Definition Of Six Sigma, Lean Six Sigma Concepts
What Is Six Sigma?
Six Sigma stands for Six Standard Deviations (Sigma is the Greek letter used to represent standard deviation in statistics) from mean. Six Sigma methodology provides the techniques and tools to improve the capability and reduce the defects in any process.
It was started in Motorola, in its manufacturing division, where millions of parts are made using the same process repeatedly. Eventually Six Sigma evolved and applied to other non manufacturing processes. Today you can apply Six Sigma to many fields such as Services, Medical and Insurance Procedures, Call Centers.
DMAIC
Six Sigma methodology improves any existing business process by constantly reviewing and re-tuning the process. To achieve this, Six Sigma uses a methodology known as DMAIC (Define opportunities, Measure performance, Analyze opportunity, Improve performance, Control performance).
DFSS or DMADV
Six Sigma methodology can also be used to create a brand new business process from ground up using DFSS (Design For Six Sigma) principles. Six Sigma Strives for perfection. It allows for only 3.4 defects per million opportunities for each product or service transaction. Six Sigma relies heavily on statistical techniques to reduce defects and measure quality.
Six Sigma experts (Green Belts and Black Belts) evaluate a business process and determine ways to improve upon the existing process. Six Sigma experts can also design a brand new business process using DFSS (Design For Six Sigma) principles. Typically its easier to define a new process with DFSS principles than refining an existing process to reduce the defects.
Six Sigma incorporates the basic principles and techniques used in Business, Statistics, and Engineering. These three form the core elements of Six Sigma. Six Sigma improves the process performance, decreases variation and maintains consistent quality of the process output. This leads to defect reduction and improvement in profits, product quality and customer satisfaction.
Six Sigma methodology is also used in many Business Process Management initiatives these days. These Business Process Management initiatives are not necessarily related to manufacturing. Many of the BPM's that use Six Sigma in today's world include call centers, customer support, supply chain management and project management.
Lean Six Sigma
Some Six Sigma practitioners have In recent years combined Six Sigma ideas with lean manufacturing to invent new a methodology. This new methodology is called Lean Six Sigma.
HISTORY OF SIX SIGMA
The roots of Six Sigma as a measurement standard can be traced back to Carl Frederick Gauss (1777-1855) who introduced the concept of the normal curve. Six Sigma as a measurement standard in product variation can be traced back to the 1920's when Walter Shewhart showed that three sigma from the mean is the point where a process requires correction. Many measurement standards (Cpk, Zero Defects, etc.) later came on the scene but credit for coining the term "Six Sigma" goes to a Motorola engineer named Bill Smith. (Incidentally, "Six Sigma" is a federally registered trademark of Motorola).
In the early and mid-1980s with Chairman Bob Galvin at the helm, Motorola engineers decided that the traditional quality levels -- measuring defects in thousands of opportunities -- didn't provide enough granularity. Instead, they wanted to measure the defects per million opportunities. Motorola developed this new standard and created the methodology and needed cultural change associated with it. Six Sigma helped Motorola realize powerful bottom-line results in their organization - in fact, they documented more than $16 Billion in savings as a result of our Six Sigma efforts.
Since then, hundreds of companies around the world have adopted Six Sigma as a way of doing business. This is a direct result of many of America's leaders openly praising the benefits of Six Sigma. Leaders such as Larry Bossidy of Allied Signal (now Honeywell), and Jack Welch of General Electric Company. Rumor has it that Larry and Jack were playing golf one day and Jack bet Larry that he could implement Six Sigma faster and with greater results at GE than Larry did at Allied Signal. The results speak for themselves.
Six Sigma has evolved over time. It's more than just a quality system like TQM or ISO. It's a way of doing business. As Geoff Tennant describes in his book Six Sigma: SPC and TQM in Manufacturing and Services: "Six Sigma is many things, and it would perhaps be easier to list all the things that Six Sigma quality is not. Six Sigma can be seen as: a vision; a philosophy; a symbol; a metric; a goal; a methodology." We couldn't agree more.
Six Sigma Costs And Savings
Many people say that it takes money to make money. In the world of Six Sigma quality, the saying also holds true: it takes money to save money using the Six Sigma quality methodology. You can't expect to significantly reduce costs and increase sales using Six Sigma without investing in training, organizational infrastructure and culture evolution.
Sure you can reduce costs and increase sales in a localized area of a business using the Six Sigma quality methodology -- and you can probably do it inexpensively by hiring an ex-Motorola or GE Black Belt. I like to think of that scenario as a "get rich quick" application of Six Sigma. But is it going to last when a manager is promoted to a different area or leaves the company? Probably not. If you want to produce a culture shift within your organization, a shift that causes every employee to think about how their actions impact the customer and to communicate within the business using a consistent language, it's going to require a resource commitment. It takes money to save money.
How much financial commitment does Six Sigma require and what magnitude of financial benefit can you expect to receive? We all have people that we must answer to -- and rhetoric doesn't pay the bills or keep the stockholders happy (anymore). I was tired of reading web pages or hearing people say:
"Companies of all types and sizes are in the midst of a quality revolution. GE saved $12 billion over five years and added $1 to its earnings per share. Honeywell (AlliedSignal) recorded more than $800 million in savings."
"GE produces annual benefits of over $2.5 billion across the organization from Six Sigma."
"Motorola reduced manufacturing costs by $1.4 billion from 1987-1994."
"Six Sigma reportedly saved Motorola $15 billion over the last 11 years."
The above quotations may in fact be true, but pulling the numbers out of the context of the organization's revenues does nothing to help a company figure out if Six Sigma is right for them. For example, how much can a $10 million or $100 million company expect to save?
I investigated what the companies themselves had to say about their Six Sigma costs and savings -- I didn't believe anything that was written on third party websites, was estimated by "experts," or was written in books on the topic. I reviewed literature and only captured facts found in annual reports, website pages and presentations found on company websites.
While recent corporate events like the Enron and WorldCom scandals might lead us to believe that not everything we read in a company's annual report is valid, I am going to provide the following information based on the assumption that these Six Sigma companies operate with integrity until proven otherwise.
I investigated Motorola, Allied Signal, GE and Honeywell. I choose these four companies because they are the companies that invented and refined Six Sigma -- they are the most mature in their deployments and culture changes. As the Motorola website says, they invented it in 1986. Allied Signal deployed Six Sigma in 1994, GE in 1995. Honeywell was included because Allied Signal merged with Honeywell in 1999 (they launched their own initiative in 1998). Many companies have deployed Six Sigma between the years of GE and Honeywell -- we'll leave those companies for another article.
| Table 1: Companies And The Year They Implemented Six Sigma | |
| Company Name | Year Began Six Sigma |
| Motorola (NYSE:MOT) | 1986 |
| Allied Signal (Merged With Honeywell in 1999) | 1994 |
| GE (NYSE:GE) | 1995 |
| Honeywell (NYSE:HON) | 1998 |
| Ford (NYSE:F) | 2000 |
Table 2 identifies by company, the yearly revenues, the Six Sigma costs (investment) per year, where available, and the financial benefits (savings). There are many blanks, especially where the investment is concerned. I've presented as much information as the companies have publicly disclosed.
| Table 2: Six Sigma Cost And Savings By Company | |||||
| Year | Revenue ($B) | Invested ($B) | % Revenue Invested | Savings ($B) | % Revenue Savings |
| Motorola | |||||
| 1986-2001 | 356.9(e) | ND | - | 16 1 | 4.5 |
| Allied Signal | |||||
| 1998 | 15.1 | ND | - | 0.5 2 | 3.3 |
| GE | |||||
| 1996 | 79.2 | 0.2 | 0.3 | 0.2 | 0.2 |
| 1997 | 90.8 | 0.4 | 0.4 | 1 | 1.1 |
| 1998 | 100.5 | 0.5 | 0.4 | 1.3 | 1.2 |
| 1999 | 111.6 | 0.6 | 0.5 | 2 | 1.8 |
| 1996-1999 | 382.1 | 1.6 | 0.4 | 4.4 3 | 1.2 |
| Honeywell | |||||
| 1998 | 23.6 | ND | - | 0.5 | 2.2 |
| 1999 | 23.7 | ND | - | 0.6 | 2.5 |
| 2000 | 25.0 | ND | - | 0.7 | 2.6 |
| 1998-2000 | 72.3 | ND | - | 1.8 4 | 2.4 |
| Ford | |||||
| 2000-2002 | 43.9 | ND | - | 1 6 | 2.3 |
| Key: $B = $ Billions, United States (e) = Estimated, Yearly Revenue 1986-1992 Could Not Be Found ND = Not Disclosed Note: Numbers Are Rounded To The Nearest Tenth | |||||
Although the complete picture of investment and savings by year is not present, Six Sigma savings can clearly be significant to a company. The savings as a percentage of revenue vary from 1.2% to 4.5%. And what we can see from the GE deployment is that a company shouldn't expect more than a breakeven the first year of implementation. Six Sigma is not a "get rich quick" methodology. I like to think of it like my retirement savings plan -- Six Sigma is a get rich slow methodology -- the take-away point being that you will get rich if you plan properly and execute consistently.
As GE's 1996 annual report states, "It has been estimated that less than Six Sigma quality, i.e., the three-to-four Sigma levels that are average for most U.S. companies, can cost a company as much as 10-15% of its revenues. For GE, that would mean $8-12 billion." With GE's 2001 revenue of $111.6 billion, this would translate into $11.2-16.7 billion of savings. Although $2 billion worth of savings in 1999 is impressive, it appears that even GE hasn't been able to yet capture the losses due to poor quality -- or maybe they're above the three-to-four Sigma levels that are the average for most U.S. companies?
In either case, 1.2-4.5% of revenue is significant and should catch the eye of any CEO or CFO. For a $30 million a year company, that can translate into between $360,000 and $1,350,000 in bottom-line-impacting savings per year. It takes money to make money. Is investing in Six Sigma quality, your employees and your organization's culture worth the money? Only you and your executive leadership team can decide the answer to that questionSigma Performance Levels - One to Six Sigma
| Sigma Performance Levels - One to Six Sigma | |
|---|---|
| Sigma Level | Defects Per Million Opportunities (DPMO) |
| 1 | 690,000 |
| 2 | 308,537 |
| 3 | 66,807 |
| 4 | 6,210 |
| 5 | 233 |
| 6 | 3.4 |
What Would This Look Like In The Real World?
It's one thing to see the numbers and it's a whole other thing to see how it would apply to your daily life.
| Real-world Performance Levels | |||
|---|---|---|---|
| Situation/Example | In 1 Sigma World | In 3 Sigma World | In 6 Sigma World |
| Pieces of your mail lost per year [1,600 opportunities per year] | 1,106 | 107 | Less than 1 |
| Number of empty coffee pots at work (who didn't fill the coffee pot again?) [680 opportunities per year] | 470 | 45 | Less than 1 |
| Number of telephone disconnections [7,000 talk minutes] | 4,839 | 467 | 0.02 |
| Erroneous business orders [250,000 opportunities per year] | 172,924 | 16,694 | 0.9 |
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