Almost perfect, how six sigma can help you

“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature,” writes Peter L Bernstein in Against the Gods: The remarkable story of risk.

The moment that new world was born arrived when seventeenth century French mathematicians Blaise Pascal and Pierre de Fermat formulated Pascal’s Triangle. This solution to an age-old mathematical problem of how to divide the stakes of an unfinished game of chance set out the laws of probability.

A century later, Abraham de Moivre discovered normal distribution and standard deviation, and hence the law of averages, and, for the first time, the world had a tangible way to quantify risk.

A single standard deviation from the mean – shown on de Moivre’s famous bell-curve diagram – is called a sigma. Six sigma amounts to six standard deviations from the mean, which equates to 99.99966% accuracy. The difficulty for business lies in establishing what constitutes a reasonable level of accuracy, and the appetite for risk varies enormously between industries.

Bernstein quotes Arthur Rudolph, the scientist who developed the Saturn V rocket: “You want a valve that doesn’t leak. But the real world provides you with a leaky valve. You have to determine how much leaking you can tolerate.”

Historically, controlling a manufacturing process to a nominal +/– three sigma was deemed acceptable for most businesses. It would, after all, result in 99.73% of a company’s production being fit for purpose. But this figure is far from good enough in today’s high-technology world.

In February 2003, Time magazine ran an article investigating what went wrong with the space shuttle Columbia, which had disintegrated on re-entering the Earth’s atmosphere a week earlier. “In a flying machine with more than 2.5 million parts, even a 99.9% reliability level would still leave 2,500 things to go wrong,” it pointed out.

This observation exposes the fact that what may appear an acceptable level of accuracy is not necessarily anything of the sort.

On 22 April 2005, the New York Times ran a front-page article about quality standards at Nasa. It reported that the space agency had “loosened the standards” for the acceptable risk of damage to its space shuttles from airborne debris. Barely three months later, a half-kilo chunk of foam peeled away from the space shuttle Discovery during its climb into orbit, in what could easily have been a rerun of the February 2003 disaster.

The episode highlights the importance that risk analysis plays in our world, and goes some way to explain why the six sigma approach is experiencing something of a renaissance since its invention in the 1980s by Bob Galvin and Bill Smith of Motorola. Famously, Jack Welch, the former CEO and chairman of GE, currently the fifth biggest corporation in the US, built his entire company around it.

In its 1999 annual report GE claimed a net benefit from six sigma of $2bn. Six sigma leaders ABB and Allied Signal have also reported that it has saved them hundreds of millions of dollars each.

Six sigma reliability equates to 3.4 defects per million opportunities, or about one in every 294,000. But achieving such an incredible level of accuracy is difficult.

Nothing in life is perfect – all we can do is strive for perfection. But in manufacturing terms it is clearly more important to have less deviation in an aerospace company such as BAE Systems than in a biscuit manufacturer.

Trying to ensure that 99.99966% of biscuits are perfect is prohibitively expensive and ultimately pointless. But how do we put a price on failure? In the case of the space shuttle or in aviation terms, a failure is likely to lead to a catastrophic loss of human life.

It is why Nasa explored using six sigma to improve its internal processes. But what Nasa forgot was that six sigma on its own is insufficient unless implemented as part of a much wider change management programme. As Bernstein says: “Our lives teem with numbers, but we sometimes forget that numbers are only tools. They have no soul; they may indeed become fetishes.”

Scottish Power is an example of one of the UK’s most innovative companies in its use of six sigma. It was awarded a best in class medal at the European Six Sigma IQ Awards in recognition of a project to improve customer account setup time.

“The six sigma business transformation programme originally adopted in our supply activities was extended to our generation activities in the year and, in total, delivered revenue and cost savings of £15m this year,” reads the company’s full-year results statement.

Willie MacDiarmid, who established the six sigma programme at Scottish Power, spoke to Financial Director. “We were keen not only to bring our costs in check,” he says, “but also to improve our processes.” And that’s a key factor in any six sigma process.

In the utility company’s case, the initial six sigma project was to improve the customer billing process. Since the project’s success, six sigma has been extended all around the organisation, from its power stations to IT.

MacDiarmid says a successful six sigma programme demands complete commitment from everyone in the company if it is not to be doomed to failure. He says he was forced to “shake hands” with some former employees of Scottish Power and allow them to move on when they refused to buy in to the six sigma vision.

“There were the early adopters, who see the opportunity early and grab it; there were the people who were sceptics to begin with but then came on board when they saw the power of it; and then there were the people who just wouldn’t buy into it at all,” he says.

But thanks to MacDiarmid and Scottish Power’s commitment to the philosophy, some of the biggest names in the world of business – including Shell and Credit Suisse – have since benchmarked the utility’s six sigma progress as they consider launching their own programmes.

“If I left Scottish Power tomorrow and joined another company, it would be one of the first things that I would adopt,” says MacDiarmid. “It takes away what we lovingly call the ‘urban myths’ around the business, which is when you get guys who think that because they have been at the company for nine years they know how it works.”

Finance plays a key role in maintaining and scrutinising the company’s six sigma programme. “The way Scottish Power is structured, the finance function has been implementing and using six sigma for the past two or three years,” says MacDiarmid. “When they realise that you can track project savings right the way through to the ledgers, so there is an audit trail – this is when these guys get turned on.”

A successful six sigma implementation is easier to imagine in a manufacturing process than in a more service-oriented organisation such as Scottish Power. But the same parameters can be applied to any company.

GE describes it this way: “Six sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products and services.”

But the company goes on to describe it as a “philosophy” and a “vision”, which lends weight to the belief that the actual statistics behind six sigma are of little import.

If you are going to do this properly you have to have a fundamental change in terms of outlook,” says MacDiarmid. Often this can become the biggest barrier to its adoption.

But six sigma lets MacDiarmid track the success of change. “What we actually have is a situation where the line people working on it are actively involved in each stage of the improvement process.”

This lets MacDiarmid make changes, such as reduce budgets or headcount, on the back of a scientific process in which everyone affected was involved from the very beginning.

IT investments are an excellent opportunity for six sigma. MacDiarmid says that if his company can shave a few days off each implementation stage of an IT project – of which there may be 100 a year – significant cost savings will suddenly appear.

Speaking to the Institute of Quality Assurance, which itself has just established a European six sigma programme in partnership with the American Society for Quality, Philip Catherwood, business development manager at Source Wales and a previous “black belt” in six sigma at Sony UK, was adamant that UK plcs had much to gain.

“Within UK industry there are still massive savings to be had in reducing the cost of poor quality, and the potential for return to be gained from six sigma is huge for any business,” he says. “While I am not saying that UK companies will generate anywhere near the billions achieved by GE, proportionally, there is no reason why some degree of savings cannot be achieved.”

To do so demands a combination of change management and risk analysis. The level of risk an organisation is likely to accept will differ immensely from industry to industry. Adopting best business practice in order to work towards a failure rate of just 3.4 defects per million opportunities is more important than the realisation itself. A successful six sigma programme will embrace risk and work towards minimising it.

As Bernstein explains: “The story that I have to tell is marked all the way through by a persistent tension between those who assert that the best decisions are based on quantification and numbers, determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the uncertain future. This is a controversy that has never been resolved.”

The odds are six sigma might just help.