inventory management applied to pm

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The role of asset management in project and

production delivery: How premature completion of

materials and deliverables can improve resource

utilization and manage risk

The I-Word (Inventory)




Dan Castle, PMPwww.CastleQuality.com

Hewlett Packard Imaging & Printing GroupLean Six Sigma Program Manager

IT Program Management Office Leader

Hewlett Packard InkJet Business UnitSupply Chain Manager

Eli Lilly & CompanyEngineering Manager

Presenter




Meeting customer needs• Make-to-Stock (MTS) – create products

and deliverables in anticipation of customer need

• Assemble-to-Order (ATO) – meet customer need with existing systems

• Make-to-Order (MTO) – meet customer need using known methods

• Engineer-to-Order (ETO) – meet customer need using unknown methods

There is a continuum of approaches to meeting customer needs – we can learn from methods used to manage deliverables and resources across this continuum

Source: APICS “APICS Operations Management Body of Knowledge Framework” (OMBOK) First Edition




Project or Production Inventory

• Normal Stock: Execution Effectiveness– The unused work product level driven by the

non-risk-adjusted project or production plan

• Safety Stock: Risk Management– The additional unused work product level

driven by project or production risk management strategies




Purposes of Inventory (1)

Inventory’s primary purpose is to meet demand in support of production or the customer. Inventory is an expensive

asset that needs to be carefully managed and controlled.

Purposes of Inventory:

Pipeline

Cycle

Anticipation

Decoupling

Safety Stock

Hedging

Obsolescence





Purposes of Inventory (2)• Pipeline – Pipeline is inventory in the transportation network, including

inventory shipped from a supplier but not yet received by the customer. The overall network design affects the amount of pipeline inventory.

• Cycle – Cycle stock is typically the most active component. It is based on lot-sizing rules as stocks are received and depleted.

• Anticipation – Anticipation is the stocking of additional inventory to cover projected trends of increased demand from forecasted events such as sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations. Additional inventory may also be carried in advance of significant supplier price increases or possibilities of labor disruptions.

• Decoupling – Decoupling is separating inventory from the supply and the use of the material. This inventory is often collected between operations so that fluctuations in the production rate of the supplying operations do not limit the output of the next operation.





Purposes of Inventory (3)• Safety Stock - Safety stock is inventory carried in excess of

expectations and used as a cushion against uncertainty in demand or replenishment time.

• Hedging – Hedging is purchasing inventory in advance to mitigate the impact of anticipated price increases or shortages.

• Obsolescence – A critical condition in inventory management is keeping inventory in a current up-to-date, usable condition. Inventory that becomes obsolete will typically end up as a write-off against profits on the profit and loss statement. Obsolescence can occur from spoilage, as in food, or the loss of utility of an item resulting from the introduction of better or more economical products , methods, or facilities.





Lead Times (“Duration”)

• Lead time is the period from which a commitment is made until the results of that commitment are usable

• Reducing lead times can both conserve capital and reduce risk from uncertainty and obsolescence

• Lead times in both project and production delivery are typically (and inappropriately) given as worst-case scenarios




Ways to Understand Lead Times

• Critical Chain Project Management (Theory of Constraints)– Remove fear-factor in task duration estimating

• Program Evaluation and Review Technique (PERT)– Optimistic time (O): the minimum possible time required to

accomplish a task, assuming everything proceeds better than is normally expected

– Pessimistic time (P): the maximum possible time required to accomplish a task, assuming everything goes wrong (but excluding major catastrophes).

– Most likely time (M): the best estimate of the time required to accomplish a task, assuming everything proceeds as normal.

– Expected time (TE): the best estimate of the time required to accomplish a task, assuming everything proceeds as normal.

– TE = (O + 4M + P) ÷ 6

Purpose: get the best estimate of average lead times to drive high level planning, which in turn allows the best decisions about resource and risk management




Consequences of Bad Lead Times

• Pessimistic Lead Times– Resources committed too early– Long project schedules– Inflated project costs– Deliverables enter “inventory” too early

• Optimistic Lead Times– Creates delays in dependent tasks– Leaves other deliverables in “inventory” too long




NORMAL STOCK

How Inventory reflects project management effectiveness




Project Management Normal Stock

• Add Costs injected into the system– Labor– Materials– Overhead

• Subtract Value extracted from the system– Internal transfer of deliverables– Acceptance by customers

Purpose: Manage Inventory – minimize residual costs




Classic PM Measures

• AC – Actual Cost (of Work Performed)– A placeholder for costs injected into the system– May ignore “work-in-progress”

• EV – Earned Value (Budgeted Cost of Work Performed)– A placeholder for value extracted from the system– NOT a good indicator for “relieving inventory”

• CV – Cost Variance = EV – AC• CPI – Cost Performance Index = EV/AC

Source: PMI “A Guide to the Project Management Body of Knowledge” (PMBOK) Fourth Edition




Measures to Consider

• Costs outstanding– Costs incurred by tasks that have not been

completed – equivalent to “work-in-progress” inventory on a production shop floor

• Costs for unused/early deliverables– Costs incurred to complete deliverables that are not

yet needed by successors or customers– Includes some actual costs of predecessor tasks –

equivalent to “work-in-progress” inventory in a production warehouse




Why should I care?

• I have the resources assigned to my project – I may as well have them do the work early– PM is moving toward the refined “pay as you go”

model – resources may be bought by the hour in the future, and good use of capital is critical

• I’m measured on schedule – the more I get done early the better– The more you have in inventory, the more you have

to revise or discard when things change




SAFETY STOCK

Use of Inventory as a means of managing project risk




Project Management Safety Stock

• Costs incurred due to decision uncertainty – Proceed-at-risk (parallel paths)– Excess and Obsolete (decisions lag commitments)

• Costs incurred due to risk strategies– Buffers – schedule (allow longer than you need)– Buffers – resources (assign more than you need)– Buffers – deliverables (make more than you need)

Purpose: Reduce schedule risk




Set-Based Development• Toyota

Development System (TDS)

• Creation of work products that may not be used in final delivery

• Alleviates design risk to meet predefined schedules

Source: Corey Ladas




Basic Philosophies

• Forward Schedule– Use resources when you have them– Perceived reduction of schedule risk– Typical project management system

approach

• Backward Schedule– Just-in-time deliverables– Typical production management system

approach




Critical Chain

• Forward Schedule Critical Path– Focuses inventory where risk is high

• Backward Schedule Remainder of Project– Reduces inventory where risk is low

• Use overall project buffers AFTER the project deliverables – manage buffer consumption

• Use safety feeding buffers prior to critical path (critical chain) tasks – do not starve the tasks




PM Inventory?

The one-third-built Washington Monument stood “in inventory” for more than twenty years

How many of your projects are still in inventory?




Reducing PM Inventory?The mantra “stop starting, start finishing” drove the implementation of Agile Software Development in Hewlett-Packard’s LaserJet Business, delivering savings of over 70 million dollars.

The focus on reducing project-related inventory directly translated Lean Manufacturing to the PM world.




Conclusion

• There is a continuum across delivery environments (MTS, ATO, MTO, ETO, PM)

• Wise capital management is a need in all delivery environments

• PM learning has crossed environments– Toyota Production System to TDS– Theory of Constraints to Critical Chain

• Consider both why and when capital and resources are committed




Upcoming CoursesUpcoming Courses

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October 29-30, 2009

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$2595– 4 days / 35 PDU’s – Ethicon September 15-18, 2009

Please contact SSI at 877.390.3057 for more information. To register: contact Karen Kowalski 973.473.2490

inventory management applied to pm

Documents

inventory management

pipeline inventory

purposes of inventory

safety stock safety

anticipation of customer

production plan safety

cycle cycle stock

meeting customer needs