DOES SIX SIGMA WORTH IT? Six sigma means a 99,9997

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DOES SIX SIGMA WORTH IT?
Six sigma means a 99,9997% precision.
But does it worth it?
An accuracy of "only" 99, 379% would mean:
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That every day, for 15 minutes, the water you drink may not be drinkable;
That every week there would be 5.000 surgical operations that do not go to fruition;
Every month we would remain without electricity for 7 hours;
All this seems acceptable?
Let's imagine for a moment what is the meaning of a Low Quality:
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To lose customers who are not satisfied;
To reduce their volume of business;
To miss opportunities because they lack the time and resources.
What’s the meaning of Six Sigma?
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Use a philosophy and a strategy made famous by some organizations that are now recognized
as the undisputed leader in the field of Quality;
Base their decisions on facts within an Integrated Management System;
Determine what is really important for their customers (critical factors) and from there begin
the process of improving;
Continuously improve products and processes;
Measure the potential of our processes.
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The components of Six Sigma are 6:
1.
2.
3.
4.
5.
6.
To constant focus on the customer;
To base management on data and facts;
To focus on processes, management and improvement;
To be proactive;
To destroy the boundaries of the organization;
To seek perfection but accept failure.
Adopt the Six Sigma methodology has the following advantages:
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It meets customer expectations, and often goes beyond;
It reduces waste and rework;
It increases the growth of the organization;
It reduces the “time to market”;
It improves the use of resources.
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Below is an example of application of six sigma:
Case Study: Use Six Sigma to Reduce Temporary Labor Expenses (www.isixsigma.com)
In any plant, when production increases above planned-for levels – whether due to sudden increased
demand or unexpected constraints in the system – contract labor may be brought in as a quick fix.
While this provides some flexibility in operations, increased labor costs is a problem.
Six Sigma can be used to optimize these changing labor costs and the accompanying productivity
concerns. Cost accounting principles are also applied to these productivity improvements.
Background
Last year a flavors and food additives company in Asia, had a surge in production in one of its product
lines (liquids) due to the transfer of production from an affiliate and, simultaneously, an increase in
sales. Because of the strict labor laws and strong union power in the Asian country, the company was
reluctant to hire additional permanent employees as that could lead to over-employment within its
workforce. Asking employees to work overtime also held little appeal, due to severe penalties related
to overtime imposed by the government.
The company chose to go with a third option – hiring casual (i.e., temporary) labor to handle additional
production loads when needed. The casual labor market in this locale is predominantly provided by one
third-party service provider that has long had a good relationship with the company. This arrangement
was supposed to help maintain the cost-effective use of casual labor. Instead, the company was seeing
an unreasonably high increase in casual labor cost.
Manufacturing Leverage Index
This index is calculated by subtracting the labor cost percent change from the production change
percent change. For example, if production increases 10 percent and casual labor costs increase 20
percent during the same time period, the index is -10 percent. Ideally, the production percent change
should be higher than the labor percent change; the goal is for the index to be a positive number and
reflect “positive leverage.”
In February 2012, the finance and operation teams of the company were asked to control their casual
labor costs. As part of this effort, the company began using a manufacturing leverage index as a key
performance indicator (KPI); this index compared the casual labor costs to the increase in production
volume. After four months, the KPI indicated there was no significant improvement in the relationship
between casual labor and production. In a June meeting with internal and external stakeholders to
address that disconnect, the company chose to use the continuous improvement methodology of Six
Sigma to reduce the costs of casual labor.
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Define
A process map of the current set up (Figure 1) revealed that the manpower requirement was based on
the product order receipt; any shortfall was handled by additional casual labor. In theory, any increase
in casual labor should match a corresponding increase in production volume. High casual labor costs is
not a problem in and of itself. When the casual labor cost increase is higher than the production volume
increase, however, it becomes a problem, as signified by a negative manufacturing leverage index.
Figure 1: Process Map for Hiring Casual Labor – Before
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Measure
During the first half of 2012, contract hours (and costs) increased while volume remained constant or
decreased compared to 2011, as shown in Figure 2. A cause-and-effect analysis was completed in July
to better understand the various factors involved in this labor and production relationship (Figure 3).
Figure 2: Manufacturing Leverage Index for Liquids Business Line
Figure 3: Cause-and-Effect Analysis
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Analyze
After discussions with members of the operations team, the accounting department and the planning
department, the various causes for the contract labor hiring were detailed and assessed through a
rating system.
Not surprisingly, there were gaps in the planning process. When a production order was received, it was
processed without checking whether it could be consolidated and processed with other orders. That
resulted in unnecessary manpower spent on cleaning the machines and equipment after producing
each individual order; preparing, measuring and weighing the raw material necessary to produce an
order; and paperwork preparation.
In addition, proper accounting was not being performed. All of the casual labor invoices submitted to
the company by the vendor were sent by mail, and then were handed manually within the company
before being approved for payment. Invoices were not input into the accounting system until they were
approved, which meant that there could be significant delays between an invoice being sent and an
invoice being processed. In a few outlying instances, invoices went missing during the manual handling
and were not found for six months.
The casual labor vendor was also a participant in improving the manufacturing leverage index. Upon the
company’s request, it provided all labor request records for 2012 detailing who at the company had
requested the labor, for which work area, for how long, etc. The records showed that the majority of
requests were made by team leaders, but there were also unjustified requests made by nonauthorized
persons.
The table below shows the results of this analysis. Among the root causes found for the continued high
labor costs, the most significant were:
1. Unauthorized requests, which indicated that the informal rules of who has authority to request
casual labor were not known or being followed). The result was a temporary worker could be
hired when there was not sufficient work to be done or when an employee could have been
transferred from another department to help.
2. Invoices not being authorized and processed on time. This reduced visibility of the problem,
allowing more unnecessary casual labor hiring.
3. Small batch orders that could have been combined with other orders for optimized production.
As noted previously, this led to more work than necessary by employees to prepare the
production line, and thus, created an artificial need for more casual labor to fill in.
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Root Cause Analysis of Contract Labor Hiring
Degree of
Likelihood of
Ability to
Score (degree of Overall Ranking
Severity*
Occurrence*
Detect*
severity x
likelihood of
occurrence x
ability to detect)
Unauthorized requests for
10
9
4
360
1
9
9
4
324
2
7
6
4
168
3
4
6
2
48
4
Time lag for invoice processing, 3
5
2
30
5
casual labor (informal rules
about who has authority not
being followed)
Casual labor invoices not
authorized and processed on
time
Liquid production quantity not
optimized
Incorrect expense recording
insufficient accrual
*On a scale of 1 to 10, where 1 means the fewest concerns and 10 means the most concerns
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Improve
Based on the root cause analysis, the most significant causes were addressed by corrective and
preventive actions.
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All orders must be checked by the planning department to confirm the minimum production
quantity. If an order does not meet the minimum production quantity, it will be held for
consolidation with other orders to reach optimum production levels.
No casual labor request can be made until there is confirmation that there is no idle or surplus
manpower available from other internal production lines.
Casual labor authorization was removed from team leaders and given only to production
managers. These authorization points were communicated to the vendor; they are required to
check that the person requesting additional labor is authorized to make that request by the
company. All requests from nonauthorized persons will be summarily rejected.
A formal, documented policy was created for casual labor employment.
In addition, the company asked the service provider to stop sending invoices by mail; all invoices must
be sent electronically. This not only helped improve the speed of invoice processing but also helped get
payment authorizations completed properly by using the existing workflow system of the company.
These improvements reduced the labor hours by up to 30 percent after July 2012. The manufacturing
leverage index correspondingly improved, reaching as high as 60 percent from an earlier low of -90
percent, as shown in Figure 4. A revised process map that shows improvements in the vendor invoices,
man power allocations and planning is given in Figure 5. The improvements were assessed by using
hypothesis testing – a t-test for the mean labor hours before and after the improvements. The p-value
is less than 0.05 so the null hypothesis is rejected, confirming that there is a significant difference in the
mean value and the performance of the process has improved (Figure 6).
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Figure 4: Casual Leveraging for Liquid – After
Figure 5: Process Map for Hiring Casual Labor – After
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Figure 6: Statistical Confirmation of Improvements
Control
The improvements were reviewed and confirmed as sustainable. The objective of the company remains
to realize control based on a clearly defined system rather than leaving decisions up to individuals who
define their own priorities and processes.
To continue to optimize production quantity, the company established a minimum process quantity in
the workflow system. As a failsafe, a warning message will pop up if the minimum quantity is not
reached with one order; the planning team will not let incomplete orders proceed to production. All
invoices follow the workflow system, so that only the authorized person (or persons) can view and
approve the invoices. A follow-up email will be sent automatically to remind those authorized staffers if
there is an invoice pending their approval – a further automated tool to help sustain improvements.
Finally, the policies for requesting casual labor have been clearly communicated internally across the
production team and with the service provider.
Conclusion
This case study demonstrates the deployment of Six Sigma tools in finance for improvements in labor
costs. The analysis involved four internal stakeholders (local operations, planning, finance and the
regional management team) as well as one external stakeholder. All data was collected either from the
company’s existing workflow system or provided by the casual labor vendor. Five people actively
worked on this project while more than 10 contributed their time during a period of one month. No
additional costs were spent on this improvement project.
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