Download the Article (PDF, 74 KB)
Roger Hoerl, manager of the applied statistics lab at General Electrics global research center
Sooner or later, almost all organizations struggle with the high cost of excess inventory. The natural response, often achieved through lean manufacturing techniques, is to drastically reduce inventory to a bare minimum. This typically produces significant cost and productivity savings, but the organization will soon begin to receive customer complaints about stock-outs and delivery delays, resulting in lost business.
The sales and marketing departments will then demand inventory levels be increased to satisfy customer expectations, and the organization will end up back where it started. Eventually, the finance department will complain about the carrying cost of the high inventory levels, and the organization will repeat the vicious cycle all over again.
Some companies go through this cycle on an annual basis. Fortunately, Six Sigma has the ability to solve this problem once and for all because its statistical methods are well suited to helping an organization account for the variation in customer demand, production and delivery processes. The methods enable a joint optimization of both the low inventory critical to quality characteristics and the high customer availability critical to quality characteristics. Six Sigmas control plan then ensures the solution is lasting and not dependent on who is currently winning the battle between sales, marketing and finance.
For more details on Six Sigma and supply chain management (SCM), try these books:
Lean Six Sigma: Combining Six Sigma Quality With Lean Production Speed, Michael George, McGraw-Hill, 2002. This is a nice book, even though it focuses more on lean than Six Sigma. I recommend it because it has a chapter on the total supply chain and another on logistics.
Cause and Effect Lean: Lean Operations, Six Sigma and Supply Chain Essentials, John Bicheno, Picsie Books, 2000. This is a quick reference guide that focuses on the supply chain and uses fishbone diagrams to convey its main concepts.
Robert B. Handfield, Bank of America University distinguished professor of supply chain management and director of the Supply Chain Resource Consortium at North Carolina State University
SCM is not, as many believe, a flash in the pan. The economic downturn has been a strong indicator to top management that a new model for managing customers and suppliers is needed. The only thing organizations still need to do is take out cost and work better with their suppliers.
The future competitive channel, however, will not involve organizations. Instead, supply chains will be competing against other supply chains. To succeed in difficult and prosperous economic times, all the organizations that make up an industrys supply chain need to step on the brakes or on the gas in a collaborative manner.
The winning organizations will then be able to apply Six Sigma principles to projects that involve not only internal operational improvements, but also projects that span their customers and suppliers processes. The best organizations will share the risks and rewards associated with collaborative process improvement strategies.
The new strategy behind supply chains was described by Jeff Trimmer, former vice president of purchasing at DaimlerChrysler, in terms of three principles:(1)
Now its up to corporate management to develop a comprehensive plan for redesigning supply chains to meet these criteria. The following books can help managers learn how to apply these principles:
World Class Logistics: The Challenge of Managing Continuous Change, global logistics research team at Michigan State University, Council of Logistics Management, 1995. This book details best practices in logistics collected through detailed interviews and meetings with corporations worldwide. Although the book was printed in 1995, these lessons are still cutting edge and are equally important today.
Powered by Honda: Developing Excellence in the Global Enterprise, David Nelson, Patricia Moody and Rick Mayo, John Wiley & Sons, 1998. This book is a wonderful how-to manual developed by one of the worlds leading experts, Dave Nelson. I interviewed many Honda employees who were involved in supplier development when Nelson was leading the purchasing group, and I was extremely impressed with the approachs success. The book provides some great insights into how to create win-win kaizen improvement projects with suppliers.
Learning To See, version 1.2, Mike Rother, John Shook, James Womack and Dan Jones, Lean Enterprises Institute, 1999. Even though it centers around the automotive industry, this book is a primer for those wanting to study value streams and identify opportunities for improvement that can deliver cost reductions, cycle time reductions and performance improvements on focused business processes.
Six Sigma Bestsellers*
The Current Literature department features information about relevant Six Sigma publications and articles that readers will find useful. Please send your recommendations to the editor at firstname.lastname@example.org.