Introduction to Six Sigma - English

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Introduction to Six Sigma15 October 2004 Note: This report is a general introduction to Six Sigma intended for Vietnamese companies and is for guidance purposes only. The assistance that Mekong Capital provides to companies in which the Mekong Enterprise Fund invests includes assisting companies to strengthen their capacity for ongoing process improvement. Mekong Capital employs Six Sigma Black Belts who are responsible for assisting companies in this area.

1. What is Six Sigma?1.1 DefinitionSix Sigma is a statistically-based process improvement methodology that aims to reduce defects to a rate of 3.4 defects per million defect opportunities by identifying and eliminating causes of variation in business processes. In defining defects, Six Sigma focuses on developing a very clear understanding of customer requirements and is therefore very customer focused. The Six Sigma methodology is based on a concept called DMAIC: Define, Measure, Analyze, Improve, and Control. For more on this, please see section 3 of this report on DMAIC. Six Sigma is not a quality management system, such as ISO-9001, or a quality certification system. Instead it is a methodology for reducing defects based on process improvement. For many Vietnamese companies this means that instead of focusing quality initiatives primarily on checking products for defects, the focus is shifted towards improving the production process so that defects dont occur.

1.2 Key themes in Six SigmaSome of the key themes of Six Sigma can be summarized as follows: o Continuous focus on the customers requirements; o Using measurements and statistics to identify and measure variation in the production process and other business processes; o Identifying the root causes of problems; o Emphasis on process improvement to remove variation from the production process or other business processes and therefore lower defects and improve customer satisfaction; o Pro-active management focusing on problem prevention, continuous improvement and constant striving for perfection; o Cross-functional collaboration within the organization; and o Setting very high targets.

1.3 Six Sigma levelsSigma means standard deviation and therefore Six Sigma means six standard deviations. Sigma Level One Sigma Two Sigma Three Sigma Four Sigma Five Sigma Six Sigma Defects per Million 690,000.0 308,000.0 66,800.0 6,210.0 230.0 3.4 Defects as Percent 69.0000% 30.8000% 6.6800% 0.6210% 0.0230% 0.0003%

The objective of Six Sigma is only 3.4 defects (or errors) out of every million defect opportunities. This translates into 99.99966% perfection. Since most private manufacturing companies in Vietnam are currently around Three Sigma or even lower in some cases, a process improvement project using Six Sigma principles may initially aim at Four Sigma or Five Sigma, which would nonetheless result in significant defect reduction.

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An important clarification is that Six Sigma measures defect opportunities and not defective products. The more complex a product, the more defect opportunities it has. For example, there are more defect opportunities in an automobile compared to a paper clip. Below is an example of counting the number of defect opportunities in the production of wooden chairs: Company A is producing 5 orders for customer, each order has one wooden chair item (5 units). Opportunity per wooden chair item is clarified as follows: o The chair was made by correct material? (1 opportunity) o Moisture content of wood is within the standard (1 opportunity) o The chair was made in correct size? (1 opportunity) o The chair has no damage? (1 opportunity) o Correct finishing is applied (1 opportunity) o Correct packaging method is applied (1 opportunity) Total number of defect opportunities = Units x Opportunities = 5 x 6 = 30 opportunities

1.4 Focus on Causes of Variation

From the Six Sigma view, a business process is normally represented in terms of Y=f(Xs), in which the Outputs (Y) are determined by some Input variables (Xs). If we suspect that there is a relationship between an outcome (Y) and potential causes (Xs), we must collect and analyze data by using some Six Sigma testing tools and techniques to prove our hypothesis. If we want to change the outcome, we need to focus on identifying and controlling the causes rather than checking the outcomes. When we know enough and have good control of the Xs we can accurately predict Y. Otherwise, we have to focus our effort on Non Value-Added Activities like inspection, testing and reworking.

1.5 Process Improvement

Six Sigma aims for processes to be improved so that problems dont recur instead of just finding short term solutions to the problems. Only when the cause of the variation, as defined in the previous section, has been identified, can the process be improved so that the variation doesnt recur in the future. For example, if a wood product manufacturer in Vietnam is experiencing slow cycle time at the semi finishing assembly quality checking station because they are getting defective parts from sanding and grinding workshops and have to rework them: Typical Solution: Rebalance the line by allocating more workers to do checking and reprocessing. Six Sigma Solution: Investigate and control key inputs to prevent defects from occurring in the first place. This may include unclear machine calibration procedures, unclear sanding-grinding quality working instructions, insufficient supervision skills of team leaders, lack of wood quality checking process at the cutting workshop, etc. In another example, if a plastics company is producing products that dont consistently meet the customers specifications on the color of the product: Typical Solution: Adjust the color mixing formulas in use by using a trial-and-error effort. Six Sigma Solution: Determine mixing process inputs which result in incorrect colors in finished products and then control those. These inputs might include raw material supplier, clarity of the formula instructions, system for generating and testing the mixing formulas, calibration of mixing equipment, ability of operators to follow instructions, etc.

1.6 Measurements and StatisticsBuilding new measurement systems (metrics) and then asking new questions is an integral part of Six Sigma methodology. To improve results, a company needs to identify ways to measure variation in business processes, generate statistics based on those measurements and then use those statistics to ask new questions about the sources of quality problems relating to its products, services, and processes.

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1.7 Six Sigma is not just about manufacturing

Although Six Sigma is most commonly used to reduce defects in the manufacturing process, the same methodology can be used to improve other business process. For example, it can be used to o identify ways to increase production capacities of equipment; o improve on-time-delivery; o reduce cycle time for hiring and training new employees; o improve sales forecasting ability; o reduce quality or delivery problems with suppliers; o improve logistics; o improve quality of customer service; etc.

1.8 Worldwide use of Six SigmaSix Sigma invented by Motorola in the 1986 and popularized by General Electric (GE) in the 1990s. Organizations including Honeywell, Citigroup, Motorola, Starwood Hotels, DuPont, Dow Chemical, American Standard, Kodak, Sony, IBM, Ford have implemented Six Sigma programs across diverse business operations ranging from highly industrial or high-tech manufacturing to service and financial operations. Although not yet widespread in Vietnam, several foreign invested manufactutring companies in Vietnam such as American Standard, Ford, LG and Samsung in Vietnam have introduced Six Sigma programs. In a recent survey conducted by DynCorp1: o Around 22% of the companies surveyed in the U.S. have a Six Sigma program in place; o 38.2% of companies with Six Sigma programs were service companies, 49.3% were manufacturing companies and 12.5% were other companies; o Six Sigma was rated significantly more highly than other quality management systems and process improvement tools in terms of achieving the greatest results (however, Six Sigma also includes some of the tools which are listed separately in the survey). Which quality management systems process improvement tools have yielded the greatest results? Six Sigma 53.6% Process mapping 35.3% Root cause analysis 33.5% Cause-and-effect analysis 31.3% Lean thinking/manufacturing 26.3% Benchmarking 25.0% Problem solving 23.2% ISO 9001 21.0% Process capability 20.1% Statistical process control 20.1% Performance metrics 19.2% Control charts 19.2% Process management 18.8% Project management 17.9% Customer-driven processes 17.9% Design of experiments 17.4% Failure mode and effects analysis 17.4% Mistake-proofing 16.5% Poka-Yoke 16.5% Process reengineering 16.1% Change management 14.7% Total Quality Management (TQM) 10.3% Variation measurement 10.3% Malcolm Baldridge criteria 9.8% Workflow analysis 9.8% Decision making 8.9% Trend analysis 8.0% Management by fact 6.7%1

http://www.qualitydigest.com/feb03/articles/01_article.shtml Page 3 of 18

Mekong Capitals Introduction to Six Sigma

Setup reduction Knowledge management Work breakdown structure

6.7% 5.8% 3.1%

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2. Benefits of Six Sigma2.1 Reduced production costsBy significantly lowering defect rates, the company can eliminate wastage of materials and inefficient use of labor which is associated with defects. This will reduce the cost of goods sold for each unit of output and therefore add significantly to the companys gross margin or allow the company to sell its products at a lower price in order to generate higher revenues. For example, if a company has a non-reprocessable defect rate of 6%, raw materials costs at 60% of revenues, labor costs equal to 10% of revenues, and a gross profit margin of 20%, a simple analysis shows significant improvements to the gross profit margin resulting from defect reduction as follows: Current Situation Defect rate Raw materials / revenue Labor / revenues Depreciation2 / revenues () Gross margin 6% 60% 10% 10% 20% Some Improvement 3% 58.3% 8% 9% 24.7% Significant Improvement 0% 56.6% 6% 8% 29.4%

2.2 Reduced overhead costs

By significantly lowering defect rates, and implementing process improvements so that similar defects dont recur, the company can reduce the amount of time that senior management and middle management spends resolving problems associated with high levels of defects. This also frees up management to focus on more value-added activities.

2.3 Improved Customer Satisfaction

Many private companies in Vietnam have had recurring problems associated with shipping products to customers which didnt meet customer specifications and therefore caused the customer to be unhappy and sometimes even cancel orders. By significantly lowering defect rates, the company will be able to consistently ship products to customers which strictly meet the customers specifications and therefore increase customer satisfaction. Increased customer satisfaction reduces the likelihood of losing orders from customers while increasing the likelihood that the customer will place larger orders with the company. This can mean significantly higher revenues for the company. Furthermore, the cost of acquiring new customers is high so companies those have lower customer turnover will have lower sales and marketing expenses as a percent of total revenue.

2.4 Reduced Cycle Times

The longer it takes for inventory to move through the production process, the higher the production costs since slow moving inventory must be moved, stored, counted, retrieved and faces greater risk of becoming damaged or not meeting specifications. However, with Six Sigma, fewer problems arise during a manufacturing process, which means that the process can consistently be completed more quickly and therefore production costs, especially labor costs per unit produced, are lower. In addition to reducing production costs, quicker turnaround times are often a selling point for many customers who want the product delivered as soon as possible.

The reduction in depreciation as a percent of revenues is a result of a higher volume of production from the existing equipment and facilities due to lower defects and reprocessing, as well as reduced machine downtime. Mekong Capitals Introduction to Six Sigma Page 5 of 18

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2.5 On-Time-Delivery

A common problem for many private Vietnamese manufacturing companies is a high rate of delayed shipments or deliveries to customers. The variations which can be eliminated in a Six Sigma project can include variations in delivery time. Therefore, Six Sigma can be used to help ensure consistent on-timedelivery.

2.6 Greater ease of expansion

A company with a significant emphasis on process improvement and elimination of the sources of defects will have a deep understanding of the potential causes of problems in expansion projects, as well as systems in place for measuring and identifying the sources of those problems. Therefore problems are less likely to occur as the company expands its production, and if they do occur, they are likely to be resolved more quickly.

2.7 Higher expectations

By aiming for 3.4 defects per million defect opportunities, it allows the company to set high expectations. Higher expectations themselves can lead to higher performance since they reduce the risk of complacency. Furthermore, Six Sigma programs introduce many new measurements which help to discover and monitor recurring problems and therefore create more of a sense of urgency to get those problems resolved.

2.8 Positive Changes to Corporate CultureSix Sigma is as much about people excellence as it is about technical excellence. Employees often wonder how they are going to solve a difficult problem, but when they are given the tools to ask the right questions, measure the right things, correlate a problem with a solution and plan a course of action, they can find solutions to the problem more easily. Therefore, with Six Sigma, the companys corporate culture shifts to one that includes a systematic approach to problem solving and a pro-active attitude among employees. Successful Six Sigma programs also contribute to the overall sense of pride of the companys employees. Six Sigma transforms the way a company thinks and works on major business issues: o Process design: Designing production processes to have the best and most consistent outcomes from the beginning. o Variable investigation: conducting studies to identify what the variables cause variation and how they interact with each other. o Analysis and reasoning: using facts and data to find the root causes of varia...

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