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

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

2. 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).

3. Why Do It? • Improvement of Process Capability: (USL-LSL)/Process Variation • Elimination of Waste • Hidden factory • Non-value-added activities • Cycle Time Reduction

4. Macro & Micro Economics of Quality(Translating Operating Performance into Financial Performance) • Macroeconomics of Quality…Iceberg Principle (Figures 2 – 4)

5. 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 = bias k = constant, unique to a given process/product a = iceberg multiplier and Y = performance measure T = performance target μ = process mean  = process standard deviation (variation) E(COQ) = ak * E(Y-T)2

6. 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

7. 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.

8. 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.

9. Where Can Six Sigma be Applied? • Every business process & function • (Figure 6)

10. 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

11. Figure 3: Measured & Hidden Costs of Quality Hidden Costs = 6 to 50X Measured Costs Direct Measured Costs: Scrap/Rework Service Calls Warranties/Concessions Indirect/Hidden Costs: Excess Inventory Overtime Reputation/Image

12. 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 $6,000,000 If Iceberg is between 6/1 to 50/1 $36,000,000 to $300,000,000 • Recall: Total net earnings were? $125 million

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

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