Improving Business

Processes With Six Sigma

Sren Bisgaard
Sigma Breakthrough Technologies, Inc.
Roger Hoerl
General Electric
Ronald D. Snee
Tunnell Consulting

Topics

Opportunities in Business Processes

How Businesses Processes are Different
Some Examples
What Have We Learned?

Improving Business
Processes With Six Sigma
Sren Bisgaard
Sigma Breakthrough Technologies, Inc.

AQC 2002

Business Processes?
Business Processes = All nonmanufacturing operations and services
Examples:
Billing
Invoicing
Production
scheduling
Forecasting and
inventory control

Purchasing
Sales
After sales service
Web site development
Finance

Occupational Distribution of the

US Labor Force
Percent of Workers

60
50

Blue-collar

ar
l
l
o
-c
e
t
i
Wh

40
30

Far

20

ic
v
r
e
S

10
0
1900

1950
Year

2000

Traditional Quality Control & Improvement

Traditionally we have focused on
manufacturing
In the past we have sometimes focused on
service
A (somewhat) ignored area: Nonmanufacturing business processes facilitating
the primary manufacturing and service
processes

A Few Characteristics of Business Processes

High volume of transactions

Labor intensive and costly
Transactions not well defined
Processes usually not planned or designed; have
frequently never been subjected to rigorous study
Pivotal to the entire organization
A large number of ways to make mistakes and high
frequency of errors and rework
Errors and delays have serious downstream costs
consequences

Economics of Six Sigma

Inflated because of defects,
scrap rework and delays; can
be reduced with 6

________________________________
Sales
$100
-Variable Costs
$ 60
________________________________
=Contribution Margin
$40
-Fixed Costs
$30
________________________________
=Profit
$10
________________________________

The Bottom-Line
Effect
of
Six
Sigma
________________________________
Sales
$100
-Variable Costs
$ 60 - 5
________________________________
=Contribution Margin
$40+5
-Fixed Costs
$30
________________________________
=Profit
$10+5
________________________________
A Cost reduction of (5/60)100% = 8.3%
A Profit Increase of (5/10)100% = 50%

Any improvement in quality and efficiency

goes right to the bottom-line!

Profit?
Profit is not the explanation, cause, or

rationale of business behavior and business

decisions, but the test of their validity.
If the archangels sat in director's
chairs, they would still need to be
concerned with profitability....
From Peter Drucker (1973, p. 60) Management: Tasks,
Responsibilities, Practices. New York: Harper and Row

Cummins Earns Profit in Worst Downturn Ever

Oct. 11, 2001--Cummins Inc. (NYSE:CUM) today reported profit
after taxes of $3 million, or 08 per share, on revenues of $1.41
billion for the third quarter of 2001, despite a continuing economic
downturn.
"I'm pleased that we met our objectives for the quarter and
remained profitable despite the worst market deterioration I've
experienced, in virtually every one of our North American end
markets," said CEO Tim Solso. "Our Engine Business continues to
be particularly hard hit with revenues down 20 percent from the
third quarter of 2000. However, we continue to realize the benefits
from our aggressive cost reduction efforts across all of our
businesses, including the benefits of our restructuring actions and
Six Sigma programs."
programs

The Key to Understanding

How Six Sigma Concepts
Apply to Business Processes

A Process Viewpoint!

Production Viewed as a System (Deming)

Business Processes
Suppliers

Design
and
re-design

Distribution

A
B
C
D

Customer
research

Production

Assembly

Improvement of quality envelopes the entire

system from suppliers and incoming materials to
the customer, redesign and after sales service

Customers

Every Process Produces

Information
That Can Be Used
For Improvement

Process

Example
Industrial Consumables Company*
Background: Manufacturing and sale of
products used by a wide spectrum of
industries in their manufacturing operations
Key Business Process: Sales forecasting is
critical to manufacturing planning,
scheduling, inventory control, sales
Problem: Forecasts are consistently
seriously off
Number of Products (SKUs): >2,700
*From: Bisgaard and Kulahci (2002), Quality Engineering, 14(2), 341-344

Reaction by BB-in-Training
BB-in-T:
I dont know why I am in this class!
My project does not fit into the general scheme of Six
Sigma
Six Sigma is about manufacturing. It has nothing to
offer for someone like me involved with a business
process

Later: BB-in-T realized that forecasting is a

process. Hence it could be subject to approaches
traditionally used to improve the quality of
manufacturing processes

Forecasting Viewed As A Process

Sales forecasting as a process:
The process produces a product a number
Key Quality Characteristics: Forecast accuracy and
Timeliness > defects = poor forecasts
Forecasters have customers, for example, the
production planning department
The process has suppliers various data on past
sales, customer behavior, current inventory levels,
etc.

Forecasting Viewed As A Process

Sales
yt

Forecasting
Process

Forecast
y t +1

y t y t

Forecast error

Input: Past Sales Data

Output: A Forecast
Defects: Forecast errors

Quality Control: Control and monitor

forecast errors
Improvement: Reduce the
forecast errors to a Six Sigma
(Cpk=2)

Learning Objective: Use feedback and

review to learn how to better forecast

BB Project and Results

Preliminary data analysis
Quick fix: use EWMAs across all 2,700 product
categories
A simulation across 2,700 sales for the past two
years showed a decrease in the relative forecast
error > 40%
Further work under way to fine-tune the
forecasting process
A forecast control system can help generate an
ongoing Shewhart cycle of learning about how to
make better forecasts

DMAIC: A Problem Solving Discipline

Define: State the problem in measurable and
actionable terms; scoping
Measure: Measure the variation of the performance
data from the process
Analyze: Find the sources of variation in the process
Improve: Eliminate or enhance drivers of process
variation
Control: Establishing controls to manage and hold on
to the gains

Six Sigma Tools for

Business Processes
Primary Tools:

Process Maps and C&E Matrix

Flowcharts
FMEAs
Paretos
Control Charts
Multi-vari
Statistical Graphics
Control Plan and SOPs

Increasingly used: FMEA, Gage R&R, DOE,

Regression, binary and categorical data analysis

Six Sigma Business Applications

Roger Hoerl
General Electric R&D

Outline

Why worry about business processes?

A Six Sigma project in collections
A Six Sigma project in publishing
Other examples of business projects
Why we are missing this opportunity, and
what can be done about it
Summary

Why Worry About Business Processes?

The vast majority of Six Sigma applications
have been in manufacturing/engineering
Research has shown that rework and waste costs
are higher in service than in manufacturing
The money trail from accounts receivable to
accounts payable is particularly promising
Six Sigma implementations focused on
manufacturing will significantly limit bottom
line impact and leads to a victimization
attitude in manufacturing

Newspaper Copy Error

Reduction Case
Define:
Goal: Reduce copy errors to less than
10/day
Team consisted of copy editors, graphic
artists, reporters, supervisors, managing
editor
Operational definition of an error
developed

Operational Definition of An Error

An error is:
Any deviation from truth, accuracy, or
widely accepted standards of English
language, or
Departure from accepted procedures
that causes delay or requires reworking
a story or graphic

Newspaper Error Reduction

Costs Associated with Errors
Error caught at copy desk
Error detected in composing room
Page killed and redone
Presses stopped & restarted
Error published

$62
$88
$768

$5000
Unknown &
Unknowable

Other Project Objectives

Eliminate rework throughout the processes used to
create stories, graphics and photos
Free copy editors to do value-added work
Breakdown barriers between departments
Automate chart and table creation to eliminate
errors and reduce personnel needs
Create a culture that emphasizes doing it right the
first time and personal responsibility for accuracy

Newspaper Copy Error Reduction

Measure:
Process mapped & key variables identified
Total errors and type of errors plotted and
displayed daily
Process stable averaging around 20 errors/day
Cause and effect relationships evaluated

Newspaper Writing and Editing Process

Editor
Assigns
Story

Reporter
Researches &
Writes Story

Editor
Reviews Story

Copy Editor
Checks Story
and Layout

Story Revised as Needed

Story Sent
to Production

Causes of Newspaper Errors

C aus e-and-E ffec t D iagram
W ro n g N a m e /N o ./Fa cts C o ve r S to ry

S ta ff A b se n ce s

S lo p p y W o rk
P la n n e d

S ic k n e s s

P o o r C o m m u n ic a tio n
P e rs o n a l

C h a n g e d Qu i c k l y
B a d S o u rc e

ER R O R S
A p a th y
P o o r ty p i n g

S p e c ia l S to ry
S lo p p y W o rk
N o R e v ie w

N o C h e c k in g

B ig N e w s D a y
P o o r K n o w le d g e

M i ssp e l l i n g s

B a d G ra m m a r

P a p e r S i ze

N E W S P A P E R E R R O R S - M A R C H TO A P R IL

TOTAL ERRORS

30

20

10

DAY

10

15

20

25

30

35

40

Analyze Phase
Pareto analysis of errors
Multi-vari study of controlled and
uncontrolled variables

Newspaper Errors - March to April

P areto C hart for E rrors
100
700

Count

500
60
400
40

300
200

20
100
0

D e fe ct

Co u n t
P e rce n t
Cu m %

159
21.2
21.2

153
20.4
41.5

119
15.8
57.4

117
15.6
73.0

98
13.0
86.0

37
4.9
90.9

30
4.0
94.9

27
3.6
98.5

Ot

he

11
1.5
100.0

rs

P e rc e n t

80

600

DEFECT CODE
1 = MISSPELLING
2 = WRONG NUMBER
3 = WRONG NAME
4 = POOR GRAMMAR
5 = LIBEL
6 = WORD MISSING
7 = DUPLICATE WORD
8 = WRONG FACT
9 = OTHER

Newspaper Errors - March to August

P areto C hart for E rrors
2000

100

60
1000
40
20
0

D e fe ct

Co u n t
P e rce n t
Cu m %

404
21.1
21.1

376
19.7
40.8

325
17.0
57.8

255
13.3
71.1

214
11.2
82.3

174
9.1
91.4

78
4.1
95.5

Ot

he

87
4.5
100.0

rs

P e rc e n t

C ount

80

DEFECT CODE
1 = MISSPELLING
2 = WRONG NUMBER
3 = WRONG NAME
4 = POOR GRAMMAR
5 = LIBEL
6 = WORD MISSING
7 = DUPLICATE WORD
8 = WRONG FACT
9 = OTHER

Multi-Vari Study
Process Output
Y = Total Errors per day
Controlled Variables
X1 = # Pages
X2 = Live Cover (yes, no)
Uncontrolled Variables
X3 = # Absent
X4 = Day of Week
X5 = Month of Year

Newspaper Copy Error Reduction

Analyze
Key drivers
# Pages
Live cover (yes, no)
Poor spelling
Wrong names, facts, and numbers
Bad grammar
Root causes
# Pages
Live cover (yes,no)
Reporters not using spellcheckers
Reporters not verifying accuracy
Poor grammar
Poor sources

Newspaper Copy Error Reduction

Improve
Implement new methods
Spellcheck how-to
Ten rules of grammar
Pyramid of trust
Collect data for one month to measure
effect of new methods

N E W S P AP E R E R R O R S - M AR C H TO JU LY
40

TOTAL ERRORS

30

20

10

0
DAY

20

40

60

80

100

N E W S P AP E R E R R O R S - M AR C H TO AU G U S T
40

TO TA L E RRO RS

30

20

10

0
DAY

20

40

60

80

100

120

Newspaper Copy Error Reduction

Improve
Implement new methods
Spellcheck how-to
Ten rules of grammar
Pyramid of trust
Collect data for one month to measure effect of new
methods
Results - no improvement!
- Methods not being used
Manager had a meeting with his staff and reinforced the
new methods of operating
- Results were immediate, dramatic and
sustained

N E W S P AP E R E R R O R R E D U C TIO N M AR C H - D E C E M B E R
40

TO TA L E RRO RS

30

20

10

0
DAY

50

100

150

200

N E W S P AP E R E R R O R R E D U C TIO N M AR C H -D E C E M B E R

AVERAGE ERRORS/DAY

20

15

10

5
WEEK

10

20

30

40

Newspaper Copy Error Reduction

Improve
Implement new methods
Spellcheck how-to
Ten rules of grammar
Pyramid of trust

Control
Process measures to be monitored
Total errors
Errors by category
% Articles checked by author
% Articles spellchecked

Results
-Total errors reduced 70%
- News assistant freed up for other work

Other Benefits
Fewer missed deadlines
- Increased ability to handle tight deadlines
Improver morale at copy desk
- Copy editors can make better use of their
talents and training
Re-keying of names (rework) reduced
More efficient and less costly sources of information
found
- Less errors and less keying time
- News assistants assigned to more valuable work

Results of a Collections Project in GE

Estimated savings across the business - $2MM
annually
About half in increased cash, half in reduced
write-offs
Senior management did not believe the estimated
savings, asked for a 6 month trial
After 6 months, about $1.45MM in actual savings
had been documented - $2.9MM annually
Secondary benefit: analysis determined optimal
number of collectors resulted in additional hires

Other Actual Financial Application Areas

Accounts receivable
Accounts payable
Factoring inventories
Closing the books
Financial auditing
Manual account
reconciliation
Acquisitions
Realizing revenue

Hedging foreign currencies

Cash flow
Credit scoring
Journal entry accuracy
Forecast accuracy
Financial reporting
Filing taxes
Managing pension funds
Payroll accuracy

Why Are We Missing This Opportunity?

The perception is the problem

Theres no money outside manufacturing

The statistical tools dont apply
The people cant understand Six Sigma
You cant get data
Its too hard (outside our comfort zone)

Biggest barrier lack of process viewpoint

With a process viewpoint, application is
obvious and straightforward

Summary
Manufacturing processes represent a small
portion of the total Six Sigma opportunity
Business processes have not received
sufficient attention
Savings like the $2.9MM from the
collections project are just the tip of the
iceberg
Having a process mentality is the key to
identifying and capturing these savings

Improving Business Processes

with Six Sigma
What Have We Learned?
Ronald D. Snee
Tunnell Consulting

Six Sigma is Different and it Works?

Bottom-Line results ($$) are created
Active senior management leadership including
periodic project reviews is part of the method
Improvement tools are linked and sequenced into an
overall approach - DMAIC
Champions, MBB, BB, and GB are trained in depth
Utilizes the scientific method and statistical thinking
Builds on methods shown to be useful
Integrates the human and process elements of
improvement

Six Sigma Integrates Human & Process

Aspects of Process Improvement
Human

Process

Bottom Line ($$)

Mgt Leadership
Culture Change
Sense of Urgency
Customer Focus
Project Teams

Process Improvement
Analysis of Variation
Disciplined Approach
Quantitative Measures
Statistical Methods
Process Management

Six Sigma Works

Six Sigma works if you follow the process. If Six
Sigma is not working, youre not following the
process.
AlliedSignal Manager
Six Sigma will not succeed by itself.
Management must follow the process that has
been proven to work. We do not know of
anyone who has followed the process and
failed.

Opportunities Outside Manufacturing

Supply Chain
Logistics, Distribution, warehousing
Inventory Reduction
Transactions
- Billing cycle time, accuracy, adjustments
- Accounts receivables reduction
Information Technology
Web Site Development, IT Contracting
Finance Audits, closing the books
Environmental Waste disposal & emission control

Opportunities Outside Manufacturing

Human Resources Hiring and staffing
Legal
External resources, document processing
Energy Reduction Electric and natural gas
Project Engineering
Cycle time, change orders
Customer Service
Order entry errors, response time
Production Planning and Scheduling
- Forecasting

Key Characteristics of
Non-Manufacturing Processes
Culture doesnt think in terms of processes,
variation and data
Work requires considerable human intervention
Processes are often complex and not well-defined
Process output is often intangible & can be unique
Measurements are often non-existent or ill-defined
Large amounts of paperwork are often generated
Similar activities done in different ways

Business Processes
Have generally

- Not been well-engineered

- Never been fully integrated or uniformly
defined.
Problems tend to be in three areas:
- Input Accuracy
- Cycle time
- Disputes Reconciliation Between the
Company and Customers

Every Process Has a Hidden Plant

A Non-Manufacturing View
Work
Activity

Check
Bad

Very
Bad

Revise,
Correct
Discard,
Do Again

Good

Package
Output
Good

Check

Bad

ELIMINATE THE HIDDEN PLANT

Send Output
to Next Step

Eye Glasses Fitting Process

PATIENT

DOCTOR

OPTICIAN

LAB
ORDER

SCHEDULES
EXAM

EXAM &
PRESCRIPTION

*REEXAM
METRICS
On-Time Delivery
Cycle Time
Quality
Lens & Frames
Cost
Customer Satisfaction

FILLS SCRIPT
FITS FRAMES

GLASSES
FIT?

GLASSES

NO

MAKES
GLASSES

*FRAME
REDESIGN

YES

NO

PATIENT
CAN
SEE?

YES

PATIENT
USES
GLASSES

*Hidden Factory - Rework, Wasted Time and Material

Comments on Six Sigma Tools Used

Gage R&R studies are typically done only for
attribute measurements
- Focus is usually on the development of
measurement systems
Process specifications are often present but not
widely recognized
Design of Experiments is not widely used today
but its use will grow over time
Multi-Vari studies is a very useful tool because
of the large amount of human intervention

We Know What to Measure

Errors, accuracy, completeness and defects

Cycle time
Cost ($$)
Customer Satisfaction

Note: For some non-manufacturing processes

capacity and downtime as also relevant metrics

So What Have We Learned?

Big opportunities exist outside of manufacturing
Six Sigma works for non-manufacturing as well as
manufacturing processes
Non-manufacturing Six Sigma requires some
different tools, but
- There are more similarities than differences
between the two types of uses of Six Sigma
Six Sigma primes its own pump;
- Initial investment more than paid for by the first
set of projects