Lean Six Sigma

Managing Efficient Organizations and their Operational Processes

Table of Contents1. Competitive Business Processes2. Lean Organizations3. Basics of Lean Six-Sigma4. Lean Six-Sigma Cycle: DMAIC5. Overview of Lean6. Improving Process Flow7. Lean Manufacturing8. Lean Supply Chain9. Lean Product Development

10. Lean Health care11. Overview of Six Sigma12. Six Sigma Tolls13. Finding the Root Cause14. Pareto Chart15. Fishbone Diagrams16. Process Variation17. Process Control18. Summary and Conclusions

COMPETITIVE BUSINESS PROCESSESChapter 1

Getting it RightSome organizations seem to get it right. The New York Ballet delivers a flawless performance of Swan Lake. The Yankees win the World Series. The M.D. Anderson Cancer Center in Houston treats patients with innovative cancer therapies, and Amazon has developed the capability to make same day deliveries in cities like New York and Miami.

How do they get it right and are there lessons from which we can all learn?

Customer ValueWhile at the operational level these companies are different, what they share is that they have all developed products, services or performances that meet their customer’s, client’s, patient’s or patron’s needs.

To look at this from another perspective, they all deliver customer value.

Customer ValueValue is, of course hard to define but it does represent A combination of price, quality, dependability and service. Nonetheless, value must be defined from the customer’s point-of-view. Not from the company’s, not from executive management’s but from the customer’s point-of-view.

When customer's don’t perceive value, there is no value. It is as simple as that!

Customer Value and Organizational Culture

Delivering value begins with company culture, defined as the shared meaning, values, beliefs and practices of an organization. Culture pervades every activity from logistics, sales, marketing, operations, customer service, accounting and finance. When culture is wrong and fails to emphasize customer value, performance suffers.

Steve jobs, the legendary founder of Apple, left the company in 1985 after a power struggle with its board of directors. Without Jobs at the helm the company lost site of its mission, and slid toward bankruptcy. Jobs returned in 1996 and by 1998 had restored its competitive position by refocusing on innovation and customer value.

Organizational Culture and Customer Value

But a customer-focused culture is less common than one would think. Before its bankruptcy, almost a decade ago, General Motors failed to manufacture cars that people wanted. As they lost market share Honda and Toyota gained.

General Motors 2000 Saturn

Then in June 2009 they filed in Federal Court for protection under Chapter 11 of the Bankruptcy Code. The disruptive conditions surrounding their reorganization were enough to unfreeze a culture that had led to its downfall and in its place a more customer and value oriented culture began to emerge.

Organizational Culture and Customer Value

There have been many companies that have been unable to recover from their inability to deliver what customers want. That list includes Circuit City, Radio Shack, Borders, Digital Equipment and Wang Computers just to name a few.

They failed for many reasons but one of the most important was their inability to maintain focus on customer value. Unfortunately, as they watched the competitive marketplace change they were unable to take the steps necessary to change with it.

The Alignment of Culture, Products and Value

But the right culture, by itself, is not sufficient.

The organization must also be capable of developing effective and efficient processes to deliver the products that its customers want. They must be effective enough to deliver the right product with the right quality and efficient enough to deliver it at the right price.

The Alignment of Culture, Products and Value

Tesla motors has the right culture and the right product, but they must develop the production processes to deliver their right product at the right price. To increase their market share they too must address the value issue.

Sustainable organizations must assure that culture, products, and value are aligned. Only then can an organization survive in a competitive market environment.

Is There Help?How can effective and efficient processes be developed?

Are there guidelines?

Is there a discipline that can be followed?

The short answer is, yes. And that discipline is called Lean Six Sigma.

Lean Six SigmaWhat is Lean Six Sigma?

Considerable confusion can be avoided if we begin by separating the term “Lean” from “Six Sigma.” And the reason this eliminates confusion is that they basically address two different functions. There is overlap but it is best to start by defining each one separately.

First we turn to Lean.

Lean DefinedWhile lean is primarily a philosophy that pervades organizational culture, at the operational level it is a collection of practices, tools and methodologies directed at improving process efficiency and minimizing waste.

Furthermore, some organizations are so committed to this philosophy that they refer to themselves as “Lean” organizations.

Applies to All Functional AreasLean is a philosophy that can be applied to every functional area in the organization.

• Lean manufacturing, implies a manufacturing process that has been designed to maximize efficiency while eliminating delays and wasted steps.

• Lean supply chain refers to an approach for selecting suppliers that ensures a smooth flow from these suppliers to the customer. It suggests a transportation system that moves goods efficiently and minimizes delays.

• Lean product development suggest a process that minimizes the length of time it takes to develop a new product from the time the project is approved to the time it is made available to customers or clients.

In all of these functional areas the focus is on delivering customer value while maximizing efficiency and minimizing waste.

Six SigmaSix sigma is different.

It addresses quality and consistency. As such it focuses on the ability of operational processes to meet customer quality expectations. To accomplish this, It sets targets and measures outcomes against these targets.

An automobile manufacturing assembly plant is deigned to produce cars that meet a set of quality standards. But to ensure that thee standards are met quality control procedures are instituted to confirm that assembly processes are in control.

Medical procedures at a health clinic are designed to minimize infections, but quality control procedures are also established to confirm that thee processes are also in control.

Six Sigma DefinedSix-Sigma can be defined in the following way. A highly disciplined process that focuses on developing and delivering near-perfect products and services.

Near-perfect does sound a bit ambitious, so a more detailed explanation of what it is that we mean by six-sigma is in order.

However, a full explanation would require an excursion into the world of statistics, which is beyond the scope of this chapter. But, an intuitive understanding of six sigma is not.

What is Meant by the Term Six Sigma?

The term six sigma is a statistical term used to measures how far the output from an operational process deviates from perfection. The less it deviates the more consistent is the output. The more it deviates the less consistent is the output and the greater is the likelihood that output standards are not met.

But why should outputs deviate at all. Aha, here is the reality. All processes deviate from an average or reference standard. When computer chips are made some are found to be defective. The goal, for example, might be to keep defectives within one percent of the total. But sometimes the defectives are smaller and sometimes larger. The output therefore deviates from the process average.

When the New York Ballet company performs Swan Lake not all performances are the same. Some are better than others. Again, the output varies, but on the average performance is near ‘perfect’.

PerfectionBut what do we mean by perfection? Is it possible to establish a concrete measure?

Well, we can!

Perfection, within the context of six-sigma, is reached when the the output from a process leads to no more than 3.4 defects per million opportunities. An opportunity here means specific process outputs. So if we are producing ignition switches for automobiles then we would design the process to deliver no more than 3.4 defective switches per million produced. If this target was, in fact, met it could be concluded that the process was in ‘perfect’ control.

So we can conclude that processes designed at the six-sigma level need to be nearly flawless to deliver ‘perfection’.

When is Six Sigma Appropriate?When GE manufactures a turbine engine for a new passenger plane, it is reasonable to understand why great precautions must be taken to achieve a level of quality that is near perfection.; flaws in the engine can lead to great tragedy. But perfection at this level would be inappropriate for making cell phones, computer chips or even ignition switches.

When is Six Sigma Appropriate?Of course we could design every processes to achieve the six-sigma level of perfection, but the cost of developing such processes together with the cost of instituting quality control measure to ensure consistency at this level would make phones, computer chips and ignition switches very expensive to produce.

The reality is that for most products and services, we need reasonable quality not perfection.

ConsistencyConsider an example in the food service industry.

Restaurants are constantly under pressure to efficiently deliver high quality dishes. And today almost every one can expect to be reviewed on Yelp. Six-sigma reminds us that variation from one meal is inevitable but that process quality must be such that very few meals fall outside the acceptable range. Of, course it is not possible to satisfy everyone, and there will be individuals who will write a negative review without cause, but, in general, establishing standards and creating controls can minimize the likelihood of critical ratings.

ConsistencyStill, restaurants must set a reasonable standard of performance. Setting a six-sigma level would mean little tolerance for anything but near perfect meals, a standard few restaurants could afford to meet.

Efficiency and ConsistencyWhat we have learned this far is that effective management of operational processes must deliver efficiency, quality and consistency. And these objectives represent the very essence of Lean Six-Sigma.

Here is a simple case that illustrates the basic philosophy and principles of Lean Six Sigma – primarily Lean - at work.

MicrosoftThree companies represent the emergence and significance of computers in terms of their economic and social impact on our lives. They include IBM, Microsoft and Apple.

Each, of course, started small and each grew large enough to require elaborate management structures, some of which border on large bureaucracies.

In the next case we will see how one process at Microsoft grew to such proportions that the cost of the process exceeded it value. Then a lean initiative was taken.

MicrosoftMicrosoft was founded in 1975 by Bill Gates and Paul Allen. In 1980 a partnership was formed with IBM to bundle the Microsoft operating system with IBM computers. Shortly thereafter they introduced the Windows operating system that has since dominated the PC market.

With sales of over $86 billion and more than 100,000 employees worldwide Microsoft has clearly had to established standard operating procedures as well as a system of checks-and-balances to ensure that its operations are both efficient and under control.

MicrosoftOne business function that has grown accordingly is marketing and sales.

To work with its customers and to best meet their needs, sales managers routinely travel to client sites. In the past they charged expenses to a credit card and upon returning completed a travel expense report that included explanations for each charge incurred. Then, the expense report would be sent to the travel department where staff would review each expense item and verify that it met the guidelines for an approved expense. Often the staff would return an expense report to collect additional information before payment could be authorized.

MicrosoftWhile reviewing an annual budget, one senior VP questioned the cost of this control process. Where these steps really necessary? Could it be, he asked, that very few people overstate expenses or submit unauthorized charges? If so, then these checks and balances might be excessive.

If expenses were not overstated then the effort directed at this process would only serve to increase costs with little value to the company and certainly little value to the customer.

So he set out to collect some data that would help him answer these questions. He asked the travel office to determine how many expense reports, filed in the last month, actually overstated expenses, by how much, and how many included unauthorized charges.

MicrosoftUpon receiving a response, he was not surprised to learn that most of the sales staff were quite honest and when expenses were overstated it was only by a few dollars. Even fewer took unauthorized charges. He then established a new policy.

Sales staff would submit only credit card bills and there would be no review of their charges. Payment would be credited to the employee’s bank account within two days, compared to the ten it had taken under the old system.

But, to insure compliance, a control system would be established whereby random statements would be audited on a periodic basis.

MicrosoftIt worked.

The office staff responsible for reviewing and approving expense reports was reduced to less than 25 percent of its original size and one year later an internal audit found no significant increase in overstated expenses. The point here is that bureaucratic processes – business processes dominated by hierarchy, procedures and rules - tend to take on a life of their own. Very often as processes mature and as a company becomes more successful, additional procedures and processes are added that create little or no customer value. They just add cost.

Yes, some may be necessary but many are not. And managers who add these additional steps, procedures and ‘safeguards’ find it easy to justify them in the interest of preventing abuse or improving management processes.

MicrosoftBut you can imagine that changes like the one at Microsoft, regardless of how small they are, are not easy to make. They can be criticized as counterproductive and even irresponsible. How could these ‘important’ safeguards be eliminated?

Those accustomed to the old ways might insist that failing to review each and every expense report could tempt staff to be less than honest. Of course that is always possible, but decisions such as this need to be based on the facts. And the facts here were clear; the sales force was honest!

Inefficiencies Not Limited to Established Processes

It would be a mistake to think that inefficiencies, like the one suggested in the Microsoft case, are limited to established processes.

Often, inefficiencies are inadvertently built into a new system. Certainly, there may have been better ways when it was first designed, but they went unexplored. Perhaps it was the rush to complete the project, or the failure to think critically about the efficiency of the process.

Here is the basic problem. It is almost always more difficult to design a lean process than an inefficient one and under pressure to get the ‘job’ done the extra time it can take to design one that is efficient is simply not available.

Inefficiencies Not Limited to Old Processes

Here is what Blaise Pascal had to say about efficiency. He ended a letter with an apology: I'm sorry that this was such a long letter, but I didn't have time to write you a short one. In our context we might say “ I’m sorry this was such an inefficient process, but I didn’t have time to develop an efficient one.”

Writing short letters or designing efficient processes takes time and in the rush to meet project deadlines process efficiency is frequently shortchanged. As a result Lean Six Sigma is never at a loss for opportunities to improve process efficiencies and customer value.

SummaryLean six sigma works because it focuses on the value customers or clients receive when they buy products and services. It is an approach that works best when it becomes part of the organization’s culture, core values, beliefs and processes that define the organization.

To understand lean six sigma it is best to separate out lean from six sigma. Lean focuses primarily on efficiency and the minimization of waste while six sigma focuses on quality and consistency

In fact, Lean has become such an important contributor to the process of managing competitive organizations that many companies now consider themselves “lean” organizations. Everything, from designing international supply chains to building effective customer service systems, is constantly and rigorously subjected to lean analysis.

SummaryIs there evidence that this really produces results?

More than three-quarters of the Fortune 500 companies have extensive Lean Six sigma programs. They see the benefits in lower costs, more dependable process outputs and, above all, an improvement in customer satisfaction.

Furthermore, it works because it provides professionals with a discipline for improving organizational performance.

Review Questions1. Designing efficient processes often takes less time than designing inefficient ones.2. About 75 percent of the Fortune 500 companies utilize Lean Six Sigma.3. There is little difference between Lean and Six Sigma. 4. Lean is primarily responsible for improving process efficiency.5. When a new business process is designed it is not necessary to utilize Lean Six

sigma concepts because it can be assumed that new processes are efficient.

Answers1. Designing efficient processes often takes less time than designing inefficient ones.

(F)2. About 75 percent of the Fortune 500 companies utilize Lean Six Sigma. (T)3. There is little difference between Lean and Six Sigma. (F)4. Lean is primarily responsible for improving process efficiency.(T)5. When a new business process is designed it is not necessary to utilize Lean Six

sigma concepts because it can be assumed that new processes are efficient. (F)