The Surprising Results of Combining Lean and Six

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1 - Special Report - The Surprising Results of Combining Lean and Six Sigma A Step-by-Step Guide to Start This report is especially for those Who would like to know more about Lean Six Sigma and its benefits Who are confident about the inevitable great value Lean and Six Sigma methodology delivers to every organization but do not know to how get others involved Who would like to start with Lean Six Sigma but need to convince their manager for financial support Written by Peter Herku Author of Profitable Empowerment 1

2 About the Author M.Sc. Peter Herku MBA Black Belt Lean Six Sigma Having a Master s degree in Chemical Engineering, completing an MBA and working for 12 years in Finance, Peter Herku discovered the measurable way of improving both profitability and company culture. Peter is specialized in implementing business improvement program at smalland medium size companies both in production and service industry. He has been teaching and coaching Lean Six Sigma Yellow-, Green- and Black Belts in Europe adding millions of Euro s to companies bottom line results. While Lean Six Sigma is known about its lengthy educational program based on lots of statistics, Peter Herku shows that it does not have to be complicated. Only a few effective tools applied in certain steps will make significant change in any organization. Peter is the author of the book Profitable Empowerment and posts articles and practical tips and advices on Lean Six Sigma at his blog. 2

3 Content 1. The Basics: What is Lean Six Sigma? What is Lean Methodology? What is Six Sigma? What do you need: Lean or Six Sigma? 5 2. Understand overall benefits and tangible results Continuous Profit Improvements Higher customer satisfaction Higher employee satisfaction and Culture Change 8 3. Indentify problems for Lean Six Sigma projects Idea generation Project selection Find you projects here: Examples of Lean Six Sigma projects Lean project examples Six Sigma project examples Calculate the benefits General rule Savings of Lean projects Savings of Six Sigma projects Final remark on benefit calculation Present to your manager Summary Check list 16 3

4 1. The Basics: What is Lean Six Sigma? To get your manager enthusiastic about this methodology you should know first what it really is. It consists of two methodologies: Lean methodology and Six Sigma methodology. 1.1 What is Lean Methodology? It s about Reducing time By Reducing complexity reducing waste reducing non-value-added steps Originated from Toyota s Production System (TPS), founded in the automobile industry and spread around the world as Lean Manufacturing mainly among production companies. Recently also applied to the service industry like IT, Financial Services, Technical Service and Maintenance companies. 4

5 1.2 What is Six Sigma? It is a method to reduce variation. Variation means uncertain outcome, unpredictable level of quality. Six Sigma is developed by Motorola in 1986 to remove defects from production processes. In the meanwhile the application of Six Sigma is widely spread in many sectors of industry. Defect is anything that can cause the customer to be dissatisfied, therefore due to its customerfocus, Six Sigma is a very good tool to improve company-wide customer-focus and quality improvement. Due to the clear, step-by-step problem solving approach (also called the DMAIC roadmap); project teams are able to find solutions to difficult business problems, therefore improving critical processes. Cross-departmental and cross-functional team work, fact-based decision making, cause-andeffect analysis; statistical tools are the most important elements of this methodology. 1.3 What do you need: Lean or Six Sigma? Some companies focus only on one or on the other. But let me ask you one question: If you are in the restaurant what is important for you: the quality of the food OR the waiting time? You would say both and actually the price as well. That s right. You cannot separate one from the other. Therefore, you need to use both Lean --- to reduce waiting time --- and Six Sigma --- to reduce mistakes and defects. When you do both, you are by definition, reducing the costs as well. And this is key to satisfying your customers. 5

6 2. Understand overall benefits and tangible results Only to learn a methodology, your manager will not support your ambitions with Lean Six Sigma. What is really important for him/her is to see the tangible results of the methodology. The result your company achieves with Lean Six Sigma is all linked with each other but below we discuss it from 3 different points of view. 2.1 Continuous Profit Improvements Improving profits means you reduce the costs or increase sales and preferably you do BOTH. When you apply Lean methodology to reduce process time, you actually improve the capacity. This means you can do more with the current resources OR you can deliver the same output with using fewer resources. In both ways you are reducing the cost of products/services you are delivering. One project team of a maintenance company (service company) was focusing on the reduction of the time for making quotations. Their base line measurement showed that this company spent 6,29 working days on average to receive a machine part, to evaluate the condition of it, make and send out the quotation to the customer. After applying Lean Six Sigma problem-solving steps, they reduced the time by 36,4% to 4 work days in 5 month time. See also the graph below. 6

7 With other words, the capacity is increased by 36,4% without investments. This company was able to fill up the extra capacity, so they increase the sales volume because they could bring out more quotations and convert those into sales orders. This 36% capacity increase filled with extra sales orders resulted in a sales increase of EUR per year. 2.2 Higher customer satisfaction Lean Six Sigma is all about delivering what the customer wants. And he does not want delays, unpredictable delivery performance, mistakes, bad quality, etc. So when you and your company is working on a continuous base to reduce lead times, to reduce mistakes then you are delivering more and more according to the requirements of the customer. Due to structured costs reduction you are also very competitive with your prices. Also an important element in satisfying your customer. And this is true for your end customer (who is paying your bills) but also for your internal customers like your colleague, next department, etc. In order to satisfy the assembly department of a technical textile producer (manufacturing company), the spiral production had to be improved. The spirals produced but being outside the specifications of the assembly dept (internal customer) was 21%. This caused not only loss in raw materials but also productivity loss and required additional manpower to cope with the volume demand of the assembly department. Lean Six Sigma project team identified the main causes and reduced the variation of the spiral dimensions by 42%. See below the improvement on the thickness of the spiral. 7

8 As a result, the waste was reduced from 21% to 4%, reducing the costs by EUR on a yearly base. The customer of the spiraling department, the assembly department, was very glad about the improved quality of the spirals which made the assembly work much easier. 2.3 Higher employee satisfaction and Culture Change To gain full benefit from Lean Six Sigma, the methodology should be introduced in the whole organization, changing the way people work. This is level 3 on the chart below. If you only run some improvement projects solving problems you will only get temporally benefits. Starting with Lean Six Sigma project work, you are going to notice: people enjoy this new way of working because of working project teams to solve an important issue. That goes beyond department walls providing with a common goal: finishing the project in 4-6 month time with significant, proven improvements. Team members also appreciate that they have a chance to tell what they think the solution is. At the end it is not about some one s subjective opinion but about facts providing evidence of whether the team has found the solution or not. Removing wastes and un-necessary steps from the process are also giving more time for the employees to focus on the quality of their work. 8

9 Some years ago, I was working with a company that was almost bankrupt. They suffered an operational loss of 1,5 million euro in the prior year. The atmosphere was negative; people were not motivated, pointing fingers to each other if something went wrong. There was no empowerment of employees, their opinion was not asked, since the company was run by one person who made all the decision basically alone. Responsibilities were unclear, creating the opportunity for more finger-pointing. The priorities of the day were changing very frequently. By appointing a new Director who believed in the transforming power of Lean Six Sigma as he already experienced it in his career a business improvement program was started. Training all key peoples in Lean Six Sigma, leading daily and weekly customer focus meetings increased the awareness in the whole organization. Since the whole managing team including 8 people, were trained in Lean Six Sigma method working on crucial projects, this had huge impact on increasing profitability of the company. It had a quick impact, in fact after 3 month of starting this improvement program, the profit increased by 22 times. Costs were reduced dramatically: on average 1,9 mill. EUR per year. The company culture has changed completely. Employees are highly motivated and empowered. Lean Six Sigma became a way of life: processes are under control, improvements are ongoing and problems are solved in a structured way without even making an official Lean Six Sigma project out of it. Very importantly, the quality level of the decision-making is very high: now it is based on facts and figures instead of gut-feeling and someone s perception and personal favor. 3. Indentify problems for Lean Six Sigma projects At this point you understand Lean and Six Sigma methodology and also see the most important results your organization is going to realize. Now, to make such improvement program more tangible and concrete to your manager, you should identify areas for improvement within your organization. These problems will be solved using Lean Six Sigma methodology. 9

10 3.1 Idea generation First, try to collect some ideas. Simply put: your projects will be about reducing lead times (Lean) and/or reducing mistakes (Six Sigma). - Brainstorming: just take a piece of paper and write down everything that you would like to see improved in your work, at your department. - Next to brainstorming you should look at the goals of your company and your department. You probably need to discuss this with your boss. Based on the goals and objectives compared to the current performance, you are able to identify the areas where improvements are required. Here are thus even more candidates for Lean Six Sigma project. Second, make a selection. 3.2 Project selection - Look at your own job: what is your most important task and where do you need to improve? In many companies you have a yearly meeting with your boss about these issues. Use that information to formulate project-idea. - Data analysis is also a very good base for project identification. If you know or your boss knows any statistics about claims or irritations in your company than you have a good improvement opportunity there. Furthermore, if you talk to the financial guys in the company, they could also give you some hints about where improvements are needed. I have to warn you though that the Finance department is often too far away from the dayto-day operational problems, therefore you need to dig deeper if you re starting point for finding LSS project is a financial statement. After having listed several possible projects, now you have to choose 3 or 4 that is really compelling to your manager. Why? If he/she does not see a problem, it is not relevant for him/her to solve it. Here is how to find the relevant projects: - Listen to your manager: take a week and pay really good attention to what he/she is upset about, which words he/she is using, which meetings are held, what is the agenda. 10

11 - What are the main goals and objectives and where do you find gaps in the performance. You could talk about this with your manager. Do not need to talk about Lean Six Sigma at this point, only try to find the most important subjects your manager is concerned about. 4. Find you projects here: Examples of Lean Six Sigma projects Here is a list of projects that I have done or coached other project leaders on. I am sure; you will find some of them are also relevant in your situation. Otherwise you can apply the concept to your situation. 4.1 Lean project examples (Both production and non-production environment) - Reduce time between customer inquiry and issuing quotation to the customer for a certain maintenance service job - Reduce the time it takes to complete a process step - Reduce the time it takes to train new employees - Increase capacity of a machine being the bottle-neck of the process - Reduce production time of a product - Increase speed of budgeting process - Reduce inventory - Eliminate rework / waste / scrap - Improve On Time Delivery performance 4.2 Six Sigma project examples (Both production and non-production environment) - Reduction of deviation from budgets - Reduction of size, color, etc. variation of a product - Reduction of variation in the processing time of a certain department - Increasing planning efficiency 11

12 - Reducing scrap due to non-quality - Increase sales of a product / customer - Improve efficient use of energy - Reducing claims and irritations - Reducing non-conformities (things that did not go as supposed) 5. Calculate the benefits This is an important part to motivate your manager to support you Lean Six Sigma plans because at the end he/she is interested in the tangible results. 5.1 General rule First of all, the general rule is that an organization can save costs with Lean Six Sigma in the amount of 1,2% to 4,5% of the annual sales. So for example, if your annual sales are EUR or whatever, then you can expect an annual costs reduction between EUR and EUR (1,2% of EUR and 4,5% of EUR). That is a rough calculation but at least you can give your manager an estimate about the total profit improvement. 5.2 Savings of Lean projects Next, when you are running Lean projects, you can expect a lead time reduction (the total time you need to complete a process or sub-process) between 20% to 60%. That means: 20% - 60% faster process 20% - 60% extra capacity without investments 20% - 60% extra capacity without additional manpower 12

13 In my earlier example at the maintenance company, we reduced the process lead time of issuing quotations by 36,4% (section 2.2). In this particular case we could fill up the 36,4% extra time with new quotations and orders, therefore the sales was increased with about EUR. If your company is not able to fill up the extra capacity, then you should remove the extra resources because you are able to do the same job in 36,4% less time. You can allocate this time to other, bottle-neck process or reduce the number of people involved at this step. Taking an average cost of employees ( EUR per year), your project saving is about EUR per year. Obviously, every company would like to choose the first option (filling up the extra capacity) but it is not always possible. Again, the final monetary savings depend on the cost structure of your company. 5.3 Savings of Six Sigma projects When you are executing a Six Sigma project, you are reducing defects. In practice you can expect a defect reduction between 50% to 75%. This can lead to 50% - 75% less scrap materials, or 50% - 75% less budget overruns, or 50% - 75% less rework, etc. all with its specifics to calculate the final savings in money. I was conducting a project in a welding shop (services and overhauling company). Together with the team we reduced the variation in welding hours compared to the planned hours by 70% at one welder. This reduction in variation made the completion of the welding job more predictable creating extra capacity for 40% regarding the whole welding shop. The company had no additional orders but once in the while they had peaks so the welders had to work overtimes amounting EUR per year. 13

14 Due to the extra capacity, they do not need to work overtime; therefore there is a direct savings of EUR per year. Another possible saving is that when a welder left the company, he was not replaced. Due to a slight decrease in demand combined with the increased capacity due to the Six Sigma project, the company reduced its costs by EUR per year. 5.4 Final remark on benefit calculation It is not easy to isolate the savings of one project. As shown in the previous example, one project can result in multiple benefits, all related to each other. Furthermore, the more projects are running in one time, those projects will have interactions: one project benefit will influence the other project as well. So although management needs to know the project savings, the real benefit is often even higher. 6. Present to your manager This is the final stage of getting your management involved into Lean Six Sigma and to get their support for your plans. Arrange a meeting with your manager and present him/her the following: - Describe 3 4 very important problems that could be solved using Lean Six Sigma methodology. Explain why you think they are crucial for the success of the organization. Try using the same words and terminology as you manager in order to have an instant recognition and common agreement. Use here sections #3 and #4 to build your presentation. - Explain the expected improvements and annual savings in terms of money. Use here the indicators from section #5. - Use case studies provided in this report to proof the results you can also achieve. See the grey sections above. - Request your manager to support your online Lean Six Sigma Green Belt training. This will enable you to successfully carry out those projects and realize the predicted savings. 14

15 7. Summary You know that Lean Six Sigma is rapidly spread all over the industry. Maybe your competitors are using it already or you want to be the first among them. Changing the way you and your colleagues work is unavoidable if you want to be in business tomorrow. Lean Six Sigma tools and techniques give you the unmatched competitive edge but now you have to explain this to your manager to get him/her support your ambition becoming a Lean Six Sigma expert. First: find the most important problems in your organization. Second: translate them to Lean or Six Sigma projects. Third: estimate the savings using the % improvements Forth: ask your manager to support you to realize those savings and solve those important issues. Sign up for prior notification when the training slots are open: 15

16 Check List Steps Activity Checked 1 The Basics: What is Lean and Six Sigma? - What is Lean Methodology? - What is Six Sigma? - What do you need: Lean or Six Sigma? 2 Understand overall benefits and tangible results - Continuous Profit Improvements - Higher customer satisfaction - Higher employee satisfaction and Culture Change 3 Indentify problems for Lean Six Sigma projects - Idea generation - Project selection 4 Find you projects here: Examples of Lean Six Sigma projects - Lean project examples - Six Sigma project examples 5 Calculate the benefits - General rule - Savings of Lean projects - Savings of Six Sigma projects 6 Present to your manager - Describe 3 4 very important and relevant problems - Explain the improvements and savings - Ask his/her support for your Green Belt training 7 Contact* Peter Herku to select the right Lean Six Sigma projects to start your Green Belt training and certification peter.herku@hercon.nl Call: *Important: Financial support from you company should be in place prior contacting Peter Herku. 16