Six-Sigma - Motorola's Learns to Measure Quality

Supply chain manufacturing concepts often seem to emerge fully formed out of nowhere, and while there have been numerous short-lived trends du jour, in reality the legitimate best practices have gestated for many years, sometimes for decades. There's nothing new about lean manufacturing or the Toyota Production System, for example, even though they're currently popular buzzwords. The TPS, after all, emerged in Japan shortly after World War II ended, and in fact was based on concepts popularized even earlier in the twentieth century by Henry Ford. So even though lean is at the top of many people's minds these days, the only thing truly new about lean is the acceptance it's finally gained in the United States.

Another manufacturing concept that is frequently associated with lean is Six Sigma, a structured, quality-centric approach to manufacturing. It began at Motorola in the 1980s as a way of improving the quality and reliability of its products, which would enable the company to deliver a consistently high level of customer service. Based on quality initiatives developed by the Japanese, Motorola's Six Sigma program—like the TPS—involved every employee in the company.

Six Sigma is a measure of quality that strives for near perfection, which is defined as no more than 3.4 defects per million opportunities.

Motorola learned from the Japanese that "simpler designs result in higher levels of quality and reliability," explains consultant Alan Larson, a divisional quality director at Motorola when Six Sigma was launched. The company also learned that it needed to improve manufacturing techniques "to ensure that products were built right the first time."

The term Six Sigma refers to the idea of near perfection, defined as six standard deviations between the mean and the nearest specification limit. In practice, this means a product or process can have no more than 3.4 defects per million opportunities. Six Sigma, like the SCOR Model, focuses on five areas: define, measure, analyze, improve, and control. Six Sigma programs typically use statistical process control (SPC) tools to monitor, control, and improve a product or process through statistical analysis.

To achieve the desired result of enabling continuous improvement, rather than merely putting a temporary bandage on a problem, Larson recommends that every department, group, and unit within a company complete the following six steps:

* Identify the product you create or the service you provide.
* Identify your customers, and determine the customers' needs.
* Identify your suppliers and what you need from them.
* Define your process for doing the work.
* Establish metrics for measuring the goodness of your process and feedback mechanisms to determine customer satisfaction.
* Ensure continuous improvement by establishing a team that measures, analyzes, and completes focused action items.

Proponents of the Six Sigma approach typically cite its lack of ambiguity as a major plus. The Six Sigma methodology applies a mathematical precision to what might otherwise be highly imprecise supply chain processes. A corollary benefit comes when a company insists on getting commitment from every employee, and requiring everybody to focus on the better good for the entire supply chain.

"Getting our business units to accept change has been accelerated because we're talking a common language and common methodology through Six Sigma," observes Lori Schock, site supply manager with Dow Corning, a manufacturer of silicone-based products. "It removes the doubting Thomas attitude because it is a common process based on facts."

Srinivasan' s 14 Lean Principles

Lean is not a quick fix. When 771 managers and executives were asked by the Lean Enterprise Institute to identify the biggest obstacle to implementing lean at their companies, nearly half (48 percent) said it was, "backsliding to the old ways of working." It's also revealing to note that when asked how far along they were with their lean implementations, more than half (53 percent) characterized their companies as being in the early stages. So while a lot of lip service is being paid to the idea of lean manufacturing, there remains a sizable gap on the execution end.

Lean manufacturing is a management philosophy focused on eliminating waste, reducing inventory, and increasing profitability.

As a result, companies continue to seek guidance in how exactly a lean operation should be set up, and just as importantly, how to maintain it. Mandyam Srinivasan, a professor with the University of Tennessee, has identified 14 principles that companies should follow to build and manage lean supply chains:

1. Measure any improvements in subsystem performance by weighing their impact on the whole system.

2. Focus on improving the performance of the lean supply chain, but do not ignore the supply chain's business ecosystem.

3. Focus on customer needs and process considerations when designing a product.

4. Maintain inventories in an undifferentiated (unfinished) form for as long as it is economically feasible to do so.

5. Buffer variation in demand with capacity, not inventory.

6. Use forecasts to plan and pull to execute.

7. Build strategic partnerships and alliances with members of the supply chain, with the goal of reducing the total cost of providing goods and services.

8. Design products and processes to promote strategic flexibility.

9. Develop performance measures that allow the enterprise to better align functions and move from a functional to a process orientation.

10. Reduce time lost at a bottleneck resource, which results in a loss of productivity for the entire supply chain. Time saved at a non-bottleneck resource is a mirage.

11. Make decisions that promote a growth strategy and focus on improving throughput.

12. Synchronize flow by first scheduling the bottleneck resources on the most productive products, then schedule non-bottleneck resources to support the bottleneck resources.

13. Don't focus on balancing capacities—focus on synchronizing the flow.

14. Reduce variation in the system, which will allow the supply chain to generate higher throughput with lower inventory and lower operating expense.

Supply Chain Metrics 5 - About the SCOR

By far the best-known and most detailed performance metrics are encompassed in the Supply Chain Operations Reference (SCOR) model, which was created in 1995 and has been continuously refined ever since. The SCOR model provides an industry-standard approach to analyze, design, and implement changes to improve performance throughout five integrated supply chain processes—plan, source, make, deliver, and return—spanning the full gamut from a supplier's supplier to a customer's customer and every point in between. The SCOR model is aligned with a company's operational strategy, material, work flows, and information flows.

As explained by Peter Bolstorff and Robert Rosenbaum in Supply Chain Excellence, a handbook on using the SCOR model, the five SCOR processes encompass the following measurable activities:

Plan: Assess supply resources; aggregate and prioritize demand requirements; plan inventory for distribution, production, and material requirements; and plan rough-cut capacity for all products and all channels.

Source: Obtain, receive, inspect, hold, issue, and authorize payment for raw materials and purchased finished goods.

Make: Request and receive material; manufacture and test product; package, hold, and/or release product.

Deliver: Execute order management processes; generate quotations; configure product; create and maintain a customer database; maintain a product/price database; manage accounts receivable, credits, collections, and invoicing; execute warehouse processes, including pick, pack, and configure; create customer-specific packaging/labeling; consolidate orders; ship products; manage transportation processes and import/ export; and verify performance.

Return: Defective, warranty, and excess return processing, including authorization, scheduling, inspection, transfer, warranty administration, receiving and verifying defective products, disposition, and replacement.

The SCOR model provides a supply chain scorecard (or SCORcard, if you will) that companies can use to set and manage supply chain performance targets across their organization. Given the increased attention and scrutiny Wall Street is applying to the supply chain's impact on a company's financial performance, being able to measure exactly how well each process is doing is one of the key steps on the road to developing a best-in-class supply chain. Therefore, one of the main roles of the SCOR model is to provide a consistent set of metrics a company can use to measure its performance over time as well as compare itself against competitors.

In the end, supply chain metrics have three main objectives, according to Shoshanah Cohen and Joseph Roussel, authors of Strategic Supply Chain Management

1. They must translate financial objectives and targets into effective measures of operational performance.

2. They must translate operational performance into more accurate predictions of future earnings or sales.

3. They must drive behavior within the supply chain organization that supports the overall business strategy.

Supply Chain Metrics 4 - Supply Chain Check-up

How do you know that you need help in the first place, though? Benchmark studies and process maps are both expensive and time-consuming, and many companies whose earnings put them well outside of the Fortune 1000 realize that their supply chains aren't all they ought to be, but they are still hesitant as to what to do about it. Consultant Mike Donovan of R. Michael Donovan & Company offers a relatively short but challenging checklist that provides a basic assessment of how healthy your supply chain might be. If you answer "no" to any of the following questions, or even worse, if you don't even know the answers to some of these questions, then the time to get serious about fixing your supply chain problems is right now:

Do your order fulfillment rates meet management's specific and measured customer service strategy?
Are your delivery lead times competitive and predictable?
Do all of your supply chain departments agree on which products are made-to-stock and which are made-to-order?
Do sales and manufacturing share equally in determining the mix and investment in inventory?
Are the appropriate calculations being used, rather than "rules of thumb," to establish the desired mix and levels?
Are management's inventory investment plan and customer service objectives being compared against the actual results that are achieved?
Are short-term forecast deviations being monitored and adjusted, and is long-term forecast accuracy continuously improving?
Is your inventory accuracy consistently above 98 percent?
Are you able to avoid carrying excess safety stock buffers?
Are your excess and obsolete inventories being measured, and are they less than 1 percent of total inventory?

Time for a Turnaround

Automaker Nissan Motors is a good example of a company that recognized it was in trouble and used strategic benchmarking to launch a complete corporate turnaround. David Morgan, president and CEO of consulting firm D.W. Morgan Company, points out that Nissan was one of the relatively few companies that sat out the boom years of the 1990s, charting instead a decade-long course of failed products and poor financial results. In the year 2000, Nissan decided enough was enough as it began an initiative aimed at achieving an 8 percent profit on each vehicle sold.

"Through data collected in its supplier benchmarking program, Nissan discovered that suppliers were consistently producing inferior products at higher than average prices. In effect, Nissan was giving away $2,000 on every car sold. Further, Nissan's distribution costs were the highest among automakers," Morgan explains.

Once it became aware of these problems, Nissan quickly responded by improving its supply base. "Today, Nissan employs sophisticated benchmarks for every partner doing business with them. Any partner that fails to meet established standards is notified of corrective action that needs to be taken," he notes.

It took more than just benchmarking to effect these changes, of course. For one thing, Nissan expanded its closely held supply base to include global component suppliers. It also embraced many of the same lean manufacturing and quality philosophies that fellow Japanese automaker Toyota had pioneered. As a result of all these initiatives, Nissan has become a benchmark for the automotive industry. As Morgan points out, since 2000, the company's stock price has nearly doubled, and in 2005, vehicle sales were up more than 10 percent. Not too bad for a company that had been written off as comatose at the turn of the millennium.

Part 5 coming soon....

Supply Chain Metrics 3 - What Makes a Supply Chain Leader?

Here's the good news: Whereas the Singhal/Hendricks study exposes the vulnerability of poorly managed supply chains, another study conducted by Accenture (in partnership with INSEAD and Stanford University) reveals that companies identified as supply chain leaders have a market cap up to 26 percentage points higher than the industry average. That begs the question: So what makes a supply chain leader, anyway?

That's where the statistical approach comes in. If you can measure the performance of your supply chain, then you'll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won't get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don't necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation.

Measure Satisfaction

Automaker Hyundai uses its parts distribution operation to build customer loyalty. The company's goal is to provide high levels of customer service while keeping its costs as low as possible. In this case, the customers are Hyundai dealers, and through dealer satisfaction surveys the company has learned that order fill rate is the number-one driver of satisfaction. "If needed parts are available, our dealers are happy," explains George Kurth, director of supply chain and logistics with Hyundai Motor America.

So to ensure that it's keeping its dealers happy while keeping its costs down, Hyundai measures the facing fill rate, which is the order fill rate from the warehouse assigned to the dealer. "If we can keep that fill rate very, very high, it's good for dealer satisfaction and it reduces transportation costs," Kurth notes. "Shipping from the assigned warehouse on our dedicated delivery route is cheap. We pay for the truck no matter how full it is. If the part is not available from the assigned warehouse, we have to ship from another warehouse via an expedited carrier. We can satisfy the dealer and get the part there on time, but the cost soars."

Hyundai's facing fill rate on orders is about 96 percent, which is considered good for the automotive industry. The automaker also measures the fill rate for its entire warehouse network, which is 98 percent, also a high score for automakers. Kurth isn't satisfied with that score, though, because "that still means that 2 percent of the time, I have to use premium transportation."

Transportation costs, however, are just part of the total supply chain cost, which also includes inventory and productivity costs. Hyundai monitors the amount of inventory it carries at any given time, with the understanding that best-in-class for the automotive industry is never going to equate well with the high-tech industry's goals. "We tend to carry a lot of parts inventory because our automobiles last several years," Kurth says. "In contrast, Dell has virtually no parts inventory because a six-month-old computer is obsolete."

To stay on top of current automotive industry trends, Hyundai belongs to an independent automotive and heavy equipment group that collects performance and cost metrics from member companies and provides benchmarking services.


Part 4 next....

Supply Chain Metrics 2 - How to Prevent a Supply Chain Heart Attack

Here's an example of how sabermetrics-style supply chain analysis can frame Nike's problems as part of a trend that goes far beyond the apparel industry. Two researchers—Vinod Singhal of the Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario—looked at more than 800 announcements of supply chain problems from public companies over an eight-year period (1992—1999). These problems included things like inventory write-offs, parts shortages, shipping delays, and the like. The researchers then tracked the price of these companies' stock one year before and two years after the announcement.

So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107 percent, return on sales fall 114 percent, and return on assets decrease by 93 percent. And that's not all: These companies also typically saw 7 percent lower sales growth, 11 percent higher costs, and a 14 percent increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.

"The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years," Singhal explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company's health.

It doesn't really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51 percent drop. Retailers experience an average decrease of 42 percent, while high-tech manufacturers will see a 27 percent decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150 percent for small companies, 86 percent for large.

"When people talk about supply chain management, they may agree that it's important, but they're not investing in solutions," Singhal points out. However, even when companies do spend on solutions, they're not necessarily spending wisely. "One reason supply chain problems occur is because there isn't enough slack in the system," Singhal notes. "As companies try to make their supply chains more efficient, they take away slack because it's expensive."

The answer, though, isn't to throw a lot of money at your supply chain problems. It's to get smarter at identifying and tracking key indicators that might indicate potential glitches early on. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices.


Part 3 coming soon....

Supply Chain Metrics 1 - Measuring Up to High Standards

It's probably just a coincidence, but the rise in popularity of supply chain management happens to coincide with the emergence of sabermetrics. No, you're not going to find that term defined in any business management journal; sabermetrics is the application of statistical analysis and research to the game of baseball. When personal computers became affordable in the early 1980s, supply chain analysts and sabermetricians alike fell in love with databases and spreadsheets that could crunch months' worth of product forecasts and decades' worth of box scores in minutes, rather than days. These days, "keeping a scorecard" is as much a part of the supply chain language as it is sports talk.

To paraphrase John Thorn, co-editor of Total Baseball, statistics are not just a cold-blooded means of dissecting profit and loss reports in order to examine a company's performance; rather, statistics are a vital part of the supply chain. The supply chain may be appreciated without statistics, but it cannot be understood without them.

To continue the sports analogy, back in the spring of 2001, the only event in which athletic footwear and "Just Do It" icon Nike seemed to be excelling was poor planning. Philip Knight, Nike's CEO, had to explain why the company's shoe sales were 24 percent less than expected, which led to an earnings shortfall of approximately $100 million. Much like a beleaguered baseball manager explains away a loss by pointing to a key player's failure to lay down a bunt in the late innings, so too did Knight point his finger at a convenient scapegoat: He blamed it on his supply chain plan.

Specifically, Knight singled out the problems Nike had implementing a new supply chain planning system. Those implementation problems, he explained, were what led to unforeseen product shortages and excesses. The installation of the software had been rushed (Knight didn't dwell on his role in making that decision, much as a baseball manager tends to gloss over whether a player was rushed to the big leagues before he was ready), and that led to conflicts between Nike's legacy order management system and the new demand and supply planning software. As a result, the company made too many of one style of shoe and too little of another, building up inventories of shoes few people wanted while experiencing shortages of more popular brands.

Simply put, Nike was having major league problems matching the right orders to the right customers. And Wall Street responded promptly, as Nike's share price dropped 19 percent when the glitch was announced.


More on this soon....