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..V ariation & 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 andY = 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 Direct Measured Costs:  Scrap/Rework  Service Calls  Warranties/Concessions Indirect/Hidden Costs:  Excess Inventory  Overtime  Reputation/Image Hidden Costs = 6 to 50X Measured Costs

12 Figure 4: Economics of Quality – Example 1  TV Units Sold5 million  Estimated Revenues (5 x $500 per set)$2.5 billion  Estimated Earnings (5% of sales)$125 million  Scrap (Measured)$12 million  Total Cost of Quality (Measured & Hidden)$ million  Cost of Scrap per TV (12M/5M)$2.40 per unit  Total Cost of Quality$ $120 (M+H) per TV Sold (6/1 to 50/1 Iceberg)  % Total Cost of Quality3% - 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