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Case 2: Six Sigma as a Business (Improvement) Strategy

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What is Six Sigma?

Strategy…a data driven philosophy & process resulting in paradigm shifts in way a company behaves, treats its customers, & produces products/services.

Measurement…Measurement of the variation of a process…Standard Deviation. Translates into process performance…dpm, COQ.

Problem Prevention/Solving Process…DMAIC (Goal is to reduce process variation).

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Why Do It?

Improvement of Process Capability: (USL-LSL)/Process Variation

Elimination of Waste Hidden factory Non-value-added activities

Cycle Time Reduction

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Macro & Micro Economics of Quality (Translating Operating Performance into Financial Performance)

Macroeconomics of Quality…Iceberg Principle (Figures 2 – 4)

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Macro & Micro Economics of Quality (Translating Operating Performance into Financial Performance)

Microeconomics of Quality..Variation & Bias * E(COQ) = ak * (2 + (μ – T)2)where 2 = process variance

(μ – T)2 = biask = constant, unique to a given process/producta = iceberg multiplier

and Y = performance measureT = performance targetμ = process mean = process standard deviation (variation)E(COQ) = ak * E(Y-T)2

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Getting to Six Sigma

Where does industry stand? (Figure 5)

Where does NACE stand? No one knew?

Strategies that don’t work…clinging to old habits Inspection (defect detection) Driving processes through numbers

Changing habits A strategy that does work…DMAIC

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Six Sigma Deployment: Key Success Factors

Emphasis on statistical science & measurement.

Rigorous and structured training deployment plans (Champion, Master Black Belt, Black Belt, Green Belt, etc.)

Project-focused approach using DMAIC strategy & tools.

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Six Sigma Deployment: Key Success Factors

Reinforcement of quality tenets…top management, leadership & support, continuous training & education, annual savings plan.

Incorporation of Six Sigma across entire enterprise.

Develop a business plan.

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Where Can Six Sigma be Applied?

Every business process & function (Figure 6)

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Figure 2: Why Estimate Cost of Quality?

Quantify the Cost of Quality for the Business Identify magnitude of potential savings Sensitize Management to the size of opportunity Help to re-expose problems we have learned to

tolerate Identify the Highest Loss Areas Permit Prioritizing the Loss Areas for Corrective

Action

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Figure 3: Measured & Hidden Costs of Quality

Direct Measured Costs:Scrap/ReworkService CallsWarranties/Concessions

Indirect/Hidden Costs:

Excess Inventory

Overtime

Reputation/Image

Hidden Costs = 6 to 50X Measured Costs

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Figure 4: Economics of Quality – Example 1 TV Units Sold 5 million

 

Estimated Revenues (5 x $500 per set) $2.5 billion 

Estimated Earnings (5% of sales) $125 million 

Scrap (Measured) $12 million 

Total Cost of Quality (Measured & Hidden) $72-600 million 

Cost of Scrap per TV (12M/5M) $2.40 per unit 

Total Cost of Quality $14.40 - $120 (M+H) per TV Sold (6/1 to 50/1 Iceberg) 

% Total Cost of Quality 3% - 24% per TV/Selling Price (14.40/500 – 120/500) 

What if we could cut losses in half? ½ x $12,000,000 $6,000,000If Iceberg is between 6/1 to 50/1 $36,000,000 to $300,000,000

 Recall: Total net earnings were? $125 million

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Figure 5: Where does U.S. Industry stand?

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Figure 6: Six Sigma Can Be Applied to Every Business Function

Service Design

Administration Purchasing

Maintenance

Quality Assurance Manufacturing

Six Sigma Methods