improving business processes with six sigma - soren bisgaard
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Improving Business
Processes With Six Sigma
Søren Bisgaard
Sigma Breakthrough Technologies, Inc.Roger Hoerl
General Electric
Ronald D. Snee
Tunnell Consulting
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Topics
• Opportunities in Business Processes• How Businesses Processes are Different
• Some Examples• What Have We Learned?
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Improving Business Processes With Six Sigma
Søren Bisgaard
Sigma Breakthrough Technologies, Inc.
AQC 2002
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Business Processes?
• Billing
• Invoicing• Production
scheduling
• Forecasting andinventory control
• Purchasing
• Sales• After sales service
• Web site development• Finance
Business Processes = All non-manufacturing operations and services
Examples:
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Occupational Distribution of the
US Labor Force
200019501900
60
50
40
30
20
10
0
Year
Bl ue-colla r W h i t
e - c o l l a r
F a r m S e r
v i c e
P e r c e n t o f W
o r k e r s
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Traditional Quality Control & Improvement
• Traditionally we have focused on
manufacturing
• In the past we have sometimes focused on
service• A (somewhat) ignored area: Non-
manufacturing business processes facilitatingthe primary manufacturing and service
processes
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A Few Characteristics of Business Processes
• High volume of transactions
• Labor intensive and costly• Transactions not well defined
• Processes usually not planned or designed; have
frequently never been subjected to rigorous study• Pivotal to the entire organization
• A large number of ways to make mistakes and high
frequency of errors and rework • Errors and delays have serious downstream costsconsequences
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Economics of Six Sigma
________________________________
Sales $100-Variable Costs $ 60
________________________________
=Contribution Margin $40-Fixed Costs $30
________________________________ =Profit $10
________________________________
Inflated because of defects,scrap rework and delays; can
be reduced with 6!
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The Bottom-Line Effect of Six Sigma ________________________________
Sales $100-Variable Costs $ 60 - 5
________________________________
=Contribution Margin $40+5-Fixed Costs $30
________________________________
=Profit $10+5 ________________________________
Any improvement in quality and efficiency
goes right to the bottom-line!
"""" A Profit Increase of (5/10)×100% = 50%A Cost reduction of (5/60)×100% = 8.3%
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Profit?“Profit is not the explanation, cause, or
rationale of business behavior and businessdecisions, but the test of their validity.”
From Peter Drucker (1973, p. 60) Management: Tasks,
Responsibilities, Practices. New York: Harper and Row
“If the archangels … sat in director's
chairs, they would still need to be
concerned with profitability....”
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Cummins Earns Profit in Worst Downturn Ever
• Oct. 11, 2001--Cummins Inc. (NYSE:CUM) today reported profitafter taxes of $3 million, or 08 per share, on revenues of $1.41
billion for the third quarter of 2001, despite a continuing economicdownturn."I'm pleased that we met our objectives for the quarter andremained profitable despite the worst market deterioration I've
experienced, in virtually every one of our North American endmarkets," said CEO Tim Solso. "Our Engine Business continues to be particularly hard hit with revenues down 20 percent from thethird quarter of 2000. However, we continue to realize the benefitsrealize the benefitsfrom our aggressive cost reduction effortsfrom our aggressive cost reduction efforts across all of our
businesses, including the benefits of our restructuring actions andSix Sigma programsSix Sigma programs."
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The Key to Understanding
How Six Sigma Concepts
Apply to Business Processes
A Process Viewpoint!
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Production Viewed as a System (Deming)
Improvement of quality envelopes the entire
system from suppliers and incoming materials tothe customer, redesign and after sales service
Suppliers
A
B
C
D
Production Assembly
Customers
Distribution
Customer research
Designand
re-design
Business Processes
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Every Process Produces
InformationThat Can Be Used
For Improvement
Process
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Example
Industrial Consumables Company*• Background: Manufacturing and sale of
products used by a wide spectrum ofindustries in their manufacturing operations
• Key Business Process: Sales forecasting is
critical to manufacturing planning,scheduling, inventory control, sales
• Problem: Forecasts are consistentlyseriously off
• Number of Products (SKU’s): >2,700
*From: Bisgaard and Kulahci (2002), Quality Engineering , 14(2), 341-344
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Reaction by BB-in-Training
BB-in-T:
– “I don’t know why I am in this class!”
– “My project does not fit into the general scheme of SixSigma”
– “ Six Sigma is about manufacturing. It has nothing tooffer for someone like me involved with a businessprocess”
• Later: BB-in-T realized that forecasting is a process. Hence it could be subject to approachestraditionally used to improve the quality of
manufacturing processes
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Forecasting Viewed As A Process
• Sales forecasting as a process:
– The process produces a “product” !
a number
– Key Quality Characteristics: Forecast accuracy and
Timeliness —> defects = poor forecasts
– Forecasters have customers, for example, the
production planning department
– The process has suppliers !
various data on pastsales, customer behavior, current inventory levels,
etc.
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Sales ForecastForecasting
Process
–
Forecast error t t y y ˆ#
1ˆ$t yt y
Forecasting Viewed As A Process
Input: Past Sales Data
Output: A Forecast
Defects: Forecast errors
Quality Control: Control and monitor forecast errors
Improvement: Reduce the
forecast errors to a Six Sigma(Cpk=2)
Learning Objective: Use feedback and
review to learn how to better forecast
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BB Project and Results
• Preliminary data analysis
• Quick fix: use EWMA’s across all 2,700 product
categories
• A simulation across 2,700 sales for the past twoyears showed a decrease in the relative forecasterror > 40%
• Further work under way to fine-tune theforecasting process
• A forecast control system can help generate anongoing Shewhart cycle of learning about how to
make better forecasts
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DMAIC: A Problem Solving Discipline
– Define: State the problem in measurable and
actionable terms; scoping
– Measure: Measure the variation of the performance
data from the process – Analyze: Find the sources of variation in the process
– Improve: Eliminate or enhance drivers of process
variation
– Control: Establishing controls to manage and hold on
to the gains
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Six Sigma Tools for
Business Processes
• Primary Tools: – Process Maps and C&E Matrix
– Flowcharts
– FMEA’s
– Pareto’s – Control Charts
– Multi-vari
– Statistical Graphics – Control Plan and SOP’s
• Increasingly used: FMEA, Gage R&R, DOE,
Regression, binary and categorical data analysis
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Six Sigma Business Applications
Roger Hoerl
General Electric R&D
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Outline
• Why worry about business processes?• A Six Sigma project in collections
• A Six Sigma project in publishing• Other examples of business projects
• Why we are missing this opportunity, and
what can be done about it
• Summary
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Why Worry About Business Processes?• The vast majority of Six Sigma applications
have been in manufacturing/engineering
• Research has shown that rework and waste costsare higher in service than in manufacturing
• The “money trail” from accounts receivable toaccounts payable is particularly promising
• Six Sigma implementations focused onmanufacturing will significantly limit bottomline impact – and leads to a “victimization”
attitude in manufacturing
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Newspaper Copy Error
Reduction Case
Define:• Goal: Reduce copy errors to less than
10/day
• Team consisted of copy editors, graphicartists, reporters, supervisors, managing
editor • Operational definition of an “error”
developed
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Operational Definition of An Error
An error is:• Any deviation from truth, accuracy, or
widely accepted standards of Englishlanguage, or
• Departure from accepted procedures
that causes delay or requires reworkinga story or graphic
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Newspaper Error ReductionCosts Associated with ErrorsCosts Associated with Errors
• Error caught at copy desk $62
• Error detected in composing room $88
• Page killed and redone $768
• Presses stopped & restarted $5000• Error published “Unknown &
Unknowable”
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Other Project Objectives
• Eliminate rework throughout the processes used tocreate stories, graphics and photos
• Free copy editors to do value-added work
• Breakdown barriers between departments
• Automate chart and table creation to eliminate
errors and reduce personnel needs
• Create a culture that emphasizes “doing it right the
first time” and personal responsibility for accuracy
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Newspaper Copy Error Reduction
Measure:• Process mapped & key variables identified
• Total errors and type of errors plotted anddisplayed daily
• Process stable averaging around 20 errors/day• Cause and effect relationships evaluated
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Newspaper Writing and Editing Process
Editor
Assigns
Story
Reporter
Researches &Writes Story
Editor Reviews Story
Copy Editor
Checks Storyand Layout
Story Sent
to Production
Story Revised as Needed
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Causes of Newspaper Errors
E R R O R S
Poo r t yp ing
N o C h e c k i n g
B ad S ource
P oor C omm un ica t ion
S l o p p y W o rk
Apathy
S l o p p y W o rk
N o R ev iew
P oor K now ledge
C hanged Qu ick l y
P l a n n e d
S pec ia l S to ry
B i g N e w s D a y
P er sona l
S i c k n e s s
Sta f f A bsen ces
P a p e r S i z e
Co ver S tory
B a d G ra m m a r
Wron g Nam e /No . /Fac ts
M isspe l l i ngs
C ause-and-Effec t D iagram
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5 10 15 20 25 30 35 40
10
20
30
DAY
T O T A L
E R
R O R S
N E W S P A P E R E R R O R S - M A R C H TO A P R IL
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Analyze Phase
• Pareto analysis of errors• Multi-vari study of controlled and
uncontrolled variables
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DEFECT CODE
1 = MISSPELLING
2 = WRONG NUMBER
3 = WRONG NAME
4 = POOR GRAMMAR
5 = LIBEL6 = WORD MISSING
7 = DUPLICATE WORD
8 = WRONG FACT
9 = OTHER
Newspaper Errors - March to April
O t h e
r s 6 7 9 8 2 4 3 1
1127303798117119153159
1.53.64.04.913.015.615.820.421.2
100.098.594.990.986.073.057.441.521.2
7 0 0
6 0 0
5 0 0
4 0 0
3 0 0
2 0 0
1 0 0
0
1 0 0
8 0
6 0
4 0
2 0
0
Defec t
C o u n t
P e r ce n t
C um %
P
e r c e n t
C
o u n t
P areto C hart for E rrors
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DEFECT CODE
1 = MISSPELLING
2 = WRONG NUMBER
3 = WRONG NAME
4 = POOR GRAMMAR
5 = LIBEL6 = WORD MISSING
7 = DUPLICATE WORD
8 = WRONG FACT
9 = OTHER
Newspaper Errors - March to August
O t h e
r s 6 9 8 2 4 3 1
8778174214255325376404
4.54.19.111.213.317.019.721.1
100.095.591.482.371.157.840.821.1
2 0 0 0
1 0 0 0
0
1 0 0
8 0
6 0
4 0
2 0
0
Defec t
C o u n t
P e r c e n t
Cum %
P
e r c e n t
C
o u n t
Pareto C hart for E rrors
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Multi-Vari Study• Process Output
Y = Total Errors per day• Controlled Variables
X1 = # PagesX2 = Live Cover (yes, no)
• Uncontrolled Variables
X3 = # Absent
X4 = Day of Week
X5 = Month of Year
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Newspaper Copy Error ReductionAnalyze• Key drivers
– # Pages – Live cover (yes, no) – Poor spelling – Wrong names, facts, and numbers – Bad grammar
• Root causes – # Pages – Live cover (yes,no)
– Reporters not using spellcheckers – Reporters not verifying accuracy – Poor grammar – Poor sources
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Newspaper Copy Error Reduction
Improve
• Implement new methods – Spellcheck how-to – Ten rules of grammar – Pyramid of trust
• Collect data for one month to measureeffect of new methods
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20 40 60 80 100
0
10
20
30
40
DAY
T O T A L E
R R O R S
N E W S P A P E R E R R O R S - M AR C H T O J U L Y
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20 40 60 80 100 120
0
10
20
30
40
D A Y
T O T A L E
R R O R S
NE W S P AP E R E RRO RS - M ARCH T O AUG US T
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Newspaper Copy Error Reduction
Improve• Implement new methods
– Spellcheck how-to
– Ten rules of grammar – Pyramid of trust
• Collect data for one month to measure effect of new
methods
• Results - no improvement!- Methods not being used
• Manager had a meeting with his staff and reinforced thenew methods of operating- Results were immediate, dramatic and
sustained
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50 100 150 20 0
0
10
20
30
40
D A Y
T O T A L E
R R O R S
NE W S P AP E R E RR O R RE DU CTIO N M ARCH - DE CE M B E R
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10 20 30 40
5
10
15
20
WEEK
A V E R A G E
E R R O R S / D A Y
N E W S P A P E R E R R O R R E D U C T IO N M AR C H -D E C E M B E R
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Newspaper Copy Error Reduction
Improve• Implement new methods
– Spellcheck how-to – Ten rules of grammar – Pyramid of trust
Control• Process measures to be monitored
– Total errors – Errors by category – % Articles checked by author – % Articles spellchecked
Results-Total errors reduced 70%
- News assistant freed up for other work
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Other Benefits
• Fewer missed deadlines
- Increased ability to handle tight deadlines
• Improver morale at copy desk
- Copy editors can make better use of their
talents and training• Re-keying of names (rework) reduced
• More efficient and less costly sources of informationfound
- Less errors and less keying time
- News assistants assigned to more valuable work
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Results of a Collections Project in GE
• Estimated savings across the business - $2MM
annually• About half in increased cash, half in reducedwrite-offs
• Senior management did not believe the estimatedsavings, asked for a 6 month trial
• After 6 months, about $1.45MM in actual savings
had been documented - $2.9MM annually• Secondary benefit: analysis determined optimal
number of collectors – resulted in additional hires
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Other Actual Financial Application Areas
• Accounts receivable
• Accounts payable
• Factoring inventories
• Closing the books• Financial auditing
• Manual account
reconciliation• Acquisitions
• Realizing revenue
• Hedging foreign currencies
• Cash flow
• Credit scoring
• Journal entry accuracy• Forecast accuracy
• Financial reporting
• Filing taxes• Managing pension funds
• Payroll accuracy
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Why Are We Missing This Opportunity?• The perception is the problem
– There’s no money outside manufacturing – The statistical tools don’t apply
– The people can’t understand Six Sigma
– You can’t get data
– It’s too hard (outside our comfort zone)
• Biggest barrier – lack of process viewpoint• With a process viewpoint, application is
obvious and straightforward
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Summary
• Manufacturing processes represent a small
portion of the total Six Sigma opportunity• Business processes have not received
sufficient attention
• Savings like the $2.9MM from thecollections project are just the “tip of the
iceberg”• Having a process mentality is the key to
identifying and capturing these savings
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Improving Business Processes Improving Business Processes
with Six Sigmawith Six Sigma
What Have We Learned?
Ronald D. Snee
Tunnell Consulting
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Six Sigma is Different and it Works?
• Bottom-Line results ($$) are created
• Active senior management leadership includingperiodic project reviews is part of the method
• Improvement tools are linked and sequenced into anoverall approach - DMAIC
• Champions, MBB, BB, and GB are trained in depth• Utilizes the scientific method and statistical thinking
• Builds on methods shown to be useful
• Integrates the “human” and “process” elements ofimprovement
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Six Sigma Integrates “Human” & “Process”
Aspects of Process Improvement
Human
• Bottom Line ($$)
• Mgt Leadership
• Culture Change• Sense of Urgency
• Customer Focus
• Project Teams
Process
• Process Improvement
• Analysis of Variation
• Disciplined Approach• Quantitative Measures
• Statistical Methods
• Process Management
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Six Sigma Works“Six Sigma works if you follow the process. If Six
Sigma is not working, you’re not following theprocess.”
AlliedSignal Manager
Six Sigma will not succeed by itself.
Management must follow the process that hasbeen proven to work. We do not know ofanyone who has followed the process and
failed.
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Opportunities Outside Manufacturing
• Supply Chain
– Logistics, Distribution, warehousing• Inventory Reduction• Transactions
- Billing cycle time, accuracy, adjustments- Accounts receivables reduction• Information Technology
– Web Site Development, IT Contracting• Finance – Audits, closing the books• Environmental – Waste disposal & emission control
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Opportunities Outside Manufacturing
• Human Resources – Hiring and staffing• Legal
– External resources, document processing• Energy Reduction – Electric and natural gas• Project Engineering
– Cycle time, change orders• Customer Service
– Order entry errors, response time• Production Planning and Scheduling
- Forecasting
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Key Characteristics of
Non-Manufacturing Processes• Culture doesn’t think in terms of processes,
variation and data
• Work requires considerable human intervention
• Processes are often complex and not well-defined• Process output is often intangible & can be unique
• Measurements are often non-existent or ill-defined
• Large amounts of paperwork are often generated
• Similar activities done in different ways
B i PBusiness Processes
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Business ProcessesBusiness Processes
• Have generally- Not been well-engineered
- Never been fully integrated or uniformlydefined.
• Problems tend to be in three areas:- Input Accuracy
- Cycle time
- Disputes Reconciliation Between the
Company and Customers
Every Process Has a Hidden Plant
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Every Process Has a Hidden Plant
A Non-Manufacturing ViewPackage
Output
Revise,Correct
Send Output
to Next StepCheck
Work
Activity
Check
Discard,Do Again
Bad
GoodBad
VeryBad
Good
ELIMINATE THE HIDDEN PLANT
E Gl Fitti P
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Eye Glasses Fitting Process
SCHEDULES
EXAM
MAKES
GLASSES
FRAME
REDESIGNREEXAM
FILLS SCRIPT
FITS FRAMES
EXAM &
PRESCRIPTION
PATIENT
USES
GLASSES
GLASSES
FIT?
PATIENT
CAN
SEE?
METRICS METRICS
•On-Time Delivery
•Cycle Time•Quality
•Lens & Frames
•Cost
•Customer Satisfaction
*Hidden Factory - Rework, Wasted Time and Material
PATIENT DOCTOR OPTICIAN LABORDER
GLASSES
YES
YESNO
NO* *
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Comments on Six Sigma Tools Used
• Gage R&R studies are typically done only forattribute measurements
- Focus is usually on the development of measurement systems
• Process specifications are often present but notwidely recognized
• Design of Experiments is not widely used todaybut its use will grow over time
• Multi-Vari studies is a very useful tool becauseof the large amount of human intervention
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We Know What to Measure
• Errors, accuracy, completeness and defects
• Cycle time• Cost ($$)
• Customer Satisfaction
Note: For some non-manufacturing processescapacity and downtime as also relevant metrics
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So What Have We Learned?
• Big opportunities exist outside of manufacturing
• Six Sigma works for non-manufacturing as well as
manufacturing processes• Non-manufacturing Six Sigma requires some
different tools, but
- There are more similarities than differencesbetween the two types of uses of Six Sigma
• Six Sigma “primes its own pump”;
- Initial investment more than paid for by the firstset of projects