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Reaching Strategic Edge
Learning Objectives
♦ Learn how Business Process Reengineering can be used as a strategic tool. ♦ Learn basic of TQM and how it leads to organizational success. ♦ Learn the concept of six sigma quality standards ♦ Have an overview of some of contemporary issues in strategic management.
Even if you're on the right track, you'll get run over if you just sit there.
− Will Rogers, Humorist
1. Introduction
Business organizations evolve different kind of strategies in response to the environmental forces. There was a time when diversification was strategic buzzword and different organizations believed in entering into newer business irrespective of any relationship with their existing business. Then the basic ideology of businesses shifted from diversification to core-competencies. There are several such changes in strategic ideology. With the changes in the environment of the business, strategic management is also evolving. In this chapter we will discuss some of the recent and evolving issues in the subject.
2. Business Process Reengineering
Waiting in a queue in a post office or bank, a person may feel need for improvement in processes. In case of queue the process begins with your stepping into the queue, and ends with receiving the desired items or service and leaving the place. The steps of the process are the activities that you and the personnel providing services perform to complete the transaction.
Buying a ticket is a simple business process. There are other business processes such as purchasing raw material, logistic movements of finished products, developing new products, etc. that are much more tricky to deal with. Business processes are simply a set of activities that transform a set of inputs into a set of outputs for another person or process.
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In order to have a better appreciation of what Business Process Reengineering (BPR) really means it would be pertinent to have preliminary knowledge of business processes. What is a business process and how it differs from other processes is question that may come to mind. Business process or business activities are not discrete or unrelated pieces of work. They are parts of recurrent work processes within which they are located, sequenced and organized.
What is a Business Process? A process is a set of logically related tasks or activities oriented towards achieving a specified outcome. “A process is a collection of activities which creates an output of value to the customer and often transcends departmental or functional boundaries. For example, one common process found almost in every organization is the order fulfilment. Order fulfilment begins with procuring an order and ends with delivery of goods to the customer. It also includes all other related activities in between. Likewise other basic processes may include developing a new product or service, launching a new product in the market, procuring goods from suppliers, preparing the organization’s budget, processing and paying insurance claims, and so on.
A business process comprises a combination of number of such independent or interdependent processes as:
♦ Developing new product
♦ Customer order processing
♦ Bill payment system
Typically a business process involves a number of steps performed by different people in different departments. The structural elements that constitute a process provide the basis for its analysis, appraisal, and redesign for achieving higher levels of efficiency and effectiveness, economy and speed, and quality and output.
A set of interconnected processes comprise a business system. The performance of business firm is, thus, the outcome of the interrelated operation of its constituent work processes. The redesign of processes, therefore, provides a powerful basis for improving the performance of a business enterprise.
Some processes turn out to be extremely critical for the success and survival of the enterprise. BPR focuses on such critical business processes out of the many processes that go on in any company. These are the core business processes of the company. A core business process creates value by the capabilities it provides to the competitiveness. Core business processes are critical in a company’s evaluation by its customers. They are vital for success in the industry sector within which the company is positioned. They are crucial for generating competitive advantages for a firm in the marketplace.
While some core business processes are easily identifiable, some core Business processes may not always be immediately apparent. The following instances serve to show that core processes need to be identified carefully in terms of their bearing on a firm’s competitiveness:
♦ In the insurance industry, the actual work that leads to a balance of competitive premium for customers, and profit after claims for the company, is a core business
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Japan proves that it is possible to achieve a much higher level of process performance by redesigning the process. It has been possible to double the speed of normal production, utilize assets several times more productively and respond to customers’ needs and expectations much more rapidly. This could be achieved by effecting a total change in the process instead of a piecemeal change. It is, therefore, imperative that for many organizations on the decline, changing the process or redesigning the process may be the only viable alternative for turnaround. They must break themselves free from their primitive and archaic work processes that drag them down. Issues that emerge from the foregoing discussions on the need for change form the underlying premises of Business Process Reengineering (BPR). They may be briefly outlined as follows:
♦ The operational excellence of a company is a major basis for its competitiveness.
♦ The business strategy of a company should be oriented towards leveraging its operational excellence into the marketplace.
♦ A customer-focussed organization needs to be realigned in terms of a process orientation.
♦ Process need to managed, not functions.
♦ For considering totally new ways of redesigning processes, each and every concept, assumption, purpose, and principle, needs to abandoned temporarily.
♦ Continuous improvement is a deficient approach when a company is far behind the industry standards, and needs rapid quantum leaps in performance.
♦ Dramatic improvement in performance is the prerequisite for overcoming competition.
♦ How to compete is more important than deciding about where to compete.
Definition of BPR: Business Process Reengineering (BPR) refers to the analysis and redesign of workflows and processes both within and between the organizations. The orientation of the redesign effort is radical, i.e., it is a total deconstruction and rethinking of a business process in its entirety, unconstrained by its existing structure and pattern. Its objective is to obtain quantum gains in the performance of the process in terms of time, cost, output, quality, and responsiveness to customers. The redesign effort aims at simplifying and streamlining a process by eliminating all redundant and non-value adding steps, activities and transactions, reducing drastically the number of stages or transfer points of work, and speeding up the work-flow through the use of IT systems.
BPR is an approach to unusual improvement in operating effectiveness through the redesigning of critical business processes and supporting business systems. It is revolutionary redesign of key business processes that involves examination of the basic process itself. It looks at the minute details of the process, such as why the work is done, who does it, where is it done and when it is done. BPR focuses on the process of producing the output and output of an organization is the result of its process.
“Business process reengineering means starting all over, starting from scratch.” Reengineering, in
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other words, means pulling aside much of the age-old practices and procedures of doing a thing developed over hundred years of management experience. It implies forgetting how work has been done so far, and deciding how it can best be done now.
Reengineering begins with a fundamental rethinking. In doing reengineering people must ask some most basic questions about their organizations and about their operations. They try to find out answers to such questions like “Why do we do what we do? And why do we do it the way we do?” An attempt to find out answers to such questions may startlingly reveal certain rules, assumptions and operational processes as obsolete and redundant. Reengineering does not begin with anything given or with any assumptions. The thinking process in reengineering begins with a totally free state of mind without having any preconceived notion. Reengineering first determines what a company must do. And then it decides on how to do it. Reengineering ignores what the existing process is and concentrates on what it should be. If something is not required to be done it is outright discarded.
Another key element in the reengineering involves radical redesigning of process. Radical redesigning means going to the root of the problem areas and not attempting to make any superficial changes. Radical redesign involves completely discarding all existing structures and procedures and evolving completely new ways of doing the work. “Reengineering is about business reinvention – not business improvement, business enhancement, or business modification.”
The next key concept that lies behind reengineering is that it aims at achieving dramatic improvement in performance. If an organization feels the need for marginal improvement in any area of operation at any point of time, the same can be achieved by conventional methods of adjustments in operating processes and reengineering is not the answer. Reengineering is meant for replacement of the old process by altogether new one to achieve dramatic improvement in the performance.
It follows from the above and also from the characteristics of the definition of reengineering that its main focus is on the process. In an attempt to improve performance. Most people in business focus their attention on tasks, jobs, people, structure, but fail to pay adequate attention on the process. Business process, as already mentioned earlier, has been defined as the series of activities that utilizes various inputs to create output that are valued by customers. Not all the processes in an enterprise enjoy equal importance in creating customers value. In order to improve its competitive position a firm must try to identify the generic business processes which significantly add to the value for its output to the customer and should try to focus on reengineering these processes first. “The generic business processes of a firm needing redesign may be classified into three broad categories as follows:
♦ Processes pertaining to development and delivery of product(s) and/or services. These may include research, design, engineering, manufacturing, and logistics, besides purchasing / procurement and materials management.
♦ Process involving interface(s) with customers. These usually include marketing, advertising, order fulfilment, and service.
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Study the existing process: The existing processes will provide an important base for the redesigners. The purpose is to gain an understanding of the ‘what’, and ‘why’ of the targeted process. However, as discussed earlier, some companies go through the reengineering process with clean perspective without laying emphasis on the past processes.
Formulate a redesign process plan: The information gained through the earlier steps is translated into an ideal redesign process. Formulation of redesign plan is the real crux of the reengineering efforts. Customer focussed redesign concepts are identified and formulated. In this step alternative processes are considered and the best is selected.
Implement the redesign: It is easier to formulate new process than to implement them. Implementation of the redesigned process and application of other knowledge gained from the previous steps is key to achieve dramatic improvements. It is the joint responsibility of the designers and management to operationalise the new process.
The Role of Information Technology in BPR
The accelerating pace at which information technology has developed during the past few years had a very large impact in the transformation of business processes. Various studies have conclusively established the role of information technology in the transformation of business processes. That information technology is going to play a significant role in changing the business processes during the years to come, has been established beyond doubt.
A reengineered business process, characterised by IT-assisted speed, accuracy, adaptability and integration of data and service points, is focussed on meeting the customer needs and expectation quickly and adequately, thereby enhancing his/her satisfaction level.
Globalization and competition call for better management, faster response to change and adherence to globally accepted standards of quality and services.
♦ Impact of IT-systems are identified as:
♦ Compression of time
♦ Overcoming restrictions of geography and/or distance
♦ Restructuring of relationships.
IT-initiatives, thus, provide business values in three distinct areas:
♦ Efficiency – by way of increased productivity,
♦ Effectiveness – by way of better management,
♦ Innovation – by way of improved products and services
All these can bring about a radical change in the quality of products and services, thereby improving the competitiveness and customer satisfaction. Information technology (IT) is a critical factor in the success of bringing this change.
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Central Thrust of BPR:
Improvement on quality and cost follows after improvement on thrust area. BPR is continuous improvement process. Although BPR is a multi-dimensional approach in improving the business performance it’s thrust area may be identified as “the reduction of the total cycle time of a business process.” BPR aims at reducing the cycle time of process by eliminating the unwanted and redundant steps and by simplifying the systems and procedures and also by eliminating the transit and waiting times as far as possible. Even after redesigning of a process, BPR maintains a continuous effort for more and more improvement.
Figure: Customer Time cycle
Reengineering does not mean any partial modification or marginal improvement in the existing work processes. Reengineering is a revolutionary approach towards radical and total redesigning of the business processes. While reengineering may lead to restructuring of organization, any restructuring does not necessarily mean reengineering. The basic principles that differentiate reengineering from any other drive on improving organizational efficiency may be briefly summarized as follows:
♦ At the core of reengineering lies the concept of discontinuous thinking. Reengineering does not have any scope for any partial modification or marginal improvement in the existing business processes. It aims at achieving excellence and a breakthrough in performance by redesigning the process entirely and radically. Obviously it requires challenging the necessity of existing rules and procedures and discarding the same to evolve altogether new processes.
♦ BPR approach recognizes that most of the existing rules and procedures of work methods are based on certain assumptions about technology, people and the goals of the organization. These assumptions may not be valid any more. Besides many of these systems and procedures have failed to reap the benefit of massive development of information technology during the past few years. BPR recognizes “the” vast and expanding potential of IT for the most rational, simple, and efficient redesign of work structure.” BPR aims at utilizing information technology for evolving a new process, instead of automating the existing process.
♦ While reengineering starts with the process it does not end there. The fundamental and
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wherein it refers to a surveyor’s mark made on a stationary object at previously determined position and elevation and used as a reference point to measure altitudes.
The scientific studies conducted by Frederick Taylor in the latter part of the nineteenth century represent an early use of the benchmarking concept. However, the term got popularity much later in the seventh decade of twentieth century. Initially, the concept evolved in companies operating in an industrial environment. Over a period of time it covered other spheres of business activity. In recent years, different commercial and non-commercial organizations are discovering the value of benchmarking and are applying it to improve their processes and systems.
What is Benchmarking?
In simple words, benchmarking is an approach of setting goals and measuring productivity based on best industry practices. It developed out of need to have information against which performances can be measured. For example, a customer support engineer of a television manufacturer attends a call within forty-eight hours. If the industry norm is that all calls are attended within twenty-four hours, then the twenty-four hours can be a benchmark. Benchmarking helps in improving performance by learning from best practices and the processes by which they are achieved. It involves regularly comparing different aspects of performance with the best practices, identifying gaps and finding out novel methods to not only reduce the gaps but to improve the situations so that the gaps are positive for the organization.
Benchmarking is not a panacea for all problems. Rather, it studies the circumstances and processes that help in superior performance. Better processes are not merely copied. Efforts are made to learn, improve and evolve them to suit the organizational circumstances. Further, benchmarking exercises are also repeated periodically so that the organization does not lag behind in the dynamic environment.
Benchmarking is a process of continuous improvement in search for competitive advantage. It measures a company’s products, services and practices against those of its competitors or other acknowledged leaders in their field. Xerox pioneered this process in late 70’s by benchmarking its manufacturing costs against those of domestic and Japanese competitors and got dramatic improvement in the manufacturing cost. Subsequently ALCOA, Eastman Kodak, IBM adopted benchmarking. Firms can use benchmarking process to achieve improvement in diverse range of management function like:
♦ Maintenance operations
♦ Assessment of total manufacturing costs
♦ Product development
♦ Product distribution
♦ Customer services
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♦ Plant utilization levels
♦ Human resource management
The Benchmarking Process
Benchmarking processes lack standardization. However, common elements are as follows:
(1) Identifying the need for benchmarking and planning: This step will define the objectives the benchmarking exercise. It will also involve selecting the type of benchmarking. Organizations identify realistic opportunities for improvements.
(2) Clearly understanding existing business processes: This step will involve compiling information and data on performance. This will include mapping processes. Information and data is collected by different methods for example, interviews, visits and filling of questionnaires.
(3) Identify best processes: Within the selected framework, best processes are identified. These may be within the same organization or external to them.
(4) Compare own processes and performance with that of others: While comparing gaps in performance between the organization and better performers is identified. Further, gaps in performance is analysed to seek explanations. Such comparisons have to be meaningful and credible. Feasibility of making the improvements in the light of the conditions that apply within the organization is also examined.
(5) Prepare a report and Implement the steps necessary to close the performance gap: A report on the Benchmarking initiatives containing recommendations is prepared. Such a report includes the action plan(s) for implementation.
(6) Evaluation: Business organizations evaluate the results of the benchmarking process in terms of improvements vis-à-vis objectives and other criteria set for the purpose. It also periodically evaluates and reset the benchmarks in the light of changes in the conditions that impact the performance.
4. Total Quality Management (TQM)
The Total Quality Management movement (or simply TQM, as it is more commonly known) has caught on in essentially every corner of industry. The TQM philosophy is a guiding force in all industrialized nations like USA, European nations, Japan, etc.
What is TQM? A definition of total quality was endorsed in 1992 by the chairs and CEOs of nine major U.S. corporations in cooperation with deans of business and engineering departments of major universities and recognized consultants:
Total Quality Management (TQM) is a people-focused management system that aims at continual increase in customer satisfaction at continually lower real cost.
TQM is a total system approach (not a separate area or program) and an integral part of high-
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4.1 Principles guiding TQM
Implementing TQM requires organization wide support. There are several principles that guide success of TQM. Various principles that guide the total quality management philosophy are as follows:
♦ A sustained management commitment to quality : An organization's personality and culture will ultimately reflect its senior management's values. If an organization is serious about implementing TQM, the commitment to do so has to start at the top, and the organization's senior management has to be unwavering in its commitment to quality. Almost any organization's senior managers will claim they are committed to quality, but how they act at the end sets the tone for the entire organization. If management allows a defective product leave the premises of the organisation in order to make sales, then all the talk about quality won't make a difference to the people making the product. If management is willing to take a sales hit if quality levels are not up to requirements, the rest of the organization will understand the commitment to quality is real.
♦ Focusing on the customer: According to Lee Iacocca had only three rules: Satisfy the customer, satisfy the customer, and satisfy the customer. This sums up the importance of customer focus in the TQM philosophy. Ultimately it the satisfaction of the customers that determines the success of an organisation.
♦ Preventing rather than detecting defects: TQM is a management philosophy that seeks to prevent poor quality in products and services, rather than simply to detect and sort out defects. "An ounce of prevention is worth a pound of cure." A little precaution before a crisis occurs is preferable to a lot of fixing up afterward. This also saves cost and time.
♦ Universal quality responsibility: Another basic TQM precept is that the responsibility for quality is not restricted to an organization's quality assurance department, but is instead a guiding philosophy shared by everyone in an organization. TQM requires that everyone takes responsibility for quality. As quality improves, the quality assurance department gets smaller. In fact, world over, a few companies fully committed to TQM have done' away completely with their quality assurance organizations. Quality measurement: The quality measurement aspect of TQM asks the question: Where are we and where are we going? A basic TQM concept is that quality is a measurable commodity, and in order to improve, we need to know where we are (or stated differently, what the current quality levels are), and we need to have some idea where we are going (or what quality levels we aspire to). This is an extremely important concept
♦ Continuous improvement and learning: TQM espouses a philosophy of continuous improvement in all areas of an organization. This philosophy ties in closely with the quality measurement and universal quality responsibility concepts mentioned above. Quality measurement is needed in order to focus improvement efforts appropriately.
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Continuous improvement is part of the management of all systems and processes. Achieving the highest levels of performance requires a well-defined and well-executed approach to continuous improvement and learning. "Continuous improvement" refers to both incremental and "breakthrough" improvement. Improvements may be of several types: Enhancing value to the customer through new and improved products and services; Developing new business opportunities; Reducing errors, defects, and waste; Improving responsiveness and cycle time performance; and Improving productivity and effectiveness in the use of all resources. "Learning" refers to adaptation to change, leading to new goals or approaches. Improvement and learning need to be embedded in the way an organization operates. This means they should be a regular part of daily work, seek to eliminate problems at their source, and be driven by opportunities to do better as well as by problems that need to be corrected.
♦ Root cause corrective action: Most of us have experienced instances in which problems we thought were corrected continued to occur. TQM seeks to prevent this by identifying the root causes of problems, and by implementing corrective actions that address problems at the root cause level.
♦ Employee involvement and empowerment: Another fundamental TQM concept is that employees must be involved and empowered. Employee involvement means every employee is involved in running the business and plays an active role in helping the organization meet its goals. Employee empowerment means employees and management recognize that many obstacles to achieving organizational goals can be overcome by employees who are provided with the necessary tools and authority to do so.
♦ The synergy of teams: In addition to the TQM concepts of empowerment and involvement of employees, taking advantage of the synergy of teams is an effective way to address the problems and challenges of continuous improvement. Dr. Kaoru Ishikawa first formalized the teams concept as part of the TQM philosophy by developing quality circles in Japan.
♦ Thinking statistically: Statistical thinking is another basic TQM philosophy. Quality efforts often require reducing process or product-design variation, and statistical methods are ideally suited to support this objective.
♦ Inventory reduction: Largely in response to their lack of natural resources (as well as the 1970s worldwide oil shortages), the Japanese pioneered the concept of reducing inventories. This management philosophy became known as Just-in- Time (or JIT, for
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places customers outside of the enterprise and within the domain of marketing and sales. TQM views everyone inside the enterprise as a customer of an internal or external supplier, and a supplier of an external or internal customer. Marketing concepts and tools can be used to assess internal customer needs and to communicate internal supplier capabilities.
♦ Organizational Structure: TQM views the enterprise as a system of interdependent processes, linked laterally over time through a network of collaborating (internal and external) suppliers and customers. Each process is connected to the enterprise's mission and purpose through a hierarchy of micro- and macro-processes. Every process contains sub-processes and is also contained within a higher process. This structure of processes is repeated throughout the hierarchy.
♦ Organizational Change: In TQM the environment in which the enterprise interacts is considered to be changing constantly. Management's job, therefore, is to provide the leadership for continual improvement and innovation in processes and systems, products, and services. External change is inevitable, but a favourable future can be shaped.
♦ Teamwork: In TQM individuals cooperate in team structures such as quality circles, steering committees, and self-directed work teams. Departments work together toward system optimization through cross-functional teamwork.
♦ Motivation and Job Design: TQM managers provide leadership rather than overt intervention in the processes of their subordinates, who are viewed as process managers rather than functional specialists. People 'are motivated to make meaningful contributions to what they believe is an important and noble cause, of value to the enterprise and society. The system enables people to feel like winners.
5. Six Sigma and Management
Six sigma is often related to Motorola, the company that has invented it. In the eighth decade of the 20th century, Motorola's significantly changed the discussion of quality from one where quality levels were measured in percentages (parts per hundred) to parts per million or even parts per billion. It pointed out that modern technology was so complex that old ideas about acceptable quality levels are no longer acceptable. The success of Motorola effectively changed the focus of quality worldwide. Many giants like Xerox, Boeing, GE, Kodak followed Motorola's lead. In India also Tata’s, WIPRO and Bharti’s and others are effectively reaping the benefits of six-sigma.
Human quest for better quality is unending. With the help of technology and newer tools organizations enhance quality of their products that are seemingly of very good quality. Quality refers to the degree of excellence and standard. Better quality is often correlated with superior processes and products.
Strategically, a product of good quality should be able to meet the specifications of customer and should be able to satisfy him. If battery of a wristwatch lasts for eight months, but is
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expected to last for a year by the customer, then the product battery is not of desired quality. Good quality should not always be associated with good products.
Another dimension of quality is that it should not be restricted to satisfying the existing desires of customers. It should not put a boundary on quality by limiting it to the current information and perspective of customers. Rather it should be futuristic, i.e., in addition to meeting customer’s present expectations, it should be able to improve them.
5.1 What is Six Sigma?
Primarily Six Sigma means maintenance of the desired quality in processes and end products. It means taking systemic and integrated efforts toward improving quality and reducing cost.
It is a highly disciplined process that helps in developing and delivering near-perfect products and services. It strives to meet and improve organizational goals on quality, cost, scheduling, manpower, new products and so on. It works continuously towards revising the current standards and establishing higher ones.
Six Sigma has its base in the concept of probability and normal distribution in statistics. Six Sigma strives that 99.99966% of products manufactured are defect free. Six Sigma is a smarter way to manage a business or a department. Six Sigma puts the customer first and uses facts and data to drive better solutions.
Six Sigma efforts target different areas such as:
♦ Improving customer satisfaction
♦ Improving quality
♦ Reducing wastage
♦ Reducing cycle time
♦ Reducing defects
Improvements in these areas usually represent dramatic cost savings to businesses, as well as opportunities to retain customers, capture new markets, and build a reputation for top performing products and services.
Although it involves measuring and analyzing an organization's business processes, Six Sigma is not merely a quality initiative; it is a business initiative. Achieving the goal of Six Sigma requires more than small, incremental improvements; it requires breakthroughs in every area of an operation. In statistical terms, "reaching Six Sigma" means that your process or product will perform with almost no defects.
But the real message of Six Sigma goes beyond statistics. Six Sigma is a total management commitment and philosophy of excellence, customer focus, process improvement, and the rule of measurement rather than gut feel. Six Sigma is about making every area of the organization better able to meet the changing needs of customers, markets, and technologies - with benefits for employees, customers, and shareholders.
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- DMADV: DMADV is again acronym for the steps followed in implementing six sigma. It is a strategy for designing new products, processes and services. ♦ Define: As in case of DMAIC six sigma experts have to formally define goals of the design activity that are consistent with strategy of the organization and the demands of the customer. ♦ Measure: Next identify the factors that are critical to quality (CTQs). Measure factors such as product capabilities and production process capability. Also assess the risks involved. ♦ Analyze: Develop and design alternatives. Create high-level design and evaluate to select the best design. ♦ Design: Develop details of design and optimise it. Verify designs may require using techniques such as simulations. ♦ Verify: Verify designs through simulations or pilot runs. Verified and implemented processes are handed over to the process owners.
5.3 What's New About Six Sigma?
In the 1980s, Total Quality Management (TQM) was popular. It too was an improvement- focused program, but it ultimately died a slow and silent death in many companies. What makes Six Sigma different?
Three key characteristic separate Six Sigma from other quality programs of the past..
- Six Sigma is customer focused. It's almost an obsession to keep external customer needs in plain sight, driving the improvement effort. (External customers are mostly those who buy business's products and services.)
- Six Sigma projects produce major returns on investment. GE's CEO, Jack Welch, wrote in the annual report that in just three years, Six Sigma had saved the company more than $2 billion.
- Six Sigma changes how management operates. Six Sigma is much more than improvement projects. Senior executives and leaders throughout a business are learning the tools and concepts of Six Sigma: new approaches to thinking, planning, and executing to achieve results. In a lot of ways, Six Sigma is about putting into practice the notions of working smarter, not harder.
Six Sigma has produced some impressive numbers. But reaching them requires a great deal of organizational teamwork. It means having the systems to provide customers what they want when they want it. It means providing employees with the time and training to tackle work challenges with some basic, and some sophisticated, analytical tools.
When a business violates important customer requirements, it is generating defects, complaints, and cost. The greater the number of defects that occur, the greater the cost of correcting them, as well as the risk of losing the customers. Ideally, your company wants to
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avoid any defects and the resulting cost in money and customer satisfaction.
But if a company have lots of customers, some defects are bound to slip through, right? The problem is that even a seemingly low percentage of defects can mean a lot of unhappy customers. If company processed 250,000 credit card bills a month and operated at 99. percent accuracy (4 sigma), we would have about 1,550 unhappy customers every month.
The goal of Six Sigma is to help people and processes aim high in aspiring to deliver defect- free products and services. The notion of zero defects is not at work here; Six Sigma recognizes that there's always some potential for defects, even in the best run processes or best-built product. But at 99.9997 percent performance, Six Sigma sets a performance target where defects in many processes and products are almost nonexistent.
Also defects can lead to lost customers, and turned-off customers tell others about their experiences, making it that much more difficult to recover from defects. As customers get more and more demanding and impatient, these high levels of defects put a company in serious risk. But keeping customers happy is good and profitable for the business. A 5 percent increase in customer retention has been shown to increase profits more than 25 percent. It is estimated that companies lose 15 percent to 20 percent of revenues each year to ineffective, inefficient processes-although some might suggest that it's even higher. Six Sigma provides a goal that applies to both product and. service activities and that sets attainable, short-term goals while striving for long-range business objectives.
5.4 Six Sigma as a system of management
A significant difference between Six Sigma and seemingly similar programs of past years is the degree to which management plays a key role in regularly monitoring program results and accomplishments. When Jack Welch introduced the Six Sigma program at GE, he told senior executives that 40 percent of their annual bonus would be based on their involvement and success in implementing Six Sigma.
That focused executive attention on turbo-charging Six Sigma in their individual divisions. Training in GE was given a huge boost, and thousands of teams were trained in large sessions. At the same time, executives throughout GE participated in days and sometimes weeks of Six Sigma training.
But training alone is not a management system. A management system involves accountability for results and ongoing reviews to ensure results. With both accountability and regular reviews, managers can begin to use Six Sigma as a guide to leading their businesses.
As a management system, though, Six Sigma is not owned by senior leaders (although their role is critical) or driven by middle management (although their participation is key). The ideas, solutions, process discoveries, and improvements that arise from Six Sigma take place at the front lines of the organization. Six Sigma companies are striving to put more responsibility into the hands of the people who work directly with customers.
In short, Six Sigma is a system that combines both strong leadership and grassroots energy and involvement. In addition, the benefits of Six Sigma are not just financial. People at all
