Many companies have gone down the path of continuous improvement only to be discouraged by the lack of “breakthrough” results. All of the texts on Total Quality harp on the need for strong commitment from senior management for these initiatives to be successful. What is it that motivates these business leaders? The answer is straightforward; Business Leaders are motivated and driven to achieve bottom-line results and increase value to shareholders. Six Sigma provides a structured and rigorous approach with a customer focus that drives benefits to the bottom line.
What is Six Sigma?
Six Sigma is a program that follows a structured and rigorous approach to process improvement and is applicable to all Business Processes. Projects are identified and prioritized based upon “Bang for the Buck.” The key drivers for selecting projects are customer focus and potential for bottom line impact. The prioritization process facilitates allocation of a business’s “scarce” resources to the projects with significant business importance, thus separating the “Vital Few” from the “Trivial Many.”
Specific targets for improvement are baselined and then monitored over the project’s life to demonstrate the achievement of goals. Tracking may include Cost (hard, soft, and cash flow), Cycle Time, Non-Value Adding Activities, Rework, Failures, and Defects.
Teams utilizing the five DMAIC (Define, Measure, Analyze, Improve, and Control) Phases of the Six Sigma Improvement Process can deliver breakthrough improvements to a business’s processes.
How Do Six Sigma Efforts Impact the Bottom Line?
Income Statement Elements affected:
Reduces Cost of Goods Sold (COGS)
Increases Gross Margin
Reduces Operating Expenses (OE)
Increases Net Income
Positive Impact on Profitability Ratios
Increases Return on Sales
Increases Return on Investment
Balance Sheet Elements affected:
Inventory Reductions Become Possible
Impacts Activity and Efficiency Ratios
Increases Asset Turnover
Increases Inventory Turnover
Decreases Inventory on Hand
Reductions of 10%-30% in both COGS and OE are common, with most companies averaging 20% reductions.
Consider this example:
$5M Depreciation and Interest
Return on Sales ratio of 2.5%
$100M Total Assets
Asset Turnover Ratio is 2.0
Given a conservative reduction of 10% in both COGS and OE from a Six Sigma implementation the Return on Sales increases from 2.5% to 12%.
Without any balance sheet improvements, the Return on Investment Ratio increases from 5% to 24%.
Inventory is generally addressed after processes have been improved and the need to carry excess inventory to meet customer demand has been reduced. A project to reduce the cycle time on the accounts receivable process is often addressed early on in Six Sigma implementations.
The key to Six Sigma success at achieving bottom-line results is following the Structured and Rigorous Improvement Process that is Customer Focused. Six Sigma is not just another “Quality” program like Total Quality Management or Quality Circles, but one that has teeth rooted in the financials of the business.