Reaching for Six Sigma

One of the hottest approaches to process improvement in the last few years has been Six Sigma. Six Sigma has been embraced as a statistical methodology for increasing quality, lowering production costs, and improving profitability. In the words of Jack Welch, CEO of General Electric: "Six Sigma GE Quality 2000 will be the biggest, the most personally rewarding and, in the end, the most profitable undertaking in our history." According to Richard Wallman, CFO for Allied Signal, we will save $ 175 million in our first year of Six Sigma and this number will double in the second year.

Six Sigma was started by Motorola as a way of reducing defects in the manufacturing process. Six Sigma represents a statistical measurement of variation from a specific attribute or characteristic desired by the end-user. Six Sigma is expressed over six exponential layers:

One Sigma = 690,000 defects per million
Two Sigma = 308,000 defects per million
Three Sigma = 66,800 defects per million
Four Sigma = 6,210 defects per million (relatively efficient)
Five Sigma = 230 defects per million (world class efficiency)
Six Sigma = 3.4 defects per million (perfection)

Six Sigma provides a universal measurement standard for all processes throughout the organization. Sigma layers give an indication of how much failure is occurring within a process. It is estimated that a company operating between the third and fourth sigma can expect about a 10% loss in revenues from inefficiency. Moving from one sigma to the next is a major undertaking. A 30-fold improvement in quality is required to get from Four Sigma to Five Sigma.

Six Sigma is a very rigorous approach to improving quality within your products and services. Processes that are critical to products and services must be analyzed in detail. Techniques like process mapping and pareto charts are often used to understand the details within a process. Generally, Six Sigma will follow a four phase approach:

1. Measure - Determine the error or defect rate
2. Analyze - Understand the Process
3. Improve - Reach for a higher Sigma
4. Control - Monitor through measurement

Few companies have made it to the Six Sigma (3.4 errors per one million). However, where defect rates are extremely costly, reaching for the Sixth Sigma is now a given expectation. It is worth noting that Six Sigma requires formal training in the statistical methods that are used. Leaders of Six Sigma are called "black belts" while participants in Six Sigma are called "green belts." Once trained, the trick is to move the black belts around to critical areas for improvement.

One reason Six Sigma has become so popular is because companies want to eliminate non-value added activities as quickly as possible. Other approaches to process improvement, such as Activity Based Management, can take considerable time with marginal improvements. According to Mikel Harry, author and founder of Six Sigma, the defects and errors within a process are a key indicator of non-value added activities. For example, when a coding error occurs in payables processing, you have to put procedures in place for detecting the error, tracking the error, and correcting the error. All of this takes time and resources. When you eliminate the errors, you immediately reduce or eliminate the non-value added activities.

It is quite clear that many large corporations have made Six Sigma an integral part of their strategies. Operating people have long accepted Six Sigma as a way of improving quality. The challenge now is for financial management to adopt Six Sigma as a way of creating higher values and increased profitability.

A final word of caution - don't forget to look at the cost/benefit of reaching for the Six Sigma. An extremely low defect rate at a $ 5 billion Motorola facility is not the same as a low defect rate at a $ 1 million shoe manufacturing facility. The costs of going to a higher sigma may not be beneficial. As a result, some in financial management are using Activity Based Management as their guide to the deployment of Six Sigma.

Written by: Matt H. Evans, CPA, CMA, CFM | Email: | Phone: 1-877-807-8756

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