Six Sigma for the CPA or CFO November 30, 2007 Peter J. Sherman ASQ Certified Quality Engineer Certified Six Sigma Black Belt

Agenda Six Sigma Action Plan Wrap Up Objectives Your Business Six Sigma Overview The Basics DMAIIC Process (Case Study Approach) Control Define Measure Analyze Improve Implement Six Sigma Action Plan Wrap Up

Biography Peter J. Sherman is an ASQ Certified Quality Engineer and a Certified Six Sigma Black Belt. He has 20 years experience, including serving as Sr. Black Belt for AT&T’s Product Development Group. Mr. Sherman has led Six Sigma initiatives across Product Development, Sales, Fulfillment, Installation, Customer Support, and Billing. He began his career in quality management working in Japan as a visiting M.I.T. Scholar in 1986-87. There he worked with Dr. Edwards Deming, the noted American Quality expert and learned firsthand Japanese quality practices including the Toyota Production System, Quality Circles and Kaizen. Mr. Sherman is lead Instructor at Emory University's Six Sigma Certification Program in Atlanta, Georgia and has been published in various journals including iSixSigma, Hospitals & Health Networks, Solutions (Supplement to Journal of Financial Planning). Mr. Sherman received his Master's in Engineering from M.I.T. and has an MBA from Georgia State University.  Mr. Sherman is a member of the ASQ and ISSSP.

Objectives Discover the role and value of Six Sigma Learn how to conduct the Six Sigma process and interpret the results through a case study Develop and implement a 6σ Action Plan for your business

Your Business

Customers “Profit in business comes from repeat customers, customers that boast about your product or service, and that brings friends with them.” W. Edwards Deming

Product / Service Development Your Business Product / Service Development Sales & Mktg Fulfillment Delivery Inventory Production Support Billing

Your Business Goals As a business owner you want to optimize: Accelerate new product / service launches Increase sales effectiveness Reduce inventory to free up cash flow Streamline operations and improve profitability Improve accuracy of orders / on-time delivery Prevent customer service calls Reduce costs of billing mistakes / lower A/R to free-up cash Increase customer loyalty / reduce churn

Your Comparative Advantage Capital? Low-Cost Labor? Market share Technology? It’s how you manage your business processes!

Why Should You Care? 30% for service companies Poor quality costs money! 30% for service companies 15% for manufacturing companies Customers have lots of options Global competition Your company’s reputation Philip Crosby, “Quality is Free”

Six Sigma Overview

Evolution of Quality Customer Value Lean Six Sigma “Juran Trilogy” Joseph Juran BPR Philip Crosby Customer Value Kaoru Ishikawa “4 Absolutes of Quality Management” Quality Circles Michael Hammer Ishikawa Diagram Taiichi Ohno ISO 9000 W. Edwards Deming Toyota Production System Kaizen PDCA Lean Deming’s 14 points TQM Walter Shewhart, Western Electric Just-in-Time (JIT) Statistical Process Control Control Charts 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

What is Six Sigma Level Quality? The reliability of getting a dial tone every time you pick up a telephone!

What is Six Sigma Level Quality? Knowing your package will be delivered by 10am the next day, guaranteed!

What is Six Sigma Level Quality? Whether you are in Athens, GA or Athens Greece, a Big Mac tastes the same!

Six Sigma Defined It’s an approach to managing a business Six Sigma (σ) is a customer focused, well defined problem solving methodology supported by powerful analytical tools. It’s an approach to managing a business Focus on customers, data and measurement It’s a process improvement methodology Improve existing processes Build new processes It’s ROI oriented

Six Sigma Defined “Today's competitive environment leaves no room for error. This is why Six Sigma Quality has become a part of our culture. At its heart, Six Sigma is about understanding what your customers want and developing a game plan to deliver it.” Jack Welch Retired Chairman, CEO General Electric Requirements are Six Standard Deviations on each side of the mean Upper Customer Requirement Six Sigma Quality Lower Customer Requirement 6 6 Sigma translates into 3.4 Defects per Million Opportunities…or 99.9997% accuracy!

Six Sigma Defined Six Sigma is a measure of quality. Sigma is a Greek letter used by statisticians to show the variation in a process. The higher the Sigma, the better.

Sigma Level Comparisons 3 σ 6 σ 93.3% Error Free 99.9997% Error Free Unsafe drinking water for 10 minutes each day One unsafe minute every seven months! No electricity for 5 hours each month One hour with no electricity every 34 years! 2.2M incorrect surgeries per year in the U.S. 111 incorrect surgeries per year! 150M wrong drug prescriptions a year in the U.S. 10,200 wrong drug prescriptions a year! 137,000 pieces of mail lost per hour in the U.S. 7 pieces of mail lost per hour! Expect cold showers 2 days a month Cold showers are less than 2 min. a year!

Calculating DPMO and Sigma Example: An Accounting firm completes 150 tax returns a year. Each tax return entails 500 specific activities / steps (1040 forms, Schedule A, Schedule B, Schedule D). Historically, your firm averages .5% defects (missing signature, transposed numbers, wrong tax rate, late filing, etc.). It costs $250 for each mistake including calls, faxes, meetings, new forms, mailings, etc. Calculate the DPMO, Sigma Level and cost of quality

Calculating DPMO and Sigma Step 1) 375 defects = .005 75,000 opportunities (150 tax returns x 500 steps) Step 2) .005 x 1,000,000 = 5,000 DPMO Step 3) Look up value in Sigma Table (see next page) Solution: 5000 DPMO (4.15 Sigma) Cost: 375 x $250 = $93,750

Sigma Table

DMAIIC Methodology A rational decision making process for improving existing processes. Courtesy IIE and Aft Systems © 2007

DMAIIC Methodology Courtesy of IIE and Aft Systems © 2007

DMAIIC Methodology

Keys to Successful Six Sigma Implementation Top Management Support and Participation: Senior management must drive the process through the organization. Elements of this include careful selection of projects, allocation of resources, and decisions based on the measurements. Clearly Defined Projects: Well-defined scope with specific quantitative and measurable improvements. Strong Project Leadership: By Black Belts and Green Belts alike.

Six Sigma Organization Structure Steering Committee

Six Sigma Organization Roles Steering Committee: Identifies projects / black belts; allocates resources; monitors progress; manages project portfolio; establishes implementation strategy and policies Champions: Provide support, resources and remove road-blocks. Champions have more in-depth understanding of the methods – measurements and interpretation of process measurements.

Six Sigma Organization Roles Master Black Belt: Master Black Belts are Six Sigma Quality experts that are responsible for the strategic implementations within an organization. Master Black Belt main responsibilities include training and mentoring of Black Belts and Green Belts; helping to prioritize, select and charter high-impact projects. Black Belt: Are thoroughly trained individuals with expertise in all the analysis tools. Black Belts are expected to lead Six Sigma projects, identify opportunities, and coach / train Green Belts. Green Belt: Green Belts play a key role in the support / execution of Six Sigma projects. Green Belts are also expected to lead smaller projects. Green belts understand concepts of problem solving, data collection, data interpretation, variation, process capability, and cost analysis.

The Basics

The Basics QA vs QC Understanding Variation Statistics 101

Count the F’s Exercise THE NECESSITY OF TRAINING FARM HANDS FOR FIRST CLASS FARMS IN THE FATHERLY HANDLING OF FARM LIVESTOCK IS FOREMOST IN THE MINDS OF FARM OWNERS. SINCE THE FOREFATHERS OF THE FARM OWNERS TRAINED THE FARM HANDS FOR FIRST CLASS FARMS IN THE FATHERLY HANDLING OF FARM LIVESTOCK, THE FARM OWNERS FEEL THEY SHOULD CARRY ON WITH THE FAMILY TRADITION OF TRAINING FARM HANDS OF FIRST CLASS FARMS IN THE FATHERLY HANDLING OF FARM LIVESTOCK BECAUSE THEY BELIEVE IT FORMS THE BASIS OF GOOD FUNDAMENTAL FARM MANAGEMENT.

What’s the Point? “You can’t inspect quality into your product or service…….you have to build / design quality into the process.” W. Edwards Deming

Both forms of quality are needed for success! QA / QC Quality Assurance Quality Control Process Input Process Output Building in quality throughout the process: Methods & Procedures Roles & Responsibilities Training Redundancy (i.e., power backup, auto-save on your PC) Ensuring output conforms to specifications: Inspection Sampling Customer Complaints Both forms of quality are needed for success!

Variation

Understanding Variation No two things are exactly alike Variation is the way things normally occur The amount of variation in a process tells us what that process is actually capable of achieving. Shrinking variation reduces costs and creates a more predicable outcome (product or service)

On this page sign your name as you normally would. Variation Exercise On this page sign your name as you normally would. ___________________

Stable processes are predictable and in control. Types of Variation Common Cause variation is always present to some degree in the process (i.e., random, chance) Take action on the system or process. Special Cause variation means something different happened at a certain time or place (ie., non-random) Identify Special Causes and address them first. Deming felt 94% of all problems are due to common cause variation and 6% attributed to special causes. Stable processes are predictable and in control.

Statistics Refresher

Statistics Refresher Mean: The sum of all the values in the sample divided by the number of values in the sample. Median: The mid-point of the data when the data is arranged from the largest to the smallest value. Mode: The value of the observation that appears most frequently. Range: The distance between the largest and smallest value. Normal Distribution (Symmetrical) Mean = Median = Mode

Statistics Refresher Example: A bank generally takes a week to open and process a new account. A random sample of 9 new accounts indicates the following cycle times in days: 5, 8, 6, 5, 10, 4, 7, 5, 12 Find the mean, median, mode and range.

St. Dev sample = ∑ (Xn – X)2 n - 1 Statistics Refresher Standard Deviation Common Usage: A measure of volatility or dispersion. “I love the returns of the stock market, but hate the volatility.” Technical Description: Defined as the positive square root of the variance*. St. Dev sample = ∑ (Xn – X)2 n - 1 Xn = Value in sample X = Mean n = Number of observations * Variance is a measure of dispersion. Defined as the mean of the squared deviations from the mean. The problem with using variance is interpreting it. it is in terms of units squared. How do you interpret square percents or square dollars? The answer is to take the square root….hence standard deviation.

Statistics Refresher Example: Over the past 6 months, a CPA firm has averaged 40 hours to complete a business tax return, with a standard deviation of 2 hours. The CPA firm pledges it can complete returns within 36 - 44 hours. What exactly does this mean? What Standard Deviation (Sigma Level) is the firm performing? How would you interpret this? Show your answer in a graphical form.

44 hours - Upper Specification Limit Statistics Refresher Normal Distribution (Symmetrical) 44 hours - Upper Specification Limit 68% 95.5% 99.73% -3 34 hrs -2 36 hrs -1 38 hrs 40 hrs + 1 42 hrs +2 44 hrs +3 46 hrs - 68% of the time (1 std. dev), average returns fall within 38 and 42 hours. 95.5% of the time (2 std. dev), average returns fall within 36 and 44 hours. 99.73% of the time (3 std. dev), average returns fall within 34 and 46 hours.

DMAIIC Process Case Study

Six Sigma Case Study Form teams of four or five Review the case study Select roles within your teams

Define Courtesy IIE and Aft Systems © 2007

Define The most critical step in the DMAIIC journey. Define the scope. Identify the problem and how much you want to improve it. An Iterative Process Analyze Define Measure Improve Implement Analyze Projects that are not well defined and scoped generally lead to a waste of resources (time, management, capital).

Control Define Measure Analyze Improve Implement Charter – the key document used to identify and define the problem statement, project scope, team members & roles, and deliverables. The Charter is the contract between your team and senior management. Voice of the Customer (VOC): A tool used to describe customers’ needs, leading to specific Critical-to-Quality (CTQ) requirements. SIPOC – A high-level process map that includes Suppliers, Inputs, Process, Outputs, and Customers. Process Flow – A more detailed process map that documents key resources, activities, cycle times, and decision points in a process. It is used to identify dependencies, redundancies, gaps, and bottlenecks.

Project Charter

VOC Example – Rotary Club Employees Define Critical-to-Quality requirements Who are your customers? What are their needs? Identify the drivers Business Professionals Community Service Schools Dept. of Welfare Public Parks 20 hours community service per year for each member Professional Networking Forum to gather Regular weekly meetings Means to communicate Member Handbook 24x7 web access

SIPOC / Process Flow Example – Rotary Club Suppliers Inputs Processes Output Customers Prospective Rotarian Application Becoming a Rotary Club Member Approval document New Rotarian Member References Rejection Document Rotarian Club Sponsor 1 2 3 4 5 6 Pay Dues Gather Biography / References Marketing / Promotion Apply for Membership Evaluate Candidate Accept / Reject

Detailed Process Flow Example - Rotary Club

Team Activities State your objective (what are you improving and by how much?) Develop a VOC (identify 1 critical-to-quality requirement) Complete a SIPOC Analysis and High-Level Process Flow

Pizza Express Charter

Pizza Express Charter

Pizza Express VOC Customer Need / Drivers CTQs Primarily middle-income families with children Good tasting, quality Pizza 100% guarantee for freshness Only source suppliers with proven track record and Quality Management System in-place Fast Service 30 minute delivery from order Regular 3 month vehicle maintenance All drivers given maps Convenience Open 7 days a week Flexible Hours of Operation Mon – Thurs (11am – 10pm) Fri and Sat (11am – 2am) Sun (Noon – 11pm) Good Customer Service Answer telephone by 2nd ring Customer greeted by name Customer not interrupted Always repeat order / address / phone number back to customer Competitively Priced Prices will not exceed average of competition

Pizza Express SIPOC / Flow SUPPLIERS INPUTS PROCESSES OUTPUTS CUSTOMERS Food Wholesalers Ingredients (dough, tomato sauce, cheese, spices, etc.) Order-to-Cash Cycle Pizza End-User Food Equipment Vendors Ovens, stoves, refrigerator, etc. Bill Landlord Building space Automobiles Cars and fuel Utility Companies Electric, gas, telephone Misc. Suppliers Pizza boxes, pots, pans, kitchen tools, etc. 1 2 3 4 5 Take Order Prepare Pizza Cook Pizza Deliver Pizza Collect Payment

Pizza Express Detailed Process Flow

Measure Courtesy IIE and Aft Systems © 2007

Measure your current performance: Define Analyze Measure Improve Implement Control Measure your current performance: % or # defects Process “in-control” or “out-of-control” Sigma Level (capability of process) % Yield Cost of Poor Quality

Data Data Collection Plan – Identify the type data (variable vs. discrete), source, the format. Collect as much as you can! Variable: Data that is continuous and can be measured (i.e., length, time). Typical types include cycle time, Average Handling Time. Attribute: Data that is discrete (i.e., yes or no response, pass or fail, go or no-go). Typical types include % Defective, # Defective, # Defects, Defects per Unit.

Collect as much data as you can!

Control Define Measure Analyze Improve Implement Histogram – a graphical representation of data in a bar chart format. Used to observe the “shape” of data (i.e., normal, bell-shaped vs. skewed). Control Charts – The fundamental statistical tool used in Six Sigma. It shows the amount and type of variation present in the process. Stable processes are predictable and in (statistical) control. Process Capability – the capability of a process to consistently make a product / service that meets a customer specification range (tolerance). Used to predict the performance of a process by comparing the width of process variation to the width of the specified tolerance. X A Capable Process Lower Specification Limit Process Width Upper Specification Limit Design Width

Example Histogram Histogram Collect data Arrange data attribute in ascending classes across the horizontal axis Populate the specific data in the appropriate class Example Histogram

Control Chart Considered the foundation of Six Sigma statistical analysis Shows the amount and type (special or common causes) of variation in a process Indicates if a process is “In-Control”  stable, predictable “Out-of Control”  not stable, special causes exist

Control Chart Interpretation In-Control – All data points are within the upper and lower control limits. UCL CL LCL

Control Chart Interpretation Out-of-Control (Special Causes) – any point touching or beyond the control limits UCL CL LCL

Control Chart Interpretation Trend – 6 successive points in an upward or downward direction UCL CL LCL

Control Chart Interpretation Cycle – variation caused by regular changes in the process inputs or methods (i.e., time of day, seasonal) UCL CL LCL

Control Chart Interpretation Jumps – distinct changes from low to high values attributed to a change (i.e., operator shifts, material) UCL CL LCL

Control Chart Interpretation Repeats – a pattern where every nth item is different (i.e., one station out of alignment) UCL CL LCL

Key Process Metrics DPMO – Defects Per Million Opportunities Sigma Level % Yield Cost of Poor Quality Upper Specification Limit Lower Specification Limit X Design Width Process Width A Capable Process

Team Activities Construct a Histogram - use the data above You decided to take a random sampling of pizza delivery times: Construct a Histogram - use the data above Interpret results (normal or skewed) Develop a Control Chart (Xbar and R) – use the data above Interpret results (in control or out-of-control) Calculate the key Process Metrics Interpret results (capable or not capable)

Pizza Express Histogram

Pizza Express Control Charts

Pizza Express Control Charts

Pizza Express Key Process Metrics

Analyze Courtesy IIE and Aft Systems © 2007

The primary purpose of the Analyze stage is to: Control Define Measure Analyze Improve Implement The primary purpose of the Analyze stage is to: Make sense out of the data Identify root causes of the problem.

Control Define Measure Analyze Improve Implement Pareto Chart – focuses efforts on the problems that offer the greatest potential for improvement by showing their relative frequency in a descending bar graph. Cause-and-Effect Diagram – graphically displays potential causes of a problem.

Pareto Chart Example – Rotary Club “Relocations” and “No time” account for 68% of the Rotary Club Drop-Out Rate

Cause-and-Effect Diagram

Root Cause Exercise What do you think caused the Titanic to sink?

Develop a Cause-and-Effect diagram Team Activities Develop a Pareto Chart Interpret the results Develop a Cause-and-Effect diagram

Pizza Express Pareto Chart

Pizza Express Cause & Effect Diagram

Improve Courtesy IIE and Aft Systems © 2007

Define Analyze Measure Improve Implement Control In order to improve, possible improvements are developed and evaluated in a logical and planned fashion Brainstorm ideas Rank, evaluate, prioritize ideas based on key criteria

Solution Prioritization Matrix Improvement Tools 2x2 Cost / Benefit Grid Solution Prioritization Matrix

Brainstorm ideas for improvement Rank and evaluate Team Activities Brainstorm ideas for improvement Rank and evaluate Solution Prioritization Matrix (modify criteria / adjust weights) Select your improvement idea and present rationale

Pizza Express Solution Prioritization Matrix

Implement Courtesy IIE and Aft Systems © 2007

Control Define Measure Analyze Improve Implement Implementation can be accomplished by a Design of Experiment (DOE)…..aka pilot. DOE helps identify and validate those factors that have the most significant impact on a process, from which you will form your conclusions and recommendations to senior management. Business Definition: DOE is a methodology of varying a number of input factors simultaneously in a carefully planned manner, such that their individual and combined effects on the output can be identified. Technical Definition:

DOE - Advantages Allows you to identify the critical factor(s) Allows many factors to be evaluated simultaneously Economical and less disruptive to normal operations Provides a fact-based approach to making conclusions in confidence

Control Courtesy IIE and Aft Systems © 2007

Example Form a dedicated team to monitor the process Define Analyze Measure Improve Implement Control Form a dedicated team to monitor the process Perform continuous improvement “Lock-in” the gains Example

Team Activity Develop a control plan for your project

Pizza Express Control Plan

Six Sigma Action Plan

Talk to your customers to understand their needs! Six Sigma Action Plan Talk to your customers to understand their needs! 1 Layout and understand your end-to-end business process Identify gaps, bottlenecks, redundancies Marketing Fulfill & Deliver Sales Support Billing

Six Sigma Action Plan 2 Determine which parts of your service processes are the best candidates: Category Description Highly Customized Poor candidates for 6 Sigma campaigns (low ROI), i.e., Complex IT systems Mass-Customized Good candidates for 6 Sigma campaigns if the volume of activity is high enough, i.e., Web-based marketing / customer accounts / fulfillment, customer support Standardized Great candidates for 6 Sigma campaigns (high ROI); i.e., Account Processing / Maintenance, Billing, Accounts Payable, Payroll

Six Sigma Action Plan Key Activities Application of Six Sigma Marketing • Increase pipeline of prospective customers • Reduce time-to-market for product and service launches Sales • Improve sales close rates • Reduce sales cycle times Fulfillment and Delivery • Improve on-time delivery of products • Improve accuracy of orders (i.e., reduce returns) • Reduce inventory levels to better manage cash flow Support • Improve first-contact resolution • Lower handling time for contacts • Improve customer satisfaction Billing • Improve accuracy of invoice • Shorten accounts receivable days outstanding

“If you don’t measure it, you can’t manage it.” Six Sigma Action Plan 3 Measure your key activities over time and determine your Sigma Level: New sales cycle times / sales close rate Account processing cycle times / defect rate Other “If you don’t measure it, you can’t manage it.” W. Edwards Deming

Preliminary Project Screener Sample Template Focus on specific, achievable process improvements!

Six Sigma Action Plan

Wrap Up Q & A Tools: www.sherman6sigma.com Resources (next page)

Six Sigma Resources Professional Organizations: American Society for Quality (http://www.asq.org) Int’l Society for Six Sigma Professionals (http://www.isssp.com) Key Books / Trade Journals / Websites: The Six Sigma Revolution, G. Eckes (2001) The Six Sigma Way, P. Pande, R. Neuman, R Cavanaugh (2000) The Six Sigma Handbook, T. Pyzdek (2000) iSixSigma Magazine (http://www.isixsigma.com) Six Sigma Forum Magazine (http://www.asq.org/sixsigma) General Electric (www.ge.com/sixsigma)

Thanks!