Six-Sigma KOs costs
When it comes to defects, intolerance is good
By Anne Millen Porter -- Purchasing, 3/4/2004 2:00:00 AM
It's impossible, these days, to have a conversation about supplier performance measurement without hearing the words Six-Sigma bandied about.
Very often, however, the phrase is used only in its narrowest sense, as in: "Our goal is for suppliers to reach Six-Sigma quality performance, or 3.4 defects per million parts. Anything higher and we penalize them in our total-cost-of-ownership calculus, adding to their bid prices what, we figure, their quality defects cost us over the lifetime of our products."
This misses the point entirely.
Six-Sigma tools and disciplines, as applied to the supply chain, aim to quantify and qualify concepts like total cost of ownership. In the ultimate Six-Sigma vision, performance to customer requirements is always near perfect, so there's no such thing as 'cost of quality' or 'cost of nonperformance'. When business processes begin to operate with extremely predictable results—as Six-Sigma adherents would have them do—then uncertainty-driven costs, such as those associated with proliferated supply bases, redundant design, expediting and follow up, inventory investment, material review boards, inbound inspection, and high-cost logistics practices, can be reduced or eliminated as well.
That's the vision anyway. Many who have attempted to expand Six-Sigma disciplines from the manufacturing floor into their supply chains have found themselves working hard to overcome challenges and achieve meaningful results. Quite often, according to Steve Trecha, president and CEO of Integrated Strategies, a supply chain-consulting firm based in Okemos, Mich., these struggles originate with a too-narrow view of customer/supplier relationships.
Trecha, together with Steve Dickinson, Six-Sigma Master Black Belt and President of Integrated Strategies' Six-Sigma practice, and Jim Bradley, vice president of the firm's Supply Chain practice, spoke recently with PURCHASING about how they "supercharge" supply-chain strategy development using Six-Sigma tools and disciplines.
Q: In context of a total supply chain strategy, how do you define and deploy Six-Sigma?
A: We use five principles. The first is zero tolerance for defects—3.4 defects per one million opportunities, which is virtually defect-free. The second principle has to be lowest life cycle cost, as you can get to zero defects at a cost no one is willing to pay. The third principle is being completely customer-centered, always delivering value as the customer defines it (as in quality, cost, delivery, etc.). Safety—for example, protecting people, equipment—is the fourth principle. The fifth principle is organizational responsibility, which includes things like business ethics and governance. Organizational responsibility is one of the things that get you from short- to long-term successes.
Q: So, in applying Six-Sigma disciplines to the supply chain, where do you start?
A: Applying Six-Sigma effectively is a five-step process. First, we use Six-Sigma analytical tools and methods to develop supply chain strategies and policies that support what an organization is trying to accomplish. Before metrics and tools come in to play, it's important to understand how the organization defines supply chain and determine if senior management is ready to run the business in a truly integrated, cross-functional fashion. An internal review answers the question of how aggressive the company wants to be about advancing its supply chain using Six-Sigma. The second step is to define all customer/supplier relationships and requirements, both internal and external customers.
Q: Can you elaborate on what you mean by internal customer/supplier relationships?
A: Confining your attention to traditional buy-sell relationships is inadequate for driving total supply chain performance. Defects occur at many points in the supply chain, and any single defect can hurt the performance of the whole. At every link in the supply chain, you have to ask: Who is the supplier? Who is the customer? And what are the customer requirements?
For example, a Quick Service Restaurant (QSR) chain ran out of chicken because its supplier didn't know it was launching a big marketing promotion. The root cause of that breakdown was internal—defective forecasting and poor communication between marketing and purchasing. Another QSR chain got stuck with a significant quantity of material after a big marketing promotion and were forced to sell it off at just 10¢ on the dollar. In both cases, marketing was the supplier, purchasing the customer. The customer requirement was accurate forecast data.
What's more, the notion of customer/supplier relationship needs to be expanded beyond just people. For example, materials organizations (suppliers) typically meet maintenance organizations' (customers) requirements by building inventories of replacement parts. But the maintenance organization isn't really the customer; rather, the customer is the machinery itself.
A common application for Six-Sigma tools and disciplines is to identify problems and fix them. The ultimate application is to be predicative so you can eliminate costs, like inventory costs, that are associated with uncertainty. You can, for example, devise statistical methods that show—based on infrared, heat or vibration detection technologies—when a machine is starting to progress from optimal health (performance) toward breakdown. From there, you can predict when the breakdown is likely to occur, say six weeks out, which allows you to schedule preventative maintenance, say four weeks out, and to know precisely when you will need the parts and resources to perform the repair. From there, you begin to establish supply chain policies such as setting supply programs or stockroom limits and systems for automatic ordering or stock replenishment, which, in turn, allows you to reduce inventory, etc.
Q: So after you define all these customer/supplier relationships, what's next?
A: Our third step is to develop product and service characteristics from which performance measurements can be designed. For example, order fulfillment, capacity utilization or information accuracy measures. Step four, measuring performance, shows where the defects are occurring in supply chain processes, which brings you to the fifth step—the one that typically gets all the attention—where you start figuring out how to fix processes, how to control them in ways that consistently produce defect-free results. All the glory comes in step five, but the foundation is built in steps 1-4.
Q: It has been said that Six-Sigma disciplines are good for fixing decent processes, but less useful for deciding if processes need to be scrapped or completely redesigned....
A: The most difficult question that Six-Sigma Black Belts face is when to fine tune or fix processes and when to blow them up. You start by creating a detailed process map, then focusing intensively on where in the process things are going wrong. On one occasion, for example, we went into a plastics factory that had been experiencing significant scrap problems and blaming the issue on suppliers. Our analysis showed a substantial portion of the scrap was occurring on just two of the company's eight production lines. Had suppliers or the basic process been at fault, the problem would have been distributed across all eight lines. In that case, the process was fine, the two lines needed to be fixed.
In a contrasting case, we created a process map for a hospital where the average waiting time for outpatient registration was 47 minutes. In mapping and analyzing their process, we identified 340 different problems that were keeping people from being registered quickly. Clearly, that process needed to be blown up. By seeing outpatient registration as the supplier to other hospital departments like X-Ray, CAT scan, etc., where expensive equipment sits idle if patient registration is delayed, we were able to design a new process that improved information sharing and flow and reduced the average wait time to just 90 seconds!
Q: Is there a danger in Six-Sigma of applying rocket science where simpler tools and techniques will suffice (and cost less to deploy)?
A: We recently had e-mail from a colleague who had gone to work for a new company. This person observed that people in the new firm seemed more concerned about using their tools than fixing problems. You avoid that by training people to always focus on delivering business results. Six-Sigma processes can be very complicated. In undertaking the training, you receive a very large toolkit, but you don't use every tool, every time. Your success as a Black Belt often depends on being able to reach into that toolbox and pull out the right tool.
Six-Sigma in action
The following case examples show what's possible when companies take integrated approaches to deploying Six-Sigma concepts and disciplines.
ROCKWELL COLLINS: Six-Sigma + lean
Rockwell Collins, Cedar Rapids, Iowa, uses a program that blends Six-Sigma with lean techniques. "Six-Sigma focuses on quality issues, such as variation reductions, defect reductions, and the cost of nonconformance," explains Tim L. Taylor, advanced quality systems manager. Lean tools focus on improving product flow, standard work processes, etc.
But moving these concepts out to the supply chain has been more challenging than just using them internally. For example, Taylor says, "It can be difficult to implement the concepts with distributors that are providing off-the-shelf products," because it is difficult to create cooperation with them in terms of things like process controls, corrective action requests, etc.
One thing Rockwell Collins is doing to address the challenge is to make sure it drives tighter Six-Sigma controls internally. "For example, we make sure that our design engineers select the right parts for the right applications, so that there is as little induced variation as possible," he explains. "We also have screens in place in receiving areas to weed out any variation we can't control from the distributors."
There are also challenges with suppliers of custom parts, such as costs associated with training. To address the problem the company's supplier quality assurance organization and its advanced quality systems group are developing a supplier training module that will allow them to bring suppliers in-house for training or take the program on the road to supplier locations.
As a result of its supply chain Six-Sigma projects, Rockwell Collins has seen improved flow from suppliers and improved internal processes, all of which reduce cost. "We have seen significant percentage improvements in terms of supplier quality, on-time delivery, and customer satisfaction," says Taylor. An example: "We had a die casting supplier where we had some molding issues," he says. A Six-Sigma team evaluated some of their process controls, looking specifically at input process variables, and then applied some Six-Sigma and lean tools to those components. "We saw an immediate improvement, from a 75% acceptance rate to 99%, and from an 85% on-time delivery rate to 99%," reports Taylor. Scrap decreased from about 40% to 1%. "As a result of these improvement, we have been looking at negotiating some cost reductions with the supplier," he adds.
CARLSON COMPANIES: Cutting cost—forever
Marcus Jenkins, a master Black Belt and master instructor for Six-Sigma at Carlson Companies (Plymouth, Minn.), became familiar with Six-Sigma when he was with General Electric. "The benefit of Six-Sigma in the supply chain is that it doesn't take cost out of our organization and put it back on the suppliers," he says. "It takes cost out of the supply chain as a whole, the result of everyone being more efficient."
It also strengthens relationships between supply chain partners, getting beyond just pushing POs, according to Jenkins. "The goal is to eliminate nonvalue and thus be able to move value through the process more quickly."
Six-Sigma projects in the supply chain have helped Carlson Companies to identify and alleviate process breakdowns, reports Jenkins. For example, when buying computers and workstations, the company usually purchases directly from manufacturers. However, it also uses a couple of value-added distributors when it needs quick deliveries. "We developed an alliance with one of these distributors, such that they became our warehouse arm," he says. As a result of the integration, people who need to order something can go onto the company's Web site to place an order, and it is backed up by the distributor's system. In the beginning, however, the systems weren't integrated well. "On any given day, out of 35,000 part numbers, 2,000 could be wrong," recalls Jenkins. Carlson and the distributor designed a Six-Sigma project and, within a month, had it the defect rate down to about 25 wrong numbers per day. "By being able to reduce returns, prevent shipments of wrong items, and solve the problem of price differences, we were able to save about $500,000," he reports.
JPMORGAN CHASE: Transforming procurement
While some companies introduce Six-Sigma disciplines as a way to improve production efforts and then expand those efforts to their supply chains, others use the disciplines to transform the procurement department itself. One such organization is JPMorgan Chase (Jersey City, N.J.).
When Javier Urioste joined the bank in mid-2002 as senior vice president and chief procurement officer, he was tasked with the responsibility of transforming the procurement organization from a nonstrategic, transaction-oriented organization to a leading edge strategic organization. Given the magnitude of this transformation, Urioste needed a methodology to make sure he could make the right changes, make sure the corporation would buy into the changes, and ensure sustainability of the changes.
"I was pleased to find that JPMorgan Chase had already been using Six-Sigma extensively to handle culture and process changes in the corporation as a whole," he says. "In addition, they had a well-staffed Six-Sigma organization, made up largely of former GE employees and others from top Six-Sigma firms."
Urioste and his team used a rigorous Six-Sigma methodology to go through each of the steps to transform procurement: analysis of the issues, voice of the client, development of options, implementation, tracking of results.
"We began with the low-hanging fruit, such as being able to find redundancies, and were able to eliminate and combine certain jobs and structures," he says. "By mid-2003, we had a very different organization with leading-edge processes."
The team then continued using Six-Sigma to address other less broad issues, such as developing a competency assessment process and a contract management methodology.
"Everyone in purchasing has been trained as a Green Belt, and we have about eight to ten Black Belts who continue to help us lead change and improve processes and structures," he continues.
Overall, the department has seen initial savings of about 15% and sustainable (year over year) savings on the order of 10%.
WYMAN GORDON: Keeping customer focus
Being a supplier to the aircraft industry, one of Wyman Gordon's goals is to help its customers make aircraft less expensively. "By optimizing internally, we can reduce some costs," explains Scott Cooper, engineering manager with Wyman Gordon, Decatur, Ga. However, he says the company recognizes that failing to consider the impact of internal changes on the whole supply chain, could end up raising costs in other areas of the supply chain. "By optimizing throughout the supply chain, we can reduce costs quite a bit more."
As Wyman Gordon began to implement Six-Sigma internally at some of its plants around the country, it began to see value in tying the supply chain into its Six-Sigma initiatives, Cooper reports. "When I was the process control manager at one of our other plants, we implemented Six-Sigma not only in that plant, but also in the supply chain."
For example, he notes that the company used a Six-Sigma team to work with one customer and some of its suppliers on reducing inspections and process times through the whole supply chain. "We studied our manufacturing cycles and our business process cycles. We then initiated some projects that led to some immediate benefits."
Words of wisdom
| Six-Sigma is no substitute for good, basic business practices. | "You have to have these in place first," points out Jenkins of Carlson Companies. "You need to have a good supplier quality management system in place before you start," adds Taylor of Rockwell Collins. |
| Integrate Six-Sigma in such a way that it's not extra work. | It should be how people get their work done in terms of reaching stretch goals. |
| Be selective. | "Don't try to make everything look like a nail and use the Six-Sigmahammer to hit it," suggests Jenkins. |
| Focus on key suppliers. | "It's important to be selective in starting Six-Sigma relationships with suppliers," cautions Jenkins. "You can't do it with all of them." |
| Understand that Six-Sigma isn't about fixing problem suppliers. | That's what traditional supplier quality assurance programs are for. Supply chain Six-Sigma is about making good suppliers better and building relationships. It's not about cutting supplier margins, but rather, cutting supplier waste. |
| Ensure that everyone understands the process and the purpose. | "The only time we ran into problems was when not everyone in a group understood the goals," explains Cooper of Wyman Gordon. "In some of our early efforts we would occasionally run into some confusion about what the projects were all about," he adds. |
| Communicate frequently with suppliers throughout the lives of projects. | Pay particular attention to keeping their senior management people updated. |
| Be sure to provide recognition to suppliers after successful projects. | This will pave the way for scheduling subsequent projects. |
| Realize that the ultimate goal is achieving results from projects. | "Look at it like a specific project," suggests Taylor. That is, identify the problem, measure the opportunities, analyze what needs to be done, implement the improvement, and report the results. |
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