Improving Business Processes With Six Sigma - Soren Bisgaard

8/18/2019 Improving Business Processes With Six Sigma - Soren Bisgaard

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Improving Business

Processes With Six Sigma

Søren Bisgaard

Sigma Breakthrough Technologies, Inc.Roger Hoerl

General Electric

Ronald D. Snee

Tunnell Consulting


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Topics

• Opportunities in Business Processes• How Businesses Processes are Different

• Some Examples• What Have We Learned?


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Improving Business Processes With Six Sigma

Søren Bisgaard

Sigma Breakthrough Technologies, Inc.

AQC 2002


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Business Processes?

• Billing

• Invoicing• Production

scheduling

• Forecasting andinventory control

• Purchasing

• Sales• After sales service

• Web site development• Finance

Business Processes = All non-manufacturing operations and services

Examples:


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Occupational Distribution of the

US Labor Force

200019501900

60

50

40

30

20

10

0

Year

Bl ue-colla r W h i t

e - c o l l a r

F a r m S e r

v i c e

P e r c e n t o f W

o r k e r s


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Traditional Quality Control & Improvement

• Traditionally we have focused on

manufacturing

• In the past we have sometimes focused on

service• A (somewhat) ignored area: Non-

manufacturing business processes facilitatingthe primary manufacturing and service

processes


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A Few Characteristics of Business Processes

• High volume of transactions

• Labor intensive and costly• Transactions not well defined

• Processes usually not planned or designed; have

frequently never been subjected to rigorous study• Pivotal to the entire organization

• A large number of ways to make mistakes and high

frequency of errors and rework • Errors and delays have serious downstream costsconsequences


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Economics of Six Sigma

________________________________

Sales $100-Variable Costs $ 60

________________________________

=Contribution Margin $40-Fixed Costs $30

________________________________ =Profit $10

________________________________

Inflated because of defects,scrap rework and delays; can

be reduced with 6!


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The Bottom-Line Effect of Six Sigma ________________________________

Sales $100-Variable Costs $ 60 - 5

________________________________

=Contribution Margin $40+5-Fixed Costs $30

________________________________

=Profit $10+5 ________________________________

Any improvement in quality and efficiency

goes right to the bottom-line!

"""" A Profit Increase of (5/10)×100% = 50%A Cost reduction of (5/60)×100% = 8.3%


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Profit?“Profit is not the explanation, cause, or

rationale of business behavior and businessdecisions, but the test of their validity.”

From Peter Drucker (1973, p. 60) Management: Tasks,

Responsibilities, Practices. New York: Harper and Row

“If the archangels … sat in director's

chairs, they would still need to be

concerned with profitability....”


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Cummins Earns Profit in Worst Downturn Ever

• Oct. 11, 2001--Cummins Inc. (NYSE:CUM) today reported profitafter taxes of $3 million, or 08 per share, on revenues of $1.41

billion for the third quarter of 2001, despite a continuing economicdownturn."I'm pleased that we met our objectives for the quarter andremained profitable despite the worst market deterioration I've

experienced, in virtually every one of our North American endmarkets," said CEO Tim Solso. "Our Engine Business continues to be particularly hard hit with revenues down 20 percent from thethird quarter of 2000. However, we continue to realize the benefitsrealize the benefitsfrom our aggressive cost reduction effortsfrom our aggressive cost reduction efforts across all of our

businesses, including the benefits of our restructuring actions andSix Sigma programsSix Sigma programs."


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The Key to Understanding

How Six Sigma Concepts

Apply to Business Processes

A Process Viewpoint!


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Production Viewed as a System (Deming)

Improvement of quality envelopes the entire

system from suppliers and incoming materials tothe customer, redesign and after sales service

Suppliers

A

B

C

D

Production Assembly

Customers

Distribution

Customer research

Designand

re-design

Business Processes


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Every Process Produces

InformationThat Can Be Used

For Improvement

Process


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Example

Industrial Consumables Company*• Background: Manufacturing and sale of

products used by a wide spectrum ofindustries in their manufacturing operations

• Key Business Process: Sales forecasting is

critical to manufacturing planning,scheduling, inventory control, sales

• Problem: Forecasts are consistentlyseriously off

• Number of Products (SKU’s): >2,700

*From: Bisgaard and Kulahci (2002), Quality Engineering , 14(2), 341-344


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Reaction by BB-in-Training

BB-in-T:

– “I don’t know why I am in this class!”

– “My project does not fit into the general scheme of SixSigma”

– “ Six Sigma is about manufacturing. It has nothing tooffer for someone like me involved with a businessprocess”

• Later: BB-in-T realized that forecasting is a process. Hence it could be subject to approachestraditionally used to improve the quality of

manufacturing processes


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Forecasting Viewed As A Process

• Sales forecasting as a process:

– The process produces a “product” !

a number

– Key Quality Characteristics: Forecast accuracy and

Timeliness —> defects = poor forecasts

– Forecasters have customers, for example, the

production planning department

– The process has suppliers !

various data on pastsales, customer behavior, current inventory levels,

etc.


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Sales ForecastForecasting

Process

–

Forecast error t t y y ˆ#

1ˆ$t yt y

Forecasting Viewed As A Process

Input: Past Sales Data

Output: A Forecast

Defects: Forecast errors

Quality Control: Control and monitor forecast errors

Improvement: Reduce the

forecast errors to a Six Sigma(Cpk=2)

Learning Objective: Use feedback and

review to learn how to better forecast


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BB Project and Results

• Preliminary data analysis

• Quick fix: use EWMA’s across all 2,700 product

categories

• A simulation across 2,700 sales for the past twoyears showed a decrease in the relative forecasterror > 40%

• Further work under way to fine-tune theforecasting process

• A forecast control system can help generate anongoing Shewhart cycle of learning about how to

make better forecasts


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DMAIC: A Problem Solving Discipline

– Define: State the problem in measurable and

actionable terms; scoping

– Measure: Measure the variation of the performance

data from the process – Analyze: Find the sources of variation in the process

– Improve: Eliminate or enhance drivers of process

variation

– Control: Establishing controls to manage and hold on

to the gains


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Six Sigma Tools for

Business Processes

• Primary Tools: – Process Maps and C&E Matrix

– Flowcharts

– FMEA’s

– Pareto’s – Control Charts

– Multi-vari

– Statistical Graphics – Control Plan and SOP’s

• Increasingly used: FMEA, Gage R&R, DOE,

Regression, binary and categorical data analysis


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Six Sigma Business Applications

Roger Hoerl

General Electric R&D


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Outline

• Why worry about business processes?• A Six Sigma project in collections

• A Six Sigma project in publishing• Other examples of business projects

• Why we are missing this opportunity, and

what can be done about it

• Summary


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Why Worry About Business Processes?• The vast majority of Six Sigma applications

have been in manufacturing/engineering

• Research has shown that rework and waste costsare higher in service than in manufacturing

• The “money trail” from accounts receivable toaccounts payable is particularly promising

• Six Sigma implementations focused onmanufacturing will significantly limit bottomline impact – and leads to a “victimization”

attitude in manufacturing


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Newspaper Copy Error

Reduction Case

Define:• Goal: Reduce copy errors to less than

10/day

• Team consisted of copy editors, graphicartists, reporters, supervisors, managing

editor • Operational definition of an “error”

developed


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Operational Definition of An Error

An error is:• Any deviation from truth, accuracy, or

widely accepted standards of Englishlanguage, or

• Departure from accepted procedures

that causes delay or requires reworkinga story or graphic


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Newspaper Error ReductionCosts Associated with ErrorsCosts Associated with Errors

• Error caught at copy desk $62

• Error detected in composing room $88

• Page killed and redone $768

• Presses stopped & restarted $5000• Error published “Unknown &

Unknowable”


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Other Project Objectives

• Eliminate rework throughout the processes used tocreate stories, graphics and photos

• Free copy editors to do value-added work

• Breakdown barriers between departments

• Automate chart and table creation to eliminate

errors and reduce personnel needs

• Create a culture that emphasizes “doing it right the

first time” and personal responsibility for accuracy


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Newspaper Copy Error Reduction

Measure:• Process mapped & key variables identified

• Total errors and type of errors plotted anddisplayed daily

• Process stable averaging around 20 errors/day• Cause and effect relationships evaluated


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Newspaper Writing and Editing Process

Editor

Assigns

Story

Reporter

Researches &Writes Story

Editor Reviews Story

Copy Editor

Checks Storyand Layout

Story Sent

to Production

Story Revised as Needed


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Causes of Newspaper Errors

E R R O R S

Poo r t yp ing

N o C h e c k i n g

B ad S ource

P oor C omm un ica t ion

S l o p p y W o rk

Apathy

S l o p p y W o rk

N o R ev iew

P oor K now ledge

C hanged Qu ick l y

P l a n n e d

S pec ia l S to ry

B i g N e w s D a y

P er sona l

S i c k n e s s

Sta f f A bsen ces

P a p e r S i z e

Co ver S tory

B a d G ra m m a r

Wron g Nam e /No . /Fac ts

M isspe l l i ngs

C ause-and-Effec t D iagram


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5 10 15 20 25 30 35 40

10

20

30

DAY

T O T A L

E R

R O R S

N E W S P A P E R E R R O R S - M A R C H TO A P R IL


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Analyze Phase

• Pareto analysis of errors• Multi-vari study of controlled and

uncontrolled variables


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DEFECT CODE

1 = MISSPELLING

2 = WRONG NUMBER

3 = WRONG NAME

4 = POOR GRAMMAR

5 = LIBEL6 = WORD MISSING

7 = DUPLICATE WORD

8 = WRONG FACT

9 = OTHER

Newspaper Errors - March to April

O t h e

r s 6 7 9 8 2 4 3 1

1127303798117119153159

1.53.64.04.913.015.615.820.421.2

100.098.594.990.986.073.057.441.521.2

7 0 0

6 0 0

5 0 0

4 0 0

3 0 0

2 0 0

1 0 0

0

1 0 0

8 0

6 0

4 0

2 0

0

Defec t

C o u n t

P e r ce n t

C um %

P

e r c e n t

C

o u n t

P areto C hart for E rrors


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DEFECT CODE

1 = MISSPELLING

2 = WRONG NUMBER

3 = WRONG NAME

4 = POOR GRAMMAR

5 = LIBEL6 = WORD MISSING

7 = DUPLICATE WORD

8 = WRONG FACT

9 = OTHER

Newspaper Errors - March to August

O t h e

r s 6 9 8 2 4 3 1

8778174214255325376404

4.54.19.111.213.317.019.721.1

100.095.591.482.371.157.840.821.1

2 0 0 0

1 0 0 0

0

1 0 0

8 0

6 0

4 0

2 0

0

Defec t

C o u n t

P e r c e n t

Cum %

P

e r c e n t

C

o u n t

Pareto C hart for E rrors


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Multi-Vari Study• Process Output

Y = Total Errors per day• Controlled Variables

X1 = # PagesX2 = Live Cover (yes, no)

• Uncontrolled Variables

X3 = # Absent

X4 = Day of Week

X5 = Month of Year


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Newspaper Copy Error ReductionAnalyze• Key drivers

– # Pages – Live cover (yes, no) – Poor spelling – Wrong names, facts, and numbers – Bad grammar

• Root causes – # Pages – Live cover (yes,no)

– Reporters not using spellcheckers – Reporters not verifying accuracy – Poor grammar – Poor sources


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Improve

• Implement new methods – Spellcheck how-to – Ten rules of grammar – Pyramid of trust

• Collect data for one month to measureeffect of new methods


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20 40 60 80 100

0

10

20

30

40

DAY

T O T A L E

R R O R S

N E W S P A P E R E R R O R S - M AR C H T O J U L Y


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20 40 60 80 100 120

0

10

20

30

40

D A Y

T O T A L E

R R O R S

NE W S P AP E R E RRO RS - M ARCH T O AUG US T


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Improve• Implement new methods

– Spellcheck how-to

– Ten rules of grammar – Pyramid of trust

• Collect data for one month to measure effect of new

methods

• Results - no improvement!- Methods not being used

• Manager had a meeting with his staff and reinforced thenew methods of operating- Results were immediate, dramatic and

sustained


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50 100 150 20 0

0

10

20

30

40

D A Y

T O T A L E

R R O R S

NE W S P AP E R E RR O R RE DU CTIO N M ARCH - DE CE M B E R


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10 20 30 40

5

10

15

20

WEEK

A V E R A G E

E R R O R S / D A Y

N E W S P A P E R E R R O R R E D U C T IO N M AR C H -D E C E M B E R


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Improve• Implement new methods

– Spellcheck how-to – Ten rules of grammar – Pyramid of trust

Control• Process measures to be monitored

– Total errors – Errors by category – % Articles checked by author – % Articles spellchecked

Results-Total errors reduced 70%

- News assistant freed up for other work


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Other Benefits

• Fewer missed deadlines

- Increased ability to handle tight deadlines

• Improver morale at copy desk

- Copy editors can make better use of their

talents and training• Re-keying of names (rework) reduced

• More efficient and less costly sources of informationfound

- Less errors and less keying time

- News assistants assigned to more valuable work


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Results of a Collections Project in GE

• Estimated savings across the business - $2MM

annually• About half in increased cash, half in reducedwrite-offs

• Senior management did not believe the estimatedsavings, asked for a 6 month trial

• After 6 months, about $1.45MM in actual savings

had been documented - $2.9MM annually• Secondary benefit: analysis determined optimal

number of collectors – resulted in additional hires


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Other Actual Financial Application Areas

• Accounts receivable

• Accounts payable

• Factoring inventories

• Closing the books• Financial auditing

• Manual account

reconciliation• Acquisitions

• Realizing revenue

• Hedging foreign currencies

• Cash flow

• Credit scoring

• Journal entry accuracy• Forecast accuracy

• Financial reporting

• Filing taxes• Managing pension funds

• Payroll accuracy


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Why Are We Missing This Opportunity?• The perception is the problem

– There’s no money outside manufacturing – The statistical tools don’t apply

– The people can’t understand Six Sigma

– You can’t get data

– It’s too hard (outside our comfort zone)

• Biggest barrier – lack of process viewpoint• With a process viewpoint, application is

obvious and straightforward


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Summary

• Manufacturing processes represent a small

portion of the total Six Sigma opportunity• Business processes have not received

sufficient attention

• Savings like the $2.9MM from thecollections project are just the “tip of the

iceberg”• Having a process mentality is the key to

identifying and capturing these savings


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Improving Business Processes Improving Business Processes

with Six Sigmawith Six Sigma

What Have We Learned?

Ronald D. Snee

Tunnell Consulting


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Six Sigma is Different and it Works?

• Bottom-Line results ($$) are created

• Active senior management leadership includingperiodic project reviews is part of the method

• Improvement tools are linked and sequenced into anoverall approach - DMAIC

• Champions, MBB, BB, and GB are trained in depth• Utilizes the scientific method and statistical thinking

• Builds on methods shown to be useful

• Integrates the “human” and “process” elements ofimprovement


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Six Sigma Integrates “Human” & “Process”

Aspects of Process Improvement

Human

• Bottom Line ($$)

• Mgt Leadership

• Culture Change• Sense of Urgency

• Customer Focus

• Project Teams

Process

• Process Improvement

• Analysis of Variation

• Disciplined Approach• Quantitative Measures

• Statistical Methods

• Process Management


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Six Sigma Works“Six Sigma works if you follow the process. If Six

Sigma is not working, you’re not following theprocess.”

AlliedSignal Manager

Six Sigma will not succeed by itself.

Management must follow the process that hasbeen proven to work. We do not know ofanyone who has followed the process and

failed.


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Opportunities Outside Manufacturing

• Supply Chain

– Logistics, Distribution, warehousing• Inventory Reduction• Transactions

- Billing cycle time, accuracy, adjustments- Accounts receivables reduction• Information Technology

– Web Site Development, IT Contracting• Finance – Audits, closing the books• Environmental – Waste disposal & emission control


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Opportunities Outside Manufacturing

• Human Resources – Hiring and staffing• Legal

– External resources, document processing• Energy Reduction – Electric and natural gas• Project Engineering

– Cycle time, change orders• Customer Service

– Order entry errors, response time• Production Planning and Scheduling

- Forecasting


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Key Characteristics of

Non-Manufacturing Processes• Culture doesn’t think in terms of processes,

variation and data

• Work requires considerable human intervention

• Processes are often complex and not well-defined• Process output is often intangible & can be unique

• Measurements are often non-existent or ill-defined

• Large amounts of paperwork are often generated

• Similar activities done in different ways

B i PBusiness Processes


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Business ProcessesBusiness Processes

• Have generally- Not been well-engineered

- Never been fully integrated or uniformlydefined.

• Problems tend to be in three areas:- Input Accuracy

- Cycle time

- Disputes Reconciliation Between the

Company and Customers

Every Process Has a Hidden Plant


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Every Process Has a Hidden Plant

A Non-Manufacturing ViewPackage

Output

Revise,Correct

Send Output

to Next StepCheck

Work

Activity

Check

Discard,Do Again

Bad

GoodBad

VeryBad

Good

ELIMINATE THE HIDDEN PLANT

E Gl Fitti P


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Eye Glasses Fitting Process

SCHEDULES

EXAM

MAKES

GLASSES

FRAME

REDESIGNREEXAM

FILLS SCRIPT

FITS FRAMES

EXAM &

PRESCRIPTION

PATIENT

USES

GLASSES

GLASSES

FIT?

PATIENT

CAN

SEE?

METRICS METRICS

•On-Time Delivery

•Cycle Time•Quality

•Lens & Frames

•Cost

•Customer Satisfaction

*Hidden Factory - Rework, Wasted Time and Material

PATIENT DOCTOR OPTICIAN LABORDER

GLASSES

YES

YESNO

NO* *


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Comments on Six Sigma Tools Used

• Gage R&R studies are typically done only forattribute measurements

- Focus is usually on the development of measurement systems

• Process specifications are often present but notwidely recognized

• Design of Experiments is not widely used todaybut its use will grow over time

• Multi-Vari studies is a very useful tool becauseof the large amount of human intervention


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We Know What to Measure

• Errors, accuracy, completeness and defects

• Cycle time• Cost ($$)

• Customer Satisfaction

Note: For some non-manufacturing processescapacity and downtime as also relevant metrics


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So What Have We Learned?

• Big opportunities exist outside of manufacturing

• Six Sigma works for non-manufacturing as well as

manufacturing processes• Non-manufacturing Six Sigma requires some

different tools, but

- There are more similarities than differencesbetween the two types of uses of Six Sigma

• Six Sigma “primes its own pump”;

- Initial investment more than paid for by the firstset of projects

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