Quality improvement for profitability

1. C O M P E T I N G I N T O D A Y ’ S M A R K E T P L A C E B Y R E D U C I N G C O S T S A N D I M P R O V I N G Q U A L I T Y Quality Improvement for Profitability Company G Steven Puvogel 000253043 June 2012

2. Company G  Foreign competition is producing higher quality goods at lower costs  Must produce higher quality product  Must reduce costs Company G must examine its options for improvement:  ISO 9000  Six-Sigma  Lean Production  Total Quality Management (TQM)  Lean Six-Sigma

3. ISO 9000  Little evidence that ISO 9000 is reason companies are more profitable  Limits innovation  Discourages improvement  Fails to create culture of change  Little improvement of profitability  Set of standards used across industries  Suppliers can be assured of using same set of standards  Fewer customer defections  ISO 9000 companies tend to be more profitable

4. Six-Sigma  Highly flexible  Creates huge cost savings  Provides tools for problem solving  Proper execution leads to high quality output  Potential for counterproductive training  Resume padding  Excessive emphasis on statistical analysis  More effective in larger scale operations

5. Lean Production  Parts are produced only as needed, reducing defects and cost  Value is determined from customers’ point of view  Increased profitability  Higher productivity  Continuous improvement  Less complacency  Less flexibility  Poorly suited for volatile situations  Potential for supply chain congestion

6. Total Quality Management (TQM)  Popular during the early 1990s, never became fully implemented by major players  Evolving set of processes  Combined reducing costs with improving customer satisfaction

7. Lean Six-Sigma  Develops leadership  Incorporates human development into improvement process  Bottom line focus  Frees up capital  Highly flexible and adaptable  Integrates cost cutting and quality improvement  Potential for supply chain backlogs  Concern of poor training opportunities  Could create inflexibility within the organization from focus on bottom line

8. Conclusions  ISO 9000 companies produce higher quality product but create less additional profit. They are also less innovative.  Six-Sigma produces higher quality products and creates cost savings.  Lean thinking lowers the cost of business processes while encouraging innovation.  Lean Six-Sigma maximizes profit while improving the quality of goods produced in an environment of innovation.

9. Recommendation  Flexibility of Six-Sigma  Efficiencies of lean production  Higher quality products  Lower costs  Higher profitability Company G should implement Lean Six-Sigma

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At Company G, we produce tangible products for domestic and export markets. In today's competitive marketplace, we face a number of external pressures. One of our biggest challenges is foreign companies that are able to produce better quality products at a lower price. As a company, we must produce better quality products at a lower cost. In recent years, many companies have implemented quality improvement processes to improve their profitability. These processes include Six-Sigma, ISO 9000, lean manufacturing and total quality management. This report will analyze the various quality improvement processes to determine which process, if any, we should implement to improve profitability.
BackgroundIn the 1980s, there was a great concern regarding manufacturing standards and quality in an increasingly global market. The International Organization for Standardization (ISO) set out create a set of standards based on British wartime manufacturing standards and on the standards of other organizations from around the world. First published in 1987, ISO 9000 saw major revisions in 1994 and again in 2000. (Chris Heffner)BenefitsISO 9000 has an advantage in that using one set of standards for quality among various companies and organizations gives an individual company an ability to ensure that suppliers are using the same set of standards to produce component parts. This can reduce internal resources that are devoted to quality checking external supplies. Standardization is intended to increase sales through fewer customer defections and through “badge of quality” opportunities. (Heras, Casadesus, & Dick, 2002)It has also been shown that companies that are ISO 9000 certified tend to have better financial performance than those that are not certified in the standard. In a study of 800 companies in the Basque region of Spain, the 400 companies that were ISO 9000 certified performed better financially in 4 out of the 5 years studied than the control group. (Heras, Casadesus, & Dick, 2002)DrawbacksWhile there has been evidence to show that ISO 9000 companies tend to perform better than companies that are not certified, there is little evidence that certification is the cause for better financial performance. In fact, a study has shown that registered companies “were performing at the same higher level before their ISO 9000 registration”. (Dalgleish, 2005) Another drawback of the ISO 9000 system is that it is designed around standardization, limiting innovation and discouraging improvement. In order to be ISO 9000 compliant, a company need only meet minimum standards and the system “fails to encourage real improvement”. (Chris Heffner)ISO 9000 often fails to create a change of culture within a company. “In fact, results show that in many companies, changes are being made only by top managers. Employees are not participating in the system except in those aspects that are strictly necessary.” (Costa & Lorente, 2007) Without buy-in throughout a company, ISO 9000 is proving to be ineffective in improving quality and profitability in companies that adopt it.
BackgroundSix-Sigma has some roots in the Japanese quality movement of the 1960s, but is credited as having been created by statistician Dr. Mike Harry in the 1980s. (Mehrjerdi, 2011) Motorola was a very early corporate adopter in the mid-1980s, gaining much attention for the methodology by winning the Malcolm Baldrige National Quality Award in 1988. (Andersson, Eriksson, & Torstensson, 2006) Early adopters also included General Electric and Texas Instruments. (Mehrjerdi, 2011)Unlike ISO 9000, Six-Sigma is not a specific standard or system of certification. Rather, it is a loosely defined framework for introducing statistical thinking to work processes. The goal of a Six-Sigma system in a company is to reduce the potential for defects in a process to 3.4 defects per million opportunities. This would be a major improvement for most companies that aim for 99% perfection in most processes. No organization can claim to be an agreed upon certification body for Six-Sigma, but many organizations offer training and certifications for individuals. (Goh, 2010)BenefitsBecause Six-Sigma is not a specific set of standards but a methodology for improving business processes, it offers a great deal of flexibility. Six-Sigma has been successfully been implemented in a variety of industries including manufacturing, design, marketing, government, education, finance and healthcare. (Goh, 2010) Many companies have seen savings from Six-Sigma projects in the billions of dollars. Examples include Motorola, which has saved in excess of $18 billion. (American Society for Quality, 2010)Six-Sigma thinking provides problem solving solutions that improve both existing processes and create effective new processes. The DMAIC model is applied to existing processes as part of a Six-Sigma project. This model is broken down into Define, Measure, Analyze, Improve and Control. With this methodology, Six-Sigma adherents can achieve measurable results. In creating new processes, the model is revised to DMADV or Define, Measure, Analyze, Design and Verify. (Andersson, Eriksson, & Torstensson, 2006)Six-Sigma also provides a very high level of quality if well executed. The goal of a Six-Sigma program is to achieve 99.99966% perfection in processes to which it has been applied. (Goh, 2010) High quality production tends to lead to higher customer satisfaction and in turn, more sales. Increased sales with lower costs improve the profitability of the companies that execute Six-Sigma programs.DrawbacksSix-Sigma does have its share of drawbacks that can drastically affect its results. The first of these is that there is strong potential for counterproductive training. There are many available sources for training in Six-Sigma methodologies including academics and professional consultants. Unfortunately, there isn’t reliable information on which trainers provide the most useful resources. Often, there is excessive emphasis on statistical analysis, to the point of not improving the processes that need to be addressed. Many trainees become certified in Six-Sigma in order to improve their resume, rather than to take a continuous improvement approach to their company. (Goh, 2010)Another drawback of Six-Sigma is that despite its flexibility, it does not always work to the advantage of every company that uses it. Some smaller companies may not operate on a scale or in an industry that can achieve results seen by larger corporations. Also, the emphasis on statistical analysis may create unreasonable expectations based on numbers that are created for training program sales pitches. (Goh, 2010)
BackgroundShortly following World War II, Japanese car maker Toyota was faced with a production problem. In 13 years, Toyota had produced less than half as many cars as American manufacturer Ford produced in a single day. Setting out to emulate Ford’s successful system, Toyota studied the American company intensely only to discover that it didn’t have the resources to do so. Finding that Ford wasted many resources, including man hours in particular, Toyota set out to create a more efficient system. The Toyota Production System was the result, which eventually evolved into what became known in United States as lean thinking. (Dahlgaard & Dahlgaard-Park, 2006)The main tenets of lean thinking include determining value from the customers’ point of view, removing activities that don’t add value, reducing waste, just-in-time production and continuous improvement. (Kocakülâh, Austill, & Schenk, 2011) These concepts are intended to increase quality and profitability through reduced costs and increased sales. Lean thinking has been adopted in a wide variety of sectors, including manufacturing, health care and government.BenefitsLean thinking has been to shown to reduce defects in manufacturing by only producing parts as they are needed. In the event that parts have a defect, only a small number will need to be recreated relative to other manufacturing philosophies where large batches of parts are created and stored. This also reduces costs associated with such storage.Another way that lean thinking has given companies a competitive advantage is how it determines value. Traditionally, companies have set price for products by taking costs and adding an amount for profit. With lean thinking, companies determine how much a customer values a product and subtracts cost to determine how much profit the company earns. With this model, increasing profit is a matter of reducing costs or giving the product more value. This way of thinking creates greater profitability through increased sales and lower cost of doing business.Lean thinking and production techniques are also associated with increased productivity. (Andersson, Eriksson, & Torstensson, 2006) By making business processes more efficient, more production is possible with fewer resources.Lean thinking attempts, through continuous improvement, to reach perfection. This direction results in regular examination of all aspects of business processes. This results in less complacency in the workplace.DrawbacksLean thinking does have some disadvantages that must be considered. Because of lean thinking’s attempt to continuously make processes as efficient as possible, there is not much flexibility for when customers and conditions demand change. This means that lean production is not well adapted to situations and businesses where volatility is the norm. (Andersson, Eriksson, & Torstensson, 2006)Another drawback of lean production techniques is its dependence on just-in-time deliveries. This can result in “congestion in the supply chain, leading to delays, pollution, shortage of workers, etc.” (Andersson, Eriksson, & Torstensson, 2006) A delay in the arrival of one part can create far-reaching work stoppages.
HistoryDuring the 1990s, a great deal of excitement was generated throughout the business community for a process known as Total Quality Management or TQM. TQM was an evolving system of processes aimed at reducing costs and improving customer satisfaction. There isn’t a great deal of empirical research on the success of TQM because despite the buzz that surrounded its potential, TQM never became fully embraced or implemented by major players in the business community. Despite TQM’s status as a fad or antiquated buzzword, there were a number of contributions made by Total Quality Management development to other quality improvement processes. Chief among these is the combining of waste management with overall quality control.
BackgroundBecause lean thinking is an approach rather than a specific process, it can often be combined with other processes. While Total Quality Management combined waste reduction and quality improvement, lean thinking focuses on waste reduction with quality improvement as a side effect. Six-Sigma on the other hand, is focused for the most part on quality improvement. One popular implementation that combines the waste reduction of lean thinking and the quality initiatives of Six-Sigma goes by the simple moniker Lean Six-Sigma. This is not truly lean thinking or Six-Sigma but a hybrid that creates new tools and approaches.BenefitsLean Six-Sigma benefits the companies and individuals that implement it by developing leadership. The tools that Lean Six-Sigma provides leaders enable them to effect change in the organizations they operate in with the buy-in they need from stakeholders. For this reason, Lean Six-Sigma is beneficial in that it incorporates human development into the improvement process. (Snee, 2010)Another benefit of Lean Six-Sigma is that it is inherently focused on “getting bottom line results”. (Snee, 2010) Projects are not attempted until it can be shown that improvement in profitability will result. Such improvement also frees capital for use in research and innovation.Lean Six-Sigma is also known for its flexibility. When a company adopts the methodologies associated with Lean Six-Sigma, the leadership looks at the organization as a whole and treats each issue or process individually. It may find that some improvements may be best made with a lean thinking approach and quickly implement a solution that reflects this. Alternately, it may find that the methodologies of Six-Sigma are best suited to bring about the changes necessary. This flexibility and the integration of key aspects of various approaches give Lean Six-Sigma a key benefit. (Snee, 2010)DrawbacksThe biggest drawbacks of Lean Six-Sigma are those seen in the other methodologies from which it is derived. For example, just-in-time production and delivery can create backlogs in Lean Six-Sigma. There is also a concern for poor training provided by individuals or organizations that either do not have the experience or knowledge for proper Lean Six-Sigma implementation. Processes developed through Lean Six-Sigma also run the risk of being inflexible due to the emphasis on bottom line improvement and efficiency.
Choosing a quality improvement process that benefits Company G, both financially as well as through greater quality is important to our ability to compete with foreign firms. As competition is currently able to provide better quality goods at lower costs, our customer base expects Company G to improve.The quality improvements afforded by an audit system of standards, such as ISO 9000 would help Company G produce items at a higher standard. However, the defects of such a system would not encourage further improvements nor would it improve costs. For these reasons, ISO 9000 is not a good fit for Company G.Six-Sigma would give Company G the boost it needed to cut costs through efficiency, as well as improve the quality of our end products. Applying lean thinking to our business processes would also lower the costs of doing business. Both of these solutions would give Company G the opportunity to compete more fully in the global marketplace.
A more complete solution to the issue facing Company G, foreign competition, would be to engage in the hybrid solution of Lean Six-Sigma. Properly executed, Lean Six-Sigma affords our organization the flexibility of Six-Sigma, with the efficiencies of lean production. Such efforts will produce higher quality goods at lower costs. For this reason, the present author is recommending that Company G adopt the methodologies of Lean Six-Sigma as soon as practical.Quality control and profitability are important to Company G’s competitiveness and success. By producing higher quality products, costumer relationships will establish and develop. By reducing costs, prices may be reduced while increasing profitability. Lean Six-Sigma’s success at reducing costs and increasing profitability make it an ideal quality improvement process for Company G to implement in all aspects of our business.

Quality improvement for profitability

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Quality improvement for profitability

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