"Only the over-all review of the entire business as an economic system can give real knowledge."
Peter F. Drucker
You may have heard of Six Sigma, a process-focused strategy and methodology for business improvement. Companies such as General Electric, Honeywell, Motorola, DuPont, American Express, Ford, and many others, large and small, have been using it to improve business performance and realize millions of dollars in bottom-line savings (Honeywell 2002, Welch 2001, Young 2001). Six Sigma is a strategic approach that works across all processes, all products, and all industries. Six Sigma focuses on improving process performance to enhance customer satisfaction and bottom-line results. Motorola created the methodology in 1987, and the use of Six Sigma by others increased rapidly during the 1990s. Six Sigma remains in widespread use as of this writing.
You also may have heard how Six Sigma has been used to improve the performance of manufacturing organizations, but thought it doesn't apply to your situation. Perhaps you don't work in manufacturing. Perhaps you want to improve results in a financial services organization. If so, you must ask whether Six Sigma can be used to improve the performance of your organization, and if so, how. The answer to the first part is a resounding yes! In our experience, and that of many others, Six Sigma works in all processes, in all parts of the organization, and in all organizations, services and health care as well as manufacturing. The second part of the question (how) is answered throughout the remainder of this book.
Six Sigma "beyond the factory floor" refers to improving processes in the non-manufacturing parts of the economy (the rest of the economy beyond manufacturing, such as financial services, e-commerce, health care, and so on). For reasons discussed shortly, we refer to this as the real economy. This real economy includes businesses that do not manufacture, such as banks and law offices, non-profits (including non-profit hospitals), and all the other (non-manufacturing) parts of organizations that do manufacture products. For example, Figure 1.1 shows a systems map for a manufacturing company. You can see from this graph that manufacturing is only one of many processessuch as delivery, finance, and human resourcesneeded to operate the company. Figure 1.2 shows a systems map of a typical manufacturing facility. Here again you see that many non-manufacturing processes are needed to run the facility, such as purchasing, shipping, and maintenance.
Figure 1.1 A corporation's core processes.
Figure 1.2 A manufacturing facility.
The real economy therefore consists of all businesses that do not manufacture physical products as well as all the other functions and processes involved in manufacturing. All processes in an organization present opportunities for improvement. This is what we mean by a holistic view of Six Sigmaseeing the big picture and not allowing our deployment or results to be limited by preconceived notions about Six Sigma and where it applies.
This book is organized according to the three major levels at which organizations must consider how to adapt Six Sigma to receive its full benefits beyond the factory floor:
The deployment (strategic) levelHow to think through overall deployment of the initiative across the entire organization.
The project (tactical) levelHow to select, conduct, and close out projects in these environments.
The methods and tools (operational) levelHow to properly apply the analytic techniques of Six Sigma when faced with difficulties common beyond the factory floor, such as skewed (non-normal) cycle time distributions, or the prevalence of discrete data.
This book is intended as a guide for those just starting their Six Sigma deployment and as a reference for experienced Six Sigma practitioners such as Six Sigma leaders, Champions, Master Black Belts (MBBs), Black Belts (BBs), Green Belts (GBs), and for others who are involved in the deployment of Six Sigma and want to assess the effectiveness of such. Of course, different sections of this book are likely to be of greater value to some than to others (depending on their role with Six Sigma).
In Statistical ThinkingImproving Business Performance (Hoerl and Snee 2002), we explained the concept of statistical thinking and its key elementsprocess, variation, and data. We focused on how to use statistical thinking to improve business processesthose beyond the factory floorby reducing variation. All processes vary, and reducing variation, both between the process average and process target, and also around the process average, is a key to improving process performance. In fact, Jack Welch (Welch 2001) states that process consistency is, in many ways, more important to customers than the average level of process performance. Statistical ThinkingImproving Business Performance also contains detailed descriptions of the statistical thinking and Six Sigma tools, including how they apply in a business setting. These tools include basic problem-solving tools (scatter plot, histogram, run chart, Pareto chart, and so on), regression, experimental design, statistical inference, and so on. Since writing this book, Six Sigma is the best way we have found to actually deploy statistical thinking broadly.
In Leading Six Sigma: A Step-by-Step Guide Based on Experience with GE and Other Six Sigma Companies (Snee and Hoerl 2003), we showed how to deploy Six Sigma in an organization and how to integrate it with other improvement initiatives. We presented detailed case studies, both successful and unsuccessful, identified the key factors required for success, and presented a detailed deployment strategy. The last chapter included a set of commonly asked deployment questions; our answers to them are based on our experience deploying Six Sigma. The majority of this material was intended for those working in a manufacturing or engineering environment, although the issue of deployment in the real economy was discussed.
This book takes the methodology one step further, focusing on perhaps the most challenging use of Six Sigma: improving processes beyond the factory floor. This requires special attention because formal improvement methods have been applied less frequently here, resulting in less being known about how to improve these processes. For example, less data are typically available on real economy processes than manufacturing. Chapter 2 addresses the differences between manufacturing and real economy applications of Six Sigma more fully. Understanding these differences will help you better understand what is required to improve processes beyond the factory floor.
Those with a holistic view of Six Sigma will see the potential "big picture" impact it can offer, instead of seeing it as a narrow technical methodology used in manufacturing. They will realize that Six Sigma can and should be applied to all types of organizations, in all functions, and by all employees (or volunteers). The holistic approach also utilizes Six Sigma as a key organizational development strategy. For example, GE, 3M, DuPont, Honeywell, and several others have consciously used Six Sigma to develop their future leaders.
This first chapter discusses why Six Sigma is needed beyond the factory floor and how it can, and has, made significant impact here. The chapter then explains how Six Sigma should be viewed as part of an overall process management system. Chapter 1 concludes with a brief overview of the Six Sigma methodology and a discussion of the key roles involved.
The Impact of Six Sigma Beyond the Factory Floor
It is generally agreed that more than half the opportunity for improvement in a manufacturing company lies beyond the manufacturing function. This opportunity can be as much as 30% to 40% of sales. Improvement beyond manufacturing has been limited in the past for at least three key reasons: lack of well-defined processes, lack of process metrics and data, and lack of an appreciation for the importance of reducing variation (both internally and to the customer). The advent of Six Sigma methodology and information technology systems has changed this situation, enabling organizations of all types to focus on improvement as never before.
The need for broadening the use of Six Sigma beyond the factory floor becomes clearer when you reflect on the trends within the business world. Three key trends, closely connected to one another, are driving the world economy: migration away from manufacturing-based economies, the rapid expansion of information technology (IT), and increasing global competition. The economies of the United States, most of Western Europe, and many other developed countries transitioned from an agricultural base in the 1800s and early 1900s to a manufacturing base in the 1900s. This movement is known as the industrial revolution, and it brought profound economic and social changes.
With the rapid expansion of IT in the late twentieth and now early twenty-first century, the world economy has continued to evolve. For example, the occupation of computer scientist did not exist during the industrial revolution. International finance, statistics and operations research, music and entertainment, e-commerce, and consumer credit are just a few examples of professional fields whose rapid expansion has been enabled by advances in IT. The overall result of this evolution is that fewer and fewer people make their living by manufacturing something. So-called white-collar jobs, such as accounting, health care, and computer science, are replacing the traditional blue-collar jobs on the assembly line. Figure 1.3 (Bisgaard 2002) shows data on the growth of such jobs in the United States relative to drops in agriculture and manufacturing over the past century. Similar results apply to most developed countries in the world today. For the purposes of this graph, white collar refers to jobs involving primarily mental work (computer scientist, accountant, and so on), blue collar refers to primarily physical labor (construction, assembly line, and so on), and service refers to jobs that interact directly with customers, such as fast-food counter service, hotel receptionist, and postal delivery.
Figure 1.3 Occupational distribution of the U.S. labor force.
Agricultural jobs have been decreasing steadily for more than 100 years, and blue-collar jobs began a steady decline around 1950. Clearly, the United States no longer has a manufacturing-based economy. The real economy in the United States today, as well as in most of the developed world, involves such fields as financial services, health care, e-commerce, and logistics, but less and less manufacturing, which has tended to move offshore to low-cost locations. In fact, it has been reported that manufacturing now represents less than 20% of the U.S. gross domestic product (George 2003, 3). Productivity improvements and increased use of automation continue to reduce the number of blue-collar jobs. Some of the key players in the real economy that need to benefit from Six Sigma include the following:
Logistics and transportation
Of course, the list could go on and on.
Even within manufacturing businesses, less and less of the income and profit derive from manufacturing and selling "widgets." GE Transportation Services (GETS), for example, is a division of GE that manufactures locomotives. In the year 2000 GE Annual Report (p. 25), GETS noted that their earnings increased that year despite lower revenues, which resulted from a softening market for locomotive sales. How did GETS increase earnings in a softening market? It was "the result of a fifth consecutive year of double-digit growth in our global services business."
By taking advantage of the latest communication and information technologies, GETS has developed value-added services, such as predicting and optimizing maintenance requirements, satellite tracking of locomotives, logistics planning, and so on. Even a "smokestack industry" such as locomotives is transitioning from selling "widgets" to selling information and value-added services. The 2001 GE Annual Report (p.5) noted that the total of contractual services agreements within GE reached the $60 billion mark (yes, $60 billion!) in 2001. These service agreements continue to grow at the time of this writing. Similarly, General Motors now makes more money from financing than they do from selling cars. The public generally thinks of GM as an automaker, but it would be more accurate to think of GM as a bank that also sells cars on the side.
These examples, the data in Figure 1.3 and system maps such as Figure 1.1, highlight the fact that even within companies that manufacture and sell things, a major portion of the people and processes critical to the organization's success lie beyond manufacturing. Part of the holistic application of Six Sigma involves taking Six Sigma to each of these areas in turn, instead of restricting Six Sigma to manufacturing. Also productivity and automation gains are reducing the cost of goods and services sold. These gains further indicate that you should look beyond manufacturing and operations for improvement opportunities.
Of course, the growth of IT has also intensified global competition, and thereby provided further impetus for real economy organizations to improve. Developing countries such as India and China are expanding the technical skills of their labor force, including in such areas as computer science and software development. With the rapid expansion of the Internet and other IT tools, developing countries have created a competitive, low-cost alternative for organizations that need skilled labor. It is now feasible for a software developer in India to work remotely for an organization located in Germany, Australia, or the United States.
In fact, Time magazine (Time 2003) anticipated that U.S. financial services firms would move more than 500,000 jobs to India in the next 5 years. This job-migration figure does not include migration of jobs from other developed countries, the impact of the rapidly growing Chinese economy, or the migration from industries other than financial services. This trend is reminiscent of the tremendous impact that global competition had on manufacturing industries, such as automotives and electronics, beginning in the 1970s. Clearly, improvement is just as critical to survival in the real economy today as it was to manufacturing in the latter part of the twentieth century.
This need to improve has added an additional organizational responsibility. It used to be that we had one primary task: Come to work and perform our job to serve our customers. Global competition requires of us a second task: Improve how we do our work to better serve our customers to stay ahead of the competition. Therefore, we now have two jobs: doing our work and improving how we do our work. Six Sigma provides many of the needed road maps and tools for doing this improvement work, thereby enabling us to serve our customers more effectively and efficiently.
Fortunately, many real economy organizations are "stepping up to the plate" relative to Six Sigma and reaping impressive benefits. GE has been applying Six Sigma to financial services almost since the beginning of its Six Sigma launch. A single project in credit card collections produced almost $3 million in annual benefits (Hahn et al. 2000). Commonwealth Health Corporation (CHC), a health-care provider based in Bowling Green, Kentucky, generated more than $800,000 in savings in the first 18 months of deployment. Chapter 3 presents CHC's case study in detail. The gains realized by American Express from Six Sigma are discussed in Young (2001). Bank of America is also deploying Six Sigma and reaping significant financial benefits ($2 billion in the first two to three years; Jones 2004).
The early implementers of Six Sigma such as Motorola and AlliedSignal began their initiative in manufacturing and moved, sometimes slowly, to applying Six Sigma across the organization. Former Motorola CEO Bob Galvin stated, "The lack of initial Six Sigma emphasis in the non-manufacturing areas was a mistake that cost Motorola at least $5 billion over a four-year period" (George 2003, 3). Note that beginning Six Sigma in manufacturing, or operations of service companies, is a good strategy because process metrics are usually well developed and significant opportunities for improvement exist there. The goal should be to move the deployment of Six Sigma as quickly as possible to the rest of the organization to maximize its benefits.
Six Sigma is increasingly recognized as an effective method for changing culture (how an organization does its work and rewards its people) as well as improving the bottom line. This is particularly important for those real economy organizations that do not have the legacy of a continual-improvement culture. As discussed in Chapter 2, our experience, and that of many others, is that few organizations outside of manufacturing have such a legacy. In the process of deploying Six Sigma, leaders enhance many systems that define the organization's culture, including developing a greater focus on improvement, changing recognition and reward systems, improving communication systems, and improving performance management systems.
Many companies are seeing Six Sigma as a way to develop leaders, build teamwork, and empower employees. Companies such as GE, DuPont, 3M, Honeywell, and American Standard have required BB and GB certification for promotion up the ranks of management. Jack Welch, then CEO of GE, stated in the 2000 Annual Report, "The generic nature of a Black Belt assignment, in addition to its rigorous process discipline and relentless customer focus, makes Six Sigma the perfect training for growing twenty-first century GE leadership." Banks, hospitals, dot.coms, and other organizations operating beyond the factory floor are beginning to see and reap these types of organizational benefits of Six Sigma.
The use of Six Sigma as a leadership development tool becomes clear when you think about what a leader does. A leader enables an organization to change the way it works, to move from one paradigm to another paradigm. Changing the way people work requires changing the process they use to do their work. Six Sigma provides the strategy, methods, and tools to improve processes. A leader skilled in the use of Six Sigma is a more effective leader, thereby making Six Sigma an effective leadership development tool. This is just as true in the real economy as it is on the factory floor.