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Report on Summer Training SIX SIGMA
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ABSTRACT
In recent years, companies have begun using Six Sigma Methodology to reduce errors,
excessive cycle times, inefficient processes, and cost overruns related to financial reportingsystems. This paper presents a case study to illustrate the application of Six Sigma Methodologywithin a finance department. Specifically, the case relates to the Continuing AccountReconciliation Enhancement project undertaken by the finance department of a major U.S.defense contractor. The goal of the project was to streamline and standardize the establishmentand maintenance of costing and planning for all business activities within the current financialmanagement process.
The Six Sigma implementation resulted in a significant reduction in the average cycle time and cost, per unit of activity, needed to produce the required financial reports.
INTRODUCTION
In 1987, Motorola developed and organized the Six Sigma process improvement
Methodology to achieve “world-class” performance, quality, and total customer satisfaction.Since that time, at least 25% of the Fortune 200, including Motorola, General Electric, Ford,Boeing, Allied Signal, Toyota, Honeywell, Kodak, Raytheon, and Bank of America, to name afew, have implemented a Six Sigma program (Antony et al. 2008, Hammer, 2002). Thesecompanies claim that Six Sigma has significantly improved their profitability (Hammer, 2002).
For example, in 1998 GE claimed benefits of $1.2 billion and costs of $450 million, for a netbenefit of $750 million. The company’s 1999 annual report further claimed a net benefit of morethan $2 billion through the elimination of all non–value added activities in all business processeswithin the company (Lucas, 2002). Similarly, Allied Signal reported that Six Sigma was a majorfactor in the company’s $1.5 billion in estimated savings (Lucas, 2002). Six Sigma has alsoenabled Honeywell to reduce the development time required to redesign Web sites by 84% for its specialty materials (Maddox, 2004b).
Six Sigma has been defined as a management strategy for improving product and process quality (Hahn et al. 2000, Harry and Schroeder, 2000, Sanders and Hild, 2000). It is also a statistical term used to measure process variations, i.e., how far a given process deviates fromperfection, which causes defects. Six Sigma works to systematically manage variation and eliminate defects--or to get them as close to zero as possible (Harrison, 2006). Six Sigma initiatives have typically been implemented on shop floors of manufacturing firms to manage “process variations” (defects or errors), to improve quality and productivity (Revere and Black,2003), and as a result, to increase the profitability of a company (Aggogeri and Gentili, 2008, Anand et al., 2007, Lucas, 2002).
WHAT IS SIX SIGMA?
Over the past two decades Six Sigma has evolved from a focus on metric to the
Methodology level and finally to the design and development of entire Management Systems. As a Metric, when a process is operating at Six Sigma level, it will produce non conformance (i.e.,defects or errors) at a rate of not more than 3.4 defects per one million opportunities. As a Methodology, Six Sigma leads to business process improvement by focusing on understanding and managing customer expectations and requirements (Brewer and Eighme, 2005; Rudisill and Clary, 2004). As a Management System, Six Sigma is used to ensure that critical improvement opportunity efforts developed through the Metrics and Methodology levels are aligned with the firm’s business strategy. The focus of this paper, however, is on the application of Methodology for business process improvement within the financial reporting process.
The core of the Six Sigma Methodology level is DMAIC which stands for define, measure, analyze, improve, and control. These are explained in detail in the following sections. In the
Define phase, the project team must work closely with stakeholders to clearly define the problem statement, project scope, budget, schedule, and constraints. Understanding customer (internal and external) requirements is the key to achieving the project’s goal. The team has to define problems and goals of the project that are consistent with customer demands and with the firm’s business strategy. Process mapping and “voice of the customer” (VOC) tools are iterative techniques recommended as a means of incorporating customer requirements.
During the Measure phase, the team creates a value stream mapping (VSM) of the
process, capturing the flow of information—where and what information is needed. Then, based on the VSM, the team starts collecting data relevant to measuring the current process performance relative to the project’s goals. The most important activities in this phase are the identification and validation of data accuracy. The most widely used tools are VSM, run charts, brainstorming, balanced scorecards, documentation tagging, data collection check sheets, and decision metrics.
Why six sigma?
Anyone looking at a table of probabilities for the normal (Gaussian) distribution will wonder what six-sigma has to do with 3.4 defects per million thingies. Only one billionth of the normal curve lies beyond six standard deviations, or two billionths if you count both too-high and too-low values. Conversely, a mere three sigma corresponds to just 2.6 problems in a thousand, which would seem a good result in many businesses.
The answer has to do with practical considerations for manufacturing processes. (The following discussion is based loosely on the treatment by Robert V. Binder in a discussion of whether six-sigma practices can apply to software .) Suppose that the tolerance for some manufacturing step (perhaps the placement of a hole into which a pin must fit) is 300 micrometres, and the standard deviation for the process of drilling the hole is 100 micrometres. Then only about 1 part in 400 will be out of spec. But in a manufacturing process, the average value of a measurement is likely to drift over time, and the drift can be 1.5 standard deviations in either direction. At any time, 6.6% of the output will be off by 1.5 sigma in each direction. Thus, when the process has drifted by 150 micrometres, 6.6% of the product will be off by 150 + 150 or 300 micrometres, and therefore out of spec. This is a high defect rate.
If you set the tolerance to six sigma, then a drift of 1.5 sigma in the manufacturing process will still produce a defect only for parts that are more than 4.5 sigma away from the average in the same direction. By the mathematics of the normal curve, this is 3.4 defects per million.
There is another reason for six sigma: a manufactured item probably has more than one part, and some of the parts will have to fit together, which means that the total error in two or more parts must be within tolerance. If each step is done to three-sigma precision, an item with 100 parts will hardly ever be defect-free. With six-sigma, even an object with 10,000 parts can be made defect-free 96% of the time.
Clearly, many things on which people rely (services, software products, etc.) are not manufactured by machine tools to particular measurements. In these cases, "six sigma" has nothing to do with statistical distributions, but refers to a goal of very few defects per million, by analogy to a manufacturing process. The usefulness of the analogy is controversial among those concerned with quality in non-manufacturing processes.
How Six Sigma Solves Problems
The Six Sigma methodology for solving problems is similar to many other approaches. The differences arise mostly from Six Sigma’s emphasis on statistical techniques to isolate and quantify undesirable variations in process and product performance. The mathematical techniques and analysis are central to Six Sigma steps for problem solving. The general steps one would follow with Six Sigma are:
1. Identify a process or product variation that is creating undesirable performance results.
2. Define the scope and parameters of the problem.
3. Develop and apply initial measures of process or product variability.
4. Estimate the business performance impact.
5. Prioritize the project with other Six Sigma projects to establish when analysis begins.
6. Collect and organize the data needed to carry out a thorough analysis.
7. Analyze the data to pinpoint the cause or causes of variation.
8. Develop an action plan for improving the process or product and a time frame for full implementation of the action plan.
9. Implement the improvements.
10. Establish the control and feedback mechanisms for continuous improvement of the process or product.
APPLICATIONS OF SIX SIGMA
In recent years, a number of manufacturing and service companies have realized that Six Sigma Methodology is flexible enough to be applied throughout all business functions. Examples of Six Sigma applications in different functional areas other than manufacturing operations are discussed next.
Sales and Marketing
In recent years, several companies have considered using Six Sigma to improve
marketing processes. For example, the marketing and sales organizations at GE and Dow have been using Six Sigma for new product development and customer support to reduce costs, improve performance, and increase profitability (Maddox, 2004a). Other companies use Six Sigma in marketing and sales as a road map to capture market data and competitive intelligence that will enable them to create products and services that meet customers’ needs (Pestorius, 2007; Rylander and Provost, 2006). Rylander and Provost (2006) suggest that companies should combine Six Sigma Methodology and online market research for better customer service, and Pestorius (2007) noted that Six Sigma could improve sales and marketing processes.
Accounting and Finance
The Six Sigma Methodology has made its way into the accounting function and has
contributed to reduced errors in invoice processing, reduction in cycle time, and optimized cash flow (Brewer and Bagranoff, 2004). The accounting department at a healthcare insurance provider, for instance, developed an applied Six Sigma Methodology to improve account withdrawal accuracy. Prior to Six Sigma implementation, rectifying an error in the billing process involved a number of reconciliation checkpoints and manual workflow, which resulted in 60% of customer accounts being charged less than the amount due and about 40% being
overcharged. After Six Sigma implementation, the defect rate reached near zero and cycle times were reduced from two weeks to three days (Stober, 2006). The U.S. Coast Guard Finance Center used Six Sigma to create a new standardized process for accounts payable services, which Improved customer satisfaction levels (Donnelly, 2007).
SUMMARY AND CONCLUSIONS
In an effort to remain competitive, process improvement has become a strategic
imperative for companies. The Six Sigma primarily used on the shop floor has improved firms’ manufacturing processes. In recent years, however, Six Sigma Methodology has proven to be successful in other functional areas, including sales and marketing, supply chain management,dded steps in the current process. accounting, and finance. Current financial reporting procedures of most companies contain numerous errors, excessive cycle times, duplicated data entry, and additional costs due to inefficient processes. Specifically, Six Sigma is one tool that could enable finance departments to streamline their financial reporting process, as described in this case study.
The purpose of this paper was to explain how Six Sigma Methodology was applied and
implemented within the finance function of a major division within a defense contractor. The Six Sigma DMAIC Methodology was used to streamline the ‘Continuing Account Reconciliation Enhancement’ process. The team followed the five phases of DMAIC in this project and the result was a significant reduction in errors, cycle times, and costs associated with preparing financial reports. The potential impact of cycle time reduction on both internal and external customer satisfaction was not measured in this study but could be incorporated into future research.