Six Sigma for Auditors TCTC 2017

September 25, 2017

Agenda What is Six Sigma and Lean Lean Six Sigma and the IIA’s IPPF DMAIC and phases of an audit Identification of Waste Process Capability Control Charts and Histograms Value Stream Mapping Cause and Effect Tools Poka-Yokes

What is Six Sigma

Developed by Motorola in 1986 Business management strategy focused on

eliminating defects and minimizing variability A “Six Sigma” process in one in which

99.99966 percent of results are free of defects Defect defined as any process that does not

meet customer specifications, or could lead to an output that doesn’t meet customer specifications

Six Sigma Defect Rates 3 Sigma Level 6 Sigma Level

8.1 million wrong drug prescriptions year worldwide

10,000 wrong drug prescriptions a year worldwide

11,000 newborn babies accidently dropped in hospitals in USA yearly

13 newborn babies dropped yearly

6 short or long landings at Atlanta airport daily

Three short or long landings at Atlanta airport yearly

500 incorrect surgical operations each week

1 incorrect surgical operation every 2 weeks

Six Sigma Concepts Critical to Quality: Attributes most important

to the customer Defect: Failing to deliver what the customer

wants Process Capability: What your process can

deliver Variation: What the customer sees and feels.

Should be reduced and results in stable operations and predictability

Lean Principles

Set of tools that help identify and eliminate waste. As waste is eliminated, quality improves and

production time and cost are lowered Waste is anything that doesn’t add value to

the product. Identifies problem areas and bottlenecks

Six Sigma vs. Lean Six sigma is about eliminating anything that does not meet

customer needs i.e. defects Very statistical and numbers driven Lean is about eliminating waste and ensuring that

everything we do adds value to the customer Combined they are about using tools that enable your

organization to take a more accurate and quantitative approach to identifying and correcting root causes of problems

The goal of all Lean Six Sigma and internal audit projects is to improve internal controls by avoiding expenses that add no value to the organization

Lean Six Sigma and The IPPF Standards

Lean Six Sigma’s purpose is to improve the business processes that support an organization’s operations

Internal audit must evaluate the effectiveness and efficiency of risk management, control, and governance processes

Standard 2100-Nature of Work states Internal Audit should use a systematic and disciplined approach

Standard 2200-Engagment Planning requires that objectives, scope, timing, and resource allocations should be based upon adequate information and analysis of the process

Lean Six Sigma and The Audit Process

Lean Six Sigma project methodology follows the DMAIC improvement Model and can be related to the 5 phases of an internal Audit

Define the problem-Pre Planning/Preliminary Survey Measure the key aspects of the process-Planning Analyze the data for cause and effect relationships-

Fieldwork/Execution/Testing Improve the process-Reporting/Recommendations Control the Future state-Follow-up/Remediation

Waste Waiting: Machine downtown, bottlenecked operations,

approvals from others, system down time, sitting in queue Extra Processing: Unneeded steps, re-entering data, extra

copies, unnecessary or excessive reports Defects: Production of defective parts, scrap, data input

errors, design errors Inventory: Any excess inventory, batch processing Excess motion: Any additional reaching, steps to copier,

handling something more than once Transportation: Move materials, parts, paperwork Underutilized Employees: Limited authority, ideas skills

Service Processes can be Full of Waste

Too many signatures Errors/typos Unclear process steps Waiting for info Too many meetings Poor office layouts Unnecessary emails Unclear job duties Obsolete databases Batching

Service Processes can be Full of Waste

Too many signatures Errors/typos Unclear process steps Waiting for info Too many meetings Poor office layouts Unnecessary emails Unclear job duties Obsolete databases Batching

Spaghetti Diagram

Shows the flow of information, materials, and/or people Often shows an unexpectedly high amount

of walking, carrying, waiting, etc Criss-crossing lines may indicate handoffs

which often add delays and wait time Can be used to improve the layout of the

office for better work flow

Spaghetti Diagram

Process Capability The capability of a process to meet its

purpose All processes have inherent statistical

variability Need to determine not just that the

process is meeting desired goal, but what specifications the process can meet Need to identify bottlenecks and variations

in the process

Theory of Constraint A chain in no stronger than its weakest link Need to address the weakest link

(constraint) and look forward to the next constraint Helps to address the bottlenecks

(constraints)

Focusing Steps Identify the constraint Work to exploit the constraint or make

better Make other changes to break the constraint This will create new constraint which

causes process to start over Don’t let inertia become the constraint

Process Control Charts Graphs used to study how a process

changes over time Helps distinguish between normal and

unusual variations Always a central line for the average, an

upper line for the upper control unit and a lower line for the lower control unit Use the data to determine if the process

variation is in control or out of control

Benefits of Control Charts Focus attention of directing and monitoring

process variation over time Distinguish special from common causes of

variation Serve as a tool for ongoing control of a

process Help improve a process to perform

consistently and predictably for higher quality, efficiency, and lower cost

Out of Control Signals A single point outside the control limits Two out of three successive points are on

the same side of the centerline and farther than 2 sigmas from it Four out of five successive points are on

the same side of centerline and farther than 1 sigma from it A run of eight in a row on the same side of

the centerline

Histogram Helps to summarize data from a process that

has been collected over a period of time Shows the relative frequency of occurrence of

the various data points and distribution of data Shows outliers that can indicate out of control

processes Helps answers the question “Is the process

capable of meeting customer requirements?”

Value Stream vs. Flowchart

• Quantification-VSM shows the amount of time consumed by tasks as well as specific transactional information

• Value-how value flows through the process from the customer’s perspective

• Pre-scheduling activities to ensure follow-ups are conducted within goals.

Value Stream Map

Value

Value adding (VA)-creates the product, service attributes and features the customer desires Business value-adding (BVA)-often hidden

from the customer but necessary to ensure the product or service meets requirements (IT systems, inspection activities, etc) Nonvalue-adding (NVA)- completely

unnecessary and should be eliminated

Cause and Effect Tools

Fishbone Diagram 5 Whys Pareto Charts Impact/Difficulty Matrix

Fishbone Diagram Problems typically are not simple. They

often involve the complex interaction among several causes Displays the major causes, sub-causes, and

root causes Provide a focus for discussion and

consensus Visualize the possible relationships among

causes

Fishbone Diagram

Five Whys Simple technique to get beyond the

symptoms of a problem and uncover root cause Why are we late? The copier jammed Why did the copier jam? Paper is Moist Why is the paper moist? High humidity Why is there high humidity? Ventilation is

poor Why is ventilation poor? Filter is dirty

Pareto Chart

A large percent of errors or defects in any process is usually caused by few problems Usually 80% of the quality issues can be

corrected by eliminating 20% of root causes Helps identify the significant few problems

so we can target them for action Use the chart to draw attention and

cooperation to attack the most important issues

Pareto Chart

Impact/Difficulty Matrix Key Projects Impact Difficulty

Resolve software issues 10 1

Design Recruiting Process 10 4

Create Customer Dockets 7 4

Plan for Market Presence 4 3

Replace Truck Fleet 3 1

Pricing Process for Custom 5 2

Poka-Yokes

Japanese for “Fail-safing” or “Mistake proofing” Ensure proper conditions exist to prevent a

mistake Help to process work right the first time Usually put into place after other tools have

found issues and help correct problems

Examples of Poka-Yokes

Locks on airline lavatory doors that active lights inside Indented trays used by surgeons to ensure no

instruments are left in patient Color coding forms to make it easy to pick out

an error All fields in an application entry screen must

be completed to move forward

Lean Six Sigma at INPRS Quality Management Team is training several

people in the organization on methodology 9 days of training Ran projects that are being ran to improve

business processes Internal Audit is participating in each project

to ensure that controls are not eliminated Continuing team that focuses on process

improvement

Lean in Audit

Everyone in the department has been trained in Lean Sigma methodology One Black belt and One Green belt in the

department All audits include some sort of process

improvement ascpect

Lean in Audit

Review metrics and analyze where issues reside using more data than previous audit methodology Utilize other tools, such as control charts,

histograms, fishbone diagrams, pareto charts, etc to determine where waste and root causes reside

Lean Six Sigma Benefits More efficient and effective processes Improved process quality output Ability to drive improvements and reduce process

waste A better understanding of customer requirements Increased customer satisfaction and value More robust products and processes Improved delivery and quality performance Critical process inputs needed to respond to

changing customer requirements

Lean Six Sigma Challenges

Getting management and employee buy-in Time and resources needed to execute

process improvement projects/initiatives Training required Data needed

Questions?

Teresa Snedigar Chief Audit and Risk Officer

Indiana Public Retirement Systems tsnedigar@inprs.in.gov

317-234-5681