Six Sigma Case Study
Inventory Reduction for Drilling Fluids Company
This Six Sigma case study looks at how we were able to drastically reduce inventory levels for our client in the oil and gas industry. This was done without sacrificing service levels.
In this six sigma case study, we look at a large company in the oil and gas sector that sells drilling liquids and chemicals to exploration companies.
The supply chain path of the company worked like this:
Product Manufacturer --> Regional Hub --> Country Warehouse --> District Warehouse --> Rig Storage
Since the items on the rig were on consignment, technically the inventory was still owned by the supplier until it is actually consumed by the customer.
Oil drilling can be highly variable and if for some reason the rigs run out of drilling fluids, it could cost the drilling company millions of dollars per hour. Due to this fact, the fluids company stocked multiple times of what was actually required to ensure they do not ever face that situation.
The inventory turns were at 1.2. This means that on average, a product would sit around for about 10 months before being consumed! These were high value and bulky items which required large warehouses to host them.
A kaizen event was conducted which involved all major players in the supply chain as well as people from the rigs.
A current state value stream map for the total procurement process was created with everyone's input. This showed us all the process steps, lead times, issues, etc. that took place from the time the need for product arises until the time product is actually consumed on the rig.
Then, a statistical analysis of inventory levels vs variable lead time demand was done. When each storage point was analyzed separately, they were all holding a bit more stock than was required for a 99% service level. When the whole supply chain was analyzed as one, the total stock that was being held was multiple times of what it needed to be for the same service level.
Basically, there were too many buffers in too many places. This led to huge overstocking.
New procurement plans were made for each item. Most items fell under the periodic order and order-up-to inventory models, depending on the characteristics of the product and its supply chain. This encouraged smaller and more frequent orders, keeping in mind the economic order quantities.
A dynamic inventory optimization tool was implemented for project managers to alert them on when to purchase product - keeping a 99% service level.
Finally, a future state value stream map was created which reduced the lead time on the "A" group products. The time between the realization that product had to be ordered until the time a product arrived at the rig was greatly reduced. This allowed even lower inventory levels.
Within 6 months of the event, the company's inventory turns reached 3.5 turns - almost a 200% improvement. It is still trending upwards. The result is tens of millions of dollars in cash savings and working capital reduction.
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