integrating balance scorecard with six sigma

1 MQPE Term Paper 2013

2013

SPJIMR, Mumbai

Aditya Garg (PGP-12-163)

Nilotpal Ray (PGP-12-198)

[ TERM PAPER- THE RESPONSE TO TQM

EVOLUTION – AND REVOLUTION ( 1975 TO 1990 ): SIX

SIGMA, BSC ]


Contents (Part-A) Abstract ......................................................................................................................................................... 1

1.0 Introduction ........................................................................................................................................... 1

2.0 Six Sigma: What is it all about? ............................................................................................................ 2

3.0 The Need for New Performance Management System- Balanced Scorecard (BSC)............................ 3

4.0 The Six Sigma Business Scorecard ....................................................................................................... 4

5.0 The Six Sigma BSC: History and Development ................................................................................... 4

6.0 Components of the Six Sigma Balanced Scorecard .............................................................................. 8

7.0 Flow Model to Design the Six Sigma Balance Scorecard .................. Error! Bookmark not defined.

8.0 Implementation and Monitoring ......................................................... Error! Bookmark not defined.

9.0 Hoshin-Kanri and Six Sigma Balance Scorecard ........................... Error! Bookmark not defined.

9.1 Inter-relation between Six Sigma Balance Scorecard and Hoshin-Kanri: ..... Error! Bookmark not

defined.

9.2 Performance Metrics for BSC- Performance, Profitability and Standards .... Error! Bookmark not

defined.

10.1 Case in Action 1 (Airlines) ............................................................................................................. 15

10.2 Case in Action 2 (US Healthcare Industry)..................................................................................... 16

11.0 Conclusion ......................................................................................................................................... 18

12.0 References .......................................................................................................................................... 19

Part B: Reference papers


Six Sigma and Balance Scorecard: The Response to TQM Evolution and

Revolution

Authors

Nilotpal Ray (PGDM-Operations Management)

Aditya Garg (PGDM-Operations Management)

S.P. Jain Institute of Management & Research, Mumbai

India

Abstract: The Balanced Scorecard Strategic Management System and Six Sigma Performance

Improvement System have been proven to be effective tools that help executives achieve

breakthrough results. Balanced Score Card is used today by companies all over the world as a

Performance Management System (PMS). Around 57% organizations of the world are currently

using this method. This technique was coined by Kaplan and Norton in 1992. These

developments are closely linked with the Business Excellence movement during the 1990’s. This

term paper provides an overview about the development of Six Sigma, and need for a new PMS,

evaluates the link between the Balanced Scorecard and Six Sigma, how a Six Sigma Business

Scorecard is developed, the components of BSC and the design, implementation and monitoring

of BSC.

Key Words: Balanced Scorecard (BSC), Six-Sigma, Performance Management System (PMS),

Business Excellence

1.0 Introduction:

The Balanced Scorecard (BSC) is a multidimensional framework for detailing, describing and

implementing strategy at all levels of an enterprise by aligning with the objectives, measures,

targets and initiatives to the strategy of the enterprise [1]

. The BSC gives a holistic picture by

aligning the financial objectives with the other perspectives such as customer, internal business

processes and people and knowledge perspectives. The BSC tends to develop strategy focused

organizations and quantifiable measures of performance.

Six Sigma is a philosophy, a structured, systematic, team driven, data driven approach to achieve

business excellence. 3.4 defects per million opportunities is what six sigma strives for in the

process improvement initiatives.

One of the mistakes organizations do is to consider BSC and Six Sigma as separate concepts. But

this is hardly the case. In fact, both these concepts go together. While BSC gives a strategic view


point and highlights the different processes to attain the strategic goals, Six Sigma identifies the

process which needs improvement and strives to improve upon those. So, both work in

conjunction with each other.

2.0 Six-Sigma: What it is all about?

All business processes are evaluated by the mean and variation of the processes. Variation is one

thing that causes trouble as it goes beyond the tolerance limits of what the customer expects. Six-

Sigma is a variance based thinking that tries to reduce variance and bring processes within the

specification limits specified by the customer. [2]

Sigma capability measures the capability of the

process to perform defect free work. A defect is anything that results in customer dissatisfaction.

The goals of six-sigma can be identified as reducing variation, reducing defects, improving yield,

enhancing customer satisfaction and consequently improving the bottom line. The typical

procedure for selection of Six Sigma projects can be seen from the following figure (Figure 1):

Figure 1: Flowchart for selection of Six Sigma Projects

Define, Measure, Analyze, Improve and Control (DMAIC) is used for processes that have not

yet reached entitlement. The steps followed in DMAIC methodology are given below (Figure 2):

fgdssf


The DMAIC approach involves management involvement, the right kind of organization

structure to facilitate the improvement, customer focus, extensive training and rewards and

recognition for successful problem solving.

The current approach for implementing Six Sigma is at two levels- the corporate and the project

level [3]

. Corporate level requires the leadership to take initiative with the middle management

assisting in the development of a business case for adapting and taking up the Six Sigma

Methodology. It involves establishing the key business performance measurements, ensuring

organizational effectiveness and establishing goals for improvement. Project level six-sigma on

the other hand relies on the DMAIC methodology to look for opportunities for improvement. It

involves extensive training for champions and sponsors, black belt and green belt candidates and

employees.

3.0 The Need for new a Performance Management System (PMS):

Performance Management Systems are the key for success and sustenance of business

organizations. Businesses need to look upon the processes where they have done exceeding well,

which needs to be sustained; and the processes which need improvement, so that it can overcome

the limitations of those processes to increase profitability. The performance management system

of an organization strongly affects people’s behavior, both inside and outside. Given the

information age competition, organizations need to use measurement systems derived from their

strategies and capabilities.

Today, around 500000 companies have heavily invested in the ISO 9000 system [4]

. But, there

are still challenges with respect to establishing a measurement system which maintains

accountability between leadership and operator. Certain companies, following Motorola,

implemented Six Sigma, but faced issues in sustaining the optimum level of performance. The

measurements are often at process level and not aggregated to corporate wellness.

The Balanced Scorecard was then developed to overcome the limitations of previous

measurement systems by supplementing the usual financial measures with other perspectives

such as customer, internal business processes and learning and growth. The BSC thus reveals

more information about an organization than the traditional financial measures did. The BSC is

applied at the strategic level and then flowed down the organization [5]

. One challenge in BSC is

the measurement of the non-financial measures as they are difficult to quantify at times.

Since Six Sigma focused on processes and didn’t reach up at the strategic level to link to

strategies and goals, and BSC focused on strategies and didn’t come down at the managers and

Figure 2: Typical Phases of a Six Sigma Process


employees level, there is a need for a new and better scorecard system that would combine the

benefits of both.

4.0 The Six Sigma Business Scorecard (BSC):

This is a unique approach to measure performance. It is a complete corporate performance

system that requires leadership to constantly inspire, managers to improve and employees to

constantly innovate. It introduces process measurement in the business for all levels of authority

and responsibility. It has incorporated the proven business practices. The scorecard can be

applied to businesses that offer either products or services. Each business is viewed as a

collection of processes; the management of business processes becomes an objective, which is

monitored using performance measurements.

The Six Sigma business scorecard allows for both measuring success and planning for future.

Planning includes 15 parameters: leadership and improvement, extent of improvement, business

opportunities analysis, organizational adjustments, vision, goals, cost competencies, system

thinking, employee’s involvement, team structure, understanding measurements, identifying

process measurements, action plan for performance, corporate plans and progress review [6]

.

Planning helps to create the system that would improve the company’s performance. This

scorecard represents the first step in the direction of fine tuning business performance for

sustainable profit growth. Emphasize growth cost to maximize profit and emphasize innovation

to maximize growth.

The effectiveness of Six Sigma Balanced scorecard has been validated by data for DOW 30

companies using criteria for America’s Most Admired Companies at Fortune Magazine’s

website.

5.0 The Six Sigma BSC- History and Development:

BSC was developed by Harvard professors, Robert Kaplan and David Norton (Kaplan and

Norton, 1992; 1996) [7]

. BSC is a strategic management device to transform strategy into actually

real action, which includes four management process dimensions: finance, customer, internal

process, and learning and growth. The features of BSC are to implement strategies in actually

daily operations and to move the focus of evaluation from financial perspective to customer,

internal process, and learning and growth, helping industries convert strategies into actual

operations. BSC not only evaluates past performance, but also creates future focus. BSC can

effectively connect evaluation systems and organizational strategies. Therefore, the concepts of

BSC have been adopted by many industries and the related research followed closely behind.

The four dimensions of BSC are depicted in Figure 3.

Combination of Six Sigma and BSC


The combination of integrating Six-Sigma with BSC was first proposed by Gerald. K. DeBusk

and Chuck Debusk (November 2011) in their Harvard Note: ‘Combining Hoshin Planning with

the Balance Scorecard to Achieve Breakthrough Results’[8]

. The following is an excerpt of

their paper:

“Many organizations today are adopting Lean and Lean Six Sigma (LSS) tools

and philosophies. Studies conducted by us revealed that four of every ten

organizations are using Lean or Lean Six Sigma. Earlier research that we

performed on LSS raised our curiosity as to what complimentary effects, if any,

exists for organizations that both LSS and Strategy or Policy Development tools

such as Balance Scorecard or Hoshin Planning which originated in Japan. If such

strategy deployment tools where being used in LSS organizations, would their use

have an effect on LSS benefits? We surveyed more than 200 members of the

Execution Premium Community (XPC), asking them about their use of LSS and

of the BSC and Hoshin Planning. The results reveal that the combination of BSC

and Hoshin Planning can be especially helpful for those organizations pursuing

LSS.”[8]

According to the article, companies like Toyota, Motorola, GE and 3M integrates Hoshin

Planning with Six Sigma [9]

. The Balance Scorecard aligns the day to day business decisions of

the company with the overall strategy of the company. The metrics of BSC are to be designed in

such a way that it reflects the growth/expansion/market development strategy of the company in

the long run. Let us take an example. Suppose a Company X is promoting Lean Philosophy both

within and outside its organization. Now let us assume that within the vertical of ‘Internal

Processes’ the company calculates production cost/unit of widget produced. Now, going by the

lean philosophy, this is not a proper measure since this will lead the company to

‘overproduction’ (thus increasing the number of widgets produced) to reduce the per unit

production cost. Thus ‘overproduction’ and ‘lean’ will become two conflicting ideas within the

company. Instead, if the company goes with minimizing the measurement of production

cost/unit man-hour saved or production cost/unit of capacity utilization, this will result in

living upto the company strategy of Lean Philosophy. Because, in both the cases, either reducing

the production cost alone, or increasing the man-hour saved or capacity utilization alone will

result in the decrease of the overall metric.

Same case happens when Six-Sigma Projects of a company is aligned to the business strategy

through BSC. Let us take another example of Company Y whose underlying business strategy is

to create shareholder value through ‘Product Differentiation’. This logically gives rise to one of

the business objectives of ‘Built in Quality within Manufacturing Processes to reduce cost of

poor quality’. Now, if we refer to the Kaplan-Norton verticals of BSC this goes into the vertical

of managing ‘internal processes’. Moving on, this gives rise to one the operational objective of

‘reducing cost of poor quality’. This in turn can give rise to one of operational metric of


‘reducing percentage defects in a particular process by 20% (say)’. This paves the way for the

scope of a Six-Sigma Project (Define + Measure phase) in this area.

This is how; every six sigma project an organization takes up, it gets aligned with the guiding

business strategy of the company. The flow-chart (Figure 4) gives an idea about how BSC and

Six- Sigma

works

hand

in hand

towards fulfilling the business strategy of a company.

Figure 3: Components of Balanced Scorecard (Kaplan, Norton 1996) [8]


Figure 4: Roadmap of Implementing BSC and Six-Sigma

Six Sigma project management and BSC:


Project management includes five major processes, “Initiating”, “Planning”, “Executing”,

“Monitoring and Controlling”, and “Closing” as well as nine knowledge areas, “Integration”,

“Scope”, “Time”, “Cost”, “Quality”, “Human resource”, “Communications”, “Risk”, and

“Procurement” [9]

. Evaluations and selections of projects, which are created through the project

initiation stage, can bring enterprises improvements and financial benefits, but both cannot be

carried out simultaneously under constraints of labor, budget, and time. Thus, it is crucial to

select projects based on certain criteria. Six Sigma project manages establishing dimensions. In

addition to the features of Six Sigma projects, to further acquire perfection and thoroughness,

one can consider quality strategies of BSC. Kaplan and Norton (1996) [8]

pointed out that BSC

can integrate organization’s mission, views, goals, and strategies into one comprehensive

evaluation structure for measuring strategy and management system. Because the themes of Six

Sigma project and organizational goals call for each other and BSC links performance

evaluation, organizational goals, and strategy together, this implies that BSC and Six Sigma

project process share similarity. BSC emphasizes quality and cost and takes into account of four

major directions including finances, customer, internal process, and learning and growth to

effectively achieve desired goals. Thus, the idea of BSC can complement the inefficiency of the

dimensions of evaluation structure. Following Figure 5 shows the proposed evaluation

framework of process performance of Six Sigma project management based on the BSC.

6.0

Figure 5: Six Sigma Project Management and BSC [9]


Components of the Six Sigma Balance Scorecard:

The Six Sigma BSC combines the various measurements into 7 elements [10]

:

1. Leadership and Profitability

2. Management and Improvement

3. Employees and Innovation

4. Purchasing and Supplier Management

5. Operational Execution

6. Sales and Distribution

7. Service and Growth

The corresponding 10 measurements include [10]

:

1. Employee recognition

2. Profitability

3. Rate of improvement in process performance

4. Recommendations per employee

5. Total spending per sales

6. Suppliers’ defect rate

7. Operational cycle time variance

8. Operational Sigma

9. New business per total sales

10. Customer satisfaction

The measurements listed above are more to do with the processes than with the function. It

strives to challenge the existing processes and improve profitability. The system is not

prescriptive though, it needs to be adapted to local conditions of a given company to match its

organizational structure and culture. Based upon the ten critical measurements, the scorecard

includes Business Performance Index (BPIn), which is the sum of weighted average of corporate

performance in various measurement areas of the scorecard. This BPIn can be used to determine

sigma level at corporate, which is missing in the traditional six sigma methodology.

7.0 Flow Model to Design the Six-Sigma Balance Scorecard:

The flow model to design an effective Six Sigma Balance Scorecard for the Organization is

depicted in the following flowchart (Figure 6). This Flow Model provides a detailed roadmap of

the BSC implementation. Ideally the BSC implementation in a company should be more

proactive rather than reactive. Integration of BSC with Six Sigma roadmap is a very crucial part

and should be done with proper strategy in place [11]

.


Commit to using the Six Sigma business scorecard by integrating Six Sigma in a revised vision

of the company. Use metrics to define target.

Understand the intent of the Six Sigma business scorecard. How it aligns to the company strategy

(Hoshin Kanri)

Create a Business Performance Index (BPI). BPI is a sum of weighted corporate performance in

various categories of the Six Sigma business scorecard. This scorecard also portrays how the BPI

can be used to determine a corporate sigma level that is missing in the Six Sigma methodology

used today.

Establish short term and long term improvement goals for a profit center or the company.

Establish measurements for each element of the Six Sigma business scorecard for each profit

center.

Establish the relationship between profitability and Six Sigma business scorecard measurements.

Develop plans to utilize technology to automate the data collection and analysis. Using ERP

systems can help in this case.

If multiple profit centers exist, establish an aggregated Six Sigma business scorecard for the

corporation

Identify key processes for improving business performance

Identify input, in-process, and output process parameters

Establish data collection methods for these process parameters

Collect data and calculate the error rate, cycle-time and cost for each department

1

2

3

4

5

6

7

8

9

10

11

12


Figure 6: Flow Model to develop Six-Sigma BSC [11]

8.0 Implementation and Monitoring:

The first step in implementing the Six Sigma business scorecard is to perform feasibility study to

identify which categories of improvement can be easily implemented and which will require

greater effort. Based on the processes that exist in a business, the leadership team must develop a

Six Sigma business scorecard that is suitable to achieve its process improvement objectives. The

successful implementing Six Sigma business scorecard includes creating awareness, building the

business model, establishing the BPI, establishing Six Sigma business scorecard measurements,

ensuring data collection capability, managing change and integrating technology and the Six

Sigma business scorecard. Implementing the Six Sigma business scorecard requires a total

leadership approach. It requires balance between production and innovation, productivity and

creativity, management and leadership, cost and revenue, personal and professional and

profitability and growth. Since the Six Sigma business scorecard is a measure of tangible and

13

14

15

16

17

18

19

Plot trend charts and present the data with respect to established goals on a weekly basis

Publish the weekly BPI and monthly Six Sigma business scorecard reports

Review business performance using Six Sigma business scorecard results

Identify measurements with the greatest variance and adverse performance


intangible accomplishments, the leaders, therefore, need to find a personality suitable way to

maintain a balance between knowledge and goodness, wealth and health, tangibles and

intangibles and profits and growth. The strategy must be developed for execution by knowing the

current capability, constraints and resources. The tool for Six Sigma includes the Six Sigma

business scorecard, Six Sigma, innovation and the 4P (Prepare, Perform, Perfect and Progress)

model of process improvement. Small businesses can make adjustments to the measurement

system based upon function and the size of the organization. The broad guidelines for

implementing an effective Six Sigma BSC goes as follows [12]

:

It is better to assign a person to be the champion for implementing and maintaining the

scorecard measurements.

An efficient data collection mechanism should be established and database in which to

enter the data should be conceptualized.

Analysis needs and reporting procedures should be mandated.

Data should be reviewed and necessary action should be taken in a timely fashion.

Six Sigma BSC should be reviewed on a monthly basis.

Measurements should be reviewed and correlated with profitability and growth and

appropriate actions should be taken wherever necessary.

Simply implementing the Six Sigma business scorecard is not enough to improve the business

performance. The business scorecard must be implemented interactively - the management and

employees must be involved in review and actions. In order to be profitable and achieve growth,

a company needs to monitor employee recognition, rate of improvement and innovation in

addition to the standard performance measurements of cost, quality and cycle time. The objective

of the review process is to ensure these indicators demonstrate the corporate performance as

planned. The purpose of the management review is for leadership collectively to understand

company’s performance look into the opportunities for further improvement, identify conflicting

priorities among various departments and assess the strategies being implemented for

effectiveness and operational execution for expected results. An effective management review

must be planned with a clear agenda. The following figure (Figure 7) shows the agenda on the

basis of which it should be formed [13]

:

Agenda for Implementation

Status and

Effectiveness

Measurement

Metrics

Corporate Sigma

Level

Continuous

Improvement

Sustainability of

BSC

Figure 7: Agenda for Implementing Six Sigma BSC in Organization [13]


The monitoring includes mainly leadership performance review, employee’s performance

review, management performance review and annual review. Under leadership performance

review, the leadership must be evaluated as a process by stakeholders, including employees. The

employee performance review includes the elements like excellence expectations, demonstrated

excellence, areas of improvement, growth plans, value plans and plans for innovations. The

management performance review incorporates assessments in the key areas of rate of

improvement, breakthrough solutions, direct value creations (including Six Sigma projects) and

leadership practices. Assessments in these areas must be performed against clearly established

expectations for improvement. The business scorecard emphasizes the role of managers to lead

the aggressive rate of improvement, generate savings and recognize employees. Besides having

annual goals for Six Sigma implementations and using the Six Sigma business scorecard,

successful implementation requires an annual review for suitability, adequacy and effectiveness

of the corporate strategies, including Six Sigma. Finally, an independent review by a third party

will ensure the integrity of the Six Sigma business scorecard.

9.0 Hoshin Kanri and Six Sigma BSC [14]

:

The Japanese translation of Hoshin-Kanri is as follows:

ho: method

shin: shiny metal showing direction

kanri: planning

A useful interpretation of the literal translation is that Hoshin-Kanri is a methodology for setting

strategic direction. It is also known as Hoshin Planning, Policy Management, and Policy

Deployment. Hoshin-Kanri (HK) is a quality planning and management method that was

developed in Japan by Yokogawa Hewlett-Packard in the early 1970s. By 1975, it had become

widely adopted by other Japanese industries. By the mid-1980s, a few Western companies, such

as Hewlett-Packard, Porter and Gamble, AT&T, Xerox Corporation, IBM, Florida Power and

Light, and Texas Instruments [14]

, had started implementing their own versions of HK. With the

exception of these few companies, its initial reception by other Western companies was less than

warm. HK called for a lot of Change Management mechanisms in the organization which most

of the companies were not flexible enough to adhere to.

Hoshin Kanri perceives the strategic management of an organization as a process and

implements process control activities to strategic management. Deming’s PDCA (Plan-Do-

Control-Act) cycle is adapted to Hoshin Kanri as the FAIR (Focus-Alignment-Integration-

Review) cycle by Witcher & Butterworth which is presented in Figure 8. FAIR is an annual

cycle, which begins when management ‘acts’ to review the previous year’s performances and

formulates the strategic focus for the coming year, which is expressed as the ‘vital few

objectives’. Then the cycle turns to the ‘plan’ phase and the vital few objectives are aligned with

annual plans and deployed by the ‘catchball process’ through the business units. The ‘do’ phase


is the integration of the vital few objectives into daily management, in other words the plans are

executed where the PDCA cycle is used continuously for taking corrective actions, process

improvement and standardization. The ‘control’ phase is a review of the annual performance.

Data from a completed cycle are fed back into the act phase, so the cycle starts over.

Figure 8: The FAIR Cycle of Strategic Management [14]

9.1 Inter-relation between Six-Sigma Balance Scorecard and Hoshin-Kanri

Balanced Scorecard and Hoshin Kanri are analogous, both seek breakthrough performance,

alignment of strategies, and integrated targets for all levels within an organization, yet there are

areas where they differ [15]

.

Area Balance Scorecard Hoshin Kanri

Focus Vision & Strategy Vision + Vital Few Objectives

Characteristics Performance based Process based

Orientation Target oriented Means oriented

Strength Structured and conceptual

framework

Catchball Process and

communicative

Weakness Top down; lack of

participation

Hard to determine the vital

few metrics


Yet, Hoshin-Kanri and BSC is very fundamentally related as shown below (Figure 9).

Figure 9: The House of Business Excellence

9.2 Performance Metrics for BSC- Performance, Profitability and Standards

Growth and profitability must be distinctly managed. Profitability depends more on internal

factors, while growth depends more on external factors. Growth is realized through strategy and

profit through execution. The Six Sigma business scorecard incorporates factors that lead to both

profitability and growth. To improve profitability key measurements are highlighted to maintain

visibility of profitability. These measurements are purchasing, operational execution, and sales

and distribution. Other measurements highlighted to drive growth include leadership, employee

innovation, service and growth. For the BPI, measurements can be broken down into profit and

growth categories as shown below [16]

:

Profit Metrics Growth Metrics

Profitability

Rate of Improvement

Total Spending per sales

Supplier’s defect rate

Operational Cycle time

Operational Sigma

Employee Recognition

Rate of Improvement

New Business

Customer Satisfaction

Additional measurements are monitored at the departmental and process levels. These include a

large number of measurements for leadership in order to promote innovation and profitability.


10.1 Case in Point 1: Airlines Industry [17]

The following illustration (Figure 10) uses airline sector example to show how the BSC

framework provides the strategic context for launching Six Sigma projects which are aimed at

closing strategic performance gaps. The left side shows the strategic objectives across the four

BSC perspectives. Moving from left to right, each strategic objective has the corresponding

measure, target and initiative.

Figure 10: Six Sigma-BSC in Airline Industry

Here, the airline wants to increase return on net assets. The strategy to do this requires quick

clearance of the plane by the ground staff who can turn around the plane quickly and get it back

in the air. This would enable the airline to consistently improve and offer lower prices. Lower

price is a customer proposition that would attract and retain customers. The airline measures fast

turnaround times by tracking the amount of time a plane spends on the ground and the

percentage of planes that depart on time. The performance targets for these are 30 minutes and

90% respectively. Now, in order to achieve and retain these targets, airline uses six sigma to

lower non-maintenance cycle time.


So, to summarize, the Balanced Scorecard describes the strategy for creating value and it aligns

resources to ensure the strategy is successfully executed. Six Sigma is the platform by which

these strategic measures are achieved using data and process improvement tools. BSC acts here

as the compass and Six Sigma as the fuel.

10.2 Case in Point 2: US Healthcare Industry [18]

Healthcare’s Value Chain

Understanding healthcare, from a business perspective, is critical to insuring the long-term

viability of a delivery system. It is also a prerequisite to applying both the balanced scorecard

approach and Six Sigma methodology. Six Sigma originally grew from a setting that was

primarily industrial and product-focused. Within this environment, operations are performed on

raw materials and as a result they become more valuable component parts. These component

parts are then built into higher-level assemblies and ultimately products of progressively

increasing value. The value chain for healthcare differs significantly from this model and is

illustrated below (Figure 11):

Figure 11: Healthcare Value Chain

The value chain for healthcare begins with highly satisfied, dedicated and well- motivated care

providers. This produces high internal quality, which relates to process steps that are felt by the

institution and are not directly felt by the patient or referring physician. An example of an

internal quality metric is the cycle time for the transcription of a radiology report. This represents

an interim step in the process that begins with the recognition of need for the exam and ends with

the authenticated report in front of the clinical decision maker. Naturally then, high external


quality follows from high internal quality. In other words, quality in those steps that are felt by

the customer leads to high customer satisfaction and loyalty. This, in turn, leads to revenue and

margin, completing the value chain.

When appropriate performance metrics are aligned along the value chain, they provide greater

insight into how the system is performing today, and what it may anticipate in the future. This

concept is illustrated below. In this illustration the organization under consideration is operating

well in its financial and customer satisfaction metrics as indicated by the upward pointing green

arrows. Employee satisfaction and internal quality are poor as indicated by the downward

pointing red arrows. As a result, external quality felt by the customer is beginning to decline as

indicated by the yellow arrow pointing sideways. It is intuitive that if this trend continues,

customer satisfaction and financial performance will begin to decline as well.

Figure 12: Cause and Effect on Value Stream

The balanced scorecard approach is based upon understanding healthcare’s value chain and

aligning both strategy and the extended delivery teams’ behavior to focus on those activities

necessary for the sustained creation of value. Six Sigma methodology is based on statistically

quantifying the impact of causal factors on the variability of results. When applied in concert,

they represent powerful tools that can be effectively deployed to align the organization’s vision,

mission, strategy and specific behaviors toward the sustained creation and delivery of value.


11.0 Conclusion:

The business scorecard strives for excellence, while standards require acceptance. To integrate

Six Sigma and ISO 9001 requirements, business leaders must understand how the ISO 9001

standard on performance will affect various elements of the business. The Six Sigma business

scorecard can be used to identify key business processes, establish measures of performance and

link those measures to the profitability of the company. As required by the ISO 9001 standard,

therefore, a procedure must be established to list a final set of measurements, collect necessary

data, analyse data, identify opportunities for improvement and formalize improvement action

using the corrective action system. Once the measurements are established, reviews of

performance levels and trends become part of the management review meeting. During this

review meeting, performance against planned goals is discussed and any necessary actions to

achieve continual improvement goals are implemented. To benefit from Six Sigma methodology

and comply with the continual requirements of the ISO 9001 standards, businesses must apply

the methodology economically. Improvements to products or services need to be linked to

corporate profitability. The improvement must accomplish in a cost-effective manner and only if

benefits outweigh the cost. Business management systems such as ISO 9001 require

implementation of measures of effectiveness, and methodology to improve. The business

scorecard can be used to monitor key business processes linking to the profit stream and Six

Sigma can be used as a methodology to improve processes. The business scorecard, therefore,

drives performance in conjunction with the business management system.

Six Sigma business scorecards is a unique approach to measure business performance which

includes consideration of all players who determine business performance in a corporation, thus

ensuring accountability, collaboration and innovation. It mandates inspiration by executives,

improvement by managers and innovation by employees. Six Sigma business scorecard delivers

an innovative execution map allowing the organizations to implement, reap and quantify the

many advantages of Six Sigma. It shows how to implement a successful and measurable Six

Sigma programme.

---


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