How to Calculate Process Sigma

How to Calculate Process Sigma

Consider a power company for illustration purposes: A power company measures their performance in uptime of available power to their grid. Here is the five-step process to calculate your process sigma.

Step 1: Define Your Opportunities

An opportunity is the lowest defect noticeable by a customer. This definition, of course, is debatable within the Six Sigma community. Here’s a useful snippet from the forum discussing this point:

“Typically, most products (and services) have more than one opportunity of going wrong. For example, it is estimated than in electronics assembly a diode could have the following opportunities for error: 1) wrong diode and 2) wrong polarity (inserted backwards), so for each assembly shipped, at least two defect opportunities could be assigned for each diode. Apparently, some manufacturers of large complex equipment with many components prefer to [count two opportunities in this case]. My point is that this approach dilutes Six Sigma metrics.” -Anonymous

Many Six Sigma professionals support the counter point. I always like to think back to the pioneer of Six Sigma, Motorola. They built pagers that did not require testing prior to shipment to the customer. Their process sigma was around six, meaning that only approximately 3.4 pagers out of a million shipped did not function properly when the customer received it. The customer does not care if the diode is backwards or is missing, just that the pager works.

Returning to our power company example, an opportunity was defined as a minute of uptime. That was the lowest (shortest) time period that was noticeable by a customer.

Step 2: Define Your Defects

Defining what a defect is to your customer is not easy either. You need to first communicate with your customer through focus groups, surveys, or other voice of the customer tools. To Motorola pager customers, a defect was defined as a pager that did not function properly.

Returning to our power company example, a defect is defined by the customer as one minute of no power. An additional defect would be noticed for every minute that elapsed where the customer didn’t have power available.

Step 3: Measure Your Opportunities and Defects

Now that you have clear definitions of what an opportunity and defect are, you can measure them. The power company example is relatively straight forward, but sometimes you may need to set up a formal data collection plan and organize the process of data collection.

Returning to our power company example, here is the data we collected:
Opportunities (last year): 525,600 minutes
Defects (last year): 500 minutes

Step 4: Calculate Your Yield

The process yield is calculated by subtracting the total number of defects from the total number of opportunities, dividing by the total number of opportunities, and finally multiplying the result by 100.

Returning to our power company example, the yield would be calculated as:((525,600 – 500) / 525,600) * 100 = 99.90%

Alternatively, the yield can be calculated for you by using the iSixSigma Process Sigma Calculator – just input your process opportunities and defects.

Step 5: Look Up Process Sigma

The final step (if not using the iSixSigma Process Sigma Calculator) is to look up your sigma on a sigma conversion table, using your process yield calculated in Step 4.

Assumptions

No analysis would be complete without properly noting the assumptions that you have made. In the above analysis, we have assumed that the standard sigma shift of 1.5 is appropriate (the calculator allows you to specify another value), the data is normally distributed, and the process is stable. In addition, the calculations are made with using one-tail values of the normal distribution.

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The Six Sigma Renaissance? What the Future Holds for Six Sigma in Financial Services

Process standardization and quality improvement had been neglected in the financial service industry for decades. When the manufacturing industry needed to become more efficient and reduce waste, the financial service industry was flourishing and therefore, found itself not in need for major improvement initiatives. When this situation changed, everyone suddenly started to look for a quick fix and Six Sigma, which had already been so successful in the manufacturing industry a method of Quality control, was seen by many as the golden path.

Countless financial services companies have followed this path and have implemented Six Sigma in the last decade. Some have been very successful and happily announce their multi-million dollar savings. However, many others keep very quiet about their returns or have stopped their engagement in Six Sigma all together because they didn’t attain the expected return on their investment. This is reflected in the coverage of Six Sigma in the financial service sector – there is only a handful of books available on the topic, while there are hundreds on the use of Six Sigma in manufacturing.

Why Six Sigma has been so successful in the manufacturing industry, but only worked for a small group of FS firms? More importantly, how can the financial service sector make better use of Six Sigma?

Strengths and Weaknesses of Six Sigma in Financial Services

Without question, Six Sigma is a well accepted quality enhancement method which has been applied with great success in the manufacturing industry for decades. However, Six Sigma methods cannot just be transferred from the manufacturing industry to the financial service industry without any changes. Let us review the main strengths and pitfalls of Six Sigma, when transferring it to the financial service industry.

Strengths:

1. Unique customer focus

Focus on the customer is one of the main strengths of Six Sigma. By linking quality improvement initiatives to customer needs, Six Sigma teams ensure that the improvement has a positive impact on the customer. Particularly in the financial service industry, where the interaction with the customer takes place on a daily basis, customer focus is of utmost importance. When implementing Six Sigma in finance processes, customer needs have to be given highest priority. Short-sighted focus on cost or headcount reduction will not bring the long term benefits Six Sigma promises.

Only a close cooperation with customers and a clear focus on customer needs can lead Six Sigma to success in a financial service environment.

2. Six Sigma framework and tool kit

Many financial service organizations have not engaged in structured process improvement until recently. Therefore, they often lack standardized processes, organized quality and engineering departments and a general understanding of what quality improvement means to them. Six Sigma provides, with the DMAIC cycle, a structured framework to guide users throughout the improvement efforts and ensures that the project develops in the desired direction. Additionally, Six Sigma comes with a whole tool kit of brainstorming, analysis and prioritization tools that help to unfold its power. This structured approach, combined with the Six Sigma tools are particularly valuable for teams with a financial service background.

3. Data-driven and statistical methodology

Some may argue that financial service process improvement greatly benefits from its data richness. However, in my experience exactly this data overflow is one of the main problems for successful project selection and completion in this industry. Too many improvement efforts are based on ill selected data and the general assumption that the problem root cause is already known before the project even starts. This causes projects to fail and the improvement efforts to loose their reputation. Six Sigma offers a more statistical approach to measuring and analyzing data, thereby minimizing the risk of quick assumptions and allowing projects to be wisely selected and executed.

Weaknesses:

1. Resistance from people

I experienced that resistance towards change is even greater in the service industry, than in manufacturing. The average white-collar worker seems to be extremely unaware of the waste in his daily work and is, to my surprise, very resistant towards others outlining this waste to him. Now this most likely originates from the fact that processes in the service industry are invisible, following an unwritten process through electronic data exchange and peoples’ heads. Seeing and accepting waste in such a virtual environment is more difficult than in a factory, where bottlenecks and process defaults are physically existing. This resistance leads to many project failures and makes it very difficult to implement Six Sigma.

2. High initial investment and slow return on investment

The financial service industry is famous for its fast-paced culture, striving from one budget to another. However, for anyone looking for short term return on investment, Six Sigma is not the right cure. Six Sigma requires a high level of initial investment for implementation and the first years of Six Sigma introduction into an organization are particularly costly. During this period Six Sigma experts and employees have to be trained or recruited and senior management focus on Six Sigma implementation is required. Additionally, return on investment is often not realised in the short term.

From an organization-wide perspective, achieving a break-even from implementing Six Sigma takes a considerable amount of time as initial investment is high and results from improvements might only become apparent after several months.

Recommendations and Outlook for Six Sigma in Financial Services

Six Sigma is more a culture than it is a methodology. In order to make it work, you have to prepare your whole organization to embrace the values and ideas behind the concept. If you are looking for a quick fix to make the next budget, then Six Sigma is definitely not the right thing for you. The same holds for organizations that have not yet had any or only limited engagement with quality and process improvement. If you still have a lot of low hanging fruits out there, then go for Lean and 5S first.

However, if you are willing to take your organization through a true transformation, to standardize and re-engineer processes and to make a long-term commitment to Six Sigma, then go for it. Success cases from the financial service industry and many years of successful implementation in the manufacturing industry prove that Six Sigma is indeed a very effective method to bring your organization to the next level.

Both of the weaknesses outlined in this article can, with the right commitment, be reduced to a minimal. Once you have made the initial investment of time, effort and money, Six Sigma will reward you with a very worthy return on your investment.

In my opinion, particularly the ever increasing importance of outsourced finance services brings a never before seen centralization and standardization to financial organizations. This allows for large scale projects and makes the return on investment more favorable, than implementing Six Sigma in small decentralized offices. The most recent developments in the financial industry and the harsh competition following the financial crisis have further strengthened the need for more cost efficient solutions and better quality. At the same time, many players in the financial service industry have already hit their climax in getting process improvement from Lean. That's why I predict that Six Sigma will see a renaissance – this time not in manufacturing, but in financial services.

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Six Sigma Certification and B2B – Selling Points

Sales force effectiveness is not about simply automating the process – it also involves connecting process to winning over customers.

This is true even in case of B2B sales where winning business customers can bring in huge profits with increased credibility.

Sales Start With Customers

When companies plan for improvement in sales results, they often introduce automation of the process or implement CRM. CRM is useful, but it is not the only solution.

From the customer’s perspective, if salespeople are able to satisfy requirements, it can mean great improvement in sales results. To achieve improvement, the value that is given to the customer should be the value that they see.

For customers, there are items that are a must have, some which may be expected but which the product may not have, and some that are unexpected and thus are delighters.

By using Six Sigma certification tools like VOC to get an understanding of customer needs, companies can provide value that the customer expects, as well as understand and try to provide that which delights them.

Six Sigma Certification DMAIC To Improve Relationships

Six Sigma certification can directly impact sales results if companies are disciplined in focusing what is of value to customers in the buying process.

It is about understanding the needs of the customer when they make that crucial buying decision.

Define: The define phase involves convincing key customers and stakeholders to work on the project.

The involvement of sales staff, sales managers, the sales support team and service personnel is just as important as key customers. It is imperative to define the focus of the project using a scope diagram, which will guide the team to focus on that specific area.

Rather than a huge project, a specific area or product can be taken for consideration.

Measure: The collection of data from customers is more important in understanding the critical to quality (CTQs) areas in this process.

Customer loyalty has a big impact on sales results and needs to be inferred – and factors that affect it should be understood. Keep in mind and collect data from loyal customers, disloyal as well as prospective ones.

A study of prospective customers helps companies to understand the reasons or factors affecting customer decisions if they have not been converted to sales as well as to understand the effectiveness of salespeople.

An insight into customer responses can be achieved by interviewing salespeople.

Analyze: An analysis using different tools of the responses of customers with that of the feedback received from salespeople can be great help.

Cross-referencing helps determine the root causes affecting sales results.

Improve: This stage involves making improvements to the sales process, like changing a pricing strategy that may be a major factor affecting sales.

It could also involve reorganizing sales functions, as well as training the sales force to improve their skills.

Control: In this stage, changes start showing results – and to sustain them, a review of activities has to be undertaken. This may include analyzing the number of proposals, active leads, customer loyalty, revenue, and profitability achieved with a changing price structure.

This is a bit like going back to the basics – but it proves to be very helpful in improving sales results. The outside-in approach helps bring about sustainable growth.

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Six Sigma and its Use in Finance

Six Sigma within the finance industry helps to reduce costs that are based on strategic decisions. These decisions are often made from statistical data collected from specific sources throughout this quality improvement process.

A finance team analyzes data in order to suggest certain changes and improvements within the organization. These projects are run by Six Sigma professionals, and these individuals are a part of a team, that is compiled of different levels of certified professionals. Taught to use special tools, these individuals are able to use data taken from all aspects of the finance industry and figure ways to change an organization’s day to day practices for the better.

The finance industry often involves auditors and bookkeepers, just to name a few. It is easier for these areas of business to use software specifically created for that purpose to measure specific improvements within the business and further reap their benefits. Data such as this can be used to bring about success within a business. These professionals are an essential aspect of the company, and the Six Sigma Process can greatly assist them in their roles within the business.

At the beginning of a project, a Six Sigma team will have to evaluate the purpose of the project and what it stands to correct or amend. A finance team can also aid in the prioritizing and selecting of these projects, as they will have a greater understanding of which decision will be best for the company financially, as this is what will make the company most successful. A finance team is able to locate those projects which will prove most beneficial to the company’s goals and financial objectives. This is especially important as the industry needs to continuously effect change in order to keep up with the changing market.

A finance team in conjunction with a Six Sigma team (or a finance team trained and certified in the Six Sigma Method) can also be involved in keeping the company’s project pipeline full. When a project is chosen, these individuals can further decide on the benefits after the completion of the project. After implementing the project, team members are able to allocate several control mechanisms which help to ensure promising results.

A trained Six Sigma team with the aid of the finance department will be able to determine the main reason/s behind the lack of performance within the organization. After process ownership has been set it can easily be transferred to others. The finance team will be able to find the KPIs, or key performance indicators, that are needed to improve the business.  There are several benefits when implementing Six Sigma within the finance industry. For instance, it improves the integrity of results (as all decisions are based upon statistical fact), helps to develop a standard calculation, records incorrect benefits, audits results, provides accountability, and lastly, budgets any further spending within the company.

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