The Lean Six Sigma Guide to Doing More With Less E-Book

Mark O. George

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 441

Veröffentlichungsjahr: 2010

Beschreibung

Create New Profits in Any Economy In this difficult economic climate, it's vital to cut waste that can eat at a company's bottom line and boost efficiency at every organizational level. The traditional business solution in a crisis is to slash away non-critical talent and resources, often doing more harm than good. There is a far better systematic approach to doing more with less. As a leading expert on Lean Six Sigma and business transformation, with a deep knowledge of its application in countless areas of business, author Mark George can help you use Lean Six Sigma to analyze your operational needs, identify high-impact opportunities, design and rapidly implement solutions, and create a system that will build efficiency and high performance in every area of your business. The Lean Six Sigma Guide to Doing More with Less can help you: * Improve operating margins by as much as 20%, ROIC by as much as 10%, and reduce the costs of goods sold by as much as 5% or more * Create "cost intelligence" that uncovers root causes allowing cost reductions without jeopardizing customer service levels and quality * Use enterprise speed, agility, and flexibility to drive step-change reductions in cost and enable competitive advantage * Identify and eliminate the costs of complexity in your business * Supercharge your legacy Six Sigma program, improving speed to results, increasing project values, and shortening completion times With case examples from a wide array of industry, encompassing decades of experience implementing Lean Six Sigma in every economic climate, in companies of every size, The Lean Six Sigma Guide to Doing More with Less will give your business an intelligent edge in lean times.

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

PREFACE

CREATING A HOLISTIC APPROACH TO LEAN SIX SIGMA

LEAN SIX SIGMA: FAD OR PHENOMENON?

Acknowledgements

CHAPTER 1 - WHY USE LEAN SIX SIGMA TO REDUCE COST?

TRANSACTIONAL EXAMPLE: LEAN SIX SIGMA TRANSFORMING OUR GOVERNMENT

THE ALLOY OF HIGH PERFORMANCE: WHY CHOOSE LEAN SIX SIGMA TO REDUCE COST

LEAN SIX SIGMA VERSUS TRADITIONAL COST-CUTTING TACTICS

EMERGING STRONGER THAN EVER

SPOTLIGHT #1 - HOW TO USE THIS BOOK

OVERVIEW OF PART I: PROCESS COST REDUCTION—A FOCUS ON THE TOOLS OF WASTE ELIMINATION

OVERVIEW OF PART II: ENTERPRISE COST REDUCTION—A FOCUS ON VALUE, SPEED, ...

OVERVIEW OF PART III: ACCELERATING DEPLOYMENT RETURNS—GETTING MORE, FASTER, ...

PART I - PROCESS COST REDUCTION

INTRODUCTION TO PART I

CHAPTER 2 - FIND COST REDUCTION OPPORTUNITIES IN WASTE

THE SEVEN COMMON FACES OF WASTE: TIMWOOD

USING THE FULL LSS TOOLKIT TO DRIVE COST REDUCTION

SPOTLIGHT #2 - SPECIAL TIPS FOR NONMANUFACTURING PROCESSES

SPOTLIGHT #3 - DESIGN A SUCCESSFUL LEAN SIX SIGMA PROJECT OR PILOT

WHICH METHODOLOGY IS RIGHT FOR YOUR PROJECT?

IDENTIFYING THE PLAYERS AND THEIR ROLES

CHAPTER 3 - USE THE VOICE OF THE CUSTOMER TO IDENTIFY COST-CUTTING OPPORTUNITIES

CUSTOMER TYPES AND THEIR NEEDS

COLLECTING DATA ON CUSTOMER NEEDS

GETTING SPECIFIC ABOUT CUSTOMER NEEDS

AVOIDING MISINTERPRETATIONS

CONCLUSION

CHAPTER 4 - MAKE PROCESSES TRANSPARENT TO EXPOSE WASTE

HOW TO DEFINE THE BOUNDARIES THROUGH SIPOC DIAGRAMS

USING VALUE STREAM MAPS TO ACHIEVE TRANSPARENCY

CONCLUSION

CHAPTER 5 - MEASURE PROCESS EFFICIENCY

PROCESS CYCLE EFFICIENCY: THE KEY METRIC OF PROCESS TIME AND PROCESS COST

LITTLE’S LAW: UNDERSTANDING THE LEVERS FOR IMPROVING PROCESS SPEED

THE WIP CAP METHOD: HOW LIMITING WIP CAN INCREASE PROCESS SPEED AND REDUCE COSTS

USING PCE AND LITTLE’S LAW TO DRIVE COST REDUCTION

CHAPTER 6 - IMPROVE YOUR ANALYSIS SKILLS

ANALYSIS SKILL # 1 : LEARNING TO “READ” VARIATION

ANALYSIS SKILL # 2 : DIGGING OUT ROOT CAUSES

ANALYSIS SKILL # 3 : ESTABLISHING RELATIONSHIPS BETWEEN FACTORS

CONCLUSION

CHAPTER 7 - MAKE RAPID IMPROVEMENTS THROUGH KAIZENS

QUICK OVERVIEW: THE KAIZEN APPROACH

WHEN SHOULD YOU USE KAIZENS IN COST REDUCTION PROJECTS?

SEVEN KEYS TO KAIZEN SUCCESS

CONCLUSION

PART II - RAISING THE STAKES

CHAPTER 8 - THINK TRANSFORMATION, NOT JUST IMPROVEMENT

ATTAIN A PROPER UNDERSTANDING OF THE EXTENT OF THE OPPORTUNITY

CONSCIOUSLYCHOOSE A PATH TO CAPTURE THE OPPORTUNITY

PLAN FOR A TRANSFORMATION JOURNEY

LEADERSHIP CHALLENGES IN LEADING A TRANSFORMATION

CONCLUSION

SPOTLIGHT #4 - TRANSFORMATION AT OWENS-ILLINOIS

CHAPTER 9 - UNLOCK THE SECRETS TO SPEED AND FLEXIBILITY

ALIGNMENT AND ANALYTICS

A MODEL OF SPEED AND AGILITY

ECONOMIC ORDER QUANTITY (EOQ)—THE FIRST 100 YEARS

AUGMENTING EOQ WITH LEAN ANALYTICS

THE EQUATIONS IN ACTION

CONCLUSION

CHAPTER 10 - REDUCE THE COST OF COMPLEXITY

THE HIDDEN COST OF ADDED OFFERINGS ON PROCESSES

ASSESSING COMPLEXITY IN YOUR BUSINESS: A HOLISTIC VIEW

HIGHLIGHTS OF THE COMPLEXITY ANALYSIS PROCESS

COMPLEXITY REDUCTION AS THE GATEWAY TO TRANSFORMATION

CONCLUSION

CHAPTER 11 - LOOK OUTSIDE YOUR FOUR WALLS TO LOWER COSTS INSIDE

WHAT IS AN EXTENDED ENTERPRISE?

WORKING ON THE SUPPLIER END OF THE EXTENDED ENTERPRISE

WHAT TO DO WHEN YOU’RE THE SUPPLIER: EXTENDING YOUR ENTERPRISE DOWNSTREAM

CONCLUSION

PART III - SPEEDING UP DEPLOYMENTRETURNS

CHAPTER 12 - CREATE A PIPELINE OF COST IMPROVEMENT PROJECTS

DEVELOPING RIGOR IN PROJECT IDENTIFICATION AND SELECTION

FROM FIRST-TIME TO ALL THE TIME: SHIFTING FROM A ONE-TIME EVENT TO AN ONGOING ...

CONCLUSION: MAINTAINING A DYNAMIC PIPELINE

SPOTLIGHT #5 - LINK PROJECTS TO VALUE DRIVERS

OPTION 1: VALUE DRIVER TREES

OPTION 2 : FINANCIAL ANALYSIS DECISION TREE

OPTION 3 : ECONOMIC PROFIT

OPTION 4 : EP SENSITIVITY ANALYSES

VALUE DRIVER EXAMPLE

CHAPTER 13 - SMOOTH THE PATH THROUGH CHANGE

CHANGE READINESS ASSESSMENTS

LEADING VERSUS MANAGING THE CHANGE

UPGRADING YOUR COMMUNICATION PLAN

PROCESS OWNERSHIP AND COST ACCOUNTABILITY

CONCLUSION: RESTORING FAITH, HOPE, AND BELIEF

CHAPTER 14 - ESTABLISHING A CENTER OF EXCELLENCE

WHAT IS A COE AND WHAT DOES IT DO?

FOCUS # 1 : PERFORMANCE MANAGEMENT

FOCUS # 2: REPLICATION: COPY AND PASTE YOUR COST SAVINGS

HOW CAN A COE FIT INTO AN ORGANIZATION?

WEAVING THE COE INTO STRATEGIC PLANNING

CONCLUSION

CHAPTER 15 - GAINING NEW PERSPECTIVES ON DEPLOYMENT COST AND SPEED OPPORTUNITIES

LOOKING FOR FOCUS AND FLEXIBILITY IN DEPLOYMENT

FOCUSING DEPLOYMENTS ON BUSINESS ISSUES

FLEXIBILITY IN BUILDING SKILLS

CONCLUSION

CHAPTER 16 - REENERGIZING A LEGACY PROGRAM

WHY DEPLOYMENTS LOSE STEAM

BUILDING A STEAM ENGINE: PERFORMANCE MANAGEMENT

PROCESS OWNERSHIP: THE PARTNER OF PERFORMANCE MANAGEMENT

HOW TO REENERGIZEADEPLOYMENT

CONCLUSION

INDEX

Copyright © 2010 by Accenture. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

George, Mark O., 1960-

The lean six sigma guide to doing more with less : cut costs, reduce waste, and lower your overhead / Mark O. George.

p. cm.

Includes bibliographical references and Index.

eISBN : 978-0-470-60658-2

1. Cost control. 2. Six sigma (Quality control standards). 3. Production control. 4. Industrial management. I. Title.

HD47.3.G47 2010

658.4’ 013—dc22

2009052170

FOREWORD

Though I have now retired from the consulting industry, I spent over 20 years helping companies grow corporate value through process improvement initiatives and business transformation. My work with improvement had begun in the late 1980s, when, upon my return from extended studies in Japan, my colleagues and I pioneered the introduction of what are now known as Lean methods in the United States. Years later, in 2002, my company, George Group Consulting, led another wave of innovation: fully integrating Lean with Six Sigma so that companies could simultaneously improve cost, speed, and quality while tying all process improvement projects to shareholder value.

Lean Six Sigma has subsequently become one of the most popular business improvement methodologies of all time. Our clients reported to the markets that their Lean Six Sigma initiatives have been cost-neutral in less than one year, that they’ve reduced costs upwards of 20 percent and have improved ROIC and Economic Profit by as much as 10 percent or more by year two of the deployment. The media abounds with examples of companies large and small that have made similar gains.

In the past decade, continuous improvement, including Lean, Six Sigma, and Lean Six Sigma, has reached unprecedented levels of acceptance. In fact, about 50 percent of Fortune 500 companies and over 80 percent of Fortune 100 companies (according to AVR Associates, Ltd, 2009), as well as government entities such as the U.S. Navy, U.S. Army, and multiple federal and state agencies have active Lean Six Sigma or similar programs.

The relevance of Operational Excellence and Lean Six Sigma continues to this day, nearly three years after having sold the George Group to Accenture and seeing it become their Process and Innovation Performance service line.

Yet despite its proliferation, research indicates that many continuous improvement programs are, unfortunately, not delivering the expected business benefits. In late 2008, the Conference Board released the results of its survey of 190 CEOs, chairmen, and company presidents from around the globe. These leaders were asked to list their top 10 challenges, particularly in the time of financial crisis. The top-of-mind concerns among business leaders today may surprise you:

Source: The Conference Board’s 2008 CEO Challenges Survey.

Executive’s Leading Concerns During TimePercent of RespondentsExcellence in execution55.4%Speed, flexibility, adaptability to change46.6%Economic performance44.6%Customer loyality/retention40.1%Improving productivity36.9%

Even though continuous improvement programs are resident in organizations of all types and in all geographies, many companies don’t seem to be addressing the fundamental issues these methodologies are intended to improve. All of the concerns listed here speak directly to the objectives of Lean Six Sigma, yet many executives don’t perceive the business impact. While many companies have claimed hundreds of millions in economic benefit from Lean Six Sigma, just as many others have failed to see the results. Is the methodology not universally applicable, or is it being poorly administered?

Today, my son, Mark George, along with hundreds of my former colleagues, continue to bring the power of George Group’s methodologies to Accenture’s clients around the globe. They’ve captured their best practices in this book, The Lean Six Sigma Guide to Doing More with Less. Previous books on Lean Six Sigma (including my own), served to introduce the concepts to readers who did not understand them or had not seen the benefits of their integration into a single transformation approach. By contrast, this new book helps the reader understand how the concepts are best applied in reducing cost and enabling competitive advantage in today’s economic climate.

The Lean Six Sigma Guide to Doing More with Less provides an understanding of the difference between Lean Six Sigma deployments that provide incremental reductions in cost and those that enable step-change improvement. In particular, Mark and his contributors present the reader with a practical understanding of how process transformation can deliver not only an operating advantage but also a structural advantage. Throughout this book, Mark presents case studies from a wide array of engagements that help the reader comprehend the approach for Lean Six Sigma to manage costs, along with the pitfalls, lessons learned, and ways to mitigate risk—it is truly a how-to guide.

For those who have toiled away mapping processes, gathering data, and applying tools only to see business outcomes left relatively unchanged, Mark helps readers understand how a holistic Lean Six Sigma approach can enable annual cost reductions of 20 percent or more and improved ROIC and Economic Profit by as much as 10 percent or more. The Lean Six Sigma Guide to Doing More with Less is a valuable reference tool for anyone seeking to reduce cost and improve business performance—no matter what degree of impact you seek, what amount of commitment you’re willing to make, or how mature your Lean Six Sigma program is.

Michael L. George Former CEO and Founder of George Group Consulting (now part of Accenture)

PREFACE

The global economic collapse of 2008- 2009 is widely recognized as the most severe crisis of its type since the Great Depression of the 1930s. As of this writing economists and analysts cannot be certain that the crisis has yet reached its profoundest depth; all agree that it will take years, if not decades, to restore the economy to anything near its prior strength and expanse.

No geography, industry, government or socioeconomic group has been spared. As the commercial economies and public sector budgets contract, there is increased pressure for organizations to survive the crisis by reductions in the cost of operation. The rescinded demand for goods and services has revealed that global overcapacity has been evident through rampant increases in unemployment, the total elimination of enterprises, the consolidation of many who remain, widespread shuttering of plants, and the closure of tens of thousands of retail outlets. Following demand and capacity balancing, many organizations have looked to restructuring, outsourcing and the tried-and-true analysis of profit-and-loss (P&L) statements to identify myriad cost reduction opportunities.

In a difficult economic period, people are tempted more than ever to apply quick fixes and ad hoc solutions. Cost reduction activities may be knee-jerk reactions—typically, poorly planned and executed—rather than well-devised strategies. Grasping for solutions is a natural, yet ineffective, reflex. Without careful analysis and understanding of the drivers of cost, reductions may not last, with costs reemerging in the same form or in other manifestations of inefficiency. The outcomes can be hit and miss; some may have benefits that are short-lived, while others may do more harm than good by eroding market share through lack of customer focus and decreased service levels.

We have discovered that the most egregious mistakes organizations make in cost-cutting actually don’t show up as total disasters but, instead, as missed opportunities. Organizations will often miss 10 to 50 times the potential savings by succumbing to traditional cost-cutting tactics, scrambling to find cost management solutions at the P&L account level and not at the enterprise level. The solutions often fail to understand the need to rethink operating models and the offering portfolio, and to build in organizational resilience, flexibility, and speed to react to market conditions.

In times of crisis, markets, institutions, and policies quickly evolve; the competitive landscape changes and new consumer trends emerge. In such times, management’s decisions can seal their company’s fate: do little and join the ranks of others in the struggle to hold market share and diminishing margins, or do something transformational and emerge even stronger than before—best poised to surpass the competition once markets recover and demand resurges.

Organizations must develop near-term strategies to survive the downturn, and longer-term strategies to thrive in the new economy. This book provides a practical understanding of how Lean Six Sigma (LSS) supports both the near-term need to survive by safely and rapidly reducing cost, and the longer-term road to high performance by transforming into a fast and agile enterprise. And while continuous process improvement is typically associated with gradual, incremental performance gains, this book illustrates how a concerted focus on process and execution can enable a structural, operational, and cultural transformation that confers true competitive advantage.

High Performance Business Defined

Thus far, Accenture has studied more than 6,000 companies, including more than 500 that meet our criteria as high performers. As described in Going the Distance: How the World’s Best Companies Achieve High Performance, Accenture defines high-performance businesses as those that:

• Effectively balance current needs and future opportunities.

• Consistently outperform peers in revenue growth, profitability, and total return to shareholders.

• Sustain their superiority across time, business cycles, industry disruptions, and changes in leadership.

And how do high performers achieve these feats? Our research has identified the “how” as the building blocks of high performance:

• Market Focus and Position results in better decisions.

• Distinctive Capabilities results in better practices.

• Performance Anatomy results in better mindsets.

High-performance businesses continually balance, align, and renew the three building blocks of high performance, creating their competitive essence through a careful combination of insight and action.

CREATING A HOLISTIC APPROACH TO LEAN SIX SIGMA

How do you avoid knee-jerk reactions and, instead, act like a high-performing organization? What’s needed is a holistic approach that focuses on applying Lean Six Sigma at multiple levels and in multiple ways across your organization. Describing that holistic approach to using Lean Six Sigma to reduce costs is the purpose of this book.

“Holistic” Lean Six Sigma addresses all seven of the fundamental requirements for effective operational cost reduction:

1. Alignment of the reduction effort to company strategy and its sense of urgency—be it immediate survival, business as usual, or establishing competitive advantage.

2. Identification of the greatest levers of operational cost reduction opportunity.

3. Understanding of the multiple drivers and root causes of cost (including processes, offerings, customers, suppliers, and distribution channels), as well as their interrelationships and the ultimate cost of complexity they create.

4. Speed-to-results, and the related effort and investment required to realize the cost reduction.

5. Practical and pragmatic implementation: the cost reduction approach must be robust and universal, able to address a wide array of opportunities, environments, and levels of operational maturity.

6. Balance between internal and external forces; ensuring that the cost reduction activity will not adversely affect net overall business performance—especially through any degradation of quality, customer service, and market share.

7. Sustainability of the cost reductions realized.

Each of the preceding seven requirements presents its own set of challenges; yet a concerted operational cost reduction strategy must address all of them. This book will illustrate that when implemented holistically the Lean Six Sigma approach encompasses all of these critical requirements and delivers cost reduction with remarkable speed.

Without consideration of all these elements, the cost reduction effort will fail to rapidly yield its full, sustained potential. Taken together, these elements address the relationship between speed, cost, and the step-change improvement that speed and agility can enable when they become a primary leadership strategy. Process performance and execution excellence can give an enterprise the speed and agility necessary to directly support radical improvements in cost, through changes in organizational structure and operating model.

If your company, division, or department is faced with rising operating costs, reduced budgets, or declining share in a shrinking market, and needs to rapidly reverse these trends, this book is for you. Throughout this text you will learn how dozens of companies have deployed Lean Six Sigma to successfully improve costs and gain a sustainable competitive advantage. Even if you already have a Lean Six Sigma program or other form of continuous process improvement initiative, you will learn how to extract greater returns—migrating from traditional gradual and incremental gains toward truly transformational high performance.

LEAN SIX SIGMA: FAD OR PHENOMENON?

You may relate to one of our clients who recently invited us to view a cabinet he sarcastically termed his “initiative vault.” It contained coffee mugs, T-shirts, banners, and training guides branded with slogans of, not one, not two, not three, but four previous improvement initiatives his company had undertaken. All had failed to live up to their promised savings, leaving him understandably cynical of any new potential additions to his “vault.” This man’s cabinet was littered with previous initiatives that failed to eliminate the underlying process performance maladies, employing only partial solutions that could not simultaneously improve cost, speed, and quality.

This book serves as a practical guide for those who are simply looking to reduce operating costs in an isolated area, as well as those who wish to enable true competitive advantage through enterprise transformation. For both situations, this book illustrates how to identify the root causes of cost and how to rapidly mitigate them with sustained net benefit.

We offer insights into how companies have deployed Lean Six Sigma to reduce costs at the local process level by as much as $2 million or more in 6 to 12 weeks and others who have reduced enterprise costs by $50 to $100 million or more in less than one year. These latter firms regularly look to Lean Six Sigma to provide annual savings equal to 2 to 3 percent of cost of goods sold. The savings are real. The approach applies to most any environment. And this book can help you apply the methods to start reducing costs now.

While individual projects will no doubt improve financial performance, they may fall short of enabling true competitive advantage for the organization. Only through an organized effort that identifies, coordinates, and aligns multiple disparate projects toward common enterprise objectives can true competitive advantage be realized.

We recognize that Lean Six Sigma is not a new phenomenon; thousands of deployments having been launched in the past decade alone. But the approach to successfully deploy this methodology and enable rapid yet substantive net returns is not widely understood and practiced. Countless firms claim to have already deployed Lean Six Sigma, but closer examination reveals that their program returns have barely exceeded total costs of deployment in many cases, if they can even be found on the P&L at all. And the time to results has been so slow that many a leadership team has lost faith and no longer sees the initiative as a true enabler of their strategic agenda.

For many firms their Lean Six Sigma journey failed to deliver the full business impact potential owing to missteps in deployment design, management, and, moreover, failure to secure and maintain leadership engagement. This book presents insights and practical approaches to extract the highest returns from your Lean Six Sigma investment—be it a single project or an enterprisewide transformation program.

For those seeking substantive impact, we provide an understanding of the array of elements required for enterprise transformation: from the initial identification of opportunities and the value at stake to the analytical relationships between offerings, process, speed, and agility, to leadership’s role in driving and supporting change, all the way to results realization and performance management. Further, we share deployment best practices and lessons learned in having architected and supported hundreds of change initiatives around the globe. We also present new, innovative, and flexible deployment approaches that minimize the time required to deploy Lean Six Sigma, and cost-effective models that allow smaller numbers of resources to be trained with faster speed-to-results.

ACKNOWLEDGMENTS

This book would not have been possible without the significant contributions made by my many collaborators who are cited throughout this book. Their experiences have combined to present Accenture’s holistic point of view on enterprise Lean Six Sigma transformation and customer value creation. To assemble and manage such an array of topics and thought capital into a single, seamless treatise was only possible through the industry and expertise of our talented associate writer, Sue Reynard.

I would like to recognize Accenture’s leaders, Walt Shill and Matt Reilly, who sponsored and truly enabled this project; whose support I am greatly appreciative.

Over this last year, my wife Irma and my children, Mark Jr. and Paloma have sacrificed countless days to allow me to dedicate myself to this project, over cherished family time. For their patience and understanding, I’m eternally grateful.

Finally, the most important acknowledgment is to my father, Michael George, who set me out on this course of authorship and who has been and shall remain my source of personal, professional, and spiritual inspiration.

CHAPTER 1

WHY USE LEAN SIX SIGMA TO REDUCE COST?

With Michael L. George and Mike Tamilio

Several years ago, a hydraulic hose company that was a Tier 1 supplier of hoses and fittings to the automotive industry found itself barely profitable, generating a negative 2 percent economic profit. A telltale sign: customer order lead time was 14 days when the industry average was 7 days. Yet its leadership, not attuned to the relationship between process velocity and cost, didn’t realize that speed was a main driver of the company’s poor financial performance. In addition to long lead times, the company also suffered from poor quality, and frequently shipped defective brake and steering parts to its primary customers.

In less than two years, the company had made a remarkable turnaround (see Table 1.1).

How were such remarkable results enabled? Through a focus on cost reduction? Partly, but the strategic alignment was around enterprise speed—reducing waste across and between functional units, which brought with it cost reduction and true competitive advantage.

For example, one client was a leading manufacturer of heavy duty trucks. Unlike other customers of this Tier 1 supplier, the truck manufacturer created a high proliferation of end items (mostly low-volume runners) required for its wide variety of truck models. When we helped the hose company complete some complexity analytics (similar to those described in Chapter 10), we discovered that process improvement was not its highest opportunity area. Rather, long manufacturing lead times were caused by having to provide the vast number of part numbers for the truck company. Management at the Tier 1 supplier decided to drop the truck company as a client, eliminate the related complexity, and focus on its remaining clients, those with higher volumes and fewer part numbers.

Table 1.1 Hose Company Results from Lean Six Sigma

Eliminating that complexity allowed the hose company to focus on the next priority: reduce the number of defective brake and steering components shipped to America’s leading automotive companies. So the hose company began an all-out assault on quality, with project identification and selection now prioritized around defect prevention. As shown in Table 1.1, quality improved from 3Sigma to 6Sigma on all critical-to-quality product specifications.

With product quality and consumer safety under control, the company was able to focus attention on Lean speed and flexibility. It launched a series of operations assessments that identified the cause of long process lead times and developed an appropriate mitigation plan that included the synchronized deployment of Lean tools (such as 5S, work cells, process flow improvement, setup reduction, and, eventually, pull systems).

This holistic approach—combining complexity reduction, quality improvement, and the elimination of process waste—delivered remarkable improvements. As noted previously, in less than two years, profit margins had doubled. But a picture is worth a thousand words! Figure 1.1 shows the drop in cost of goods sold as lead times dropped.

Notice that the rate of cost reduction was relatively slow initially, and then accelerated as cycle time was driven down to less than 25 percent of its original value. Based on the initial observations, one would have expected a linear relationship between lead time reduction and its effect on costs. Why did the rate of cost reduction speed up as lead times continued to drop? What was going on?

Figure 1.1 The effects of customer order lead time on manufacturing cost: For the whole company, cost of goods sold fell by 9 percent as the cycle time from the beginning to the end of production was reduced to 35 percent of its original value. At the same time, company profit increased from 7.3 percent on a sales increase of 13.8 percent.

Initially, process improvement projects resulted in reduced cost of poor quality and direct labor cost; savings typically associate with continuous improvement. While these projects were prudent, they yielded relatively small incremental impact to the overall business performance; certainly not enough to provide competitive advantage. You will recall that the hose company’s manufacturing cycle time was initially 14 days on average, compared to its peer group’s cycle time of 7 days (which was also the customer’s accepted lead time).

When the hose company’s lead time reached the peer-group average of 7 days, costs had been improving gradually. But when the company continued to strive for greater speed and reached a 3-day cycle time, the company’s operating performance enabled a structural advantage.

There is, in fact, a threshold of cycle time that is needed to dramatically eliminate cost, to make the step-change from a mere operating advantage to a structure advantage. So the question for leaders becomes how much process velocity is required for our operational advantage to enable a structural advantage? Figure 1.2 reminds us that both of these elements are required to enable substantive reductions in cost.

Customer Dissatisfaction and High Cost Processes Go Hand in Hand

As this hose company’s experience demonstrates, slow processes make unhappy customers. We have been working with several clients to drive consistency, speed, and savings in their commercialization processes and in their sales pipeline. It has also become clear that problems with customer-facing processes are responsible for much customer dissatisfaction. Most companies will go to great lengths to please customers when they complain about a product, but ignore the aggravation that inconsistent responsiveness, delayed contracts, and unfriendly agents cause. A strategic project that focuses on the wastes and variability in these areas will achieve a double victory, reducing costs in critical processes while driving up customer satisfaction.

In this case, once cycle time from start to finish was 50 percent less than the lead time demanded by customers, the company was able to close a large warehouse and quality containment facility. Closing the warehouse allowed the company to greatly reduce an array of costs frequently referred to as the “hidden factory.” These included:

• Inventory

• Capital and equipment

• Energy

• Insurance

• Taxes

• Excess labor

• Transportation

• Handling, product damage

. . . and other costs that added no value from the perspective of the customer.

The correlation between speed and cost—both at a process level and at an enterprise level—is a powerful concept and one that has provided competitive advantage to manufacturing and services companies alike. The lessons we can learn from the hose company are that:

• Process-level speed is important and can confer some operating advantage, but by itself cannot fundamentally shift the cost base of the company.

• Enterprise-level speed and flexibility is where the biggest gains will come from, conveying a structural advantage that will let you supersede your competition, based on both speed and cost (but you can’t achieve enterprise speed without process-level speed).

Figure 1.2 Where operating advantage becomes structural advantage.

Benefits of Speed and Agility

The hose company just described created a true market advantage when it reduced its lead time by 80 percent across all of its products. The changes needed to achieve that velocity and agility also dramatically dropped costs.

While reducing costs is a good thing in its own right, it is also the case that faster cycle times and the flexibility to rapidly deliver all offerings in your portfolio will win more customers in a financial downturn because customers do not want to tie up their money in inventory; nor, in transactional processes, do they want to wait for new products, faster response, and so on.

TRANSACTIONAL EXAMPLE: LEAN SIX SIGMA TRANSFORMING OUR GOVERNMENT

The opportunity for cost reduction through cycle-time reduction was born in manufacturing but has proven to work just as effectively in nonmanufacturing applications. For example, U.S. Naval Aviation was one of the first government organization to implement process improvement across the enterprise. One example of the ability of cycle-time reduction to generate cost reduction occurred at the Naval International Program Office, which provides proposals to allied governments in response to their request for price, delivery, and specs—on an F/A-18, for example. The response originally required 5.5 man-years of effort and ranged from 30 to 392 days to respond. Customers found significant errors in 91 percent of the proposals. Further, a study of naval weapons systems showed a high correlation between cost overruns and excess cycle time.

Through prioritized project identification and selection and the application of Lean Six Sigma, the average response lead time was reduced to 11 days and the error rate to 8 percent. The overall cost of proposal preparation was reduced by 36 percent, and customer satisfaction dramatically improved. The gains were recognized at the highest levels.

THE ALLOY OF HIGH PERFORMANCE: WHY CHOOSE LEAN SIX SIGMA TO REDUCE COST

The more we have tested and implemented the central tenets, tactics, and tools of the combined Lean Six Sigma methodology, the more convinced we’ve become that both are essential to rapid and sustainable cost-cutting. The integration of Lean and Six Sigma is one of the most effective methods for consistently improving cost, speed, and quality, with broad successes in service as well as manufacturing functions. Companies have experienced unprecedented cost savings in diverse areas:

• Feeding higher-quality leads into the sales funnel at a fraction of the cost.

• Reducing developmental timelines for new products by 20 to 50 percent while nearly eliminating the high cost of defects.

• Slicing away complexity and variability throughout the supply chain to yield 10 to 30 percent cost savings while shortening process lead time by as much as 80 percent.

These transformations and cost savings are achieved in three- to five-month projects, a timeline made possible by the powerful combination of Lean speed and Six Sigma quality. The true power of the merger of Lean and Six Sigma as a single solution is in its unsurpassed ability to expose the wastes and complexities that are hidden in underlying processes. Cost-cutting measures can then be sequenced for cascading returns at the organizational level.

Lean Six Sigma is the synthesizing agent of business performance improvement that, like an alloy, is the unification of proven tools, methodologies, and concepts, which forms a unique approach to deliver rapid and sustainable cost reduction.

Alloys form new products of high utility from preexisting materials. But, unlike some alloys that lower the purity and value of the source materials, Lean Six Sigma multiplies the additive value of its elements.

• It’s fast, delivering substantive results literally in a matter of weeks.

• It’s efficient, delivering exceptional reductions in cost with relatively low investment. Companies featured in this book have realized rates of return at the project level equal to 5 times their investment, and rates of return at the program level 12 times or greater.

• It’s effective, providing a mechanism to identify, leverage, and replicate best practices in cost reduction across the enterprise.

• It’s practical, providing fact-based, analytical, straightforward methods used to uncover the root causes of high cost; get waste out of processes; and transform plans into actions.

• It’s game changing, creating competitive advantage in terms of operational cost, customer quality, and enterprise speed:

— Reducing direct labor costs.

— Lowering indirect costs.

— Improving return on assets.

— Accelerating customer order lead times.

— Improving overall customer service levels.

— Enabling enterprise flexibility—responsiveness to changes in customer needs and market demands and economic conditions.

• It builds capability. Whether simple project execution or enterprise transformation, Lean Six Sigma imparts capability to the organization in a blended array of methods, including e-learning, classroom participation, experiential learning, or “just-in-time” project support training.

• It’s transformational. Resources at all levels are engaged and aligned toward common goals and projects that support business strategy. Company culture can truly transform as resources are provided with a fact-based improvement methodology and infrastructure that supports and empowers the entire organization to continuously drive toward higher performance.

• It’s sustainable, linking process metrics with performance management; engaging process owners; and empowering front-line resources by providing them with control mechanisms to sustain gains.

Perhaps the most important advantage of Lean Six Sigma is that it lets you cut fat, not muscle—that is, reduce costs without destroying the ability to meet customer need.

Over the past year, as the world, and in particular the United States and the United Kingdom, have been battling the recession, all companies and many government agencies have been looking at almost any way to reduce costs. However, in many cases, companies in the process of cutting costs have also inadvertently damaged the fabric of the business. They have cut the muscle that is required to effectively serve the needs of their customers in the process of trying to remove the fat that is weighing down the business.

The contraction in demand at the end of 2008 was so severe that many companies had to take drastic action to align their cost base with current and future demand (although that was very difficult to predict, and the forecasting remains challenging). In all businesses or organizations, it is only logical to reduce capacity to meet demand. This can be done fairly safely if the organization knows and understands how the activities in the business react to a drop-off in demand. Where the organization doesn’t understand how the business reacts to a drop in demand, or management wants to move beyond “right-sizing,” the risk of cutting the muscle rather than the fat becomes more likely.

The problem of not understanding how an organization reacts to a drop in demand is actually surprisingly common, particularly in service industries such as banking and insurance and in government departments. It is in these industries and agencies that we have seen some of the most aggressive but potentially damaging cuts to cost bases.

Companies can’t undo decisions made in the past, but they can be more effective in the future, as the need to continuously look at how to cut the cost base and increase productivity will not go away in this highly competitive economic environment.

LEAN SIX SIGMA VERSUS TRADITIONAL COST-CUTTING TACTICS

When working with clients in this and past recessions, the approach to cost-cutting has been dominated by functional cost assessment carried out by the finance function. Our experience has been that upon review of the largest cost areas, senior management either direct where the cuts will be made or provide targets for each function or business to reduce their cost base. While this approach often yields quick results, it tends to have a couple of severe limitations:

• The cost reductions are focused on functions. There is little regard for the impact that reductions could have on the rest of the end-to-end process. Therefore, there can be, and often are, unintended consequences from the actions that are taken.

• The linkages between functions often break down and, as a result, rework and lead times increase and quality of service declines.

• Savings tend to be unsustainable as the core skills required to run the processes are no longer available to execute the processes to the quality required by customers.

So, in effect, the cost-cutting is responsible for breaking the fabric of the processes required to serve customers. An example of the type of confusion this can cause can be witnessed in many of the front, middle and back offices of the world’s largest investment banks (Figure 1.3). Here, tremendous reductions in staff have cut out many roles necessary to link processes together across different functions and successfully execute and account for a trade accurately. In one instance, we witnessed 3 different managers at operational risk in a 12-month period, just when the SEC, FSA, and other regulatory bodies had been asking banks to better understand the risks inherent within banking operations.

As you can tell from the title of the book, our focus is on how Lean Six Sigma can help you reduce costs and avoid the pitfalls of traditional cost-cutting approaches (see the sidebar, “Common Pitfalls of Traditional Cost-Cutting Approaches”) while delivering lasting efficiencies and savings to the bottom line. Cost reduction, as a term, is most often associated with plant shutdowns and mass layoffs. These truly are slash-and-burn reactions. Such maneuvers, in reality, often hurt the business and the customer by failing to distinguish between what is truly wasteful in the process and what is actually valued by the customer. Often, the idea is to cut 10 to 20 percent of the resources and hope the rest will pick up the slack. It never really happens. The slack remains, and it is felt through increasing delays in customer complaints, driving depressed revenues down even further.

Figure 1.3 Functional turmoil caused by ill-thought-out cost reduction can lead to poor execution and low customer satisfaction.

These responses to economic pressure fail to position the company with innovative, competitive processes that will outperform the market in recessions and in economic recovery. The crisis may pass, but the choices made during the crisis can persist indefinitely.

Cutting costs via Lean Six Sigma is very different from traditional cost-cutting practices, as outlined in Table 1.2.

In short, Lean Six Sigma cost-cutting is process focused. We have created an analytical method called Prime Value Chain analysis (PVC), described in Chapter 10, that is designed to illustrate how different functions coordinate to deliver the activities that create value. It also illustrates the resources that it takes to deliver the different activities. Using this approach, combined with end-to-end mapping, allows senior managers to see across the value chain to identify where there are excess resources that are not essential to executing the end-to-end process. These are resources that are either surplus to demand (fat) or that can be eliminated via productivity improvements based on process improvements (the equivalent to increasing fitness, to extend the analogy). For it is only through increasing productivity that organizations can do “more with less.” Without increasing productivity, reducing staff only enables you to do “less with less.” And unlike functional cost-cutting, if the productivity improvements are implemented effectively, they will tend to be far more sustainable. With a strong continuous improvement culture, productivity improvements can be built upon to create a virtuous cycle of improvement.

Common Pitfalls of Traditional Cost-Cutting Approaches

• Failure to focus on the process rather than rolling out tools. Many organizations learn about individual tools and attempt to roll them out. It is not about implementing an individual tool, such as Value Stream maps or 5S, it is about identifying root causes of costs and applying the right tool to close that gap.

• Lack of understanding of the voice of the customer (VOC). Therefore, needless complexity and overprocessing encumber the system. Customers determine what is truly “value add.” Without understanding VOC, safe and effective waste elimination cannot be achieved.

• Failure to understand the costs of complexity. Most organizations fail to recognize that each offering or transaction type introduced into the processes drives higher cost. The relationships between offerings and process are rarely understood.

• Just doing it, without sufficient analysis, preparatory work, baseline data, process ownership and accountability, and control plans to sustain improvement efforts.

• Turning to technology as a solution for every ailment. If the solution to every business problem begins with IT, and the company has not first considered the process itself, the solution may be suboptimal and costly.

Table 1.2 Comparing Traditional and Lean Six Sigma Cost-Cutting

Traditional ActionCommon Pitfalls/RisksAlternative Lean Six Sigma ApproachHeadcount reductionThere was a time when headcount reductions were an easy fix for cost-cutting. Many companies have productivity ratios far below industry leaders, making headcounty reductions a necessity for competitiveness. This is no longer true. Most organizations today run on skelton crews, compared to those bloated years. Further cuts are dangerous if they are not done carefully, and only after eliminating waste. There are weel-documented repercussion, including the demoralization and slowing of the remaining workforce, the ensuing flight of brain power, and the inability to ramp up for future demand.Rapid cost-cutting can be achieved by eliminating wasteful process steps, including many that are overprocessing items. By looking first at the waste in these steps, further capacity can be liberated. As the process is streamlined, there are often many savings captured that can render a headcount reduction unnecessary; or talented individuals can be redeployed to essential activities and other cost-cutting Lean Six Sigma projects.If excess capacity does exist, Lean Six Sigma can help ensure that customer service levels and quality can remain intact during the capacity re-balance.Capacity decreaseMistakes abound in a crisis. Firms are in survival mode. Cuts are dictated across business units, and managers are forced to close down capacity to meet shrinking demand. This is done by eliminating shifts, running shorter batches, or closing down operations. Traditionally, these moves take far too long to achieve, and come with enormous trade-offs in abolity to ramp up and maintain market share coming out of a demand slump.A project focusing on the right capacity levels can ordinarily be completed in less than three months (even for multinational organizations). Capacity levels need to reflect current levels of demand, taking into account statistical considerations for the variability and demand by offering as well as potential impacts on delivery requirements. If ramping production down irritates customers with late deliveries, the cost savings can be minuscule compared to the loss of revenue. Using the Lean Six Sigma toolkit, capacity can often be optimized inexpensively. Then, decisions can be made statistically, decisions can be made statistically, on a product-by-product, service-by-service basis. This yields the best balance between cost reduction and demand profiling.Inventory reductionReducing inventory levels in tight times is as old as business. A look at the balance sheet of most companies will reveal that there are still excessive inventory levels. The traditional cost-cutting reflex tends to set a percentage reduction across the board.Thisis both unwise and unproductive. The inventory levels are often incourrect or muddied by overaged and obsolete material. Reductions come as a large write-off with some cash, but actually negatively hit the balance sheet. Remaining inventory levels still have too much of the wrong items and too few the right items.High inventory levels can be a result of waste in a process stemming from poor execution and process performance, ill-conceived policies and procedures, lack of integrated planning and scheduling, inflexibility and low equiplent or operator reliability, and so on. Starting with the largest costs and volumes, it is more effective to streamline the processes feeding inventory into the warehouses. Often, pull systems can replace push systems for immediate and permanent reductions in inventory levels, with the adventage of easy ramp-up when demand increases.As process speed improves, flexibility increases, and deliveries are made on time with fewer and fewer items in stock.Price increasesMore companies are pursuing the business model of specialization rather than commoditization. It is difficult to find to find an organizaton that believes it is something other than a specialist. If customers can be convinced they are receiving specialized items, rather than a commodity, they can be convinced to pay more. One rubber products company recently went into bankryptcy after raising rates for its client by 20 to 30 percent. It turned out, their customers already knew they were buying a commodity. Words alone will not convince customers that your organization is adding specialized value, and everyone believes they are adding value.Understanding customers’ real needs and identifying value that can be improved, allows you to effectively drive cost reductions in existing processes without harming the customer. The Lean Six Sigma toolset defines these needs while making the resulting improvements highly visual. Exploring these solutions together with the customer often leads to agreements for higher prices. At the bare minimum, cost savings are achieved in the resulting processes.Lean Six Sigma can also help develop flexible pricing processes that optimize transaction prices and contractual terms where perceived differentiation and value exists.Demanding productivityCompanies have often demanded improvements in productivity without using the Lean Six Sima methodology. Processes will not improve because we ask themto. We cannot expect better performance from people syuck in bad processes.Companies seek immediate returns using a proven disciplined methodology. A useful productivity metric presented in this book is Process Cycle Efficiency (PCE). Analysis of low PCE can uncover root causes of high cost and low performance and lead to effective mitigation approaches.

Taking a process perspective also gives managers real insight into the impact that making reductions will have elsewhere in the process, so the likelihood of changes having unintended consequences (that is, reducing important muscle from the operation) is dramatically reduced. It also gives a clear picture of where the business should focus to improve its operations in the short to medium term so it can consolidate the gains that have been made and look to how it can create a competitive cost advantage.

Managers need to understand what they are cutting before they get out the meat cleaver to cut costs. Attacking the largest cost areas while providing short-term cost reductions can lead to significant unintended consequences that can be difficult and expensive to fix. We recommend that understanding how an organization executes the processes that deliver value to customers is the first step to being able to cut fat from an organization, rather than the muscle that binds it together.

EMERGING STRONGER THAN EVER

Competitors may try to copy your products and offerings—but it’s nearly impossible for them to copy your processes.

—Lou Giuliano, former CEO, ITT Industries

At the same time Lean Six Sigma can support near-term, local, cost reduction opportunities, it also enables transformational change that provides competitive advantage, beyond cost, especially once the enterprise emerges from the downturn. Why is this true? This book shows how the Lean Six Sigma approach yields rich visibility into the root causes of operational cost, and provides an understanding of the dynamic relationships between processes, offerings, people, capital, equipment, suppliers, materials, and—most importantly—the customer.

Figure 1.4 ROIC of winners versus losers: Winners are those that outperformed others in their industry for the six years following the recession of 1990-1991; losers are those that under-performed others in the industry. Following a recession, winners that view downturn as an opportunity to improve business performance pull away from the competition.

Source: Accenture High Performance Supply Chain Research Initiative, 2008.

In its ability to address these elements, the Lean Six Sigma cost reduction approach provides an all-important residual benefit: effective and predictable execution. Lean Six Sigma helps stabilize processes and makes them more predictable; it reduces order lead times and improves fulfillment rates; it uncovers what is truly valued by the customer, and helps deliver that value at the lowest possible cost to the company. We know of no other cost reduction approach that can rapidly drive such increased internal efficiency while at the same time improve the enterprise’s ability to dependably serve its customers.

High-performing organizations manage their cost reductions strategically during economic downturns and strengthen their existing positions. These organizations view a downturn as an opportunity to improve business performance, to take market share, and change their competitive position. They make fundamental changes to increase cash flow and to drive sustainable results. They advance their strategic position by building differentiating capabilities, shedding/acquiring assets and businesses, anticipating downturns, and positioning themselves for better performance postrecession (Figure 1.4).

SPOTLIGHT #1

HOW TO USE THIS BOOK

This book has been written and organized to help a wide array of readers address their cost reduction opportunities and strategies by implementing Lean Six Sigma. Some may not be familiar with the methodology and how it can rapidly reduce cost. They may be managers or P&L owners looking for cost reduction alternatives to improve financial performance within a functional area, department, or single facility. Part I of this book is designed specifically for this group of readers. This section, even though it focuses mainly on Lean Six Sigma’s tools of cost reduction, is not intended to be a do-it-yourself substitute for the requisite skills possessed by trained experts. Instead, it provides an understanding of Lean Six Sigma’s practical and rapid cost reduction approach. It helps management understand the method sufficiently so that they may immediately improve local or departmental operating cost by leveraging skilled Lean Six Sigma practitioners, be they internal or external. Other readers may already be familiar with Lean Six Sigma but need to extract greater impact from the methodology across the entire business. These readers may be business leaders, deployment champions, or sponsors of an enterprise program who want to take their initiative to the next level. Perhaps their Lean Six Sigma initiative is no longer relevant to the business, or it needs to evolve, or perhaps their investment has failed to yield its full cost reduction potential.