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Strategic Development to Operational Success LEAN SIX SIGMA LOGISTICS by Dr. Thomas Goldsby • Robert Martichenko Copyright ©2005 by J. Ross Publishing, Inc. ISBN 1-932159-36-3 Printed and bound in the U.S.A. Printed on acid-free paper 10987654321 Library of Congress Cataloging-in-Publication Data Goldsby, Thomas J. Lean Six Sigma logistics / by: Thomas Goldsby & Robert Martichenko. p. cm. Includes index. ISBN 1-932159-36-3 (hardback : alk. paper) 1. Business logistics—Management. 2. Six sigma (Quality control standard). 3. Process control. 4. Inventory control. 5. Waste minimization. 6. Industrial efficiency. I. Martichenko, Robert, 1965–. II. Title. HD38.5.G63 2005 658.4′013—dc22 2005011208 This publication contains information obtained from authentic and highly regarded sources. Reprinted material is used with permission, and sources are indicated. Reasonable effort has been made to publish reliable data and information, but the author and the publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. All rights reserved. Neither this publication nor any part thereof may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, me- chanical, photocopying, recording or otherwise, without the prior written permission of the publisher. The copyright owner’s consent does not extend to copying for general distribution for promotion, for creating new works, or for resale. Specific permission must be obtained from J. Ross Publishing for such purposes. Direct all inquiries to J. Ross Publishing, Inc., 6501 Park of Commerce Blvd., Suite 200, Boca Raton, Florida 33487. Phone: (561) 869-3900 Fax: (561) 892-0700 Web: www.jrosspub.com iii TABLE OF CONTENTS Preface . xi Acknowledgments . xiii About the Authors . xv Web Added Value™ . xvii Section 1. Lean Six Sigma Logistics: Why Bother? Chapter 1. What Is Lean Six Sigma Logistics? 3 What Is Logistics? . 4 What Is Lean? 4 Lean and the Logistician 4 What Is Six Sigma? . 5 Six Sigma and the Logistician . 5 What Is Lean Six Sigma Logistics? . 6 The Logistics Bridge Model 7 Chapter 2. The Importance of Logistics and Supply Chain Management . 9 Discovering the Dark Continent of Logistics 9 This Thing Called “Supply Chain Management” 11 The Logistics Wastes . 14 Section 2. The Logistics Wastes Chapter 3. The Waste of Inventory 19 Logistics and Inventory Management . 19 The Temptation of Inventory 20 The Costs of Holding Inventory . 22 iv Lean Six Sigma Logistics Chapter 4. The Waste of Transportation . 27 Logistics and Transportation Management . 27 Transportation and Logistics Trade-offs . 29 Transportation Carrier Relationships 31 Minimizing the Day-to-Day Wastes in Transportation . 32 Chapter 5. The Waste of Space and Facilities 35 Logistics and Warehousing . 35 How Many Facilities? How Much Space? 36 Are Advanced Technologies a Cure or Merely a Crutch? . 37 Chapter 6. The Waste of Time . 39 Logistics and Time Wastes . 39 Order Transmission . 39 Order Processing . 41 Order Filling 42 Order Staging and Verification 43 Order Shipping and Delivery . 44 Chapter 7. The Waste of Packaging 47 Logistics and Product Packaging 47 Packaging as a Source of Waste 48 Packaging as a Waste 49 Packaging as a Visual Control . 50 Chapter 8. The Waste of Administration . 51 Logistics and Administration 51 Administration as Help and Hindrance 52 Technology and Administration 52 Chapter 9. The Waste of Knowledge . 55 Logistics and Knowledge 55 Cultivating Knowledge 56 Managing the Flow of Knowledge . 57 The River of Wastes . 59 Section 3. The Logistics Bridge Model Chapter 10. A Tour of the Bridge 65 History of Lean Six Sigma Logistics . 66 Table of Contents v The Importance of the Logistics Bridge Model 66 The CEO’s Perspective 67 The Implementer’s Perspective 69 The Logistics Bridge Model: Getting Started 70 Chapter 11. Logistics Flow: Asset Flow 71 People Flow . 72 The People “Perfect Order” 73 Organizing People . 73 Bridging the People Gap 74 Inventory Flow . 75 Understanding Safety Stock 76 Inventory Management 77 Starting with the Systems Approach 77 Inventory and Cause and Effect . 78 Inventory Management Fundamentals 79 Fixed Resources Flow . 80 Identifying and Mapping Fixed Resources 81 Questioning the Need 82 Vision of Excellence and Fixed Resource Flow . 83 Chapter 12. Flow: Information Flow . 85 Data Flow . 86 Historical Data . 86 Event and Real-Time Data . 87 Future and Deterministic Data . 87 Data Excellence . 89 Knowledge Flow 89 Continuous Improvement and Knowledge Flow . 90 Standardized Work and Knowledge Sharing . 91 Getting Knowledge to Flow . 92 Communication Flow . 93 Strategic Communication 93 Hoshin Planning 94 Operational Communication . 95 Chapter 13. Flow: Financial Flow 97 Income Statement Flow . 98 Logistics Activities and Hidden Operating Costs . 99 vi Lean Six Sigma Logistics Logistics Costs Flow Across the Organization . 100 Inventory Carrying Costs and the Income Statement . 101 Vision of Excellence and the Income Statement 102 Balance Sheet Flow . 103 Inventory as a Current Asset 104 Inventory Turns and the Balance Sheet 105 The Balance Sheet and Business Strategy 106 Flexibility . 106 Visibility 107 Cash Flow 107 Cash Flow Drivers 108 Accounts Payable and Cash . 108 Accounts Receivable and Cash 110 Revenue Growth and Cash . 110 Gross Margin and Cash Flow 111 Selling, General, and Administrative Expense and Cash Flow . 111 Capital Expenditure and Cash Flow 112 Inventory and Cash Flow . 113 Vision of Excellence and Cash Flow 113 Chapter 14. Capability: Predictability . 115 Organization . 116 Highlighting Waste and Creating Visibility 117 Standardized Operations and Setting Priorities . 118 The Organized Workplace: Clutter, Complexity, and Quality . 119 Measurement and the Organized Workplace . 119 Coordination . 120 Coordination and Value Stream Mapping . 121 Coordination and Detailed Planning 122 Coordination and Measurement 124 Complexity . 124 Complexity of Products 125 Complexity of Processes . 126 Chapter 15. Capability: Stability 129 Standardization . 130 The Key Aspects of Standardization . 130 Standardization and Continuous Improvement 131 Flexibility . 132 Developing Flexibility and Back to Basics . 133 Table of Contents vii Flexibility and Lead Time 134 Logistics Infrastructure Flexibility . 135 Planned Network Design and Visibility 136 Control 137 Today’s Capability Is the System’s Capability . 138 Common and Special Cause Variation 139 Chapter 16. Capability: Visibility . 141 Understandability . 142 Beginning to Understand 143 Channel Partners and Their Important Role 143 Opportunities and the Moment of Truth . 144 Measurability 145 Voice of the Customer 146 Creating Internal Measures of Meaning 148 Actionability . 149 Chapter 17. Discipline: Collaboration . 153 Teamwork . 154 Processes and Knowing the Customer . 155 Building Teams . 156 Complementary Skills and Opposing Views . 156 Natural Stages of Team Development . 157 Strategic Sourcing 158 Raw Material Suppliers 159 Standardization, Complexity, and Dual Sourcing . 160 Beware the Term “Partnership” . 160 Collaboration and Logistics Services . 161 Third-Party Logistics . 162 Developing a Lean Third-Party Logistics Relationship 163 Project Management 165 Project Management: The Basics . 166 Meeting Agenda (Compass) . 167 Storyboard 167 Gantt Chart 168 Failure Mode and Effects Analysis 169 Chapter 18. Discipline: Systems Optimization 173 Total Cost . 174 Explicit and Implicit Costs . 174 viii Lean Six Sigma Logistics Horizontal Integration 177 Perceived Difficulty and System Constraints 179 Compensation and Incentive Programs 179 Teamwork, Imperfection, and Defensive Behavior . 180 Breaking Down the Walls 181 Vertical Integration 181 From Customer to Supplier 182 Vertical Integration and Information 182 Variability, Leveled Flow, and Vertical Integration . 183 Chapter 19. Discipline: Waste Elimination . 185 Quality at the Source . 186 The Benefits of Quality at the Source 187 Logistics and Quality at the Source 189 Continuous Improvement . 190 Continuous Improvement: The Bare Facts 190 The Challenges of Continuous Improvement Implementation . 192 Bridging the Gap . 193 Getting People Trained . 194 Execution 195 Acting as Lean Six Sigma Logistics Leaders . 195 Section 4. Building the Bridge: Lean Six Sigma Logistics Tools Chapter 20. Strategy and Planning Tools . 201 Surveying the Tool Kit . 201 Voice of the Customer 202 Voice of the Business . 204 Value Stream Mapping 206 Pareto Analysis and ABC Classification 208 The XY Matrix 211 Chapter 21. Problem-Solving Tools . 213 DMAIC (Define-Measure-Analyze-Improve-Control) . 213 Define . 214 Measure 214 Analyze 215 Improve 216 Control . 217 Causal Analysis Tools . 218 Brainstorming 218 Cause-and-Effect Diagrams 219 Table of Contents ix Five-Why Analysis 220 Design of Experiments 222 Inferential Statistics . 223 Chapter 22. Operational Tools . 227 Flow Concepts . 227 Just-in-Time and the Pull System 227 Lead-Time Management, Speed, and Flexibility 229 Leveled Flow . 230 Frequency and Lot Size 232 Organization Concepts . 232 Standardized Work Plan . 233 The SIMPOC Model . 233 5S Organization and Visual Control 234 Red Tag Initiatives 235 Poka-Yoke 236 Chapter 23. Measurement Tools . 237 Data Collection Plan 237 Process Capability 238 Defects per Million Opportunities 241 Sigma Calculations 242 Conventional Measures of Logistics Performance . 245 Total Cost Analysis . 246 Chapter 24. Case Study: GoldSMART Products, Inc. 249 Lean Six Sigma Logistics: A Real-World Story . 249 GoldSMART Products, Inc.: A Case in Lean Six Sigma Logistics 250 The Calm Before the Storm . 250 The Approach of Ominous Clouds 251 In the Eye of the Storm . 252 Riding Out the Storm . 255 Seeing Daylight Again 260 Chapter 25. Summary and Conclusion 267 Index . 271 [...]... moments when you can have your cake and 14 Lean Six Sigma Logistics eat it too Lean Six Sigma Logistics can bring about these beautiful moments too, by maximizing the capabilities and balancing their contribution to logistics excellence, leading to overall enterprise success Lean Six Sigma Logistics is about capturing the trade-offs present within logistics and between logistics and other functions found... tactical development, and successful operational execution Section 4 introduces key methods and tools that can be utilized for strategy develop- 8 Lean Six Sigma Logistics ment, problem solving, measurement, and Lean Six Sigma Logistics implementation Toward the close of the book, a real-world example is provided as an exercise in critical thinking and problem solving related to Lean Six Sigma Logistics. .. notes to accompany the GoldSMART case study, and extensive slide presentations on key principles and concepts, including the Logistics Bridge Model xvii SECTION 1 LEAN SIX SIGMA LOGISTICS: WHY BOTHER? 1 WHAT IS LEAN SIX SIGMA LOGISTICS? Lean Six Sigma Logistics Although it may sound as if it would require a yearlong training course to do the topic justice, most logisticians are in fact using Lean Six Sigma. .. of waste 3 Six Sigma is about understanding and reducing variation Therefore, Lean Six Sigma Logistics can be defined as: The elimination of wastes through disciplined efforts to understand and reduce variation, while increasing speed and flow in the supply chain What Is Lean Six Sigma Logistics? 7 The Logistics Bridge Model Both Lean and Six Sigma lend distinctive disciplines and tools to logistics. .. contributing to business success at all levels Where does one start when dealing with a topic as complex as Lean Six Sigma Logistics? Mathematicians have shown us that Y is a function of X, so if we truly want to understand Y (Lean Six Sigma Logistics) , the best place to start is with the Xs In this case, the Xs we need to understand individually are logistics, Lean, and Six Sigma Once we can envision... can be reached at Tom@logisticsprof.com xv xvi Lean Six Sigma Logistics Robert Martichenko is President of LeanCor LLC Headquartered in Florence, Kentucky, LeanCor delivers logistics and supply chain management services to companies embracing Lean manufacturing and Six Sigma in order to eliminate organizational waste His over ten years of transportation, consulting, and third-party logistics experience... disciplines and tools will allow an organization to uncover and deal with wastes and inefficiencies Although Lean and Six Sigma tools are very powerful, we need to remember that for Lean and Six Sigma to work in logistics, a fundamental mind shift must occur This mind shift requires that we first begin to make decisions based on the concept of “total logistics costs,” and second, we have the courage to eliminate... book into four sections In Section 1, we continue to explore the importance of excellence in logistics and supply chain management Section 2 examines the wastes that are all too often created in the absence of Lean Six Sigma implementation Section 3 provides the details of the Logistics Bridge Model, the guiding principles to Lean Six Sigma Logistics We illustrate the key tenets to logistics strategic. .. assessment tools, among other things Whenever you see the WAV™ symbol in any of our publications, it means bonus materials accompany the book and are available from the Web Added Value Download Resource Center at www.jrosspub.com Downloads available for Lean Six Sigma Logistics: Strategic Development to Operational Success consist of Lean and Six Sigma tools, an algorithm for calculating total logistics. .. belts), Six Sigma delivers a problem-solving model armed with “voice of the customer” utilities and statistical process control tools Define-Measure-Analyze-Improve-Control (DMAIC) is a map, or step-by-step approach, to understand and improve on organizational challenges (see Chapter 21) Six Sigma trained employees will work on “projects” using the DMAIC model to reduce variation in processes and to attempt . for Lean Six Sigma Logistics: Strategic Development to Operational Success consist of Lean and Six Sigma tools, an algorithm for calculating total logistics. .............................. 249 Lean Six Sigma Logistics: A Real-World Story ....................................... 249 GoldSMART Products, Inc.: A Case in Lean Six Sigma Logistics