“Praveen Gupta has developed an excellent methodology for aligningsenior management, supervisors, and employees in continu...
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SIX SIGMABUSINESSSCORECARDEnsuring Performance for ProfitPRAVEEN GUPTAMcGraw-HillNew York • Chicago • San Francisco • Lisb...
Copyright © 2004 by The McGraw-HIll Companies, Inc. All rights reserved. Manufactured in theUnited States of America. Exce...
To my parents, Prem Vati and Kishan Lal Gupta,Bill Smith, the inventor of Six Sigma,and the astronauts of space shuttle Co...
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For more information about this title, click here.CONTENTSBob Galvin’s Reflections         xiiiForeword     xxiPreface    ...
viii     CONTENTS Improve      36 Control     37Challenges in Implementing Six Sigma   39CHAPTER THREE. NEED FOR THE SIX S...
CONTENTS       ixComparing Balanced Scorecard and Six Sigma Business Scorecard  87CHAPTER FIVE. PLANNING FOR THE SIX SIGMA...
x      CONTENTSEstablishing the BPIn    129Establishing Six Sigma Business Scorecard Measurements     130Ensuring Data Col...
CONTENTS     xiSeven Practices of Good Leadership for Superior Execution 182  Personal Practices 182  Professional Practic...
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BOB GALVIN’SREFLECTIONS     ecause the Six Sigma Business Scorecard takes the SixB    Sigma methodology to a new level by ...
xiv     BOB GALVIN’S REFLECTIONSOn Achieving and Sustaining Superior CorporatePerformanceLeadership must provide direction...
BOB GALVIN’S REFLECTIONS   xvcept of Six Sigma, demonstrated this principle well in how hecommunicated Six Sigma. I would ...
xvi     BOB GALVIN’S REFLECTIONSparticipate in the process. People can participate in theprocess by simply mapping the way...
BOB GALVIN’S REFLECTIONS   xviipromise for the company. Leaders such as Roger Miliken ofMiliken & Company and John Pepper,...
xviii    BOB GALVIN’S REFLECTIONSOn Executives’ Accountability for ImprovementEvery month at Motorola, the top 15 to 25 ex...
BOB GALVIN’S REFLECTIONS   xixfrom Motorola that helped them bring about their recent suc-cesses. Motorola’s being recogni...
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FOREWORD     ow more than ever, corporations the world over are scram-N    bling to redefine the processes, techniques, an...
xxii    FOREWORDrevenue monitoring. The goal here is the rapid improvementin profit and sustainable business growth.    Ma...
PREFACE    his book has been written to create a comprehensive cor-T   porate performance measurement system that will ena...
xxiv     PREFACEused as a methodology for continual improvement. Six SigmaOverview and Leadership for Performance chapters...
ACKNOWLEDGMENTS   am grateful to my family (Archana, Krishna, and Avanti) forI  allowing me to write this book at odd hour...
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INTRODUCTION     usinesses today seek an effective corporate performanceB    measurement system to maximize the bottom lin...
xxviii      INTRODUCTIONmeasure of corporate wellness. Currently, there is no methodthat enables an organization to determ...
INTRODUCTION   xxixG   Acts as a catalyst for bringing out the best among employeesG   Generates energy and enthusiasmG   ...
xxx     INTRODUCTIONFIGURE I-1.   Organization of chapters in Six Sigma Business Scorecard.    With the renewed focus on l...
INTRODUCTION     xxxito evolve for the benefit of all stakeholders. For organizations tosucceed, the leadership must inspi...
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SIX SIGMABUSINESSSCORECARD
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C H A P T E R                                                                               O N ETRENDS INPERFORMANCEMEASU...
2      CHAPTER ONEboasting that its latest cars possess more electronics and com-puting power than did the Apollo 13 is an...
TRENDS IN PERFORMANCE MEASUREMENTS               3Year    GDP PPI    CPI      PI    VPI      CU TIPI E/H ($) O/H Index    ...
4                  CHAPTER ONEimplemented to reap rich benefits. Figure 1-2 shows the evolu-tion of various techniques.   ...
TRENDS IN PERFORMANCE MEASUREMENTS           5that were better, faster, and cheaper. The spiral of demandand supply change...
6     CHAPTER ONEthe model offers no system to change the course (except tochange the executives or the salespeople). Furt...
TRENDS IN PERFORMANCE MEASUREMENTS   7plan based on input from employees, the management teamexercises control over proces...
8       CHAPTER ONEquality or goodness of process and product is the overridingresponsibility of everyone in any organizat...
TRENDS IN PERFORMANCE MEASUREMENTS   9G    Design and development. Planning, inputs, outputs,     review, verification, va...
10     CHAPTER ONEstages of the process to ensure that requirements are beingmet. This might be done by controlling input ...
TRENDS IN PERFORMANCE MEASUREMENTS            11service, public responsibility beyond the organization, and con-stancy of ...
12              CHAPTER ONE    well as in several areas within each category. Each area con-    sists of a set of question...
TRENDS IN PERFORMANCE MEASUREMENTS   13leaders envisioned the state of manufacturing 20 years intothe future. They predict...
14      CHAPTER ONEBALANCED SCORECARDRobert Kaplan and David Norton introduced the BalancedScorecard in 1991 in The Harvar...
TRENDS IN PERFORMANCE MEASUREMENTS   15margins—businesses need a performance measure (or score-card) that is robust and th...
16     CHAPTER ONE                       IMPROVEMENT                       Management and                        Improveme...
C H A P T E R                                                                             T W OSIX SIGMA—ANOVERVIEWI  n th...
18      CHAPTER TWOmuch less than the yield at each process. For example, ifprocess and parts yields were at 99 percent fo...
SIX SIGMA—AN OVERVIEW   19TotalCost                           Failure Rate (%)FIGURE 2-2.   Failure rate versus total cost...
20           CHAPTER TWO        Worker-related            factors:     Lack of Purpose, Skills        and Experience      ...
SIX SIGMA—AN OVERVIEW          21processes; it is a collection of various processes that generatehidden and visible waste ...
22         CHAPTER TWO       Defect Rate,        Sigma Level        Cost Reduction     parts per million                  ...
SIX SIGMA—AN OVERVIEW   23by Motorola University, followed by training in Six Sigmamethods. Senior management then taught ...
24      CHAPTER TWOhigher profitability. The passionate implementation of the SixSigma methodology is the means, customer ...
SIX SIGMA—AN OVERVIEW    25G   Customer critical requirementsG   Project goals and objectivesG   Team roles and responsibi...
26            CHAPTER TWOG   Affinity diagramsG   Voice of the customerG   Kano’s quality analysisG   Force field analysis...
SIX SIGMA—AN OVERVIEW    27deviation, and probability distributions (i.e., the Normal distrib-ution and the Poisson distri...
28         CHAPTER TWOadd value to the product. The goal, then, is to reduce the levelof inspection or testing as much as ...
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
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Business   six sigma business scorecard ensuring performance for profit
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Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
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Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
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Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
Business   six sigma business scorecard ensuring performance for profit
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Business six sigma business scorecard ensuring performance for profit

  1. 1. “Praveen Gupta has developed an excellent methodology for aligningsenior management, supervisors, and employees in continuouslyimproving the critical drivers of sustained high performance.” —Robert F. Anderson, President, Robert F. Anderson and Associates, Inc.“This book must be studied by all who are driven to create a corpo-rate environment that attracts good employees, demands results,and produces sustained profitability.” —Lonnie C. Rogers, President, Ideal Aerosmith“The Six Sigma Scorecard simplifies implementation of the SixSigma initiative by using measurements for better, faster, and cost-effective performance throughout the company. The BusinessPerformance Index (BPIn) is an excellent tool for executives tomonitor corporate performance for growth and profitability.” —Anton Hirsch, President, Corbra Metal Works“The Six Sigma Business Scorecard makes it easy to understand thevalue of the process measurements by explaining their relationshipto profitability. Using a business scorecard is an excellent idea toensure improvement.” —Chuck Georges, Vice President of Manufacturing, Molon Motor & Coil Corporation“Synthesizing the tenets of Six Sigma methodology and the SIPOCelements with the balanced scorecard, Praveen has given leaders inall disciplines the business tools to measure and direct their effec-tiveness in terms of profitability and growth.” —Brian O’Reilly, Director of Quality & Regulatory Affairs, Dentsply Professional
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  3. 3. SIX SIGMABUSINESSSCORECARDEnsuring Performance for ProfitPRAVEEN GUPTAMcGraw-HillNew York • Chicago • San Francisco • Lisbon • London • MadridMexico City • Milan • New Delhi • San Juan • SeoulSingapore • Sydney • Toronto
  4. 4. Copyright © 2004 by The McGraw-HIll Companies, Inc. All rights reserved. Manufactured in theUnited States of America. Except as permitted under the United States Copyright Act of 1976, no partof this publication may be reproduced or distributed in any form or by any means, or stored in a data-base or retrieval system, without the prior written permission of the publisher.0-07-143147-0The material in this eBook also appears in the print version of this title: 0-07-141730-3All trademarks are trademarks of their respective owners. Rather than put a trademark symbol afterevery occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefitof the trademark owner, with no intention of infringement of the trademark. Where such designationsappear in this book, they have been printed with initial caps.McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales pro-motions, or for use in corporate training programs. For more information, please contact GeorgeHoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069.TERMS OF USEThis is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensorsreserve all rights in and to the work. Use of this work is subject to these terms. Except as permittedunder the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may notdecompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon,transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it withoutMcGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use;any other use of the work is strictly prohibited. Your right to use the work may be terminated if youfail to comply with these terms.THE WORK IS PROVIDED “AS IS”. McGRAW-HILL AND ITS LICENSORS MAKE NO GUAR-ANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OFOR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMA-TION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE,AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUTNOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR APARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the func-tions contained in the work will meet your requirements or that its operation will be uninterrupted orerror free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inac-curacy, error or omission, regardless of cause, in the work or for any damages resulting therefrom.McGraw-Hill has no responsibility for the content of any information accessed through the work.Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental,special, punitive, consequential or similar damages that result from the use of or inability to use thework, even if any of them has been advised of the possibility of such damages. This limitation of lia-bility shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tortor otherwise.DOI: 10.1036/0071431470
  5. 5. To my parents, Prem Vati and Kishan Lal Gupta,Bill Smith, the inventor of Six Sigma,and the astronauts of space shuttle Columbia,for their ethics, vision, and sacrifice, respectively.
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  7. 7. For more information about this title, click here.CONTENTSBob Galvin’s Reflections xiiiForeword xxiPreface xxiiiAcknowledgments xxvIntroduction xxviiCHAPTER ONE. TRENDS IN PERFORMANCEMEASUREMENTS 1Technology and Globalization 1Macroeconomic Measures 2Evolution in Performance Measurements 3Juran’s Financial and Quality Trilogies 5Business Trilogy 6ISO 9000 Quality Management System 7Process Thinking 9Malcolm Baldrige National Quality Award Guidelines 10Balanced Scorecard 14Six Sigma Business Scorecard 14CHAPTER TWO. SIX SIGMA—AN OVERVIEW 17Complexity and Performance 17Cost of Poor Performance 18Basics of Six Sigma 21Traditional Approach to Six Sigma 22The Breakthrough Approach to Six Sigma 23 Define 24 Measure 26 Analyze 31 vii Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  8. 8. viii CONTENTS Improve 36 Control 37Challenges in Implementing Six Sigma 39CHAPTER THREE. NEED FOR THE SIX SIGMABUSINESS SCORECARD 43Missing Rate of Improvement 45Insufficient Process Performance Measurements 46Deming’s 14 Points 49Measurement Challenges with Quality Systems 50 Limits of ISO 9000 50 Shortcomings of Six Sigma Measurement 53 Limits of the Balanced Scorecard 54Measurements According to The Goal 56Developing a New Measurement System 56CHAPTER FOUR. THE SIX SIGMA BUSINESSSCORECARD 59Business and Leaders 59Current Accounting Systems 61Information Age Paradigm 61SIPOC Analysis for Constraints 63Managing the Profitability Process 65External Factors 66Process-Based Measurements 67Six Sigma Business Scorecard 67Business Processes to Consider 68Elements of the Six Sigma Business Scorecard 69 1. Leadership and Profitability 71 2. Management and Improvement 73 3. Employees and Innovation 76 4. Purchasing and Supplier Management 78 5. Operational Execution 79 6. Sales and Distribution 83 7. Service and Growth 83Six Sigma Business Scorecard Measurements 84Business Performance Index (BPIn) 85Corporate DPU and DPMO 86Corporate Sigma Level 87
  9. 9. CONTENTS ixComparing Balanced Scorecard and Six Sigma Business Scorecard 87CHAPTER FIVE. PLANNING FOR THE SIX SIGMABUSINESS SCORECARD 89Leadership and Improvement 89Extent of Improvement 90Business Opportunity Analysis 91Organizational Adjustments 92Vision 94Goals 95Core Competencies 96Systems Thinking 96Employees’ Involvement 97Team Structure 98Understanding Measurements 99Identifying Process Measurements 100Action Plan for Performance 103Corporate Plans 106Progress Review 106CHAPTER SIX. SIX SIGMA BUSINESSSCORECARD DEVELOPMENT 109Profitability Visibility 111Measurement Failures 112Features and Benefits of the Six Sigma Business Scorecard 114Impact of Customer Requirements on Measurements 115Factors Influencing Profitability 117Growth and Profitability 118Ownership for Performance 120Step-by-Step Development of the Six Sigma Business Scorecard 121Sample Measurements 123BPIn Example 124CHAPTER SEVEN. IMPLEMENTING THE SIXSIGMA BUSINESS SCORECARD 127Creating Awareness 128Building the Business Model 128
  10. 10. x CONTENTSEstablishing the BPIn 129Establishing Six Sigma Business Scorecard Measurements 130Ensuring Data Collection Capability 132War on Waste 134Managing Change 135Integrating Technology and the Six Sigma Business Scorecard 138CHAPTER EIGHT. ADAPTING THE SIX SIGMABUSINESS SCORECARD TO SMALL BUSINESSES 141Six Sigma Business Scorecard and Business Size 141Implementing in a Small Business 144CHAPTER NINE. MONITORING PERFORMANCEUSING THE SIX SIGMA BUSINESS SCORECARD 147Management Review 147Leadership Performance Review 150Employees’ Performance Review 153Management Performance Review 154Compensation for Performance 157Communication with the Community 158Annual Review 158CHAPTER TEN. PERFORMANCE, PROFITABILITY,AND STANDARDS 161Dow Jones Industrial Average Companies 161Performance and Profitability 162Measurements for Growth and Profitability 165Balancing the Six Sigma Scorecard for Growth and Profitability 166Business Performance Index (BPIn) 168Managing for Profitability 171 Managing Sales 171 Reducing Costs 172Facilitating Growth 174Inspiring for Innovation 175CHAPTER ELEVEN. LEADERSHIP FORPERFORMANCE 177Leadership Challenges 177Lessons in Leadership 180
  11. 11. CONTENTS xiSeven Practices of Good Leadership for Superior Execution 182 Personal Practices 182 Professional Practices 183Leadership Expectations 183Leadership Role Models 185Leadership Characteristics According to the MBNQA Guidelines 187Leadership Improvement 189CHAPTER TWELVE. SIX SIGMA SCORECARDVALIDATION 191The Ten BPIn Measurements 192 1. Employee Recognition (Percentage of Employees Recognized by CEO) 193 2. Profitability 193 3. Rate of Improvement in Process Performance 194 4. Recommendations per Employee 194 5. Total Spending/Sales 195 6. Suppliers’ Defect Rate 195 7. Operational Cycle Time Variance 196 8. Operational Sigma 197 9. New Business/Total sales 197 10. Customer Satisfaction 198Application of BPIn to Dow 30 Companies 198Correlation between BPIn and Profitability Performance 200CHAPTER THIRTEEN. INTEGRATING THESIX SIGMA BUSINESS SCORECARD ANDQUALITY MANAGEMENT SYSTEMS 203Six Sigma Methodology for Continual Improvement 206Six Sigma Business Scorecard for Effectiveness 206Integrating the Six Sigma Business Scorecard with ISO 9001 208 Cost Containment 208 The Improvement Methodology 209 Steps to Integrate Six Sigma and ISO 9001 213Conducting Good Internal Audits 215Benefits of Integrating ISO 9001 and Six Sigma 216REFERENCES 219Index 223
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  13. 13. BOB GALVIN’SREFLECTIONS ecause the Six Sigma Business Scorecard takes the SixB Sigma methodology to a new level by creating perfor-mance standards, it must incorporate input from Bob Galvin,Chairman Emeritus of Motorola, Inc. Bob is the first CEOwho has implemented Six Sigma companywide. During myassociation with Motorola over about 20 years I have lookedup to Bob and his team of executives for lessons in leadership. In 1988 the Leadership section of the Malcolm BaldrigeNational Quality Award (MBNQA) guidelines was based onBob’s leadership practices when he was CEO of Motorola. Hisexemplary performance as a leader is still recognized andsought after worldwide. He has a reputation as a visionary.Although he’s retired and spends time learning to play thecello and maintaining his energy through athletics, Bob con-tinues to provide leadership advice on various aspects of busi-ness and to various sectors, including the U.S. government.Bob is involved in several projects to keep his ever-learningmind active in providing value for society and guidance toMotorola. I sought Bob’s thoughts about the Six Sigma BusinessScorecard and corporate performance in the current businessenvironment. His personal vitality, the depth of his convic-tions, and his enthusiasm for sharing ideas are evident in hisreflections. xiii Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  14. 14. xiv BOB GALVIN’S REFLECTIONSOn Achieving and Sustaining Superior CorporatePerformanceLeadership must provide direction in bits and pieces in such away that it stimulates activities. Leaders must often engage inanecdotal, relevant, and contributory activities. For example,Motorola developed a team competition (TC) that was adoptedfrom Miliken & Company. It created the same type of mental-ity that permeates a football team competing in the SuperBowl. The TC provided an opportunity for teams to get togetherand showcase their winning attitudes and successes. Theseevents are large sessions where people really get excited aboutsharing their work and are enthusiastically led by their CEO. Such sportslike competitions provide reward and personalstimulation and encourage employees to achieve superior per-formance. Leaders cheering for their teams demonstrate theircommitment to competitive and superior results throughoutthe corporation.On the CEO’s Role in Achieving the Desired CorporatePerformanceAchieving superior performance is personal. The CEO andother high-level executives must commit themselves toimproving their personal quality and the people they influ-ence. For example, a phone company executive who attendeda Motorola Briefing (to share the experience of winning theMBNQA) decided to improve his personal quality and perfor-mance. He enhanced the way he did his job by speaking morenicely to people and becoming punctual for meetings. As aresult of these personal changes, in one of his next meetings,meeting attendees all got together and finished the meetingone minute before it was supposed to start! Quality is translatable. Whether it is a vice president, amanager, a crew supervisor, or a supervisor, personal vitalitymust be demonstrated in a way that appeals to the employees.Therefore, once the improvement initiative is in motion, it isunstoppable because of the vital spirit of everyone involved.For example, Bill Smith at Motorola, who taught me the con-
  15. 15. BOB GALVIN’S REFLECTIONS xvcept of Six Sigma, demonstrated this principle well in how hecommunicated Six Sigma. I would invite people and ask whatthey were doing only to discover that a lot of neat things forprocess improvement were occurring that I could learn (fromemployees such as Bill Smith). As for the skeptics, we do not need to do anything withthem. They discover for themselves that if they are left out,they will no longer be vital members of the team. At the per-sonal level, these concepts are simple to implement. We mustteach employees how to map jobs, determine the time neededto do them, identify opportunities for improvement, and applystatistical thinking and simple tools that have been embracedby people like you and me. As for the link between quality and profitability, I firmlybelieve that the link is evident. It must be absolutely clear thatwhen we make fewer mistakes and prevent latent defects frombeing shipped to customers, the savings are directly transfer-able. The improvement must lead to lower costs, faster delivery,and higher customer satisfaction. In the Motorola corporateauditing department, when the process was mapped and under-stood better, auditors realized that the audits could be done in10 to 20 percent of the time they previously took. Regarding CEOs or executives who do not see the directlink between poor quality and profitability, I say they must beblind. They may need a little arm twisting. If they do not workout, they must leave the company. The disposition processmust be clearly communicated. The boss must evangelize SixSigma or the improvement process; otherwise, it will not be asuccessful initiative. CEOs can communicate their message about qualitythrough case histories, success stories, and anecdotes aboutexperts. Jack Germain, Bill Smith, and Dick Buetow, all lead-ers in quality, were credible people based on their experienceand contributions in their respective professional areas. Theywere believable people. I never expected any of my people to be perfect. I wantedthem to at least listen to what the leadership was saying and
  16. 16. xvi BOB GALVIN’S REFLECTIONSparticipate in the process. People can participate in theprocess by simply mapping the way they do their work and dis-covering opportunities for breakthrough. For example, peoplein the patent office were doing a fine job. However, as theyparticipated in the Six Sigma process, they discovered that thetime used to file patents could be reduced significantly. Many quality gurus have already taught us that qualitynever costs money. However, quality improvement, or directlylinking to profitability, may need awakening. I hope thatSix Sigma Business Scorecard will awaken lots of peopleand be able to change them with help from several “BillSmiths.” Art Sundry led that awakening at Motorola when he stoodup at a management meeting and proclaimed, “Our qualitystinks!” People like Sundry have credentials. He was a suc-cessful leader who still desired to improve. He kept looking foropportunities to improve and places to find some tools to helphim improve. Improvement in performance is an aggregationof a lot of little details. Different people take different stimuli. At Motorola, wehappened to be lucky that we made a point of having an opendialogue in officers’ meetings. At such meetings the chief mustlisten instead of talk. People begin to respond when the leader-ship listens. We do not change over a weekend. Because of theopen communication environment, Bill Smith had the courageto present his idea about Six Sigma, and listeners were willing toentertain it. In such an environment, officers know what needsto be done, take risks, and challenge the existing processes.They find a champion, nurture the seeds of success, andmultiply that success into many successes. Bill Smith wanted to see me, and he took the risk to do so. Iimmediately listened to him, and when I could not understandhis hypothesis, I asked him to come again the next morning.On Sustaining the Corporate PerformanceThe CEO of a company is like the captain of a team. If a CEOcannot stimulate the team, he or she does not hold high
  17. 17. BOB GALVIN’S REFLECTIONS xviipromise for the company. Leaders such as Roger Miliken ofMiliken & Company and John Pepper, ex-CEO of Proctor andGamble, bring in 10 to 15 like-minded individuals who havesimilar beliefs. The leader becomes a zealot and goes aboutpromoting his or her quality religion throughout the company.The demeanor and conduct of the institution where qualityhas emerged radiate throughout the entire corporation. Asquality improves, financial measures improve. By giving atten-tion to all, people recognize that employees’ contributions area much-appreciated phenomenon. The CEO must listen andreact to employees’ ideas. Speaking of attention, Motorola developed an excellenteducation program through Motorola University. The objectivewas to get employees into the classroom for communicatingcorporate beliefs, to learn the new processes, and for encour-aging team competition, where good ones share success storiesfor others to follow. Personal visibility is a human need. AtMotorola we even invited suppliers to learn about ourimprovement process. All said they also wanted to be bettersuppliers. Institutionalizing corporate beliefs, values, andgoals throughout the theater of operations is critical to sus-taining long-term performance. When the CEO’s belief per-meates each and every employee, the results will surprise us,as we experienced at Motorola from 1987 to 1992.On Creating a Sense of Urgency to Achieve SuperiorFinancial ResultsI set my own deadlines for achievement, and my people had tosatisfy their objectives. If someone does not understand theobjectives, then the leader has to work with the person.Sometimes we make changes in personnel if the objectivesand the current employee skill set appear to be divergent. Financial measures take care of themselves. If we map theprocess and do the work in the most effective way, we end uphaving good results. Such an approach brings down the cost,is appreciated by the customers, and is reason enough forrepeat business and even more business.
  18. 18. xviii BOB GALVIN’S REFLECTIONSOn Executives’ Accountability for ImprovementEvery month at Motorola, the top 15 to 25 executives met.One was designated to be the main speaker and to present thebest idea to improve quality in his or her area. For that meet-ing, the executive became a teacher, sharing ideas with his orher counterparts. Whatever the “religion” preached at thecompany, one must accept it or go to another “church.”On Thoughts about a Participative Management ProgramWe first learned about the participative management processearly, in the 1960s. We took the essence of it, refined it in theMotorola way, and implemented it. This process allowedemployees and groups to establish stretch goals to generatesavings or execute their tasks better. The savings were sharedwith employees of the group. This process did wonders for us.We created numerous pockets of excellence and success sto-ries. Employees earned a significant percentage of their salarydue to the savings they realized for Motorola. The CEO Quality Award was created to recognize theextraordinary successes of a team or an individual who has sig-nificantly improved a process, leading to higher customer sat-isfaction or less waste of resources. For people who receivedthe CEO Quality Award, it was a very important award, as thestandards to achieve this award were very tough.On Motorola TodayThe Six Sigma and process improvement initiatives wereattenuated in the mid-1990s due to company growth.However, they are being restored currently. The way they arebeing applied today is somewhat different. The program isnow called Six Sigma Digital. People who are advocating itand living it are very enthusiastic about it. There is a personalvitality to the entire program that comes through ChrisGalvin, Chairman and CEO, and Mike Zafirovski, Presidentand COO. They have truly personalized it. Interestingly, the leaders at GE, Honeywell, Citibank, andother companies all recognize that they have learned something
  19. 19. BOB GALVIN’S REFLECTIONS xixfrom Motorola that helped them bring about their recent suc-cesses. Motorola’s being recognized is a rewarding experience.On Thoughts about the Six Sigma Business ScorecardAn important word is flexibility. Any scorecard must not pre-sent a rigid construct. The scorecard must allow flexibility toexcite the human mind. It is much easier to influence peoplewho are involved in the process. I believe people will read Six Sigma Business Scorecard, getexcited about something in it, and generate many ideas forperformance improvement. For example, using the title ofChief Growth Officer instead of Chief Technology Officermakes sense. That is a clever idea. It makes sense to bring thebusiness plan mentality to the technology front.
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  21. 21. FOREWORD ow more than ever, corporations the world over are scram-N bling to redefine the processes, techniques, and strategiesthey need to survive in an age of uncertainty. The sterlingstocks of the 1990s, tarnished by world strife, ethical aberra-tions, miscalculation, and complacency, are in need of a newframework for survival. Praveen Gupta provides just that bymerging two powerful performance improvement processes,Six Sigma and the Balanced Scorecard, to create Six SigmaBusiness Scorecard. I worked with Praveen at Motorola University for severalyears. His experience there, at other parts of Motorola, andAT&T Bell Laboratories before that, and his current role as aSix Sigma performance consultant make him well qualified tocomment on the fluid approaches needed in our constantlychanging corporate climates. Both Six Sigma and the BalancedScorecard have been used historically to manage functions andoperations. By blending these processes, Praveen takes theirpower to the next level, challenging us to redirect our use ofthese tools to the measurement of the value-added activitiesof our efforts. Rather than purely statistical processes, Praveenprovides a roadmap for improving profitability and involvingemployees intellectually, by demanding dramatic improvementfrom organization leaders. By implementing the tools offered in Praveen’s model, thereader should expect more than process improvement and xxi Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  22. 22. xxii FOREWORDrevenue monitoring. The goal here is the rapid improvementin profit and sustainable business growth. Many winners of national and regional quality awards havegone on to stumble because they focused on process improve-ment, defect reduction, and cost reduction without aligningthose efforts with customer satisfaction, employee develop-ment, business growth, and profit improvement. The SixSigma Business Scorecard places new emphasis on the latter. I applaud Praveen for leading business outside of the linesby developing this dynamic hybrid. His powerful formulademands that institutional leadership be held accountable forachieving dramatic rates of improvement, while investing inthe intellectual capabilities of all employees. I am sure thatyou will enjoy and learn as much as I did from The Six SigmaBusiness Scorecard. It is an important work that offers keysolutions to the challenges of our times. A. William Wiggenhorn Chief Learning Officer CIGNA Philadelphia, Pennsylvania
  23. 23. PREFACE his book has been written to create a comprehensive cor-T porate performance measurement system that will enableleadership to balance profitability and growth. Having workedwith many CEOs, owners, presidents, and general managers,I have had the opportunity to observe that visibility of contrib-utors to profitability has been lost. There lies an ocean ofinformation unutilized in the absence of a business model thatidentifies components of profitability and establishes measure-ment standards. Six Sigma Business Scorecard offers a new approach toestablishing a corporatewide measurement system that willenable leadership to monitor a company’s performance againstexpected performance. Customers expect better, faster, andcheaper; the Six Sigma Business Scorecard promotes theserequirements. The Business Performance Index (BPIn) allowsan organization to determine the “sigma” level as a relativemeasure of performance. This is the first time a model forestablishing corporate sigma level has been developed as aleading indicator of corporate performance. The first four chapters in the book establish a baseline anddefine the Six Sigma Business Scorecard. The next four chap-ters focus on implementing the Six Sigma Business Scorecardsystem. Chapters 9–12 focus on monitoring performanceusing the Scorecard. The final chapter integrates the ISO9001:2000 and Six Sigma methodology where the scorecardis used to establish measures of effectiveness and Six Sigma is xxiii Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  24. 24. xxiv PREFACEused as a methodology for continual improvement. Six SigmaOverview and Leadership for Performance chapters have beenincluded to maximize the benefits derived from the Six SigmaBusiness Scorecard. This book expounds on Leadership for inspiration,Managers for improvement, and Employees for innovation. Tosustain profitability and growth, a clear responsibility forgrowth has been identified as Chief Growth Officer (CGO),who is responsible for internal and external research anddevelopment. The target audience for this book includes leaders, man-agers, supervisors, and employees who are responsible forachieving superior results and making their business or depart-ment perform better, faster, and cost-effectively on a continualbasis. Six Sigma Business Scorecard presents the revolutionarymethod for determining corporate sigma level that wasemployed successfully by Motorola in the early 1990s.Corporations who have been implementing Six Sigma need amethod to determine the corporate sigma level. This bookdoes just that.
  25. 25. ACKNOWLEDGMENTS am grateful to my family (Archana, Krishna, and Avanti) forI allowing me to write this book at odd hours, and to manyfriends and colleagues for listening to my unsolicited andpainful ideas. My sincere thanks to Frank Brletich and CarynPenru for their review, recommendations for, and edit of themanuscript. Thanks to Rajiv Varshney for jazzing up the figuresand Rajeev Jain, Jim McNulty, Barb Schultz, and Terry Luczakfor their thoughtful discussions. The book would not have passed beyond the thoughtprocess without knowing Ken McCombs, Senior Editor atMcGraw-Hill. Ken has been phenomenal in believing in theSix Sigma Business Scorecard concept and in helping patientlyduring the development of this book. The staff at McGraw-Hillhas done a wonderful job of making Six Sigma BusinessScorecard a reality. I am thankful to Bob Galvin, Chairman Emeritus, Motor-ola, Inc., for sharing his views with readers of this book, andBill Wiggenhorn, Chief Learning Officer, Cigna, for reviewingthe manuscript and preparing the Foreword. Bob Galvinwas the first CEO to launch Six Sigma at Motorola, and BillWiggenhorn was the catalyst for institutionalizing Six Sigma atMotorola. I am honored to receive encouragement from thesetwo great leaders. xxv Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
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  27. 27. INTRODUCTION usinesses today seek an effective corporate performanceB measurement system to maximize the bottom line. Withthe advent of the Internet, ongoing globalization, and stan-dardization in management systems, business leaders mustfocus on how to measure performance to monitor their con-tinued viability and success. Many existing performance mea-surement systems were designed to support business practicesand to monitor progress. With shrinking margins and competi-tive pressures, however, corporate performance measurementsystems must do more than monitor. They must identifyopportunities for optimizing profitability and growth, withoutpitting one against the other. The idea is to use performancemeasures to add value, instead of simply measuring for a for-mality. That is precisely what the Six Sigma BusinessScorecard is designed to do. The Six Sigma Business Scorecard combines the Six Sigmamethodology for dramatically improving customers’ delightwith the Balanced Scorecard method for achieving financialobjectives. The Six Sigma Business Scorecard utilizes strategyto maximize profitability and growth, accelerate improvement,foster leadership accountability, and encourage employeeinvolvement. It builds on proven methodologies and offers anew method for measuring corporate performance. Filling inthe blanks that have been left open by the other measurementsystems or methodologies, the Six Sigma Business Scorecardis integrated into a Business Performance Index (BPIn), a xxvii Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  28. 28. xxviii INTRODUCTIONmeasure of corporate wellness. Currently, there is no methodthat enables an organization to determine its overall perfor-mance level. The Six Sigma Business Scorecard methodologyhighlights the responsibilities for corporate performance andestablishes a formula for determining the sigma level of anorganization. The purpose of the Six Sigma Business Scorecard istwofold: (1) to identify measurements that relate key processmeasures to a company’s profitability, making the opportuni-ties so visible that they are difficult to ignore, and (2) to accel-erate the improvement in business performance. Optimizingthe profitability, cost, and revenue variables is a primary pur-pose of the Six Sigma Business Scorecard. The salient features of the Six Sigma Scorecard includethe following:G Provides a new model for defining a corporate sigma levelG Aligns with the business’s organizational structureG Maintains visibility of cost, revenue, and profitabilityG Includes leadership accountability and rate of improvement The Six Sigma Business Scorecard is a great model forestablishing a common target in terms of corporate defects perunit (DPU), defects per million opportunities (DPMO) andSigma. In the absence of such a target, corporate leaders areunable to focus and suffer from ineffective implementation ofSix Sigma. The Business Performance Index provides a one-number measure of corporate performance in terms of Sigmathat can be used as a benchmark for driving future improve-ments. The benefits of the Six Sigma Business Scorecardinclude the following:G Provides a target for performance improvementG Enables a business to drive dramatic improvementG Promotes the intellectual participation of all employeesG Forces changes in an organization on a continual basis
  29. 29. INTRODUCTION xxixG Acts as a catalyst for bringing out the best among employeesG Generates energy and enthusiasmG Reduces cost and improves profits Throughout the book, a business has been considered as acollection of business processes, irrespective of their output,products, or services. Therefore, the Six Sigma BusinessScorecard can be applied to all organizations. It has beenadapted for even small businesses based on the feedback fromsmall business owners. The book is meant to be a documentedmethodology to implement a practical corporate performancemeasurement system that provides some predictable indicatorsand identifies opportunities for improvement. To benefit fromthe Six Sigma Business Scorecard, business leaders must bewilling to think creatively and make necessary organizationalchanges to balance profitability and growth. The organizationof Six Sigma Business Scorecard is shown in Figure I-1. The Six Sigma Business Scorecard includes 13 chapters thatlead step by step through the implementation process. Differentorganizations will face different challenges in implementingthe Six Sigma Business Scorecard, depending upon their com-plexity and level of commitment to improving profitability andgrowth. Many in the leadership cadre believe that profitabilityand growth have an adversarial relationship. The current busi-ness environment encourages maximization of one or theother. However, to survive and thrive, businesses must balanceboth profitability and growth. The Business Performance Index has been validatedbased on estimation and public information about the com-panies on the Dow Jones Industrial Average Index and severalcompanies on a one-to-one basis. BPIn has shown correla-tions with performance. BPIn would not be significantlyaffected by minor errors in the measurement system. Toimprove a company’s BPIn, that is, profitability and growth,the company must improve dramatically in all areas of busi-ness led by the leadership, facilitated by management, andexecuted by employees.
  30. 30. xxx INTRODUCTIONFIGURE I-1. Organization of chapters in Six Sigma Business Scorecard. With the renewed focus on leadership for corporate perfor-mance, the Six Sigma Business Scorecard can be used as atool that will allow an organization’s leadership to keep prof-itability in sight, involve employees intellectually, and demanddramatic improvement from the management team. Achievingprofitability and growth requires a unique recipe for eachbusiness. The Six Sigma Business Scorecard allows that recipe
  31. 31. INTRODUCTION xxxito evolve for the benefit of all stakeholders. For organizations tosucceed, the leadership must inspire, managers must improve,and employees must innovate. This combination of roles willproduce strong teamwork, corporate synergy, and excitementand resonating results that are visible and felt by everyone inthe organization. Having been involved with the Six Sigma methodology fromits early days, I believe no corporation monitors Sigma level oroverall performance index. With the Six Sigma BusinessScorecard and BPIn, businesses can now determine the corpo-rate wellness index and Sigma level that should be a leadingindicator of the financial performance. Given that The Six Sigma Business Scorecard offers a newmethodology, there will be opportunities for improvement andfurther refinement in the methodology. The author plans tomonitor companies that successfully implement the Six SigmaBusiness Scorecard and those that struggle against imple-menting it. The author would be greatly honored to receiveany feedback for further refinement of the Six Sigma BusinessScorecard at praveen@qtcom.com.
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  33. 33. SIX SIGMABUSINESSSCORECARD
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  35. 35. C H A P T E R O N ETRENDS INPERFORMANCEMEASUREMENTS o survive and grow, a business enterprise must meet itsT stated objectives. How do we know if a business is meetingits goals? Just as we go to a doctor for a checkup to confirm ourphysical well-being, a business also needs monitor its health.It needs to measure its performance frequently to evaluate itspast performance and identify areas where it must improve inthe future. Historically, as supply geared up to meet the rising demandfor consumer products, the productivity of an enterprisebecame the most important performance measure. As the gapbetween supply and demand decreased and competitionincreased, customers had better choices, and they begandemanding more features and better service. Customer demandpropelled companies to innovate and diversify in order to grow,and businesses became more complex. Productivity alone thusbecame an insufficient measure of business performance.TECHNOLOGY AND GLOBALIZATIONThe advent of transistors was the next big innovation in busi-ness. Transistors accelerated the growth of computing andinformation technology, leading to applications that helped pro-duce products and services that were cheaper, more accurate,and of higher quality. A 1998 automobile print advertisement 1 Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  36. 36. 2 CHAPTER ONEboasting that its latest cars possess more electronics and com-puting power than did the Apollo 13 is an example of howstriving for increases in product functionality has led to moretechnological advancements. These technology developmentsfundamentally changed the way business is done. With technology, distances have grown shorter, and theworld has become one large market. The exponential advance-ments in telecommunications and Web-based technologyreduced the virtual travel time between two places to mereseconds. In other words, information can be exchanged almostanywhere around the world within seconds. These advance-ments helped to reduce the effect of time zone differencesand cultural barriers, and distributed production worldwide. Aglobal company in the apparel market with retail stores in theUnited States may have its products produced in factories inChina, may manage its business with Enterprise ResourcePlanning software coded in Israel, and may have its customercall center staffed by representatives in India. The global integration and increasing competition also createdchallenging business dynamics. For example, the electronicsindustry’s explosive growth and competitive pressures resulted inreduced margins despite high innovation and excellence in per-formance. The true challenge is to achieve growth through inno-vation and excellence while maintaining high profitability. In addition to changes brought about by technology andglobalization, businesses face an ever-evolving landscape offrequent mergers and acquisitions, competition from paralleland substitute products, and threats from buyers and suppliers.Excelling in this environment requires a comprehensivereporting system that can accurately read the market’s pulse. Aperformance measurement system (e.g., a report card orscorecard) that provides feedback for timely response, as wellas monitoring and enhancement purposes, must exist.MACRO ECONOMIC MEASURESThe U.S. economy is a classic example of a feedback systemconstantly monitored through a set of measures (see Figure 1-1).
  37. 37. TRENDS IN PERFORMANCE MEASUREMENTS 3Year GDP PPI CPI PI VPI CU TIPI E/H ($) O/H Index GI Profits ($B) (000) (%) ($B) ($B) 1970 1.04 39.3 38.8 4.1 56.3 81.1 58.7 3.23 67 152.4 28.5 1980 2.8 88 82.4 10.2 30.2 81.5 79.7 6.66 80.4 477.9 92.5 1990 5.8 119.2 130 19.6 40.6 82.3 98.9 10.01 95.4 861.7 110.1 2000 9.9 138 172.2 30.2 47.9 82.1 147.5 13.75 101.4 1767.5 275.6GDP: Gross Domestic Product CU: Capacity UtilizationPPI: Producer Price Index TIPI: Total Industrial Production IndexCPI: Consumer Price Index E/H: Earnings per HourPI: Personal Income O/H: Output per HourVPI: Vendor Performance Index GI: Gross InvestmentFIGURE 1-1. Measures of U.S. economic performance, 1970–2000.(Strawser, 2001.)These national economic indicators are signals that investors,business, and government respond to in order to encouragelong-term growth of the U.S. economy. The U.S. federal gov-ernment, for example, reacted with tax and interest rate cutsin 2002 to spur the economy after measures such as the GrossDomestic Product (GDP) growth rate, unemployment, andcapital spending reflected a slowing economy. The collectionof data, analysis, and corrective action must occur a shorttime after the actual event to counter undesired outcomes.EVOLUTION IN PERFORMANCEMEASUREMENTSAfter World War II, several national economies grew signifi-cantly, leading to a global competitive environment. From time-motion studies to quality improvement tools, businessesdeployed methods to improve their performance. Beginning inthe 1970s, Japanese automakers challenged U.S. industry bydeploying quality management tools taught by J. M. Juran,Edwards Deming, Phil Crosby, Genichi Taguchi, and others.In the 1980s, other ways to promote process and performancestandards were created, such as the ISO 9000 qualitymanagement system developed by the International Organizationfor Standardization (ISO) and the Malcolm Baldrige NationalQuality Award (MBNQA) guidelines established by the U.S.Motorola-pioneered Six Sigma methodology and successfully
  38. 38. 4 CHAPTER ONEimplemented to reap rich benefits. Figure 1-2 shows the evolu-tion of various techniques. The purpose of these new quality management techniqueswas to improve the performance of business processes. Theprocess control charts developed by quality pioneer Dr. WalterShewhart brought together the disciplines of statistics, engineer-ing, and economics to improve the consistency of productionprocesses. Design for Manufacturability helped improvereproducibility, recognizing the importance of consideringcost, quality, and manufacturing characteristics early in aproduct’s design stage. The ISO 9000 system improved inter-relationships between business functions. Benchmarking helpedin competitive positioning by measuring comparative operatingperformance and identifying best practices. Six Sigma acceler-ated the rate of improvement. Lean manufacturing increasedprocess agility, and innovation introduced new products faster.The improvements in business performance also led to anincrease in customer expectations and demand for products 100% Rate of Improvement 6␴Effectiveness Process Management Systems 75% In-process Design for Manu. (DFM) Statistical Controls In-process Controls Quality Control 50% In-line Inspection Medieval 1920s 1960s 1980s 1990s times Time lineFIGURE 1-2. Performance control methods.
  39. 39. TRENDS IN PERFORMANCE MEASUREMENTS 5that were better, faster, and cheaper. The spiral of demandand supply changed the paradigm from a focus on quantity toa focus on quality and functionality. To meet customer expectations for better value and share-holder expectations for bigger profits, a new system for perfor-mance measurement and improvement must evolve. Fromfinancial to process measures, a balanced approach isrequired—an approach that encompasses strategic, opera-tional, and leadership functions.JURAN’S FINANCIAL AND QUALITYTRILOGIESJ. M. Juran developed the Financial and Quality Trilogies (seeFigure 1-3), which have three aspects: planning, control, andimprovement. The Financial Trilogy elements of planning, con-trol, and improvement all end up at sales—planning for sales,controlling sales, and increasing sales—leading to a strategicsales plan. The sales plan includes sales by segments, budgetsallocated to achieve those sales, margin goals, resourcerequirements, distribution requirements, and discount models.The CEO or equivalent typically develops this strategic salesplan, which is reviewed quarterly to see how well it is beingexecuted and to develop follow-up action items. The Financial Trilogy works well in a supply-driven environ-ment, but it has limitations. When results are not achieved, Control Control Leader Sales Quality Plans a. Financial b. Quality c. Business Trilogy Trilogy TrilogyPlan Improve Plan Improve Management EmployeesSales Sales Quality Quality Controls ImproveFIGURE 1-3. Financial and QualityTrilogies. ( Juran, 1998.)
  40. 40. 6 CHAPTER ONEthe model offers no system to change the course (except tochange the executives or the salespeople). Furthermore, theFinancial Trilogy does not include all employees, relate tooperational performance, or drive internal improvement. Inaddition, when the market forces change in the presence ofever-increasing competition, such a model creates chaos,stress, and poor performance because it leaves many workersout of the loop rather than encouraging the intellectualinvolvement of all workers across departmental boundaries. The Quality Trilogy elements of planning, control, andimprovement involve strategic quality planning, process con-trols, and product improvement. The Quality Trilogy is typicallythe responsibility of the quality manager or equivalent, whoplans for quality through data analysis; controls the qualitythrough inspection, test, and repair; and improves productquality through programs such as Total Quality Management(TQM). All aspects of the Quality Trilogy are managed by thequality department in a subservient relationship to management.Because the quality manager is held responsible for defectiveproducts, one challenge with the quality trilogy is that it pointsblame to the quality department for production problems. Inother words, it lacks accountability and leadership. In addi-tion, history has shown that conventional quality programs donot show a significant impact on profitability; hence theyoften look like investments without meaningful results.BUSINESS TRILOGYIn the 1970s and 1980s, we saw a tremendous shift in the roleof the quality department with the advent of ISO 9000, theMalcolm Baldrige National Quality Award, and Six Sigma.Customer expectations about product quality changed from sim-ply looking for a good warranty program to completely rejecting(with penalty) any supplier who could not provide quality prod-ucts. Suppliers were held responsible for damage caused bytheir poor performance. Customer expectations for feature-richand innovative products, extraordinary customer service, andthe lowest available price brought about the Business Trilogymodel. In the Business Trilogy (as shown in Fig.1.3), executives
  41. 41. TRENDS IN PERFORMANCE MEASUREMENTS 7plan based on input from employees, the management teamexercises control over processes, and improvement occurs whenall minds in the company work toward it. But leadership morethan management is what’s needed to create a superior compa-ny. Leadership inspires employees toward a common goal,defining their purpose, communicating the consequences oflow performance, and rewarding excellence rather than medioc-rity. We’ve all seen executives who created several multimillion-dollar problems and were rewarded because they then solvedthose problems! Examples abound of leadership teams thatimplement poorly planned, controlled, and executed decisions,yet who still receive incentives in hopes of better results nexttime. Without new systems and processes, the second timearound is not going to be any better than the first. Any business has three segments: leadership, operations,and support. The business theater of operations must includesuperior leadership, excellent management, and committedemployees. In such a model, the leadership plans to become asuperior company through proper goal setting for higher profitmargins. The management team manages processes for dra-matic improvement (highest quality in the shortest time).Employees produce innovative products or deliver serviceswith love and care. Of course, what goes around comesaround. Employees will only care when they are cared for bythe leadership.ISO 9000 QUALITY MANAGEMENTSYSTEMThe ISO 9000 system evolved when the European Union(EU) was forming in the mid-1980s. Its main purpose was toprovide standards that would facilitate trade between EU mem-ber countries. Later it became an international standard forquality management under the auspices of the InternationalOrganization for Standardization (ISO). In reality, the ISO9000 system is a business management system. As productsand services became complex and customer requirementsbecame stringent, the responsibility for business performancemoved from the quality department to all departments. Today,
  42. 42. 8 CHAPTER ONEquality or goodness of process and product is the overridingresponsibility of everyone in any organization. The newest version of ISO 9000 includes additionalmeasurements that weren’t in the original plan, as well asthe requirement for continual improvement. It has the fol-lowing requirements:4.0 Quality Management SystemG General requirementsG Documentation requirements. General, quality manual, con- trol of documents, control of records5.0 Management ResponsibilityG Management commitmentG Customer focusG Quality policyG Planning. Quality objectives, quality management system planningG Responsibility, authority, and communication. Responsibility and authority, management representative, internal communi- cationG Management review. General, review input, review output6.0 Resource ManagementG GeneralG Provision of resourcesG Human resources. General, competence, awareness and training, infrastructure, work environment7.0 Product RealizationG Planning of product realizationG Customer-related processes. Determination of requirements related to the product, review of requirements related to the product, customer communication
  43. 43. TRENDS IN PERFORMANCE MEASUREMENTS 9G Design and development. Planning, inputs, outputs, review, verification, validation, control of changesG Purchasing. Purchasing process, purchasing information, verification of purchased productG Production and service provision. Control of production and service provision, validation of processes for produc- tion and service operations, identification and traceability, customer property, preservation of productG Control of monitoring and measuring devices8.0 Measurement, Analysis, and ImprovementG GeneralG Monitoring and measurement. Customer satisfaction, internal audits, monitoring and measurement of processes, monitoring and measurement of productG Control of nonconforming productG Analysis of dataG Improvement. Continual improvement, corrective action, preventive action As the list illustrates, the requirements are quite comprehen-sive. The ISO 9001:2000 system is based on process thinking:1. Plan for setup.2. Do for excellence.3. Check for verification.4. Act for improvement.PROCESS THINKINGTo perform well, the process owner needs to control inputs,process activities, and the process output. Control means thatthe process owner understands the requirements as well asreceiving, producing, or supplying according to the require-ments. Verification methods must be implemented at various
  44. 44. 10 CHAPTER ONEstages of the process to ensure that requirements are beingmet. This might be done by controlling input material throughsupplier qualification, as well as monitoring the process bymeans of data analysis, inspection, tests, and measurements.A corrective action is initiated if the verification shows thatthe requirements are not being met. A business benefits from consistency of operations once thebusiness infrastructure is established using the ISO 9001 qualitymanagement system. However, even with an ISO 9001 system,the business will operate at below desired performance levelsif the processes are not optimized.MALCOLM BALDRIGE NATIONALQUALITY AWARD GUIDELINESWhen the ISO 9000 quality management system waslaunched in the United States in 1987, the U.S. Congressestablished the Malcolm Baldrige National Quality Award toimprove business performance. The resulting MBNQACriteria for Performance Excellence (also known as theBaldrige Criteria) provided a system for managing process per-formance. The first Baldrige award went to Motorola, where Ihad an opportunity to contribute to the quality systems whileworking with the late Bill Smith. The purpose of the BaldrigeCriteria was to accelerate the rate of improvement and inno-vation. The award criteria provided a performance frameworkbased on measures of leadership, customer information, oper-ations, human resources, and finances. Studies showed thatorganizations implementing systems based on the awardguidelines outperformed their counterparts in value creation,stock performance, and market leadership. With worldwide acceptance, the Baldrige Criteria raisedawareness of customer satisfaction, leadership, and informa-tion management. The Baldrige Criteria were based on globalbest practices. For example, the leadership category was createdbased on behaviors and practices deployed by leaders such asBob Galvin, then CEO of Motorola. Leadership included defi-nition of a vision, communication with employees, community
  45. 45. TRENDS IN PERFORMANCE MEASUREMENTS 11service, public responsibility beyond the organization, and con-stancy of purpose. The Baldrige Criteria provide a role model forcompanies to achieve superior performance, while ISO 9000provides a framework for an organization to achieve goodresults consistently. The Baldrige Criteria highlight the following aspects ofbusiness performance:G Visionary leadershipG Customer focusG Employee developmentG Process excellenceG Market leadershipG Superior financial resultsThese business aspects are addressed in the seven categoriesof Baldrige Criteria for excellence, as shown in Figure 1-4, as Category Area Point Value Leadership Organization Leadership 120 Public Responsibility and Citizenship Strategic Planning Strategy Development 85 Strategy Deployment Customer and Market Focus Customer and Market Knowledge 85 Customer Relations and Satisfaction Information and Analysis Measurement and Analysis of 90 Organizational Performance Information Management Human Resource Focus Work Systems 85 Employee Education, Training, and Development Employee Well-Being and Satisfaction Process Management Product and Service Processes 85 Business Processes Support Processes Business Results Customer-Focused Results 450 Financial and Market Results Human Resource Results Organizational Effectiveness ResultsFIGURE 1-4. Baldrige Criteria for performance excellence.(MBNQA Guidelines, 2003.)
  46. 46. 12 CHAPTER ONE well as in several areas within each category. Each area con- sists of a set of questions that focus on certain aspects of a business. The objective is to emulate, as much as possible, each guideline in order to achieve superior results. The three major performance measurement and improve- ment systems of ISO, the Baldrige Criteria, and Six Sigma all launched at about the same time. ISO launched ISO 9000 and Motorola launched the Six Sigma methodology in 1987, and Congress launched the Baldrige Criteria in 1988. Figure 1-5 highlights key differences among the three approaches. Faced with fierce foreign competition in the semiconductor industry, the late Bill Smith invented the Six Sigma methodology in 1985–1986. He realized that the rate of improvement Motorola required to be profitable was so significant that something dramatically different had to be done. Motorola ISO 9000 MBNQA Six SigmaA framework for creating “Quality A framework for creating “Performance A framework for linking improvement toThinking.” Thinking.” profitability.Facilitates process management Facilitates benchmarking to improve Facilitates dramatic improvement tothrough documentation and performance levels to best-in-class achieve performance excellence.compliance. levels.Specifies all business functions Specifies key aspects of business. Specifies a methodology forexcept Accounting. improvement irrespective of functionality.Promotes Management Promotes exceptional leadership Requires leadership to aim at highestResponsibility through behaviors as a way of life in society. performance with highest profitability.communication and managementreview.Main aspect is compliance to Main aspect is to achieve total Main aspect is achieving anddocumented practices and customer satisfaction through maintaining a high improvement rate forimproving effectiveness. superior practices and business aspects that affect performance. profitability.About 500,000 companies have About 4 to 8 companies win the Has been adopted by severalimplemented it worldwide. national level; similar number at companies to achieve dramatic state level and in other countries. improvement and profitability.Savings are difficult to quantify. Performance of publicly traded Companies have reported huge amount companies has shown advantage of savings in production and service over the others by 3 to 4 times. areas.Mass application of the Limited to a few companies. Selectively used by companiesstandards. committing to be a superior company.It is a third-party certification. It is recognition for excellence. It is a methodology to optimize performance and maximize profitability.Is on decline due to diversification Stabilized due to limited recognition. Growing rapidly as an attractive meansin series of industry-specific Has expanded into health care and to realize superior financial results.standards. education.FIGURE 1-5. Comparison of ISO 9001:2000, MBNQA, and Six Sigma systemrequirements.
  47. 47. TRENDS IN PERFORMANCE MEASUREMENTS 13leaders envisioned the state of manufacturing 20 years intothe future. They predicted that cellular phones were going tofollow a similar route as the commercialization of digitalwatches. Interestingly, that is exactly what happened. Today,the trend in the cost of a cellular phone is almost like that of adigital watch several years ago. Like the price of digital watches,the price of cell phones has dropped precipitously. Sometimesa cellular phone is even complimentary with the purchase of acellular service. This is why new processes for improvementmust be created continually and not just as a one-time deal.Sustaining the Six Sigma process is critical to maintain perfor-mance once the initial success is achieved. Before launching the Six Sigma initiative, Bill Smith haddiscovered that most customer complaints and failures ofthe product in the field were primarily caused by errors that thequality control system was unable to detect before the productwas shipped. Typically, management focuses on resolving cus-tomer complaints through developing a superior customer ser-vice team. With Six Sigma, however, improving customer servicefor fixing field failures may be less important than developingsystems that will catch and correct errors before the customerreceives the product. The field failures really determine the cus-tomers’ perception of an organization’s products or services. Toaddress the customers’ concerns, therefore, internal operationalexcellence, driven passionately by the leadership, is mandatory. In addition to widespread programs such as ISO 9000, theBaldrige Criteria, and Six Sigma, several companies havedeveloped their own ways of achieving excellence. These canbe effective, but issues arise in the methods such organizationsuse to rate their performance. Every organization looks atfinancial performance critically every month or quarter.However, many organizations, small or large, do not review theiroperational performance as rigorously as they do their financialperformance. In essence, they are watching the pennies at theend of the line while ignoring the dollars in the line, whichshould be subject to even greater scrutiny. Companies withsuperior performance do so and reap the benefits. However,most businesses struggle to find a method of looking at thesecosts that is simple, practical, and compatible with profitability.
  48. 48. 14 CHAPTER ONEBALANCED SCORECARDRobert Kaplan and David Norton introduced the BalancedScorecard in 1991 in The Harvard Business Review. TheBalanced Scorecard was a relief for many organizations; itgave management a new way of monitoring a company’s per-formance by measuring past success and setting goals for thefuture. The Balanced Scorecard is designed to provide a strate-gic vision for the organization by looking at four perspectives:financial, customer, learning and growth, and internal businessprocesses. For each of these four areas, the company looks atgoals (How will we define success?), measures (What will wemeasure to know we are successful?), targets (What quantitativeresults do we wish to achieve?), and initiatives (What activitieswill we do to achieve them?). The Balanced Scorecard has been used by senior executivesfor more than a decade as an excellent tool for strategy develop-ment. Kaplan and Norton demonstrated how executives inindustries such as banking, oil, insurance, and retailing haveused the Balanced Scorecard to guide their current performanceand target future performance goals. However, implementationat the grassroots level has been questioned for practicality.SIX SIGMA BUSINESS SCORECARDThe business environment has changed a lot during the lastdecade. Several hundreds of thousands of businesses world-wide implemented ISO 9000 quality management systems.About a million copies of Baldrige Criteria are shipped tobusinesses annually. Many businesses and their suppliers haveimplemented the Six Sigma methodology. However, the chal-lenge is to improve profitability significantly, to prevent market-place dynamics such as the dot-com meltdown of 2000. Thevalue of performance measures has become more importantthan ever. With the current and anticipated unsettling business envi-ronment—accelerating trends in technology, high expectationsfor performance, eroding prices, and shrinking profitability
  49. 49. TRENDS IN PERFORMANCE MEASUREMENTS 15margins—businesses need a performance measure (or score-card) that is robust and that addresses various aspects of abusiness including the marketplace dynamic. Businesses needa tool that provides a framework and guidance, creates chal-lenges, and stimulates excitement. Businesses need perfor-mance measures that continually renew and reenergize them,forcing them to discard the status quo and embrace innova-tion on a continual basis. Such a system must rely on the basics of a business. A busi-ness is a collection of processes, including the leadershipprocess. Each business process has inputs that includesuppliers, assets, resources (capital, material, people), andinformation. The process also has a vision, measures, policiesand procedures, and output that includes products or servicesfor customers. Every business has variances. The question iswhat to do with them. Each business must have a process tohandle excessive variances in the organization. Typically, thesevariances are the leaks in profitability. To fine-tune profitability,one must look at measures of all aspects of the organization theway it really works in order to reverse any loss of profitability. The Six Sigma Business Scorecard has been developed tolook at measures of all aspects of the organization. It address-es the concerns that executives express about current score-card systems, such as their ineffectiveness at relating to theemployees who do the work. Most scorecards are strategic inintent and do not flow down to process measures. For any scorecard to be implemented successfully, thescorecard must include sound planning, operational excel-lence, and sustainable growth. With an understanding of theBusiness Trilogy, process model, and dynamic economic envi-ronment, a Six Sigma Business Scorecard was developed thatpersonifies leadership and management; aligns purchases andoperations; drives customer service and sales; and promotesemployee excellence, innovation, and improvement. Such ascorecard should intuitively be persuasive to executives forstrategy as well as rewarding to employees for continual excel-lence through innovation. The Six Sigma Business Scorecard, as shown in Figure 1-6,is driven by those responsible for inspiration, planning, and
  50. 50. 16 CHAPTER ONE IMPROVEMENT Management and Improvement Purchasing and Sales and Supplier Distribution R Management EC VO Leadership and ES Profitability NT Operational Service and U Execution Growth E Employees and Innovation INNOVATIONFIGURE 1-6. Six Sigma Business Scorecard.profitability (i.e., the leadership); controlled by managers whoimprove processes and reduce costs; improved by employeeswho develop innovative solutions to meet customer needs; andsteered by sales and customer service representatives whoacquire and maintain customers through high-quality relation-ships for revenue and growth.
  51. 51. C H A P T E R T W OSIX SIGMA—ANOVERVIEWI n the early 1980s, the U.S. electronics industry was in fierce competition with offshore manufacturers. Because ofthe oil crisis of the late 1970s, the economy was in a slump.Motorola soon realized it had to do something different. Theleaders at Motorola envisioned trends in manufacturing inthe communications industry. The tack they decided to takewas to develop Six Sigma. The leaders conducted benchmarkingstudies, analyzed problems, and reviewed customer feedback.They discovered that customers expected better products thanthey were getting and that problems in the field were exten-sions of internally observed problems. The leaders determinedthat the future of manufacturing electronic products lookedlike the future of digital watches—trinkets that had to be pro-duced at a very low cost in order to be a viable product line.Interestingly enough, cell phones and digital watches lookpretty much the same today—in price as well as appearance.Today, however, cell phones are offered as part of a serviceplan instead of being sold as a separate entity.COMPLEXITY AND PERFORMANCEAs Motorola’s leadership gained knowledge and understoodthe need, the Six Sigma process started to become apparent instatistical terms. The issue was this: Each process by itselfcould be fine; however, when a series of processes wasinvolved in the production of a product or service, the net was 17 Copyright 2004 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.
  52. 52. 18 CHAPTER TWOmuch less than the yield at each process. For example, ifprocess and parts yields were at 99 percent for each compo-nent of the operation, the overall yield for the entire operationwould be much less, as shown in Figure 2-1. The overall yield is calculated by multiplying the processyield at each process. In the case of 100 components, thismeans 0.99 (for 99 percent yield) is multiplied 100 times.The figure shows that as soon as the process or the productcomplexity exceeds 100, the probability of making errorsincreases such that almost every unit of output must berepaired at least once. Therefore, a performance level of 99percent does not stretch far enough for complex products orservices.COST OF POOR PERFORMANCEWith any failure rate, there is an associated cost. The cost of theproduct is directly related to the failure rate, as shown in Figure2-2. The total cost is determined according to the formula Total cost ϭ Unit cost (1 ϩ Failure rate)The additional cost is a waste of valuable resources that isdeducted from the overall profitability of the business. The Overall Yield, % (99% Yield at Each Process, or Number of Operations for Each or Components Component) 100 36.7 500 0.5 1000 0 5000 0FIGURE 2-1. Components versus overallyield.
  53. 53. SIX SIGMA—AN OVERVIEW 19TotalCost Failure Rate (%)FIGURE 2-2. Failure rate versus total cost.waste occurs in all functions of a business, e.g., sales, design,purchasing, production, quality assurance, and even manage-ment. Typical accounting practices do not consider all aspectsof the business, as the focus is on the visible waste. However,hidden costs need to be understood, identified, and monitoredin order to maximize an organization’s profitability. The cost factors, as shown in Figure 2-3, include the directcost of material, the cost of resources required to handle it,and even opportunities lost because of customer dissatisfac-tion. Following is a list of aspects of costs that contribute towaste and harm profitability.G Awareness of common purposeG Employees’ skills and experienceG Defective materials and excessive use of materialG Insufficient informationG Improperly maintained machinesG Wrong or damaged toolsG Impractical proceduresG Lack of trainingG Reduced capacity due to failure ratesG Lack of preventive maintenance
  54. 54. 20 CHAPTER TWO Worker-related factors: Lack of Purpose, Skills and Experience Profitability Reduction Factors Non-worker-related factors: Material, Info., Machines, Tools, Proc., Training, Capacity, Maintenance, Design, Sales, Purchasing, Req., Mgmt policies, Decisions, Comm.FIGURE 2-3. Factors contributing to reduction in profitability.G Suboptimized designsG Poorly understood customer requirementsG Overambitious sales representativesG Excessive discountsG Informally communicated requirements to suppliersG Purchasing policies requiring cheapest parts instead of valueG Management uncertainty in decision making and lack of direction Note that most of these cost factors are related to neithermanagement nor employees. However, with changing businesspractices, increasing complexity of products, and interdepen-dence of various functions, everyone must work to ensure thatnecessary activities occur correctly. Management is no longersolely responsible for every action of all employees, nor areemployees solely responsible for every decision that manage-ment makes. Instead, everyone must be responsible for ineffi-ciencies in the system. The system is not a function of two
  55. 55. SIX SIGMA—AN OVERVIEW 21processes; it is a collection of various processes that generatehidden and visible waste in the system. Considering waste in the system, as well as ever-increasingcustomer expectations, Motorola recognized that a new yieldmodel was needed. The late Bill Smith, a senior manager atMotorola, developed a model that would allow higher yieldsat each operation, thus generating better products and servicesto customers. With the Six Sigma level of performance, eachfunction must be performed virtually perfectly. The failurerate at each operation is expected to be 3.4 parts per millionversus simply 99 percent. With such a high level of perfor-mance, the field performance improves significantly, wastereduces dramatically, and profitability can improve enormously.Figure 2-4 shows the impact of the revised business model onthe overall performance of the system. With this magnitude ofimprovement, the Six Sigma concept becomes a powerfulstrategy to drive improvement in an organization’s perfor-mance and profitability.BASICS OF SIX SIGMASix Sigma offers a measure of goodness, a methodology forimproving performance, a measurement system that drivesdramatic results, and a new paradigm that requires a passionatecommitment from leadership to set high expectations. Figure2-5 demonstrates the relationship between defect rate, sigmalevel, and cost reduction opportunities. Overall Yield, % (99% Overall Yield, Yield at Each % (99.9996% Process, or Yield at EachNumber of Operations for Each Process, or for or Components Component) Each Component) Improvement, % 100 36.7 99.9 Greater than 100% 500 0.5 99.8 Greater than 1000% 1000 0 99.6 Practically infinite 5000 0 98 Practically infiniteFIGURE 2-4. Performance improvement due to the Six Sigma process capability.
  56. 56. 22 CHAPTER TWO Defect Rate, Sigma Level Cost Reduction parts per million Opportunities, % of Sales 66,810 (or 6.7%) 3 25 6210 (0.6%) 4 15 233 5 5 3.4 6 1FIGURE 2-5. Sigma level and related opportunities for improvement. Companies that have implemented Six Sigma have reportedenormous savings. For example, Motorola, GE, Honeywell(formerly Allied Signal), Raytheon, ABB, and many more haverealized savings in the hundreds of millions of dollars. Duringthe first 5 years of Six Sigma implementation, Motorolareported about $1 billion in manufacturing operation savingsand similar savings in nonmanufacturing operations. ForMotorola, 1987 to 1992 was a significant period when salesand profitability improved significantly.TRADITIONAL APPROACH TO SIX SIGMAThe traditional approach to Six Sigma involves the steps thatfocus on discovering customers’ critical requirements, develop-ing process maps, and establishing key business indicators. Afterthese steps are completed, the business moves on to review itsperformance against the Six Sigma standards of performanceand takes actions to realize virtual performance. The oftenoverlooked aspect of achieving dramatic improvement in busi-ness performance is the superior management review process,in which the senior executives become extensively involved inmonitoring performance and demanding necessary improve-ments from their middle managers and employees. Once suc-cess is achieved, reward and recognition are critical successfactors to perpetuate the rate of improvement. The traditional approach, used by Motorola during thefirst 5 years, requires leadership and managerial staff toundergo extensive training for change management supported
  57. 57. SIX SIGMA—AN OVERVIEW 23by Motorola University, followed by training in Six Sigmamethods. Senior management then taught employees to createan upward communication process. When employees had aproblem, they were required to go to their supervisors foranswers. The outcome was a common understanding of theSix Sigma process and common goals for improvement. Employees were asked to set goals that would allow themto stretch their imaginations, promoting creativity and superiorteamwork. When teams excelled, they were recognized by theCEO and were rewarded with the CEO Quality Award. Thisbecame the best award employees could receive, and theystrived for it.THE BREAKTHROUGH APPROACH TOSIX SIGMAThe new approach to Six Sigma, called the Breakthroughapproach and developed by Mikel Harry and RichardSchroeder (2000), captured the Motorola methods and pack-aged them in the Define, Measure, Analyze, Improve, andControl (DMAIC) methodology. The Breakthrough approachconsists of management involvement, organizational structureto facilitate the improvement, customer focus, opportunityanalysis, extensive training, and reward and recognition forsuccessful problem solving. Its benefits include the standard-ization of the methods, global adaptation of the methodology,and commercialization of Six Sigma. In any case, whether Six Sigma is implemented through thetraditional approach, the Breakthrough approach, or variousderivatives, its primary driving factor is the commitment of thecompany’s leader, the CEO. The successful implementation ofSix Sigma at Motorola was led by Bob Galvin, and LarryBossidy. These leaders communicated an enthusiastic vision, apersonal desire to achieve results, an expectation of an aggres-sive rate of improvement, direct involvement in communicat-ing results to stakeholders, and recognition of those who sup-ported the vision. The most fundamental aspect of the visionis superior customer satisfaction that, if achieved, leads to
  58. 58. 24 CHAPTER TWOhigher profitability. The passionate implementation of the SixSigma methodology is the means, customer satisfaction is theend, and superior profitability is the financial outcome.Businesses that successfully implement Six Sigma see signifi-cant improvement in profitability. The current Six Sigma approach consists of two implementa-tion levels—the corporate level and the project level. Corporate-level implementation requires leadership to take initiative andmiddle management to assist in developing a business case foradapting the Six Sigma methodology. They develop the businesscase by analyzing business performance and identifying factorsthat adversely affect profitability—in other words, identifyingareas where waste of capacity, facilities, funds, and humanresources occurs. During this phase, leaders and managers revis-it the purpose of the business. They collect supporting data toassess how well the purpose of the corporation is being achievedbased on customer feedback, market share, and earnings. The critical aspects of the corporate-level preparation forthe Six Sigma methodology include establishing key businessperformance measurements, ensuring organizational effective-ness, readying the organization for Six Sigma, and establishinggoals for improvement. These goals and opportunities are thenaligned with other business initiatives and filtered into projects. The project-level implementation relies on the DMAICmethodology to capitalize on opportunities for improvement.Extensive training is conducted for champions and sponsors,Black Belt and Green Belt candidates, and employees. Thetraining for champions and sponsors includes an understandingof the need for Six Sigma, Six Sigma’s benefits, the rolloutplan, the working of Six Sigma projects, the roles and respon-sibility of all employees (including executives), and anoverview of the DMAIC methodology (described below). TheBlack Belt and Green Belt training programs include varioustools and techniques to apply the DMAIC methodology.DEFINEThe first step—to define—is to clearly describe the problem andits impact on customer satisfaction, stakeholders, employees,and profitability. During this phase, the following are defined:
  59. 59. SIX SIGMA—AN OVERVIEW 25G Customer critical requirementsG Project goals and objectivesG Team roles and responsibilitiesG Project scope and resourcesG Process map and supplier, Input, Process, Output, and Customer (SIPOC)G Process performance baseline In understanding the customer requirements, one canlearn from Noritaki Kano’s quality approach. Kano’s approachsorts the customer requirements into three categories:assumed, specified, and expected requirements. An assumedrequirement is one that’s taken as a given. Someone who is buy-ing a car, for example, never checks to be sure that the car willinclude four wheels. When an implicit requirement is not met,customers are extremely dissatisfied. Assumed requirements,then, are dissatisfiers, where ignorance is the best outcomeand loss of the customer is the worst outcome. The specifiedrequirements are a customer’s explicitly communicated require-ments. To meet the requirements is to satisfy the customer.But if an organization has not done anything beyond whatcustomers have specifically asked for, customers will be veryopen to try competitive products or services. The expectedrequirements include requirements beyond what the customerexplicitly communicates. These are the customers’ real,unstated expectations of what they would love to receive fromsuppliers. For a supplier to fulfill these expectations, the sup-plier must really understand the customers’ needs for productsor services. The supplier must also anticipate the customers’future needs, thus demonstrating a desire for ongoing relation-ships with customers, i.e., showing superior customer service. Once the requirements are understood, they flow down tothe operation level, where project goals and objectives are set. Some of the techniques used in the define phase includethe following:G Project charterG Stakeholders’ commitment analysis
  60. 60. 26 CHAPTER TWOG Affinity diagramsG Voice of the customerG Kano’s quality analysisG Force field analysisG Pareto analysisG Process mappingG SIPOC (Suppliers, Inputs, Process, Outputs, Customers)Some of these tools are used widely in various aspects of abusiness. However, a couple of these techniques, specificallystakeholder analysis and SIPOC, are used as part of Six Sigma. The Commitment Matrix (Figure 2-6) is an effective wayto assess what support is needed versus the current level ofcommitment from each of the business functions. An adversegap between the level of commitment needed and the level ofcommitment that is currently available identifies the opportunityto increase internal support. Additional support levels can beidentified depending upon a company’s needs. This analysis ofcommitment is an excellent way to communicate concern toaffected team members. Performing this analysis for each pro-ject ensures that necessary support is available to achieve results.MEASUREThe purpose of the next phase—to measure—is to describe theopportunity for improvement and quantify the baseline perfor-mance. When changes are made for improvement, then thebusiness can verify the effectiveness of the changes. To analyzedata, basic statistical techniques such as averages, standardCommitment Management Purchasing Engineering Production SalesPassionate Needed NeededPositive Needed NeededNeutral Available AvailableResistance Available AvailableDestructiveFIGURE 2-6. Commitment matrix.
  61. 61. SIX SIGMA—AN OVERVIEW 27deviation, and probability distributions (i.e., the Normal distrib-ution and the Poisson distribution) are critical for understandingthe nature of excessive variation in the process.Variation. W. Edwards Deming said that “variation is evil.”This premise underlies the method for achieving dramaticimprovement in any process. Walter Shewhart classified varia-tion as random or assignable. Deming called it common orspecial variation. The nature of variation depends upon itscauses, which could be random or assignable. Random causes of variation, such as ambient temperature,supplier-to-supplier variation in parts, or operator-to-operationvariation, are inherent in the process. Assignable causes arethose that change for specific reason, such as machine break-down, an untrained operator, use of the wrong material, anincorrect setup, or some design-related issue. The randomcauses are difficult to diagnose, and many of them act concur-rently, while the assignable causes are known, specific, andintroduced in the process. In statistical terms, random causesare the ones that are more likely to happen as a routine (about95 percent of the time), while assignable causes occur less often(about 5 percent of the time) and are exceptions. In developingstatistical thinking, it is not as important to learn many statis-tical techniques as it is to understand the nature of variation.Cost of Quality. Another measure of performance is the costof quality. The traditional cost of quality consists of four cate-gories: internal failures, external failures, appraisal, and pre-vention. The goal is to increase the preventive cost of qualityand to reduce the internal failures, external failures, andappraisal components. Typically, not all the costs of poor qualityare measured in a company’s accounting system; therefore, ittakes both effort to understand and courage to measure accu-rately the cost of poor quality. Generally, management’s initial reaction is that the cost ofpoor quality is not significant. For example, a company wantsto improve customer satisfaction by reducing the number ofdefects reaching customers, so it adds inspection and testpoints. Over time, this inspection and testing becomes a stan-dard process. This process, however, is an activity that doesn’t
  62. 62. 28 CHAPTER TWOadd value to the product. The goal, then, is to reduce the levelof inspection or testing as much as possible, as it is a wastefulactivity. Figure 2-7 lists some measures of the cost of poorquality (COPQ) that must be targeted for reduction. The objective must be to reduce COPQ and increaseinvestment in the prevention costs. Figure 2-8 shows typicalratios of the cost of poor quality, illustrating that a lot moreeffort must be committed to improve the prevention cost.Surveys have found that employee training is still the bestinvestment to make in order to add value. Measurement System Analysis (MSA) is a method used toassess repeatability and reproducibility of the measurementmethod. The goal is to ensure that the measurement systemdoes not add to excessive variability, thus leading to false con-clusions and, therefore, false starts. Normally, it is known asGage Repeatability and Reproducibility (Gage R&R). The GageR&R can be performed on any measurement method to appor-tion variances. The measurement method must have resolutionan order of magnitude higher than the measurement itself. Internal External Failures Failures Appraisal Prevention Failure Reviews Customer Drawing Planning Dissatisfaction Checking Redesign Equipment Final Inspection Capability Downtime Studies Reinspection Excess Inventory In-Process Design Reviews Inspection Repair Costs Excess Travel Laboratory Field Testing Expense Testing Retesting Excess Material Personnel Vendor Surveys Handling Testing and Evaluation Rework Penalties Receiving Procedure Inspection Writing Scrap Pricing Errors Product Audits Training Allowances Engineering Shipping Market Analysis Changes InspectionFIGURE 2-7. Cost of poor quality (COPQ) measures.

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