Introduction
The inventory cost should be managed because it has a significant effect on the production cost of any company. In order for a company to minimize the cost of inventory and get the maximum circulation of resources, lean six-sigma is introduced to control inventory. Inventory includes both semi-finished products and raw materials. Lean sigma concept evolved in the 2000s and it combines the six sigma concepts and lean methods which together make up the lean six-sigma (Parast, 2011). Through lean optimization of a company’s value chain, firms are able to control the strategic operations and reap value from the business. Lean six-sigma helps companies to find innovation breaks that are beyond the increase in financial performance, beyond operations and inherent inclination to innovation is created in the company. The goal of six-sigma is not only cost cutting but also growth. In addition, it aims not only at efficiency but also effectiveness. In this regard, this essay will look at the effects lean six-sigma on inventory management.
Impact of Implementing Lean Six-Sigma Approach
Process Methodologies
Lean Six Sigma builds on methods, tools, and knowledge that is derived from implementation lean methods and operational improvement studies that focus on cost reduction through process optimization. The Lean Six-Sigma draws its tools, principles, and philosophies from lean and six-sigma. When a company adds lean to six-sigma, slow processes are replaced and challenged with better and streamlined workflows. Moreover, the data that is gathered during Lean Flow execution helps to identify the Six-sigma opportunities with the highest impact. When six-sigma is used together with lean, a structure is provided that ensures there are predictability and consistency in achieving optimum flow. Lean six sigma works on the principle that activities that create critical customer issues on quality and those that cause the longest time delays in any production process offer the best opportunity to improve on lead time, capital, quality and cost (Singh et al., 2010) . This principle basically focuses on reducing the lead times and improving on achieving customer needs. Although Six Sigma and lean focus on diverse improvement goals, process variation and reducing of waste, an analysis of the two methods shows that they can best work together when combined.
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The methodologies guiding six sigma and lean are different but they complement each other. While six-sigma reduces the process variances, lean on the other hand focuses on identifying and eliminating waste. That is lean gets rid of the non-value while six sigma adds value in the process by reducing the variances. Leans also work on the assumption that the removal waste will speed up the operational process and thus improve business performance. Six-sigma, on the other hand, works on the assumption that process problems are caused by process variations and a reduction of these variances will, in turn, improve on business performance.
Processes Improvement
The aim of six-sigma is to thoroughly decrease process variations in order to achieve quality levels of near zero defects as well as to increase the stability of the process. The standard deviations are thus reduced by management so that they are able to fit within the limits specified. Lean, on the other hand, improve the process flow by removing waste from the process as well as in the labor use (Evans & Lindsay, 2014) . Lean six sigma approach is a holistic management methodology that targets improving the entire process. It identifies the defects within the system, reduces them and finally eliminates them leading to an improved process that creates a value-added chain for the consumers. The implementation of lean six-sigma in an organization brings along financial benefits and advantages to the consumers, the employees and the quality improvement. Lean six-sigma identifies the waste in a company and eliminates that source of waste. It is a program that is systematic and can be used in the long-term to improve processes by making them faster, better and reducing on costs by applying methodologies that deal with deadlines, quality, and cost.
Cost Reduction
The cost of capital in a business sense is the opportunity cost that a company incurs when investing in an asset comparative of the projected return on assets that have a comparable risk. Stock being an asset ought to be cost measured so as to reflect the firm’s approach to financing assets. Inventory in any organization takes up space and for this reason, it ought to be moved out of storage. According to Salah, Rahim & Carretero (2010), an inventory holding cost is always incurred when a company can productively use that space in other ways. Lean Six Sigma is thus used to reduce the holding cost by reducing the lead time. Cost reduction can be of great help to a company in that it increases the firm’s profits. However, firms use different strategies depending on the product or service they offer. In this regard, when deciding to use lean six- sigma in reducing holding cost of inventory, the management ought to be aware of the decisions that are made during the product development process that has an effect on cost. Firms sometimes launch new products into the market without focusing on cost if the market rejects the product. Cost becomes important when price becomes a significant differentiator and when competition increases in the market.
Continuous Improvement
Lean Six-sigma has also impacted companies in the continuous improvement of operations. Continuous improvement is a never-ending struggle by management to eliminate and expose the origin of problems. Usually, continuous improvement involves small step or many incremental improvements instead of using one overwhelming innovation. In Japan, continuous improvement is part of their business culture. This according to the Japanese is an opportunity to improve all factors that are involved in the transformation process on a continuous basis. According to Parast (2011), the lean six-sigma is a management concept that involves training of workers on how to spot the problems that have the potential to interrupt the smooth running of the system. This is because the improvements driven by employees are an integral part of any organization’s success in the process of continuous improvement. By using lean six-sigma, management will not force changes to the workers and thus the employees will not resist the changes. This is because when involved in the continuous improvement process, they will be able to recognize the value and necessity of implementing the alternative methods.
Inventory Control of Slow Moving Products
Another way lean six-sigma has impacted on inventory management is under the control of slow-moving products. Inventory management of slow-moving goods is essential to any organization since excess stock increases the stock-outs and holding costs which can have a great effect on the performance of operations. Estimating the lead time for slow moving products can be tedious as such products are extremely stochastic with a lumpy demand. In this regard, a company is not able to create control parameters for inventory policies. Lean Six-sigma helps in eliminating half of the slow-moving inventory thus freeing up millions of dollars that can be used as working capital. In addition, it frees up storage space which in turn eliminates the material handling cost. The company can also make use of the free space for others services.
Conclusion
Lean six-sigma, when applied to processes in an organization, can lead to increased productivity, better consumer satisfaction, lower costs and better distribution of products in terms of the number of shops to geographical coverage (Kabir, Boby & Lufti, 2013) . The best way to quantify the real effect in inventory management is through calculation of indicators such as consumer penetration rate, consumer satisfaction index, consumer winning rate, reduction of inventory lead time, the flexibility of the supply chain, quality across the whole process, as well as the total cost for each process. The period in which the effects of Lean Six-sigma can be noticed is after 1-3 years. Some of the effects of the implementation of lean six-sigma include financial and non-financial advantages. These include inventory control of slow-moving products, continuous improvement of processes, cost reduction, and process improvement. These benefits extend to the customers (cheaper, better and faster products and services), to the employees (improved skills, active involvement in decision making, increased motivation), improved quality as well as a thorough change in the overall culture of the company.
References
Evans, J. R., & Lindsay, W. M. (2014). An introduction to Six Sigma and process improvement . Cengage Learning.
Kabir, M. E., Boby, S. M. M. I., & Lutfi, M. (2013). Productivity improvement by using Six-Sigma. International Journal of Engineering and Technology , 3 (12), 1056-1084.
Parast, M. M. (2011). The effect of Six Sigma projects on innovation and firm performance. International Journal of Project Management , 29 (1), 45-55.
Salah, S., Rahim, A., & Carretero, J. A. (2010). The integration of Six Sigma and lean management. International Journal of Lean Six Sigma , 1 (3), 249-274.
Singh, B., Garg, S. K., Sharma, S. K., & Grewal, C. (2010). Lean implementation and its benefits to production industry. International journal of lean six sigma , 1 (2), 157-168.
