Six Sigma

The quality movement, once rooted in manufacturing centers, has branched into a wide swath of vertical industries and all parts of the organization, thanks to Six Sigma. Once known as an initiative that was limited to eliminating product defects, Six Sigma has grown into a full-fledged management discipline.

General Electric Co. CEO Jack Welch has been a staunch evangelist for the program, claiming that GE's organizationwide adoption of Six Sigma, begun in the mid-1990s, added $600 million to GE's bottom line in 1998 alone.

Fairfield, Conn.-based GE brings more than just products to life. It's a highly diversified organization with a huge services arm, and everyone at GE breathes, eats and sleeps Six Sigma. A look at how the program has been used outside the manufacturing plant demonstrates why Six Sigma hasn't become passe.

Beyond Manufacturing

"Six Sigma is every bit as applicable to service processes as it is to manufacturing," says Dan Mailick, vice president of Six Sigma sustainability at J.P. Morgan Chase & Co. in New York. Three years ago, the firm began adopting Six Sigma techniques.

Within J.P. Morgan's foreign exchange banking department, a team asked its customers what they valued and what made them choose one investment bank over another when conducting foreign exchange deals. Once these issues were understood, the team was able to define and measure the activities that most impact customers' needs.

The analysis aided the bank in understanding why performance varied among different branches. These lessons helped yield higher margins for the foreign exchange group, as well as best practices for individual traders.

Sigma is a Greek term for variation. Six Sigma is defined as 3.4 defects per million products. The program's objective, at least in the beginning, was to minimize variations or defects during the production of products.

Motorola Inc. created the concept in the 1980s. Engineers had concluded that new products, which often failed to meet customer expectations, could be produced error-free from the start. This represented a fairly radical idea in manufacturing: measuring customer requirements and performance against these targets during production, rather than after a product's completion.

According to Tom McCarty, director of Six Sigma business improvements at Motorola University in Schaumburg, Ill., Six Sigma differs substantially from quality initiatives that were prominent in the '70s and '80s, such as continuous improvement and total quality management.

"Quality programs . . . focused on defect elimination for the sake of defect elimination," he explains. In other words, it was quality for perfection's sake, not for the customers'.

In addition, explains McCarty, earlier quality initiatives focused on teaching employees to become more quality-focused in their jobs, with the hope that incremental improvements would bubble up.

In contrast, Six Sigma requires big structural changes and lots of top-down directives. First, employees are trained in the Six Sigma ways and take on new titles such as "project champion" and "black belt." These staffers run short-term projects aimed at achieving cost reductions or revenue enhancements. The finance team, senior executives and black belts try to determine in advance how much bottom-line potential the projects hold and prioritize opportunities along those lines.

By assigning values to each project, a CEO has a basis for quantifying the extent to which Six Sigma efforts helped contribute to the bottom line.

Two major factors differentiate Six Sigma from other quality programs, according to Michael Burkett, an analyst at Boston-based AMR Research Inc.: measurable results and the insight senior executives have into various projects. "It's the dollar values that draw attention," he notes.

Acronym City

Six Sigma, like most management programs, is jargon-rich. Take the critical-to-quality (CTQ) metric. Once customers have defined what's most relevant to them, such as the speed in receiving products or services, the company determines which activities most affect its ability to act on a request quickly and measures those activities, or CTQs. Then there's the defect-per-million opportunity (DPMO), which managers can use to apply Six Sigma thinking to any business process.

For example, sales, human resources and finance activity can all be defined as processes of interrelated activities, which require inputs and produce outputs for customers. And with each activity resides the opportunity for mistakes.

By expanding the meaning of "defects" and applying it to every task, Six Sigma has seen its most creative applications. Burkett once applied Six Sigma thinking to a company's sales program. His team started with an error - incorrect orders - then discerned its repercussions, such as incorrect inventory levels and unhappy customers. The analysis led to the development of a product configuration tool that customers could use to place their orders and reduced the number of incorrect orders.

GE Global Exchange Services in Gaithersburg, Md., uses Six Sigma in running the world's largest business-to-business e-commerce network. "What's great about Six Sigma is the methodology," says Nancy Matro, the company's CIO.

Matro says she believes that the application of Six Sigma methods has improved her group's ability to define software specifications and develop code with few bugs. The basic Six Sigma methodology - measure, analyze, improve and control - can be used to improve any activity.

Matro points out that Six Sigma methodology is unique because the customer defines the defect, the program is data-driven and the program emphasizes the monitoring of fixes to see that they stick. "No one within GE will accept hearsay these days," she adds.

On the surface, these examples would appear to have little to do with the objective of minimizing defects to 3.4 per million. However, companies such as GE and J.P. Morgan have found ways to extend the program's usefulness.

As McCarty explains, "Six Sigma isn't something a consultant does to you; it's a capability you build within your organization."

Shand is a freelance writer in Somerville, Mass. Contact her at dshand@bkds.com.

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