In Search of Perfection With Six Sigma

Six Sigma measures the number of defects per million opportunities for error within a business process. While that might sound Greek to some, corporate finance executives at leading companies are becoming fluent in this quality initiative because of its significant cost-management capabilities.

When the term Six Sigma comes to mind, many financial managers think of a process quality goal, and for good reason. It is, by definition, a statistical term that measures how much a business process varies from perfection and is based on the number of defects per million opportunities for error. The idea is to scrutinize all processes, pinpoint where errors occur, analyze and correct them, and then put measures in place to control the process. Proponents of Six Sigma, whose roots trace back to earlier quality initiatives such as total quality management and reengineering, say it’s a faster way to achieve process improvement than its predecessors.

There is, however, more to Six Sigma than its goal of delivering a higher percentage of defect-free products. These days, Six Sigma is being credited with maximizing equipment usage, optimizing cycle time and even improving response time to customer inquiries. In the cost-management arena, it’s reducing high costs of inspection, maintenance, inventory carrying, frequent expediting and high scrap and rework, among other expenses.

"Excess costs related to poor quality include excess manufacturing steps, excess people to do the job, overtime and excess equipment," says Joseph A. DeFeo, executive VP and COO of the Juran Institute Inc., a management consulting and training firm in Wilton, Conn., which helped develop the Six Sigma concept. "By using Six Sigma to reduce those areas of waste, you can often reduce your total costs by 15 percent to 20 percent annually."

Historically, operations managers have been the Six Sigma champions. However, the cost-management benefits inherent in the concept have spurred more and more financial managers to pick up the Six Sigma banner and run with it.

"Today, there’s a strong trend toward senior financial managers championing Six Sigma," DeFeo says. "There’s a much stronger tie with the financial people to Six Sigma than there has been with earlier quality initiatives like total quality management. More and more of them are becoming black belts" (a designation given to those who complete a certain level of training for Six Sigma). He adds that having the financial manager lead Six Sigma gives credibility to the project and validates the results.

Validation of Six Sigma savings is one duty of financial managers at AlliedSignal, a Fortune 500 aerospace, automotive and chemical company based in New Jersey. "The financial manager has to audit and validate that the product savings credited to Six Sigma actually do positively affect our bottom line," says Steve Peterson, worldwide director of quality and Six Sigma for Turbocharging Systems of AlliedSignal Inc. in Torrance, Calif.

AlliedSignal, along with General Electric Co. (GE) and Motorola Inc. — which pioneered Six Sigma over 10 years ago — are among the most notable companies to ingrain the concept into their core operations and reap significant cost savings as a result. According to GE’s annual letter to shareholders, employees and customers, Six Sigma techniques applied at GE resulted in bottom-line benefits of more than $750 million in 1998. At Motorola, the estimated savings attributed to Six Sigma since the company started using it in the late 1980s are about $2.2 billion. And at AlliedSignal, cost savings credited to Six Sigma totaled over $500 million in 1998. "The payoff that Six Sigma delivers is usually two to three times the amount of money and time that must be put into it," DeFeo says.

These companies have made no secret of the fact that they’re saving money with this initiative, something which has earned the attention of major investors. "Wall Street analysts have definitely taken notice — to the point where more of them are saying, ‘Show me what you’ve done with Six Sigma’ and including that information in their evaluations," says DeFeo.