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Lean Six Sigma for ServiceHow to Use Lean Speed and Six Sigma Quality to Improve Services and Transactions
By Michael L. George
McGraw-HillCopyright © 2003 The McGraw-Hill Companies, Inc.
All right reserved.
Chapter OneThe ROI of Lean Six Sigma for Services
"The lack of initial Six Sigma emphasis in the non-manufacturing areas was a mistake that cost Motorola at least $5 billion over a four year period."
—Bob Galvin, former CEO of Motorola
Service operations now comprise more than 80% of the GDP in the United States and are rapidly growing around the world. Even within manufacturing companies, it's common to have only 20% of product prices driven by direct manufacturing labor—the other 80% comes from costs that are designed into the product or costs associated with support and design functions (finance, human resources, product development, purchasing, engineering, etc.).
Moreover, in service applications, the costs related to work that adds no value in your customers' eyes ("non-value-add") is higher than in manufacturing, in both percentage and absolute dollars. The revenue growth potential of improving the speed and quality of service often overshadows the cost reduction opportunities. For example, as you'll see in the case studies later in this book, work that adds no value in your customers' eyes typically comprises 50% of total service costs. This represents enormous "white collar" potential for achieving significant speed, quality, and cost improvements, all of which can give organizations a major strategic advantage over their competition.
Here are some typical organizations that needed Lean Six Sigma in their services and business processes:
Like many of its counterparts in the banking industry, Bank One had been reincarnated several times throughout the 1990s. Mergers and acquisitions meant that heroic efforts were needed every day just to get the basic business work accomplished. In an industry as competitive as finance, this condition couldn't last long—and they had a long way to go to get the process under control, let alone achieve any kind of competitive advantage.
In 1999, Lockheed Martin (LM) set a goal of eliminating $3.7 billion in costs. At the time, LM was a relatively young organization, having been formed by a series of mergers and consolidations in the aerospace industry in 1995. Its workforce was a conglomeration of almost 20 separate companies, cultures, and processes, with a core manufacturing operation surrounded by a much larger "service" component (procurement, administration, design/engineering, etc.). How could they bring everyone together to achieve such a challenging goal?
At Stanford Hospital and Clinics (SHC), the future was clear: Patient volume was dropping because SHC kept losing contracts due to high costs. Physicians and management alike recognized that if they didn't do something soon, they would continue to lose current patients and be unable to attract new ones. It's one thing to want to provide high-quality patient care, but the pragmatists operated under this slogan: "No margin, no mission."
When Graham Richard, an entrepreneur and businessman, was elected as Mayor of Fort Wayne, Indiana, he had a simple vision: "I want Fort Wayne to be a safe city. I want it to have quality jobs. I want it to have excellent service and attract new businesses." He knew the city couldn't keep doing "bureaucracy as usual" if it was to implement this vision. But was there an alternative that would work in government?
Though these organizations come from a range of sectors, they represent significant service opportunities for applying Lean Six Sigma. Their goals and objectives may be different, their needs range from providing medical care to patients to providing logistical support for manufacturing, but they are all in the vanguard of a new movement. They realized the most effective way to achieve their objectives was by integrating Lean and Six Sigma principles and methods to improve service operations.
Bank One's use of these principles and methods started with an initiative in their National Enterprise Operations called Focus 2.0. Launched in February 2002, it began with a series of carefully selected, strategically important projects. As a result of their efforts, the NEO group has the opportunity to generate millions of dollars in revenue per year due to improvements in one operation and saved thousands of dollars in cost avoidance and waste reduction in others.
Lockheed Martin developed a clear goal: "We want Lean processes with 6s capability." They can cite a long list of service processes from procurement to design that now take a fraction of the time and cost they took before. In fact, over 1000 projects have been completed in the past few years in service areas alone. Their debt is down, revenues are healthy, they are going to exceed their cost-reduction target, and there are a record number of orders backlogged. They were able to offer their newest missile (with all the customer-required capabilities) at half the cost and one-third the cycle time of its predecessors due to significant and widespread use of Lean Six Sigma, not by using cheaper materials or cutting corners! They won the Joint Strike Fighter contract, which has an estimated value of over $100 billion. "There are a lot of reasons that contribute to these kinds of results," says Mike Joyce, a vice president at Lockheed Martin, "but a fundamental contributor is LM21 (Lockheed Martin 21st Century), our organizational effectiveness initiative that's based on Lean Six Sigma."
At the 4000-person Lockheed Martin Naval Electronics and Surveillance Systems plant, 75% of the Black Belt projects have been in non-traditional manufacturing or white collar areas, generating $5 million in savings in its second year alone.
In just four years, Stanford Hospital and Clinics' application of Six Sigma concepts (data, customers, quality) and Lean thinking (process flow, the preventable costs of unnecessary complexity) put them in a position to deliver higher quality patient care with lower costs—and regain market share from local competitors. Here's an example of their results: mortality from coronary artery bypass graft surgery dropped by 48% at the same time costs in the cardiac unit dropped by 40%. Overall, material costs throughout the hospital are now running $25 million below previous levels per year.
Fort Wayne Mayor Graham Richard has authorized the launch of numerous projects citywide that draw on Lean and Six Sigma principles and methods. Many city departments have seen improvements in some aspect of its citizen services (clearer communication, faster response times to queries or complaints), a significant drop in costs, or better use of city resources. A change in construction permits, for example, has dropped the response time from almost two months to less than two weeks, and removed the kind of hassles that dissuaded many companies from wanting to do business with the city. (See Case Study # 3 in Chp 12 for details.) Improvements in garbage collection have reduced costs nearly $200,000 a year for the subcontractor while providing better services.
Each of these organizations recognized several fundamental truths: (1) getting fast can actually improve quality, (2) improving quality can actually make you faster, and (3) reducing complexity improves speed and quality. However, this cycle doesn't happen unless you apply both Lean and Six Sigma.
What Does Lean Six Sigma Mean for Services?
Lean Six Sigma for services is a business improvement methodology that maximizes shareholder value by achieving the fastest rate of improvement in customer satisfaction, cost, quality, process speed, and invested capital. The fusion of Lean and Six Sigma improvement methods is required because:
Lean cannot bring a process under statistical control
Six Sigma alone cannot dramatically improve process speed or reduce invested capital
Both enable the reduction of the cost of complexity
Ironically, Six Sigma and Lean have often been regarded as rival initiatives—Lean enthusiasts noting that Six Sigma pays little attention to anything related to speed and flow, Six Sigma supporters pointing out that Lean fails to address key concepts like customer needs and variation. Both sides are right. Yet these arguments are more often used to advocate choosing one over the other, rather than to support the more logical conclusion that we need to blend Lean and Six Sigma.
How is it that Lean and Six Sigma are complimentary? Chapter 2 goes into more detail about what each of these methodologies brings to the party, but here's a quick overview:
Six Sigma ...
emphasizes the need to recognize opportunities and eliminate defects as defined by customers
recognizes that variation hinders our ability to reliably deliver high-quality services
requires data-driven decisions and incorporates a comprehensive set of quality tools under a powerful framework for effective problem solving
provides a highly prescriptive cultural infrastructure effective in obtaining sustainable results
when implemented correctly, promises and delivers $500,000+ of improved operating profit per Black Belt per year (a hard dollar figure many companies consistently achieve)
focuses on maximizing process velocity
provides tools for analyzing process flow and delay times at each activity in a process
centers on the separation of "value-added" from "non-value-added" work with tools to eliminate the root causes of non-value-add activities and their cost
provides a means for quantifying and eliminating the cost of complexity
The two methodologies interact and reinforce one another, such that percentage gains in Return on Invested Capital (ROIC%) is much faster if Lean and Six Sigma are implemented together. (Some people might question whether ROIC is a valuable metric for service businesses, and the answer is yes: Many service businesses—hotels, airlines, restaurants, health care—are very capital intensive. In most other service business—software development, financial services, government, etc.—the biggest costs are salaries/benefits, so invested capital is really the "cost of people.")
In short, what sets Lean Six Sigma apart from its individual components is the recognition that you can't do "just quality" or "just speed." Empirical proof of the need to use Lean and Six Sigma in combination is found throughout this book; additional support is gained by analyzing performance data using specialized software (see sidebar and Figure 1.1).
Applying Lean Six Sigma to Services—It's Not Just for Manufacturing!
The roots of both Lean and Six Sigma reach back to the 1980s (and beyond), a time when the greatest pressures for quality and speed were on manufacturing. Lean arose as a method for optimizing automotive manufacturing; Six Sigma evolved as a quality initiative to eliminate defects by reducing variation in processes in the semiconductor industry. It's not surprising, therefore, that the earliest service applications of Lean and Six Sigma arose in the service support functions of manufacturing organizations—GE Capital, Caterpillar Finance, ITT, Lockheed Martin, etc. These companies were already adept at key Six Sigma and Lean skills: value stream mapping, data collection, analysis of variance, setup reduction, design of experiments. It's impossible for outsiders to know how much of the stated gains in these companies are due to improvements in service operations vs. improvements in manufacturing, but Jack Welch stated that Six Sigma added $2 billion to GE's 1999 profits of $10.7 billion—and service applications dominate profit at GE. In the May 2000 issue of Industry Week, Lou Giuliano (CEO of ITT Industries) announced increased profits of over $130 million in the second year of Lean Six Sigma implementation (based on a $12 million investment).
Many people in service environments have heard about Six Sigma, the improvement methodology focused on achieving extraordinarily high levels of quality that has contributed well-publicized millions to the bottom line of companies like GE, Allied Signal, ITT, and Lockheed Martin. In contrast, few people outside manufacturing know much about Lean applications. Which is the problem. People hear "Lean" and automatically think "manufacturing" because that's the way it's always been used. In fact, Lean creates process speed (by reducing cycle time) and efficiency (minimal time, capital invested, and cost) in any process.
Like Six Sigma, Lean evolved in the manufacturing arena, but even more than Six Sigma, Lean sounds like it is at home only on the factory floor. Terms like batch processing, WIP, setup, workstation turnover, Pull systems, 5S's, and Kanban have no inherent meaning for people whose job is to talk to customers, type at a computer, or coordinate services. And yet these concepts have powerful applications in services.
Here's one example from Stanford Hospital of Lean thinking at work in a service environment: It is standard in medicine for every surgeon to specify his or her own surgical tray of instruments and supplies for any procedure. In Stanford's cardiac surgical unit, that meant there were six different surgical trays for each type of case, one for each surgeon.
One of the central tenets of Lean Six Sigma, however, is that unnecessary complexity adds costs, time, and enormous waste. Stanford got all the surgeons to collaborate on developing a common surgical tray. Naturally, they were skeptical at first. But when pushed to examine the issue more closely, the surgeons realized that having six different trays had little impact on the quality of care provided to patients. Within the space of a few meetings, they were able to agree on a standard surgical tray. Stanford went on to apply this simplicity principle and other Lean Six Sigma concepts throughout the hospital. The result? As noted earlier, annual material costs have dropped by $25 million.
Here is another example from the City of Fort Wayne. The transportation department has an annual budget of $2 million. Once a bid for any large expenditure was accepted, that money would get "locked up," in their terms, inaccessible to other uses. Sounds like proper procedure, right? But what if the job came in underbudget? That would mean there was money sitting around that wasn't needed but that the department couldn't use for other jobs. Or say the job had cost overruns ... then the city would have to scramble to find money it likely didn't have.
The team assigned to work on this problem realized, for the first time, that there was a lot of variation between the bid price and the actual price of most jobs—ranging from about 23% below bid to 22% over. Their first step was to set a goal of having bids come in ±10% of actual cost. (Was that a good target? No one knew at first! The point was that the city had never had a target before.) By Leaning the process (defining the flow of work and eliminating complexity) and using data to pinpoint problems, the team was able to greatly reduce the amount of variation in the bid-to-actual amounts, freeing up nearly $200,000 a year that would previously have been "locked up."
These examples are typical of the gains that can be achieved when Lean and Six Sigma tools are applied together in service applications.
Why Services Are Full of Waste—and Ripe for Lean Six Sigma
There are three key reasons why service functions need to apply Lean Six Sigma (the following chapters go into more detail):
Service processes are usually slow processes, which are expensive processes. Slow processes are prone to poor quality ... which drives costs up ... and drives down customer satisfaction and hence revenue. The result of slow processes: more than half the cost in service applications is non-value-add waste.
Service processes are slow because there is far too much "work-in-process" (WIP), often the result of unnecessary complexity in the service/product offering. It doesn't matter whether the WIP is reports waiting on a desk, emails in an electronic in-box, or sales orders in a database. When there is too much WIP, work can spend more than 90% of its time waiting, which doesn't help your customers at all and, in fact, creates or inflicts substantial waste (non-value-add costs) in the process.
Excerpted from Lean Six Sigma for Service by Michael L. George Copyright © 2003 by The McGraw-Hill Companies, Inc.. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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