emerging concepts

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ROLE OF INFORMATION TECHNOLOGY IN SUPPLY CHAIN

Legacy systems are older IT systems based on mainframe technology that usuallywork at an operational level on only one stage or even one function within a stage

of the supply chain.''Legacy system" is a very broad label and applies to a wide variety of systems with

applications that can range from order entry to manufacturing scheduling to delivery

Although these functions are very different, they are all called legacy systemsbecause of the older technology involved and because these systems continue to existpast their intended life span through numerous updates of the original code.Two important characteristics of legacy systems are the very narrow scope acrosswhich they have visibility and the operational nature of the tasks they perform.Legacy systems end to focus solely on a particular function and are built as

independent entities witnlittle regard for other systems.Therefore, communication between systems is often minimal, and visibility acrossfunctions and supply chain stages is very limited.Legacy systems also have very limited analytical capabilities because they focusmore on gathering information rather than on analyzing information to makedecisions.

The following are the main advantages of legacy systems:

1,Legacy systems tend to be able to get the operation done. They may not be very efficient andthey may be slow, but because legacy systems have often been up and running for morethan a decade, they do work. Using legacy systems, therefore, is less risky in somerespects than installing an untested new system whose operational abilities are unknown.

2.Legacy systems sometimes take less incremental investmentto run than installingnew applications because legacy systems already exist. The complex layers of code,however, often turn modifications into a quagmire that can be more difficult to completethan starting from scratch with a new system.

legacy systems have a large number of disadvantages, which are summarized as follows

1. Legacy systemsfocus on only a small partof a stage within the supply chain.2. Legacy systems usually have only transactional capabilities, which relegatesthem to an operational rather than a planning or strategic role.3. Legacy systems are usually based on mainframe technology that is difficultto modify and takes a long time to run when situations change.

PresentEnterprise Resource Planning

Enterprise resource planning (ERP) systems are operational IT systems that gatherinformation from across all of a company's functions, resulting in the entire enterprisehaving a broader scope.

ERP systems monitor material, orders, schedules, finished goods inventory, andother information throughout the entire organization.

ERP systems' main advantage over legacy systems is the clearly superior scope theyprovide to make better supply chain decisions.

ERP systems are good at monitoring transactions but generally lack the analyticalcapability to determine what transactions ought to happen.


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The ability to keep track of orders and have broad visibility in general has become moreimportant as supply chains become more global and more complex. Today's trend of usinga product-based instead of a function-based organizational structure has also helped makeERP systems more attractive, because this structure increases the importance of the cross-functional scope that ERP systems provide.ERP systems typically have many modules, each covering different functions

within a company. These modules are linked together so that users in each functioncan see what is happening in other areas of the company.

There are several key modules.to an ERP systern, each of which can be installed on its ownor with a combination of other modules:

1. Finance. This module tracks financial information such as revenue and cost datathrough various areas within the company.2. Logistics. This module is often broken into several sub modules covering differentlogistics functions such as transportation, inventory management, and warehousemanagement.3. Manufacturing. This module tracks the flow of products through the manufacturing

process, coordinating what is done to what part at what time.4. Order fulfillment. This module monitors the entire order fulfillment cycle, keepingtrack of the progress the company .has made in satisfying demand.5. Human resources. This module handles all sorts of human resources tasks, such as thescheduling of workers.6. Supplier management. This module monitors supplier performance and tracks thedelivery of supplier's products.

ERP systems not only allow a company to track items throughout the system, theyalso allow a company to automate processes.

By automating processes, companies are often able to increase efficiency and reduceerrors. This combination can result in significant cost savings if executed properly. It is

important to keep in mind, however, that automating poor processes only guaranteesthat they will be executed poorly each time. Thus, firms should review theirprocesses before implementing ERP systems. Beyond merely automating oldprocesses, which can be akin to paving the cow paths, installing an ERP systemoften serves as a catalyst for a firm to redefine processes to make them moreeffective. ERP vendors build different versions of their software packages fordifferent industries that are consistent with that industry's functional requirements.

Placing Enterprise Resource Planning Systems on the SupplyChain Information Technology MapERP systems were developed to provide an integrated view of information across

functions within a company and with the potential to go across companies.The enlarged scope of visibility along the horizontal axis is what chiefly differentiatesERP from legacy systems and is the main reason why the ERP industry was sosuccessful during the mid-and late 1990s.Within a company, an ERP system will provide visibility of both incoming supplies andorders so that manufacturing managers can be sure when they schedule production thatdemand will be met and that appropriate materials will arrive on time.Salespeople can view production schedules and warehouse inventory levels in order todetermine when a product might be delivered to a customer. ERP systems can alsocreate the opportunity to share data across firms so that managers have visibility acrossthe entire supply chain, although few companies have reached this stage of


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implementation.Nonetheless, the enlarged scope of visibility is the largest benefit that ERP systemsoffer because it allows company and supply chain managers to make much betterdecisions.

ERP systems have a number of disadvantages:1. ERP systems still have relatively weak analytical capabilities because their focus isat an operational level. The ERP players are trying to move upward on the IT map,but it is a difficult move to make because software for the planning level requiresquite a large amount of specific expertise to develop.

2. ERP systems have a reputation for being very expensive and difficult to implement.This can be especially true when the standard modules must be customized to accommodatedifferent business processes.

3.There are many stories of companies that have spent large amounts of time and moneyinstalling an ERP system only to have it fail and be forced to rip the entire system outand return to the old legacy systems. Of course, these are countered by great successstories.

The Enterprise Resource Planning Players

There are five major ERP players in the marketplace, which we describe here.In addition to these five, there are many smaller players that focus on small and midsizecompanies as their customers.The larger players have moved into these smaller markets, though, and these giants maybecome the major players there as well.

1SAP

The clear ERP market leader with around a 30 percent share of the market, SAP hasits roots writing software for manufacturing environments.

The firm has a strong tradition of building capabilities in-house, and they are expandingtheir product offerings vertically by developing more analytical functions to be used insupply chain planning.

2. Oracle

The second largest player with about, half the share of SAP, Oracle is the only oneof the Big Five ERP players that is not solely an ERP firm.

Oracle also writes database software, which led it to begin creating ERP systems.

Oracle initially added financial applications to its database programs and eventually grew

to be a full ERP provider.Oracle has had the most success with consumer packaged goods companies, although theyhave successfully expanded into other industries.

3. Peoplesoft

Whereas SAP started with manufacturing applications and Oracle with finance,Peoplesoft started with human resources applications.

It has acquired an analytical software firm in the supply chain realm (Red Pepper) in orderto push its products up the vertical scale of the IT map.

4. J. D. Edwards This firm started out building cross-functional systems that were


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targeted toward midsize, firms, generally those with around $1 billion in sales.

J. D. Edwards has purchased Numetrix, a supply chain software company, in an effort to in-crease its offering in the analytical applications realm.

5. Baan Baan, like J. D. Edwards, began with the entire integrated view in mindrather than a specific function as is the case with the three leaders. Baan also focuses on

midsize companies.Baan tends to perform better in manufacturing environments, although they haveattempted to break out of this vertical industry. In order to im-prove its supply chain

The PresentAnalytical Applications

Whereas an ERP system's greatest advantage is the broad scope it provides, an analyticalapplication's advantage lies in the fact that it can be used for both planning and strategicdecisions.

Analytical systems are not focused at an operating level but rather on planning and strategicdecisions.

They analyze information supplied to them by legacy or ERP systems in order to help

supply chain managers make good decisions.For example, ERP systems may provide demand history, inventory levels, and supplier leadtimes, and then an analytical application would determine what the inventory level shouldbe to maximize profitability.

Analytical applications rely on sophisticated algorithms including linear programming,mixed integer programming, genetic algorithms, theory of constraints, and many types ofheuristics.These algorithms are most often proprietary to the software company, and large amounts ofR&D go into developing them. Due to the level of sophistication, this technology isrelatively hard to develop if a firm has not had much experience in this area.

Procurement and Content Cataloging ApplicationsProcurement and cataloging applications focus on the relationship between a manufacturerand its suppliers and the procurement process that takes place between them.Though there are many such applications, the basic purposes of supplier-focusedapplications are to enable a streamlined procurement process, replace the supplier's catalog,and keep track of parts, specifications, prices, order processes, and the suppliers themselves.Supplier management systems allow analytical comparisons of supplier versus supplier andpart versus part to help buyers make decisions on whom to buy from and what to buy. .

Advanced Planning and SchedulingAdvanced planning and scheduling (APS) has been one of the fastest growing areas inanalytical applications.APS systems produce schedules for what to make, where and when to make it, and how tomake it while taking into account material availability, plant capacity, and other businessobjectives.APS can also encompass the functions of strategic supply chain planning, inventoryplanning, and available to promise (ATP).These systems are highly analytical and use sophisticated algorithms such as linearprogramming and genetic algorithms.APS systems can be used to develop detailed production schedules in plants, performmanufacturing planning, and perform supply chain planning to optimize the use ofmanufacturing, distribution, and transportation resources to meet demand.APS systems require inputs of transaction-level data that arc collected by ERP or legacysystems. APS systems are an area that


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Transportation Planning and Content SystemsTransportation planning and content systems perform the analysis todetermine how, when, where, and in what quantity materials ought to betransported. Comparisons of different carriers, modes, routes, and freightplans can be made using these systems. The planning vendors produce theengine that performs the analysis, and content vendors provide the data needed

to perform the analysis, such as mileage and tariff requirements.

Demand Planning and Revenue ManagementThe demand planning and revenue management application helps companies fore-casttheir demand using proprietary analytical tools.These systems take as inputs historical data and any information regarding futuredemand and come up with models to help explain past sales and forecast futuredemand.Good systems take into account demand trends as well as seasonality along withmodifications for promotions to forecast future demand.The idea of revenue management is also often placed under the demand planningumbrella. Revenue management deals with using price discrimination to maximize

the amount of consumer surplus one can get from product sales.

Customer Relationship Management (CRM) and Sales ForceAutomation (SFA)The customer relationship management (CRM) and sales force automation(SFA) applications automate relations between sellers and buyers by providingproduct and price information.They also allow for detailed customer and product information to be available inreal time so that salespeople can direct their efforts or customers can configureorders themselves.

Supply Chain Management

Supply chain management (SCM) systems are a combination of many of the pre-ceding applications and are used to span the stages in the supply chain.

They are delivered as a suite of different supply chain applications that are tightly

integrated.

SCM systems allow for a more global scope because they can span many supply cha

stages with their different modules.

For instance, an SCM system could come with APS, demand planning,

transportation planning, and inventory planning.

SCM systems have the analytical capabilities to produce planning solutions and

strategic level decisions.

Although they .do not usually span all of the supply chain stages and they rely on

legacy. systems or ERP systems to provide the information necessary to performthe analysis, SCM systems currently provide the highest level of functionality with

respect to the vertical axis of the IT map.

SCM systems are the only systems to reach into the strategic level of functionality.

i2 is the leader in developing SCM

Inventory Management SystemsThese systems observe demand patterns: take inputs on forecasting, costs, margins,and service levels; and then produce a recommended stocking policy.They are best used to achieve an optimal balance between inventory costs andstock out costs.


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Manufacturing Execution SystemA manufacturing execution system (MES) is less analytical than an APS system andis similar to the operationally focused ERP system, except that it concentrates onlyon executing production in a manufacturing facility.An MES generally produces short-term schedules and allocates resources with theiranalytical capabilities.

The leading MES modules are from the ERP companies and a number of smallerplayers that develop only MESs.

Transportation ExecutionSimilar to an MES with respect to APS, transportation execution systems maketransportation plans work.They are less analytical than their planning counterparts but serve as an operationallink to the planning tools.

Warehouse Management SystemLike transportation execution systems, warehouse management systems (WMSs)execute inventory planning commands and run the day-to-day operations of a ware-

house. These systems also keep track of inventories in a warehouse.

Placing Analytical Applications on the Information Technology Map-On our ITmap, analytical applications generally reside within various stages of the supplychain at the planning level, as we can see in Figure 12.6. Some planning applicationshave operational counterparts, which are also shown. SCM stretches across manysupply chain stages. Note that some applications, such as the transportation ap-plications, can exist between any two stages in the supply chain, and not simplywhere they are shown in Figure 12.6.

The IT map helps us see the major advantages of analytical applications,which are as follows:

1. Analytical applications have very sophisticated analytical capabilities andgenerate solutions that are far superior to what could be arrived at withoutthem. Therefore, these applications can potentially greatly increase theirusers' profitability. This can be seen by analytic applications' penetration upthe vertical scale of the IT map.2. Analytical applications generally can respond in real time to problems andemergencies. For example, schedules can be instantly rerun if a machinegoes down, thereby quickly shifting production.

The Analytical Application PlayersWithin each of the analytical applications discussed, there are different leadingproviders, and we point this out where there is a clear leader. However, because this in-

dustry is relatively young, there is quite a bit of fragmentation. For the purposes of ourdiscussion, we list only the two major SCM providers (along with the ERP players) be-cause they provide the best combination of cross-stage scope and analytical capability.

, 1. i2 Technologies. i2 is the market leader in the SCM realm. i2's strength beganwith its powerful APS systems used for discrete manufacturers. i2 is particularlystrong in the high-tech industry, although it now has a very broad base of customers.

2. Manugistics. The number-two player in SCM is Manugistics, although it is fallingfurther behind i2. Manugistics' systems are best at demand planning and working withdistribution-intensive products such as consumer goods.

- 3. ERP players. Some of the ERP players are also developing SCM capabilities


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using three different approaches. SAP is developing its capabilities in-house, Oraclehas leaned toward partnering with existing SCM players (although it has developedan in-house supply chain solution as well), and Peoplesoft, J. D. Edwards, and Baanhave acquired SCM companies and are incorporating their products into the ERPsuites. At this writing, the ERP players have not made a significant dent in theanalytical applications market, as their products are behind the leaders discussed.

EVOLUTION OF ERP

In the manufacturing industry; MRP (Material Requirements Planning) becamethe fundamental concept of production management and control in the mid1970s.

At this stage BOM (Bill of Materials), which is purchase order managementthat utilizes parts list management and parts development, was in themainstream.

And this concept (MRP) unfolded from order inventory management of

materials to plant and

personnel planning and distribution planning, which in turn became MRP-II(Manufacturing Resource Planning). (DURING 80S)

This incorporated financial accounting, human resource managementfunctions, distribution management functions and management accountingfunctions.

It came to globally cover all areas of enterprise mainstay business andeventually came to be called ERP.(URING 90 S)

What Is ERP?

Enterprise Resource Planning (ERP) covers the techniques and concepts employed for

the integrated management of businesses as a whole, from the viewpoint of the effective

use of management resources, to improve the efficiency of an enterprise. ERPpackages are integrated (covering all business functions) software packages thatsupport the above ERP concepts.

Figure 1.1 shows how information is integrated within an organisation using theERP system.


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ERP software is a mirror image of the major business processes of an organiza-

tion, such as customer order fulfillment and manufacturing.

Its success depends upon reacha circumscribed ERP system isn't much betterthan the legacy system it replaces.

.ERP systems' set of generic processes, produce the dramatic improvements thatthey are capable of only, when used to connect parts of an organization and integrate

its various processes seamlessly

Reasons for the Growth of ERP Market

There is no doubt that the market for Enterprise Resource Planning (ERP) systems is in greatdemand. Industry analysts are forecasting growth rates of more than 30% for at least thenext five years. Why are so many companies replacing their key business systems? Theanswer is:

To enable improved business performance

Cycle time reduction

Increased business agility

Inventory reduction

Order fulfillment improvement

To support business growth requirements New products/product lines, new customers

Global requirements including multiple languages and currencies

To provide flexible, integrated, real-time decision support

Improve responsiveness across the organization

To eliminate limitation in legacy systems

Century dating issues

Fragmentation of data and processing

Inflexibility to change

Insupportable technologies

Maintenance mana ement


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To take advantage of the untapped mid-market (medium size organizations)

Increased functionality at a reasonable cost

Client server/open systems technology

Vertical market solutions

These are some of the reasons for the explosive growth rate of the ERP markets andthe ERP vendors.

As more and more companies are joining the race, the ERP vendors are shifting theirfocus from bigFortune 1000companies to different market segments (medium

size companies, small companies, etc.). The future will see fierce battle for market share and mergers and acquisitions for

strategic and competitive advantage.

The ultimate winner in this race will be the customer, who will get better productsand better service at affordable prices.

The Advantages of ERP

Installing an ERP system has many advantagesboth direct and indirect. The directadvantages include improved efficiency, information integration for better decision making,faster response time to customer queries, etc. The indirect benefits include better corporate

image, improved customer goodwill, customer satisfaction, and so on. The following aresome of the direct benefits of an ERP system:

Business Integration

Flexibility

Better Analysis and Planning Capabilities

Use of Latest Technology

Benefits of ERP

Installing an ERP system has many advantagesboth direct and indirect. The directadvantages include improved efficiency, information integration for better decision-making,faster response time to customer queries, etc. The indirect benefits include better corporateimage, improved customer goodwill, customer satisfaction, and so on. In this chapter we willsee some of the benefits of the ERP systems. They are:

Reduction of lead-time

On-time shipment

Reduction in cycle time

Better customer satisfaction

Improved supplier performance

Increased flexibility

Reduction in quality costs

Improved resource utility

Improved information accuracy and decision-making capability

ERP and Related Technologies

Introduction


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ERP is an abbreviation for Enterprise Resource Planning and means, the techniques andconcepts for the integrated management of businesses as a whole, from the viewpoint of theeffective use of management resources, to improve the efficiency of an enterprise.

ERP systems serve an important function by integrating separate business functionsmaterials management, product planning, sales, distribution, finance and accounting andothersinto a single application. However, ERP systems have three significant limitations:

1. Managers cannot generate custom reports or queries without help from aprogrammer and this inhibits them from obtaining information quickly,which is essential for maintaining a competitive advantage.

2. ERP systems provide current status only, such as open orders. Managersoften need to look past the current status to find trends and patterns thataid better decision-making.

3. The data in the ERP application is not integrated with other enterprise ordivision systems and does not include external intelligence.

There are many technologies that help to overcome these limitations.

These technologies, when used in conjunction with the ERP package, will help inovercoming the limitations of a standalone ERP system and thus, help the employees to makebetter decisions.

Some of these technologies are BPR,

Data Warehousing,

Data Mining,

On-line Analytical Processing (OLAP),

Supply Chain Management and so on.

With the competition in the ERP market getting, hotter and hotter, and ERP vendors searchingfor ways to penetrate new market segments and expand the existing ones, tomorrows ERPsystems will have most of these technologies integrated into them.

Business Process Reengineering (BPR)

Dr Michael Hammer defines BPR as "... the fundamental rethinking and radicalredesign of business processes to achieve dramatic improvements in critical, con-temporary measures of performance such as cost, quality, service and speed." One ofthe main tools for making this change is theInformation Technology (IT).

We have seen that the ERP systems help in integrating the various businessprocesses of the organization with the help of modern developments in IT. With a

good ERP package, the organization will have the capability of achieving dramaticimprovements in critical areas such as cost, quality, speed and so on. So many BPRinitiatives end up in the ERP implementation.

Data Warehousing If operational data is kept in the databases of the ERP system, it can create a lot of

problems. As time passes, the amount of data will increase and this will affect the performance

of the ERP system. So it is better to archive the operational data once its use is over. When I say 'the use is

over', it does not mean that the archived data is useless. On the contrary, it is one of the most valuable resource of the organization. However

once the operational use of the data is over, it should be removed from the operational


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2

Introduction

Look beyond how logistics and SCM can

influence organizational success and to

consider the issue ofsustainability as it

applies to logistics and SCM

Green issues

Economic sustainability

Reverse logistics

Sustainability to include environmental management, close-loop supply chain and abroad perspective on triple-bottom-line(3BL)

Sustainable logistics is concerned with reducing the environmental and other disbenefitsassociated with the movement of freight

10

Sustainable logistics and SCM

Supply chain redesign

Promoting scale Enhancing efficiency

Three ways in which to improve the sustainability

of logistics and supply chain system

Redesigning supply chain

Using scale to use the

negative environmental

effects of logistics

activities

Promoting various

efficiency solutions

An criteria for measuring organizational success: economic, environment and social The green revolution and supply chain redesign The link between economic growth and transport growth The role of scale in logistics and SCM Efficiency solutions Reverse logistics

Green Revolution


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The international Kyoto Protocol has called for a 60% reduction in carbon emissions by

2050 Carbon footprint: the environmental disbenefits associated with economic activities such

as the movement of freight http://www.carbonfootprint.com/index.html

Food miles: the distance by which the various components of a particular food item haveto travel before final consumption http://www.food-mileage.com/calculator/

Green product design

It is at the product design stage that the most contribution can be made towards reducinga products environmental footprint

This is sometimes referred to as green product design

Supply chain redesign Greening the supply chain:

Largely about forward planning Over 80% of carbon savings are only achievable at the supply chain design

stage, e.g.:

deciding where to locate warehouses and distribution centres deciding which transport modes to use reconfiguring distribution networks so as replace small deliveries direct

to all end customers with centralised deliveries to a hub from where endcustomers retrieve their goods

Reverse logistics encompasses a number of streams of activity: Return of end of life products Return of defective, damaged and unwanted products Return of packaging and recovery of returnable equipment such as containers,

pallets and barrels

Closed loop supply chains:those which also comprise reverse / return flows

17

Closed-loop supply chain

Material

Supply

Component

Manufacturing

Assembly or

Re-assemblyDistribution

User

CollectionInspection

SeparationDisassembly

Material

Recovery

Waste

Disposal

Recycle RemanufacturingRepair

Reuse

Disposal


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GSCM Spring 2007 Session 16 May 24

Reuse and Recycling:Reuse and Recycling:

From Supply Chains toFrom Supply Chains to

Supply LoopsSupply Loops


Lee & Billington, for example, define a supply chain as

[] a network of facilities that procure raw materials,

transform them into intermediary goods and then finalproducts, and deliver the products to customers througha distribution system.

What happens to the product after sale and deliveryis of no concern for supply chain managers

End-of-lifeproductdisposal

Productdemand &

use

Rawmaterials

mining

Primarymaterials

production

Component

manufacture

Finalproduct

assembly

Productsale anddelivery

Traditional supply chains end with the sale and delivery of the final product

From supply chains to supply loopsFrom supply chains to supply loops


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Supply loops divert end-of-life products from landfill and reprocess theseproducts, their components or their materials into secondary resources

which replace primary resources in forward supply chains.

End-of-lifeproductdisposal

Product

demand &use

Rawmaterialsmining

Primarymaterials

production

Component

manufacture

Finalproduct

assembly

Productsale anddelivery

Component

re-processing

Product

re-processing

Materials

re-processing

Eol productcollection

& inspection

Lean Thinking for the Supply ChainAlthough lean thinking is typically applied to manufacturing lean techniques and focus are applicableanywhere there are processes to improve, including the entire supply chain. A lean supply chain is onethat produces just what and how much is needed, when it is needed, and where it is needed.

The underlying theme in lean thinking is to produce more or do more with fewer resources while givingthe end customer exactly what he or she wants. This means focusing on each product and its valuestream. To do this, organizations must be ready to ask and understand which activities truly create value

and which ones are wasteful. The most important thing to remember is that lean is not simply abouteliminating wasteit is about eliminating waste and enhancing value.

The Concepts of Value and Waste

Value, in the context of lean, is defined as something that the customer is willing to pay for. Value-adding activities transform materials and information into something a customer wants. Non-value-adding activities consume resources and do not directly contribute to the end result desired by thecustomer. Waste, therefore, is defined as anything that does not add value from the customer'sperspective. Examples of process wastes are defective products, overproduction, inventories, excessmotion, processing steps, transportation, and waiting.

Consider the non-manufacturing example of a flight to the Bahamas. The value-adding part of thatprocess is the actual flight itself. The non-value-added parts of that process are driving to the airport,parking at the airport, walking to the terminal and then to check-in, waiting in line at check-in, walking tothe security check, and so on. Many times the non-value-added time far exceeds the value-added timein this type of process. Where should our improvement efforts be focusedon the non value-addedsteps or on making the plane fly faster?

Understanding the difference between value and waste and value-added and non-value-addedprocesses is critical to understanding lean. Sometimes it is not easy to discern the difference whenlooking at an entire supply chain. The best way is to look at the components of the supply chain andapply lean thinking to each one and determine how to link the processes to reduce waste.

Creating Value

Lean principles focus on creating value by:


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Specifying value from the perspective of the end customer

Determining a value system by:

o Identifying all of the steps required to create value

o Mapping the value stream

o Challenging every step by asking why five times

Lining up value, creating steps so they occur in rapid sequence

Creating flow with capable, available, and adequate processes

Pulling materials, parts, products, and information from customers

Continuously improving to reduce and eliminate waste

The value stream consists of the value-adding activities required to design, order, and provide a productfrom concept to launch, order to delivery, and raw materials to customers. To develop a value streammap for a product, you select a product family and collect process information. Then, you map the stepsin sequence and by information flows; this is called a current-state map. The current-state map providesa clear picture of the processing steps and information flow for the process as it exists today. Next, yousearch the map for improvement opportunities using the concepts of lean, and create a future-state map.This will portray a vision of the future for the process or supply chain you are creating. This future-state

map helps you to visualize the roadmap to get from the current state to the future state.

Mapping the value stream for the supply chain is a similar process. However, the current-state mapincludes product flow, transportation links, defects and delivery time and steps, and information flow.After creating the current-state map for the supply chain's value stream, supply chain partners shouldscrutinize it for bottlenecks, waste, and process improvements. They should use what they discover tocreate future-state maps for the supply chain. An ideal-state map can also be created that provides avision of how the supply chain could look if perfect integration of all components were to occur. This is ineffect an entitlement map for the supply chain process.

Here's how it works: A current-state map might indicate that flow within facilities is well defined, but thattransportation methods between facilities is creating excess inventory and is not cost effective. Thecurrent state map may also show a weakness in the information flow that is not adding value to theprocess. The future-state map should create flow between facilities, leveling pull within each facility, and

eliminating waste. The method for leveling pull might be to install frequent transport runs or milk runs.Information flow could be improved by installing a Web-based process to allow real-time flow ofinformation between all supply chain partners as demand changes. The ideal-state map of this supplychain might have a greatly compressed value system with relocated operations and short transportationdeliveries.

"Waste" Reduction

The "Waste" reduction process begins with the question "What can we do to improve?" Some answersmay include:

Stop defective products at their source

Flow processes together or change the physical relationship of components of the process

Eliminate excess material handling or costly handling steps

Eliminate or reduce pointless process steps

Reduce the time spent waiting for parts, orders, other people, or information

In manufacturing environments, these waste reductions create the benefits of reduced manufacturingcycle time, reduced labor expenditures, improved product quality, space savings, reduced inventory, andquicker response to the customer. When waste is reduced or eliminated across the supply chain, overallcycle time is improved, labor and staff costs are reduced, product quality and delivery are improved,inventories are reduced, and customer lead-times are shortened. The net effect is the entire supplychain is more efficient and responsive to customer needs.


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Components of the Lean Supply Chain

Lean Suppliers

Lean suppliers are able to respond to changes. Their prices are generally lower due to the efficiencies oflean processes, and their quality has improved to the point that incoming inspection at the next link is notneeded. Lean suppliers deliver on time and their culture is one of continuous improvement.

To develop lean suppliers, organizations should include suppliers in their value stream. They shouldencourage suppliers to make the lean transformation and involve them in lean activities. This will helpthem fix problems and share savings. In turn, they can help their suppliers and set continually declining

price targets and increasing quality goals.

Lean Procurement

Some lean procurement processes are e-procurement and automated procurement. E-procurementconducts transactions, strategic sourcing, bidding, and reverse auctions using Web-based applications.Automated procurement uses software that removes the human element from multiple procurementfunctions and integrates with financials.

The key to lean procurement is visibility. Suppliers must be able to "see" into their customers' operationsand customers must be able to "see" into their suppliers' operations. Organizations should map thecurrent value stream, and together create a future value stream in the procurement process. Theyshould create a flow of information while establishing a pull of information and products.

Lean Manufacturing

Lean manufacturing systems produce what the customer wants, in the quantity the customer wants,when the customer wants it, and with minimum resources. Lean efforts typically start in manufacturingbecause they free up resources for continuous improvement in other areas, and create a pull on the restof the organization. Applying lean concepts to manufacturing typically presents the greatest opportunityfor cost reduction and quality improvement; however, many organizations have received huge benefitsfrom lean concepts in other functions.

Lean Warehousing

Lean warehousing means eliminating non-value added steps and waste in product storage processes.Typical warehousing functions are:

Receiving

Put-away/storing

Replenishment

Picking

Packing

Shipping

Warehousing waste can be found throughout the storage process including:

Defective products which create returns

Overproduction or over shipment of products

Excess inventories which require additional space and reduce warehousing efficiency

Excess motion and handling

Inefficiencies and unnecessary processing steps

Transportation steps and distances

Waiting for parts, materials and information


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Information processes

Each step in the warehousing process should be examined critically to see where unnecessary,repetitive, and non-value-added activities might be so that they may be eliminated.

Lean Transportation

Lean concepts in transportation include:

Core carrier programs

Improved transportation administrative processes and automated functions

Optimized mode selection and pooling orders

Combined multi-stop truckloads

Crossdocking

Right sizing equipment

Import/export transportation processes

Inbound transportation and backhauls

The keys to accomplishing the concepts above include mapping the value stream, creating flow,reducing waste in processes, eliminating non-value-added activities and using pull processes.

Lean Customers

Lean customers understand their business needs and therefore can specify meaningful requirements.They value speed and flexibility and expect high levels of delivery performance and quality. Leancustomers are interested in establishing effective partnershipsthey are always seeking methods ofcontinuous improvement in the total supply chain to reduce costs. Lean customers expect value from theproducts they purchase and provide value to the consumers who they interact with.

Benefits of Lean Systems

Speed and Responsiveness to Customers

Lean systems allow a supply chain to not only to be more efficient, but also faster. As the culture of leantakes over the entire supply chain, all links increase their velocity. A culture of rapid response and fasterdecisions becomes the expectation and the norm. This does not mean that decisions are made withoutcareful thought. It simply means that a "bias for action" becomes the new corporate culture and anythingless will not be tolerated. Slow response or no response becomes the exception, rather than the rule.

Reduced Inventories

In the lean paradigm, inventory is considered waste. Many would argue this point, but manufacturing cantake place efficiently with little or no raw material, work in process (WIP), or finished goods inventory.

Many companies today produce directly into trailers and maintain no other finished goods inventory. Allquality inspections and checks are performed within the process, rather than after production is

complete. In this true make-to-order scenario, all goods are shipped directly to the next link in the supplychain when the trailer is full, and overproduction is not possible and cannot be tolerated. No space isdesignated to store finished goods. The system is not designed to carry them.

Applying one-piece flow and pull systems can reduce WIP dramatically. A Kanban or visual signal formore goods to be moved forward to the next process can accomplish this procedure. Although theultimate goal is to eliminate WIP, minimal WIP is normally the result. The elimination of bottlenecks isone goal of a lean supply chain, but a bottleneck will always exist to some degree. As a result, WIP mustalways exist in front of a bottleneck or the bottleneck operation will be starved and will stop.

Raw material inventory is a different matter. Although the leanest organizations have arranged just intime deliveries to support manufacturing, this approach requires the absolute highest degree ofcompetency and coordination within the supply chain.


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Reduced Costs

Traditional mass production tries to minimize unit costs by increasing total production over the life cycleof the product. High development costs are the result of this model. To recover the enormousdevelopment and initial capital costs sunk into the product before it was produced, mass producersforecast and run long production cycles for each SKU. Consumer preferences and variety suffer in thisscenario. Costs still need to be minimized, but not at the expense of what more sophisticated consumersnow demand.

Improved Customer Satisfaction

Lean promotes minimizing new product development time and expense. This delivers the product tomarket faster, making it easier to incorporate current requirements into the product. Lean also promotesthe use of less capital-intensive machines, tools, and fixtures, which results in more flexibility and lessinitial cost to recover. As a result, product life cycles may be shorter and product developmentsincorporated in newer versions of the product more frequently. Profitability does not suffer and brandloyalty is increased, as customers prefer to buy products and services from a perceived innovator.

Supply Chain as a Competitive Weapon

A strong supply chain enables the member companies to align themselves with each other and tocoordinate their continuous improvement efforts. This synthesis enables even small firms to participatein the results of lean efforts. Competitive advantage and leadership in the global marketplace can onlybe gained by applying lean principles to the supply chain. Thought, commitment, planning, collaboration,and a path forward are required.

Path Forward to a Lean Supply Chain

Lean is a cooperative process for survival and for success. Supply chains that want to grow andcontinue to improve must adopt lean. Lean concepts require an attitude of continuous improvement witha bias for action. The concepts of lean apply to all elements of the supply chain, including supportdepartments such as product development, quality, human resources, marketing, finance, purchasing,and distribution. The challenge is to bring all of these areas out of their traditional silos and make themwork together to reduce waste and create flow. Duplication and a lack of appropriate and timelycommunication run rampant in these traditional organizations. A lean supply chain is proactive and plansfor the unexpected by positioning all resources for effectiveness. Downturns in demand can beaddressed without layoffs or significant productivity losses.

Leaning "other" areas presents a larger challenge than it does in manufacturing. Supervisors and factoryworkers embrace change that results in making their lives less complicated and more successful. In thehierarchy of support areas, it is more challenging for the people to understand how lean can benefitthem. The answer is simple: What benefits the organization as a whole benefits the supply chain.

Because the Internet provides us with unprecedented opportunities for sharing information andconducting transactions across the supply chain, companies should have a sense of urgency aboutadopting lean concepts. But all chain partners have to be on the same playing field, and the leanconcept is intended to let everyone reach new levels of efficiency and effectiveness. Supply chainleaders should not delayit's urgent to act now to implement lean concepts in the supply chain.

SIX SIGMA

six sigma training, history, definitions - six sigma and quality management glossary

Six Sigma is now according to many business development and quality improvement experts, the mostpopular management methodology in history. Six Sigma is certainly a very big industry in its own right,and Six Sigma is now an enormous 'brand' in the world of corporate development. Six Sigma began in1986 as a statistically-based method to reduce variation in electronic manufacturing processes inMotorola Inc in the USA. Today, twenty-something years on, Six Sigma is used as an all-encompassingbusiness performance methodology, all over the world, in organizations as diverse as local government

departments, prisons, hospitals, the armed forces, banks, and multi-nationals corporations. While Six


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Sigma implementation continues apace in many of the world's largest corporations, many organizationsand suppliers in the consulting and training communities have also seized on the Six Sigma concept, topackage and provide all sorts of Six Sigma 'branded' training products and consultancy and services. SixSigma has also spawned manay and various business books on the subject. Six Sigma, it might seem, istaking over the world.

Interestingly while Six Sigma has become a very widely used 'generic' term, the name Six Sigma isactually a registered trademark of Motorola Inc., in the USA, who first pioneered Six Sigma methods inthe 1980's. The original and technically correct spelling seems to be Six Sigma, rather than 6 Sigma,although in recent years Motorola and GE have each since developed their own sexy Six Sigma logos

using the number six and the Greek sigma character s.

Six Sigma is now a global brand and something of a revolution. But what is Six Sigma?...

six sigma definitions

The answer is that Six Sigma is lots of things.

First, Six Sigma is arguably a very clever way of branding and packaging many aspects of Total QualityManagement that exist in their own right, regardless of the development of Six Sigma. Read the sectionabout Total Quality Management and 'Excellence' and you will understand this.

Six Sigma is lots of different things because it had different meanings over time, and also because it isnow interpreted in increasingly different ways. And Six Sigma is still evolving.

Motorola Inc., who first developed the methodology in the mid-late1980's and who provide extensiveSix Sigma training and consultancy services, provide the following definitions:

six sigma according to motorola

"...Six Sigma has evolved over the last two decades and so has its definition. Six Sigma has literal,conceptual, and practical definitions. At Motorola University (Motorola's Six Sigma training andconsultancy division), we think about Six Sigma at three different levels:

As a metric

As a methodology

As a management system

Essentially, Six Sigma is all three at the same time."

"...Six Sigma as a Metric: The term "Sigma" is often used as a scale for levels of 'goodness' or quality.Using this scale, 'Six Sigma' equates to 3.4 defects per one million opportunities (DPMO). Therefore,Six Sigma started as a defect reduction effort in manufacturing and was then applied to other businessprocesses for the same purpose.."

"...Six Sigma as a Methodology: As Six Sigma has evolved, there has been less emphasis on the literaldefinition of 3.4 DPMO, or counting defects in products and processes. Six Sigma is a businessimprovement methodology that focuses an organization on:


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Understanding and managing customer requirements

Aligning key business processes to achieve those requirements

Utilizing rigorous data analysis to minimize variation in those processes

Driving rapid and sustainable improvement to business processes.."

"..At the heart of the methodology is the DMAIC model for process improvement. DMAIC is commonlyused by Six Sigma project teams and is an acronym for:

Define opportunity

Measure performance

Analyze opportunity

Improve performance

Control performance.."

"...Six Sigma Management System: Through experience, Motorola has learned that disciplined use ofmetrics and application of the methodology is still not enough to drive desired breakthrough

improvements and results that are sustainable over time. For greatest impact, Motorola ensures thatprocess metrics and structured methodology are applied to improvement opportunities that are directlylinked to the organizational strategy. When practiced as a management system, Six Sigma is a highperformance system for executing business strategy. Six Sigma is a top-down solution to helporganizations:

Align their business strategy to critical improvement efforts

Mobilize teams to attack high impact projects

Accelerate improved business results

Govern efforts to ensure improvements are sustained.."

"..The Six Sigma Management System drives clarity around the business strategy and the metrics thatmost reflect success with that strategy. It provides the framework to prioritize resources for projects thatwill improve the metrics, and it leverages leaders who will manage the efforts for rapid, sustainable, andimproved business results.."

General Electric (GE), the first large-scale adopters and advocates of Six Sigma after Motorola, andconsidered by most experts to have been responsible for Six Sigma's rapidly achieved high profile,provide the following definitions of Six Sigma:

six sigma according to general electric

"...Six Sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products and services. Why 'Sigma'? The word is a statistical term that measures how far a givenprocess deviates from perfection. The central idea behind Six Sigma is that if you can measure howmany 'defects' you have in a process, you can systematically figure out how to eliminate them and get asclose to 'zero defects' as possible. To achieve Six Sigma Quality, a process must produce no more than3.4 defects per million opportunities. An 'opportunity' is defined as a chance for nonconformance, or notmeeting the required specifications. This means we need to be nearly flawless in executing our keyprocesses."

"...At its core, Six Sigma revolves around a few key concepts.


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Critical to Quality: Attributes most important to the customer

Defect: Failing to deliver what the customer wants

Process Capability: What your process can deliver

Variation: What the customer sees and feels

Stable Operations: Ensuring consistent, predictable processes to improve what the customersees and feels

Design for Six Sigma: Designing to meet customer needs and process capability..."

six sigma according to isixsigma

The Isixsigma organisation, which seems to be the biggest online 'community' of Six Sigmapractitioners, was founded in 2000, and is owned and run by a number of 'quality professionals'.Isixsigma provides the following main definition of Six Sigma (which actually serves as an introductionto several other very detailed Six Sigma definitions contained in the Isixsigma resources):

"...Six Sigma is a rigorous and disciplined methodology that uses data and statistical analysis to measureand improve a company's operational performance by identifying and eliminating 'defects' inmanufacturing and service-related processes. Commonly defined as 3.4 defects per millionopportunities, Six Sigma can be defined and understood at three distinct levels: metric, methodology andphilosophy..." July 2005.

six sigma history

Here's a brief history of Six Sigma, and the Six Sigma name. Additionally, comments I've received aboutSix Sigma contain aspects of Six Sigma history.

Since the 1920's the word 'sigma' has been used by mathematicians and engineers as a symbol for a unitof measurement in product quality variation. (Note it's sigma with a small 's' because in this contextsigma is a generic unit of measurement.)

In the mid-1980's engineers in Motorola Inc in the USA used 'Six Sigma' an an informal name for anin-house initiative for reducing defects in production processes, because it represented a suitablyhigh level of quality. (Note here it's Sigma with a big 'S' because in this context Six Sigma is a 'branded'name for Motorola's initiative.)

(Certain engineers - there are varying opinions as to whether the very first was Bill Smith or MikalHarry - felt that measuring defects in terms of thousands was an insufficiently rigorous standard. Hencethey increased the measurement scale to parts per million, described as 'defects per million', whichprompted the use the the 'six sigma' terminology and adoption of the capitalised 'Six Sigma' brandedname, given that six sigma was deemed to equate to 3.4 parts - or defects - per million.)

In the late-1980's following the success of the above initiative, Motorola extended the Six Sigmamethods to its critical business processes, and significantly Six Sigma became a formalised in-house'branded' name for a performance improvement methodology, ie., beyond purely 'defect reduction', inMotorola Inc.


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In 1991 Motorola certified its first 'Black Belt' Six Sigma experts, which indicates the beginnings ofthe formalisation of the accredited training of Six Sigma methods.

In 1991 also, Allied Signal, (a large avionics company which merged with Honeywell in 1999),adopted the Six Sigma methods, and claimed significant improvements and cost savings within sixmonths. It seems that Allied Signal's new CEO Lawrence Bossidy learned of Motorola's work with SixSigma and so approached Motorola's CEO Bob Galvin to learn how it could be used in Allied Signal.

In 1995, General Electric's CEO Jack Welch (Welch knew Bossidy since Bossidy once worked for

Welch at GE, and Welch was impressed by Bossidy's achievements using Six Sigma) decided toimplement Six Sigma in GE, and by 1998 GE claimed that Six Sigma had generated over three-quarters of a billion dollars of cost savings. (Source: George Eckes' book, The Six Sigma Revolution.)

By the mid-1990's Six Sigma had developed into a transferable 'branded' corporate managementinitiative and methodology, notably in General Electric and other large manufacturing corporations, butalso in organizations outside the manufacturing sector.

By the year 2000, Six Sigma was effectively established as an industry in its own right, involving thetraining, consultancy and implementation of Six Sigma methodology in all sorts of organisationsaround the world.

That is to say, in a little over ten years, Six Sigma quickly became not only a hugely popularmethodology used by many corporations for quality and process improvement, Six Sigma alsobecame the subject of many and various training and consultancy products and services aroundwhich developed very many Six Sigma support organizations.

six sigma central concepts

You will gather from the definitions and history of Six Sigma that many people consider the model to becapable of leveraging huge performance improvements and cost savings.

None of this of course happens on its own. Teams and team leaders are an essential part of the SixSigma methodology.

Six Sigma is therefore a methodology which requires and encourages team leaders and teams to takeresponsibility for implementing the Six Sigma processes. Significantly these people need to be trained inSix Sigma's methods - especially the use of the measurement and improvement tools, and incommunications and relationship skills, necessary to involve and serve the needs of the internal andexternal customers and suppliers that form the critical processes of the organization'sdelivery chains.

Training is therefore also an essential element of the Six Sigma methodology, and lots of it.

Consistent with the sexy pseudo-Japanese 'Six Sigma' name (Sigma is in fact Greek, for the letter 's', anda long-standing symbol for a unit of statistical variation measurement), Six Sigma terminology employssexy names for other elements within the model, for example 'Black Belts' and 'Green Belts', whichdenote people with different levels of expertise (and to an extent qualifications), and differentresponsibilities, for implementing Six Sigma methods.

Six Sigma teams and notably Six Sigma team leaders ('Black Belts') use a vast array of tools at eachstage of Six Sigma implementation to define, measure, analyse and control variation in processquality, and to manage people, teams and communications.


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When an organization decides to implement Six Sigma, first the executive team has to decide thestrategy - which might typically be termed an improvement initiative, and this base strategy shouldfocus on the essential processes necessary to meet customer expectations.

This could amount to twenty or thirty business process. At the top level these are the main processes thatenable the organization to add value to goods and services and supply them to customers. Implicit withinthis is an understanding of what the customers - internal and external - actually want and need.

A team of managers ('Black Belts' normally) who 'own' these processes is responsible for:

identifying and understanding these processes in detail, and also

understanding the levels of quality (especially tolerance of variation) that customers (internaland external) expect, and then

measuring the effectiveness and efficiency of each process performance - notably the 'sigma'performance - ie., is the number of defects per million operations (pro-rate if appropriate of course).

The theory is entirely logical: understanding and then improving the most important 'delivery-chain'processes will naturally increase efficiency, customer satisfaction, competitive advantage, andprofitability.

Easily said - tricky to achieve - which is what the Six Sigma methodology is for.

Most practitioners and users of Six Sigma refer to Motorola's early DMAIC acronym (extended since toDMAICT) as a way of reinforcing and reminding participants what needs to be done:

six sigma DMAIC and DMAICT process elements

D - Define opportunity

M - Measure performance

A - Analyse opportunity

I - Improve performance

C - Control performance, and optionally:

T - Transfer best practice (to spread the learning to other areas of the organization)

Motorola emphasises that in order for Six Sigma to achieve 'breakthrough improvements' that aresustainable over time, Six Sigma's 'process metrics' and 'structured methodology' must be extended andapplied to 'improvement opportunities' that are directly linked to 'organizational strategy'. It is difficult toargue with the logic. There is little point in measuring and improving things that have no significant

impact on the strategically important organizational processes.

Six Sigma team leaders (Black Belts) work with their teams (team members will normally be peopletrained up to 'Green Belt' accreditation) to analyse and measure the performance of the identified criticalprocesses. Measurement is typically focused on highly technical interpretations of percentage defects (bya which a 'sigma' measurement is arrived at - see the one-to-six sigma conversion scale below), and adeep detailed analysis of processes, involving organizational structures and flow-charts. Many othertools for performance measurement and analysis are used, for example the 'balanced scorecard' method,and 'process mapping', etc., depending on the processes and systems favoured by the team leaders andproject statisticians, and what needs to be measured and analysed. Six Sigma does not stipulatespecifically what analytical methods must be used - the organization and particularly the team leadersdecide these things, which is why implementation and usage of Six Sigma varies so widely, and why Six

Sigma will continue to evolve. Any analytical tool can be included within Six Sigma implementation.


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Six Sigma experts and commentators commonly refer to typical failure rates of organizations that havenot put particular pressure on their quality performance levels. Aside from anything else this at leasthelps to put the 'Sigma' terminology into a simpler mathematical context:

It is said that many ordinary businesses actually operate at between three and two and sigmaperformance. This equates to between approximately 66,800 and 308,500 defects per millionoperations, (which incidentally is also generally considered to be an unsustainable level of customersatisfaction - ie., the business is likely to be in decline, or about to head that way). Bear in mind that an'operation' is not limited to the manufacturing processes - an 'operation' can be any process critical tocustomer satisfaction, for example, the operation of correctly understanding a customer request, or the

operation of handling a customer complaint. Six Sigma is not restricted to engineering and production -Six Sigma potentially covers all sorts of service-related activities. What matters is that the operation isidentified as being strategically critical and relevant to strategy and customer satisfaction.

A measurement of four sigma equates to approximately 6,200 DPMO, or around 99.4% perfection. Thiswould arguably be an acceptable level of quality in certain types of business, for instance a roadsidecafe, but a 99.4% success rate is obviously an unacceptable level of quality in other types of business,for example, passenger aircraft maintenance.

A measurement of five sigma equates to just 233 defects per million opportunities, equivalent to a99.98% perfection rate, and arguably acceptable to many businesses, although absolutely still not good

enough for the aircraft industry.

Here's a simplified one-to-six sigma conversion scale:

one to six sigma conversion table

'Long Term

Yield'

(basically the

percentageof successfuloutputs or

operations)

%

Defects Per

MillionOpportunities(DPMO)

'ProcesssSigma'

99.99966 3.4 6

99.98 233 5

99.4 6,210 4

93.3 66,807 3

69.1 308,538 2

30.9 691,462 1

You can see from the conversions above that the sigma scale is exponential. The difference between theDPMO equating to each whole number more than doubles as you move up through the scale. By myrough calculation, 'seven sigma' would equate to about 2 defects per 100 million opportunities ( correctme if I'm wrong), which is perhaps a little over-demanding even for the aircraft industry, and that'sperhaps why nobody bothers much with anything over six sigma.


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Motorola and many other devotees of Six Sigma are increasingly at pains to point out that Six Sigma isnowadays far less concerned with the mathematical theory of the Sigma calculations, and a lot moreconcerned with the model's broader performance improvement methods, nevertheless, Six Sigma'scomplexity and variable interpretations are not helped by the difficulty in penetrating the originalmathematical reasoning behind the essential Six Sigma metric: just exactly why does Six Sigma equateto 3.4 defects per million? What are the calculations which take us from 3.4 PPM (parts per million), ie.,0.0000034%, to 'Six Sigma'? Mathematical interpretations vary apparently. (If you can explain this insimple language, and less than a couple of hundred words, please do, and I'll gladly add the explanationto this page).

There is also difficulty in phrasing a single simple definition of Six Sigma. For example, the task ofcreating a Six Sigma 'elevator speech' (in other words - explain Six Sigma inside 30 seconds) continuesto challenge many of the Six Sigma enthusiasts who frequent the growing Six Sigma web forums. If youhave a good Six Sigma 'elevator speech' please send it, and I'll gladly add it to this page.

six sigma elevator speech

Here is a suggested Six Sigma elevator speech (thanks Steven, Jun 2010): "Sigma is the symbol ofstandard deviation, a measurement of deviation of a sample from the population average. Each sigmayou depart from the average, the event, in this case failure, becomes more an more improbable. At 6sigma, the probability is about 3.5/million. But this is just the statistical side of Six Sigma. The bulk ofthe work in a Six Sigma project would be in defining failures, measuring deviations, and other activitieswhich ultimately lead to product quality. In fact, Six Sigma is used as a term for a management style,with the ultimate goal of high levels of customer satisfaction."

Can you offer a better Six Sigma elevator speech than this? If so please send it.

See also the Six Sigma elevator speech funny story below.

Aside from its definitions, the Six Sigma concept now has a life of its own, open to a range of

interpretations, beyond the control and reach of the early Six Sigma originators.

I heard someone say once that Six Sigma is a bit like Naomi Campbell - an attractive, seductive, yethighly complex model. (Also, sexy, expensive, and has been known to fall over...)

Advocates of Six Sigma, which include many highly respected people such as Jack Welch, are in nodoubt that Six Sigma can produce immense results, and quickly too. You will see claims that Motorolasaved in excess of $16bn resulting from implementing Six Sigma.

The Six Sigma model may or may not be the most popular ever, but ultimately - as with any businessmethodology - it relies not on how it is defined, it relies instead on how well people use it.

six sigma - other points of note

First and simply, Six Sigma is a quality improvement methodology.

Six Sigma has also become a generic 'brand' for a set of concepts that many organizations have used, andcontinue to use, to improve quality, and to provide quality and performance improvement services andtraining.


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In this respect Six Sigma has captured corporate imagination. Six Sigma is an immensely popularvehicle for initiating and supporting the process of organizational change. Six Sigma has become anindustry in its own right. See the names of some of the major US organizations that have adopted SixSigma in recent times.

Six Sigma is a very flexible concept: to an statistical engineer Six Sigma might be a production qualitymetric; to a customer service employee, or a CEO, Six Sigma can represent a corporate culture.

The expression Six Sigma was first used in the context of quality improvement by American Motorola

engineers in the mid 1980's.

Initially within Motorola Six Sigma was purely a quality metric that was used to reduce defects in theproduction of electronic components.

Six Sigma was then simply a statistical term that specifically referred to a performance target of 3.4defects per million operations or 'opportunities' (DPMO).

The target of 3.4 defects per million operations which was set by Motorola engineers was to an extentarbitrary and subjective. Even the calculations which arrive at 3.4 defects per million and whichcorrelate to precisely six sigma, are open to debate and different interpretation. At this level, Six Sigma

is a highly complex science, so it is not surprising that the meaning of Six Sigma had to change in orderfor it to become something that managers and employees could relate to.

Sigma is Greek for the letter 'S', and the term 'sigma' has been used for many years by statisticians,mathematicians and engineers, as a measurement unit of statistical variation.

During the mid to late 1980's Motorola developed its Six Sigma ideas, which extended to and embracedmany existing quality improvement methods and tools.

Motorola quickly realised that they could extend Six Sigma principles beyond manufacturing - to reducevariation and defects in all aspects of organizational performance.

Following Motorola's success in defining and applying the Six Sigma methodology, Six Sigma became atransferable model. The early adopters of Six Sigma aside from Motorola were Allied Signal (a largeavionics company which merged with Honeywell in 1999), and then more significantly the massive GE(General Electric) corporation; (according to most commentators the Six Sigma model was transferredbetween the Chief Executives of the respective organizations).

GE particularly trumpeted its successes and multi-billion dollars of bottom-line improvements derivedfrom Six Sigma, and by the end of the millennium Six Sigma was established as a mainstreammanagement methodology, and had been adopted by very many of the world's largest corporations.

Strictly speaking the Six Sigma brand is trade-marked in the USA and belongs to Motorola Inc..Motorola has since developed its own accredited, certified services and training for Six Sigma, withinwhat is called the 'Motorola University'.

Many other organizations and consultancies of all sizes also develop and deliver Six Sigma training, andthis activity seems not to be subject to particular mandatory control or accreditation (although Motorolacertainly do have established structures and competencies). Seemingly anyone can start up as a SixSigma consultant, just like anyone can start up as a quality management consultant, or a performancemanagement consultant.


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Six Sigma grew quickly from a statistical process for reducing defects in production, to become a'branded' and yet generic management methodology, whose elements extend far beyond the meaning ofthe original Six Sigma expression.

So, Six Sigma is very flexible, and it continues to evolve, and it's difficult to describe.

Perhaps the most objective way of looking at Six Sigma is to recognise that the Six Sigma methodologyessentially provides a framework, and importantly a strongly branded corporate initiative, for anorganization to:

train its people to focus on key performance areas

understand where the organization wants to go (its strategy, related to its market-place)

understand the services that the organization's customers need most

understand and better organize main business processes that deliver these customerrequirements

measure (in considerable detail) and improve the effectiveness of these processes.

Motorola, and as a rule other advocates of Six Sigma, say that as a management system, Six Sigma is atop-down method (ie., instigated at CEO-level) for executing business strategy by using and optimisingthese process elements:

Aligning critical improvement efforts to business strategy.

Mobilizing teams to attack high-impact projects.

Accelerating the improvement of business results.

Governing efforts (of teams and people) to achieve and sustain improvements.

Central also to Six Sigma purpose and method is increasing the clarity of business strategy and the

metrics that most reflect success within it. Other more recognizable terms for these might be KRA's(Key Results Areas) and KPI's (Key Performance Indicators).

While Six Sigma's attention to process quality variation is arguably greater than most other performanceimprovement methodologies, the basic principles of establishing and measuring critical processes are notearth-shatteringly new. What is new is arguably Six Sigma's focus (some would say obsessive focus) ondetailed analysis.

In this respect Six Sigma's emphasis on detail will logically appeal to organizations with a 'detail culture'and, organizations that have a high proportion of managers who enjoy focusing on accuracy, for examplecorporations in industries such as engineering, technology, manufacturing, finance, etc.

(I'd be interested to know of any great successes of applying Six Sigma in fields where theorganizational culture, service and managerial profiles lean more towards people, communications,relationships, creativity, etc., for example advertising and design, news and media, leisure andentertainment, sport and the arts, research and development, and teaching, training and coaching.Theoretically, Six Sigma is unlikely to prove hugely successful in environments where people are notgood at or inclined to a lot of detailed measurement, processing and checking, but I'm open to evidenceto the contrary...)

Incidentally, the above paragraph has featured on this webpage since 2005. The page is visited severalthousand times each month. As at 2011, after more than 300,000 page views, I have yet to receive any


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evidence of Six Sigma being used successfully in work environments that are not stronglyprocess/systems-driven.

I draw your attention to some of the significant aspects of Six Sigma, which have some implications fororganizational culture, and for the decision whether to adopt Six Sigma in the first place:

Six Sigma, while involving and relying on teams is a top-down methodology. This implies quite stronglycentralized operating structures and behaviors. Many organizations thrive and depend on such dynamics,but some don't.

Words like 'mobilize' and 'accelerate' and 'high-impact projects' imply that people need mobilizing, thatimprovement needs accelerating, and that people are not already engaged on high-impact projects. Ifyour organization already has lots of highly mobilised people, is successfully achieving fast-movingimprovements, and people engaged on high-impact projects, then probably Six Sigma is not for you.

Six Sigma is likely to produce far greater returns in organizations that need to achieve these thingscompared to organizations that are already doing them.

six sigma and quality management glossary

Many of these terms are very specifically related to Six Sigma. Others are used in a general 'qualitymanagement' context and also in Six Sigma. As already explained, Six Sigma tends to embrace manyother methodologies. A few of these terms are quite technical since they occur in the statistical,engineering and mathematical aspects of Six Sigma. The more complex mathematical terms andacronyms are included in this glossary not to provide detailed explanations, but instead to enable initialrecognition and a basis for further investigation, if you are so inclined. This small glossary is notexhaustive because it would take about ten years to compile an exhaustive Six Sigma and QualityManagement glossary. This is just a few highlights, some points of clarification, words of warning, itemsof mild amusement, and terms of special note..

acceptance, and acceptable quality level (ACL) - Acceptance has at least two different meanings inSix Sigma terminology, so be careful to understand which one is being referred to. Firstly, acceptancerelating to quality is the quality expectation of the customer, internal or external. Acceptable QualityLevel (ACL) means the same basically, in more formal Six Sigma-speak, and which will frequently beexpressed in terms of percentage defects. Secondly acceptance refers to the buy-in or agreement ofpeople affected by proposed actions and changes, notably stakeholders. While not strictly part of the SixSigma battery of supporting tools, I can strongly recommend Sharon Drew Morgen's facilitativecommunications concepts for anyone struggling with stakeholder acceptance (and wholesaleorganisational change as well for that matter.)

activity report - A simple tool which enables teams and team leaders to manage project management

tasks, responsibilities and timescales.

affinity diagram - A diagrammatic method of capturing, analysing and organising lots of ideas,elements, activities, etc., that together represent or influence an overall category, such as a process orissue. The brainstorming method is central to structuring an affinity diagram, and 'post-it' or sticky notesare commonly used as a way of generating and organising data. Commonly used in brainstormingsolutions during the Improve stage of DMAIC.

analysis - Analysis of all sorts of data is a critical component within the Six Sigma model, whichinvolves using various analytical methods to identify and quantify the causes of quality variation andfailure in specific processes. Various analysis perspectives are adopted, for example:


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discrete - looking at a particular failure or problem - eg., using Pareto ('80:20') or pie-charts toshow causes by percentage

continuous - mapping performance variation and types, etc., over time, using distribution graphs

process - creating detailed flow-diagrams to understand what's really going on in the process orsub-process

ANOVA, ANCOVA, MANOVA, MANCOVA - Despite first impressions these are nothing to do withRussion gymnastics or ice-skating moves. ANOVA is an acronym for analysis of variance, a specialised

variation calculation method concerned with comparing means and testing hypotheses, best left toengineers and mathematicians. So are the related methods, ANCOVA (analysis of covariance),MANOVA (multiple analysis of variance), and MANCOVA (multiple analysis of covariance). Unlessyou are an engineer or a mathematician you will almost certainly have better things to do than get togrips with this level of statistical capability. Terms such as these illustrate why we need to work in multi-disciplined teams.

balanced scorecard - A sophisticated strategic analysis and improvement methodology developed byKaplan and Norton which in its own right can sit outside Six Sigma, but which can be included withinSix Sigma methods, and in any event might be used or referenced in the context of quality andperformance improvement. The 'balanced scorecard' identifies, correlates, 'balances', measures anddrives improvement across a wide variety of factors that are deemed responsible for overall

organisational effectiveness, and for meeting customer expectations. The tool essentially translatesstrategy into operational metrics, and according to Motorola (ie., in a Six Sigma context) typicallyfeatures the perspectives of, vision, current initiatives, business processes, and business results.'Balanced Scorecard' became a generic 'brand' for business improvement in the 1990's, rather like SixSigma, although arguably not on such a grand scale.

black belt - A specific Six Sigma term to describe a team leader and one who has achieved accredited'Black Belt' qualification via an appropriate training course.

black noise/white noise - Technical terms relating to respectively non-random and random causes ofvariation.

business improvement campaign - A Motorola Six Sigma buzz-phrase, which represents a leadershipinitiative to improve the business's 'big Y's'.

business process management - A common generic expression in its own right, but also a Six Sigmaterm for the initial strategic element of Six Sigma. Six Sigma's strategic first phase is designed todevelop management's commitment to Six Sigma, and also management's active participation in the SixSigma process (which suggests why a powerful brand name for the initiative, ie., Six Sigma, is helpful..).This amounts to identifying the key processes within the organisation that determine effectively meetingcustomer expectations; then measuring the effectiveness and efficiency of the processes (notablymeasuring variation in quality and analysing the causes), and then initiating improvements in the

weakest processes, which should logically yield the greatest results and return on effort.

cause-effect diagram - Also known as the fishbone diagram, this is a generally used tool for mappingand analysing causal factors towards an end output, so that contributing factors (and weaknesses can bemore easily identified). Used especially in Six Sigma as a team brainstorming analysis tool. Called afishbone diagram because the diagram plots contributing factors along parallel diagonal lines which eachjoin a central horizontal time-line (like the back-bone) which culminates at one end with the main issueor question.

CTQ - Critical To Quality - An element within a process that has a major influence on the processquality, and typically the quality of a critical process, or it would be unlikely to be receiving Six Sigmaattention.


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defect - A vital and generic Six Sigma term for any failure in meeting customer expectation (internal andexternal customers) - any failure within the delivery process.

DFSS - Commonly used abbreviation in Six Sigma activities and communications, it means Design ForSix Sigma, and describes the method of using tools, training, measurements, and verification so thatproducts and processes are designed at the outset to meet Six Sigma requirements. A more specificversion is DMADV: Define, Measure, Analyze, Design, and Verify. Both DFSS and DMAVD areconcerned with, and emphasise the importance of, using Six Sigma principles in product/process design,not just for remedial improvements - rather advocating that prevention is better than cure. Thus, if SixSigma capability is built into new organizational systems and products when they are designed, so

performance will be better, and the need for Six Sigma remedial effort will be reduced.

DMAIC/DMAICT - Central Six Sigma process and acronym to ensure you remember it: Define,Measure, Analyse Improve, Control, more recently extended to DMAICT by others in the Six Sigmaconsulting and training communities, to Transfer (transfer best practice and thereby share learning).

DMADV - An alternative/substitute abbreviation to DFSS (Design For Six Sigma), and like DFSSDMADV is central to Six Sigma initiatives. DMADV more specifically describes a method comprisinglinked steps; Define, Measure, Analyze, Design, Verify, for ensuring that products and processes aredesigned at the outset to meet Six Sigma requirements.

frequency distribution/frequency distribution analysis or checksheet - Frequency distribution andthe checksheets and other frequency distribution measurement tools form an essential aspect of SixSigma data analysis. Identifying frequency of variation in processes is central to Six Sigma, sincecustomers are particularly sensitive to variation, arguably even more than isolated failures. Therefore thesampling and collection of data over many operations and extended time periods, and the use of this datato indicate the frequency (number of times) that a variation occurs rather than the size of isolatedfailures, is an essential perspective for truly understanding what's happening, and the causes, within anycritical delivery process. Frequency distribution analysis is an excellent antidote for any temptation torespond to an isolated failure with a knee-jerk quick fix, such as shooting the messenger or bollockingthe workers when something deeper in the process is awry.

green belt - A Six Sigma team member who has received Green Belt training and who works part-timeon Six Sigma projects under the guidance of a Black belt team leader.

just in time (JIT) - Just In Time, commonly abbreviated to JIT, describes operational or productionmethods based on minimising stock levels, the aim of which is to reduce capital employed in stock,which also has knock-on benefits to reducing storage space, decreasing dependence on logistics, easiersupply chain management, and better overall quality. Just In Time is actually a capability arising fromimprovements within a business operation, rather than a cause of improvement itself. Introducing Just InTime methods without improving efficiency and reliability necessary to support it is not viable. SinceJust In Time methods entail reducing stock levels to absolute minimum or even zero, JIT allows no roomfor error. Timing and predictibility are cruicial. JIT requires total commitment to quality and efficiencyor the supply chain and related operations break down, the costs and implications of which can easily

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