Winning With Six Sigma

Lean Six Sigma (LSS) is about continuous improvement. This topic is approach as motherhood. Most people and companies will agree that a continuous improvement approach is the only way to ensure a successful future. The acid test remains in how a company approaches the topic. “Show me how you do continuous improvement”. It is at the point that things tend to fall a little flat.

Many companies have adopted LSS as their primary vehicles to practically support continuous improvement. LSS is about finding a better way to do things and practically making it stick.

A key tenant of LSS is that it empowers people to get back to the real work. It respects that people in a process know it best and have the capacity to improve it. LSS offers a toolset that aids these individuals to step back and look at what they do in a critical way. The combination of process and work knowledge and the proven LSS methodology brings about a new reality that is more efficient and effective than what has come before.

Stated differently, LSS is about merging ‘doing’ and ‘improving’ which really brings us back to what ones job is truly about. No longer is improving merely a job on top of ones exiting job, it is ones job.

Plan-Do-Check-Act (PDCA)

PDCA is the classical, and probably simplest, approach to continuous improvement that anyone can adopt.

Here is a simple example to illustrate PDCA.

1. Plan: You are starting a new job at Afrox and plan to get to work at 08:00.

o You gather some information. For example the location of the new job and a possible route to use. From this you estimate the time required to get there by 08:00.

o Several things need to happen to get you to work on time e.g. awaken, get dressed, drive to work etc. It all starts with the alarm awaking you at the right time, let’s say 06:30.

2. Do:

o You set the alarm (and within this is a PDCA: P – time to set the alarm; D – set the alarm; C – ensure the alarm has been set; A – awaken when the alarm goes off).

o You get ready for work and drive to work.

3. Check: Verify the time of arrival. Let’s say you arrived at 07:30. Earlier than planned.

4. Act: All else staying the same you may consider setting your alarm clock a little later for the next day and cycle through the PDCA again … continuous improvement.

So, how can you adopt PDCA in your daily work. It all starts with having a plan and being willing to see the plan through. Not filling it in “file 13”.

The plan should look at how you can do what you do better and setting goals to achieve it. As part of the plan, gather some info (no need for serious data of Six Sigma data analysis), use simple practical info. With the right information set your plan.

Follow through on your plan by doing the things in your plan. Often this is the challenging part due to the many daily activities that may distract you. Yep, you need to commit, which is made so much easier when you realize the actual improvement is going to free you up to do “real” work.

Check how you are progressing against plan and against your goal.

Act as you observe the plan in action and as you start recording the outcomes of the improvement. If need be, remain flexible to work through the PDCA until you achieve what you set out to do … continuous improvement.

Piero

A much under utilised tool in the LSS belt arsenal is the roject storyboard. Use your storyboard to help you tell your project story. Tell your story as fully as possible.

Secondly, ensure the “golden thread” is clearly discernable. That is, as you tell your story, make it clear to the audience, how one tool / phase flows into the next. Or how the current activities take its cue from what has gone before.

Thirdly, the storyboard is your selling aid. Believe it or not, you must continuously resell your project through the use of logic, data and enthusiasm. Remember, you will be using many tools that are foreign to your company… the storyboard is not to educate (maybe it is in some way) but to show how you used sound techniques to make good decision and solve problems. Focus on the reason for using a tool / technique and the outcome (less on how it was used, unless asked).

Fourthly, offer summaries along the way, particularly at phase changes. Tell the audience what you just told them (1 slide summary) and tell them what you are about to tell them (1 slide summary).

Lastly, be clear and concise. Do the Zen thing … “Less is More”. Use illustrations and graphics (”picture and a 1000 words …”) with information text blocks.

Go forth and tell it … may be the force be with you!

Best wishes with you improvement and innovation work.

Piero Pazzi

Six Sigma is renowned for its ability to improve business outcomes and processes. DFSS, a second Six Sigma methodology, assists companies with increasing their innovation capabilities and new initiative success rate. Now Six Sigma has entered the realm of business turnaround as it facilitates the development of a clear path to success.

In essence turnaround is about creating a new vision, strategy and aligning the company’s processes and resources to deliver its new objectives. Usually the focus with a turnaround is about productivity improvement, cost management, cash generation and low hanging growth opportunities.

Alongside a due diligence (Voice of the Business—VOB) exercise, when looking at turning around a loss making company, the new leadership should seek to understand the Voice of the Customer (VOC). Any successful business knows what its customers’ current and future needs are. Highly successful companies have aligned their processes and resources to create value and satisfy those needs.

Six Sigma aids in gathering and analysing the VOC while measuring a company’s internal process capabilities.

Through a filtration mechanism the VOC, and associated opportunities, are prioritised. From this flows a strategic intent.

Once the company’s strategies are defined, objectives can be crystallised and several project ideas developed (for each objectives) to bring about improvement and business innovation. This ideas include process, systems, resources etc.

These project ideas are entered into a hopper and prioritised against the company’s key outcomes required.

Project ideas are segmented into improvement projects (DMAIC) and innovation projects (DFSS). Experienced Six Sigma personnel will assist the new leadership bring about swift yet sustainable improvement while laying a platform for future growth through the innovation projects.

What makes Six Sigma powerful in business turnaround situations is its drive to make decisions based on data. Subjectivity is forgone leaving objectivity to decide the course of action.

Because of its focus on measures, progress can be measured at various levels within an organization and quick interventions launched when processes, systems or resources stray from course.

Once Six Sigma has improved or innovated a process, its control mechanism and self-policing system ensures continuous improvement and continuous innovation.

Successful I&I (Improve & Innovate),

Piero

Successful investors focus primarily on risk reduction. Many tools are available on the market today to assist investors with fundamental and technical analysis of their equity investment. However, to successfully understand risk, portfolio analysis is essential. This article explores a method of better understanding the risk of your investment portfolio using various tools—including Excel, Minitab and Crystal Ball.

It is a well documented fact that by diversifying an investment portfolio the total portfolio risk is reduced, particularly the unsystematic risk or unique risk. However, the investor is cautioned that beyond an optimal point, the advantage of adding additional shares dissipates the risk reduction advantage.

Figure 1 below depicts a complete portfolio risk. Analysis which is discussed below.

Once shares (the investment focus of this article but can be substituted for any investment type) have been selected, and basic information as to price and volume has been noted, the next step is to calculate the Portfolio Beta.

Portfolio Beta

The portfolio Beta is obtained from the individual share Beta. Beta measure the sensitivity of a share price to the movement of the market as a whole. For example, a share with a Beta of 1.5 will move, on average , 15% for each 10% move of the market.

The individual share Beta’s are determined by performing regression analysis between the monthly returns of the ALSI index as the independent variable and the monthly returns of the individual shares. Minitab has powerful regression functions to assist with this process.

These Betas are then weighted by the proportion of the portfolio and summed to produce the portfolio beta.

Coupled with good knowledge of the market and skills at forecasting, the Beta can be used to reduce risk by shifting your portfolios Beta. Increasing it when you predict a market rise and vice versa. Thus, you will be altering the market risk of your portfolio.

R² and Standard Deviation

Again using the monthly returns of the individual shares, the R² and Standard Deviation (Std Dev) for each share can be obtained using Minitab. In fact performing the regression in the previous step will provide you with this information.

The R² value indicates the percentage market or systematic risk inherent in the share and ultimately the portfolio. Systematic risk is risk that can not be diversified away. It works hand in hand with Beta risk. Technically the R² explains the “best fitting” line that fits the return data. It tells us what proportion of the movement of a share is due to market movement.

Standard Deviation

STD DEV measures the standard amount by which the value in a data set differs from the mean (average).

In finance, the STD DEV of expected returns is a common measure of investment risk. The higher the variance, measure by STD DEV, the higher the risk of a share or portfolio.

The Market Index Risk

The market index risk is the STD DEV of the market index risk. In our examples it is equal to 4.5%. The magnitude of the portfolio risk is =

Portfolio Beta X Market Index Risk.

The Portfolios Unique Risk

When a diversified portfolio across shares are not perfectly correlated, the portfolio risk is less than the weighted sum of the risk of the individual shares. The risk that disappears in the portfolio creation process is called the shares unsystematic risk or unique risk.

The unique risk of a portfolio is calculates by first computing the unique risk of each share—(1-R²) x STD DEV. The result is then multiplied by the proportion of each share to the portfolio. The square root of the sum of these results constitute the portfolio’s unique risk.

By diversifying the portfolio, the unique risk was reduced and is significantly lower than any of the individual shares.

The Portfolios Total Risk

The portfolio’s total risk is calculated by the following formula:

(Total Risk)² = (Market Risk)² + (unique Risk)²

Portfolio Return

The benchmark return of a a portfolio can be caluclated using the following formula:

Benchmark returns = Beta x Market Index Return + (1-Beta) x Risk Free Rate.

Using Crystal Ball (CB)

When using CB the first step is to define distribution return assumptions in Crystal Ball (green cells). The expected return for each share is multiplied by its proportion in the portfolio. These are summed to produce the portfolio return (blue cell)

The simulation is run and the distribution graph below is produced.

This portfolio has a 77.15% chance for producing a positive return.

The sensitivity analysis, shown to the right, ranks the magnitude of the various shares returns and impact on this portfolio.

Successful I&I (Improve & Innovate),

Piero

Business Process Reengineering is often about radical redesign and reorganization of processes. It is about starting a anew, in a sense, and may be required to lower costs and improve service delivery.

Hammer and Champy, authors of Reengineering the Corporation, offer seven reengineering principles to developing processes that result in significantly improved outcomes. These principals are:

· Focus and organise around outcomes

· Identify all the processes in an organisation prioritise them for redesign intervention

· Integrate information processing work into the work that produces the information

· Centralise, and where not possible, treat dispersed resources as though they were centralised

· Link parallel activities in the workflow

· Ensure decision points are at the place where the work happens

· Capture information once and as close to the source as possible

It is often not possible to wipe the stale clean and start afresh at redesigning a business or process. Six Sigma’s DMAIC methodology offers a methodology for taking existing processes to new highest and may include a measure of redesign.

Design for Six Sigma on the other hand offers a methodology that is specifically geared at creating new processes and offerings.

Six Sigma brings to BPR the following elements:

· Proven set of statistical tools and methods to eliminate variation

· Data driven design or improvement

· Use of scorecards, dashboards, metrics and baselines

· Stage gating to ensure initial assumptions are valid while maintaining vigilance for changes

· Elimination of waste time, effort or resources

· All efforts are linked back to the ‘Voice of the Customer’, the business strategy and objectives.

Successful I&I (Improve & Innovate),

Piero

Probability distributions are useful models representing random behaviour. Diverse fields of human endeavour, including business, science, engineering, and many others, all use the same system of probability distribution models. Why are these models so important? Benefits of probability distribution models fall into four broad and overlapping categories:

Estimation: When a sample of observations of a random variable is available, numerical characteristics describing the random variable may be estimated from the data. The mean and standard deviation are examples of these characteristics. It is common to assume a particular distribution family, such as the normal family, before estimating these characteristics. These estimates are more precise with an assumption that the random variable has a distribution from a limited family of distributions than without that assumption. Probability distribution models improve the precision of population estimates.

Prediction: Following estimation, one often wants to predict future behaviour based on past behaviour. Using a probability distribution model, one can predict ranges of values that will occur with any given probability, or one can predict the probability that values will fall within any given range. Without using a distribution model, predictions are restricted to the specific values previously observed. Probability distribution models make predictions mode flexible and versatile.

Simulation: Using distribution models to represent random variables that are inputs to a system, simulation predicts how the system reacts to the input. The outputs of the simulation form new random variables to be modelled, estimated, and predicted. Probability distribution models allow systems to be tested and optimised rapidly using simulation tools.

Communication: Essential to all of the above is the ability to describe complex random behaviour in concise terms. Probability distribution models provide a concise system of terminology for describing and communicating randomness to others.

Nu-Biz possesses the capabilities to develop sophisticated decision models for your business, and various aspects therein, using techniques that include a variety of model creation and statistical programming.

· Decision models include business simulations, optimisation, time series etc.

· Product forecasting,

· Marketing Investment Prioritisation & Allocation,

· Portfolio allocations,

· Product launch,

· Product mix,

· Project selection,

· Sales projection,

· Business decision modelling,

· etc.

Successful I&I (Improve & Innovate),

Piero

Whilst no clear definition for a High Performance Organisations (HPO) exists some popular, albeit generic, principles can be explored in an attempt to get ones head around it. Some of these include:

• HPO as a platform or structure that drives execution.
• Decisions are made where the work happens or the customer touched. It may mean that decisions a pushed down to the lowest possible level in the organisation.
• HPO is about high perfroming teams are with basic tools to make decisions and solve problems. Although the teams are composed of members that make up work teams, ad hoc members can change.
• Supporting services and functions exist to support these HPO teams sometimes refered to as High Performance Teams.
• HPO teams may from time to time enlist the assistance of process or performance improvement teams to deal with tougher issues where the root cause and solutions are not clear.
• HPO teams may use Value Stream Mapping to identify improvement opportunities within their processes.
• HPO steering committees identify core processes to Value Stream and prioritise improvement opportunities.

Excuse me, but how does differ from the strategic aspects of Lean Six Sigma?

• Master Black Belts should be using Value Streaming and other techniques to identify and prioritise improvement opportunitites.
• Six Sigma is about team work, and Lean in particular leverage proven methods such as “Quality Cicles” or “Green Areas” to facilitae communication and improvement actions at all leves in the organisation.
• A strong element of Lean Six Sigma is change and chnage management. Black Belts are often referd to as “Chnage Agents”.

Now, while I do not condemn HPO, I do question whether it is not simply a reinvention of some aspect of Lean Six Sigma. One that can only leave Lean Six Sigma poorer and further institutionalise the persepction that it is only about statistics and imrpovement techniques, and less about change management.

I’d be keen to learn your views.

Successful I&I (Improve & Innovate),

Piero