645 0.12% 103 0 137 0.10% 94 0 8 0.09% 22 0 22 0.06% 23 0 27 0.04% 42 0 36 0.03% 129 0 80 0.01% 121 0 67 0.01% 1 0 18 0.00% 4 0 31 0.00% 0 0 11 0.00% 0 0 13 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 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0
m ay no v m ay no v m ay m ar m ar m ar ja n ja n ja n ju l ju l se p se p ju l se p

material usage invoices paid

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) S = 13907.1
70000

R-Sq = 1.2 %

R-Sq(adj) = 0.0 %

If R-Sq > 80%, then correlation is significant R-Sq = 1.2%

material usage ($)

60000

50000

40000

30000

20000

Regression 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

MFGR G.E. PHILIPS SYLVANIA TEST SAMPLE 24 39 39 FAILED FAILED FAILED FAILED BY YR 1 BY YR 2 BY YR 3 BY YR 4 0 0% 2 8.3% 5 20.8% 19 79.2% 1 2.60% 5 12.8% 12 30.8% 16 41.0% 0 0% 2 5.1% 3 7.7% 4 10.3%

Low Price Best Price

$18.00 $16.00 $14.00 Cost per Lamp $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ORIGINAL COST 1 YR 2 YR 3 YR 4 YR G. E. PHILIPS SYLVANIA

Sylvania bulbs are the most cost effective for the City Without the cost/lifespan analysis, former procedures would have directed us to purchase Phillips bulbs The addition of bulb replacement labor costs to the analysis, would further expand the cost differences

Test Time

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 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

Purchase/Replenish Pull System

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 Tow n & Country fixture
100 < oct 1 '03
1

> oct 1

80 +1SL=72.5 Qua ntit y use d 60 +1SL=49.4

40

_ X=44.4

X=29.9 -1SL=16.3

20

0 4 8 12 16 20 24 28 Observat ion, per mont h 32 36

100 HPS Town & Country Fixture

(Continued)
Test for Equal Variances for 14-120nc
est StDevs=26.62 < oct 1 '03 fact or est StDevs=22.23 > oct 1 F-Test Test Statistic P-Value Test Statistic P-Value 10 20 30 40 50 60 70 95% Bonferroni Confidence Int erv als for St Dev s 80 1.43 0.801 0.18 0.671

Should all data be used to estimate monthly demand? Difference in means Difference in medians Similarity in Standard Deviations

Levene's Test

< oct 1 '03 fact or

> oct 1

20

40 14- 120nc

60

80

100

Inconclusive to not under estimate, use data since Oct 1, 2003

150w Cobra Head Fixture

8.82% of material expense
14-105: 150w cobra head fixture
60 50 40 30 X=19.18 20 10 0 4 8 12 16 20 24 28 Observa t ion, per m ont h 32 36 -1SL=31.57 < oct 1 '03
1

> oct 1 +1SL=56.83 _ X=44.2

Qua nt it y use d

150w Cobra Head Fixture

(Continued)
Test for Equal Variances for 14-105nc
est StDevs= 9.22 < oct 1 '03 fa ct or est StDevs= 9.20 > oct 1 F-Test Test Statistic P-Value Test Statistic P-Value 1.00 0.849 0.10 0.757

Large difference in means Large difference in medians Similar standard deviations Conclusion Including data prior to Oct 03 might result in under estimation of usage

Levene's Test

10 15 20 25 30 95% Bonferroni Confidence Int erv als for St Dev s

35

< oct 1 '03 fa ct or

> oct 1

10

20

30 14- 105nc

40

50

60

100w Alley Fixture

Demand Analysis Lots of Variability
1 4 -1 5 1 : 1 0 0 w co bra head al l ey fi xt ure
< oct 1 '03 40 > oct 1

30 Quantity used X=18.42 20

+1SL=29.83

_ X=15.2

10

0 4 8 12 16 20 24 28 Obse rva t ion, pe r m ont h 32 36

-1SL=0.57

100w alley fixture (continued)

100w Alley Fixture

Similar Means
F-Test

(Continued)
Test for Equal Variances for 14-151
est StDevs = 9.78 < oct 1 '03 fact or est StDevs = 14.74 > oct 1 Test Statistic P-Value Test Statistic P-Value 0.44 0.166 0.01 0.934

Similar Medians Similar Standard Deviations

Levene's Test

10

20 30 40 95% Bonfer r oni Confidence Int erv als for St Dev s

50

< oct 1 '03 fact or

> oct 1

10

20 14-151

30

40

Conclusion Including data back to Jan 01 should not result in under estimated demand

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 Time Analysis lead time analysis

lead ti me i n days: vendor Gr aybar
A nderson-D arling N ormality Test A -S quared P -V alue < M ean S tD ev V ariance S kew ness Kurtosis N M inimum 1st Q uartile M edian 3rd Q uartile M aximum 8.699 5.73 0.005 10.296 7.222 52.161 1.44571 2.68320 81 1.000 6.000 7.000 16.000 41.000 11.893 8.000 8.545

10

20

30

40

95% C onfidence Interv al for M ean 95% C onfidence Interv al for M edian

9 5 % C onfidence I nter vals

Mean Median 7 8 9 10 11 12

7.000 6.256

95% C onfidence Interv al for S tDev

lead time analysis

Lead Time Analysis

Lead Time on Graybar Items

M ai n Effects P l ot: l ead ti me (i n day s) for Gr ay bar , by i tem number
40

There is too much variation in lead time between different items

30 Mean of days

20

10

0
14-120 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 17-331 17-332 17-333 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 18-706 18-707 19-603 20-221 20-222 20-242 20-244 20-246

it em

Conclusion: Lead Time Analysis must be done at the item level not the vendor level

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 Plan SummaryPlan Summary Control

Process Process Step Output Input Process Specification (LSL, USL, Target) Cpk /Date Measurement Technique %R&R P/T Sample Size Sample Frequency In 2004, materials for all bid projects supplied from inventory. For 2005, no materials from inventory for bid projects

optimizing inventory levels

eliminate need for capital project inventory

lower optimal inventory level, reduced demand for stocked inventory

changed project bidding specs (contractor to supply materials)

project bid specs require material acquisition by successful contractor for 100% of bid street light projects

examine project bid specifications for inclusion of materials as pay items in project bids

review 1 project for compliance with objectives

1st project bid each construction season until procedures are embedded

optimizing inventory levels

calculate demand for stock items

accurate kmax, kmin values

posted transactions

100% of transactions posted daily for accurate kmax, kmin value re-calculations monthly. Demand calculations done for all 'a items' and 'b items' every month. Usage updated daily. Finance Manager to review lead time summary report and compare new values with values listed on product summary report. Update dtb with any changes. Perform task on a semi-annual basis.

demand means and standard deviations automatically calculated and kmax, kmin values automatically adjusted based on new metrics. Dtb auto runs on 1st of month

all usage examined for all items monthly

optimizing inventory levels

lead time reanalysis and determination, re-calculate necessary for lead-times and valid kman, kmin update dtb calculations

lead time dtb summary report comparison of the cost of order processing to the cost of carrying inventory

comparision of database values to lead time summary report

examine 100% of 'a items' and 'b items'

semiannually

optimizing inventory levels

optimal order interval determine established for order intervals, each inventory item by item item

not yet established

not yet determined

ontrol PlanPlan Summary (Continued) Control Summary (cont)

Process Process Step Output Input Process Specification (LSL, USL, Target) Cpk /Date Measurement Technique %R&R P/T Sample Size Sample Frequency Stock out reports sent to PW Finance Manager. Finance Manager compiles information and reports to Director. Stock out occurance rate tracked with control charts (see also 2004 service material requistion process level = 1 step)

optimizing inventory levels

service level determination

service level determined

analyze stock out reports for service level decision

stock out frequency rept reviewed by Division Director who makes determination if the costs of stock-outs exceed the costs of carrying more inventory

100% of stock out reports

annually

material acquisition

updated material order materials req sheet

At least weekly, run 'Materials Needed?' rept and 'Product Materials Summary' rept to spot any Needed?' report, items below kmin values. 'Product Process material requisition Summary' report sheet

as of dec '04, not yet initiated

compare stock out occurances to total number of items ordered on a monthly basis, with stock out event classified as defective occurance. Chart quarterly performance

100% of orders placed

quarterly

material acquisition

materials order order materials processed

submit material req list to supervisor for review. Upon return, check dtb for each item, noting price, vendor, and any special ordering considerations. Confirm prices, and order goods. Input material order information into the dtb requisition sheet by creating a purchase order

compare material req sheet to dtb and ascertain completeness of form. Determine if request seems reasonable.

random, as determined by supervisor

receive materials

receiving goods

restocked shelves, confirmed receipt of materials

order arrival

oversee deliverly and unloading of materials. Verify reciept of all goods with packing slip. Update dtb.

payable clerk to monitor for stock person's signature on packing slip

whenever payments 100% of are packing slips processed

ontrol Plan Summary (cont)

Process Process Step Output Input Process Specification (LSL, USL, Target) Cpk /Date

Control Plan Summary (Continued)

Measurement Technique % R&R P/T Sample Size Sample Frequency cycle count worksheet, physical counting of selected stock items print cycle counting worksheet, physically count stock, update dtb with correct counts, turn in completed worksheet to office staff for defective computations. Investigate causes for defectives. Update control charts and post to network drive through Nov '04, ave defective rate a items = 19.7%, b items = 27.6%, c items not yet computed a items' count every other month, 'b items' count 2 times/year, 'c items' count once/year

inventory record accuracy

cycle counting

reconcile actual inventory to record of inventory, control charts

differences between actual count and recorded count considered defectiv only if e difference exceeds 5%

100% of each item classification category

inventory record accuracy monitor inventory process output (monitoring the project Y)

cycle counting

item classifications determined for cycle counting

comparison of dollars spent on each item as compared to total dollars spent for all items

run usage report, calculate item classifications, compare new classifications to old classifications and update dtb accordingly (pareto analysis)

Pareto items by spending lev el. Sort and order items according to dollars spent, highest to lowest. Add highest items until reaaching 80% of total dollars spent and designate these items as 'a items'. The next set of items totalling 15% of total dollar Product summary report run on last work day of month, and total inventory value reported to PW Finance Manager. Finance Manager adds monthly data to minitab file and produces I-chart. I chart pasted to file on shared drive. At year end, a usage report is run to determine the total v alue of inventory used in the past year. The average monthly inventory value is computed from data used to build I-chart. The total value of inv entory used in the past year is then divided by th

total spent for all items in given time period. Minimum period is 1 yr

annually

monitor monthly v of ale inventory

updated I chart of dollar value of month end inventory

monthly usage report

statistical control limits as designated on I-chart

5-15-03 $772,000. 12-31-03 $568,250. 12-31-04 $411,796

aggregate value of all items in inventory

monthly

monitor inventory process efficiency inventory turn rate

monitor long term changes in system efficiencies

inventory turn rate

total value of inventory used in past year, average monthly v alue of inv entory

realistic target not yet known because many items still overstocked (dec 2004). Goal is to continue to increase turn rate going forward

2003 = .69 2004 = 1.12

100% annual usage spending/ave month end value of inventory carried over 1 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!

Inventory on hand, m onth end values
$ 8 00 ,0 0 0

$ 7 00 ,0 0 0

$ 6 00 ,0 0 0

$ 5 00 ,0 0 0

$ 4 00 ,0 0 0

To date, $400,000 of funds released can be redirected towards better use

$ 3 00 ,0 0 0

Inventory Levels, March 2005

I Char t: S t L i ght i nv entor y v al ues at month end
800000 baseline improvements control

700000 Inventory values, $

1 1

600000

500000
1 1 _ +1SL=410481 X=399026 -1SL=387570 1

400000

300000 jun'03 6 9 12 jun'04 18 21 mar'05

Methodology is Working Methodology is Working!

I Chart: St Light inventory m onthly values, all item s
800000 700000 Individual Value ($) 600000
1

2003

2004

2005

2006

500000 400000 300000 200000 jul nov mar jul nov mar jul Obse rva t ion nov mar jul
1 11 1 1

11

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

nov

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
$1,400,000

Annual Budget

$1,300,000

$1,200,000

$1,341,000 of Accumulated Savings

$1,100,000

$1,000,000

$900,000
2000 2001 2002 2003 2004 2005 2006 2007

BID YEAR

BID YEAR