Many companies have tried to improve their business but were discouraged when they didn’t see any breakthroughs. To make these initiatives a success, all texts on Total Quality stress the importance of senior management commitment. What motivates these business leaders to be successful? It is simple: Business leaders are driven and motivated to improve shareholder value and achieve bottom-line results. Six Sigma is a method that focuses on the customer and provides benefits for the bottom line.
Six Sigma: What is it?
Six Sigma follows a systematic and rigorous approach to process improvements and can be applied to all Business Processes. The “Bang for the Buck” principle is used to prioritize projects and identify them. Customers focus and the potential for bottom-line impact are key factors in selecting projects. Prioritization allows businesses to allocate their “scarce”, business-related resources to projects of significant business importance. This helps separate the “Vital Few” and the “Trivial Many.” ”
To demonstrate that the goals have been achieved, specific targets are set and monitored throughout the project’s duration. Tracking can include Cost, hard, soft and cash flow, Cycle Time and Non-Value Adding Activity, Rework Failures and Defects.
The five DMAIC (Define Measure, Analyze and Improve) Phases can make a significant improvement to a company’s processes.
How Six Sigma efforts impact the bottom line?
Income Statement Elements:
- Reduced Cost of Goods Sold
- Gross Margin Increased
- Lower Operating Expenses
- Increases in Net Income
- Positive Impact on Profitability Ratios
- Sales increase with higher returns
- Increased Return on Investment
Balance Sheet Elements:
- Inventory reductions are possible
- Effects on Activity and Efficiency Ratios
- Asset turnover rises
- Increased inventory turnover
- Inventory decreases on hand
Most companies achieve a reduction of 20% to 30% in OE and COGS.
Take this example:
- $200M Sales
- $100M COGS
- $90M OE
- $5M Interest and Depreciation
- 2.5% Return on Sales
- 100M in Total Assets
- Asset Turnover Ratio: 2.0
Returns on Sales increase from 2.5% to 12% when there is a 10% reduction in COGS and OE for Six Sigma implementations.
The Return On Investment Ratio rises from 5% to 24% without any balance sheet adjustments.
After processes have been improved, inventory can be addressed. Six Sigma implementations often address a project to shorten the cycle time of the accounts receivable process.
Six Sigma’s success in achieving bottom-line results comes down to following the Rigorous and Structured Improvement Process that is customer focused.
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