Chapter 1 Making Economic Decisions

Chapter 1 Making Economic Decisions

Chapter 1 Principles of Six Sigma Meaning of Six Sigma Enterprise level -- strategic business initiative significant improvements in areas such as bus., growth, capacity, investor relationships, & customer satisfaction Operations level -- tactical projects improving delivery time, cost of poor quality (COPQ), defects per unit (DPU), & other operational measures

Process level tools to reduce process variability minimizes the number of defects, shortens process cycle times, and decreases direct costs. Meaning of Six Sigma Fundamental Form -- 3.4 defects per million opportunities for defect a single opportunity for defect for a single critical-toquality (CTQ) characteristic

Fundamental Idea performance is improved quality, capacity, cycle time, inventory levels, and other key factors are also improved both the provider and the customer experience greater satisfaction HW: Show the calculation of 3.4 defects per million for 6 process. Driving Need of Six Sigma Human needs for understanding and repeatability

of results seek to enhance our ability to replicate some object, situation, or phenomenon Business needs to replicate a successful business transaction Deploy processes both vertically and horizontally to minimize average transactional costs and time, while concurrently to maximize quality and volume

Customer Focus: Nature of customer-provider relationship Customer (dictionary): a person who buys something Customer is a person (or organization) that receives some form of value in exchange for another form of value, held or originated by the provider Customer and provider both seek to maximize their respective benefits Customer and provider both have expectations quality of the business relationshipquality of the business relationship

Quality is a relative measure of the gap between rightful expectation and actual performance Core Beliefs: Hope Six Sigma brings quality of the business relationshiphope that moves people to align their values, aims, and goals in a common direction Six Sigma initiative was designed to raise the bar so high that employees would be forced to reexamine the way in which work was done, not just tweak the existing work processes

Core Beliefs: How is 6 better? Astounding economic benefits quality of the business relationshiplet the data do the talking. Six Sigma is a repeatable management process based on the idea of measurement 6 is a goal-driven, result-oriented, fact-based management system based on scientific principles

Deterministic Reasoning Nature of Determinism: a change in some object, event, or phenomenon is dependent on a change in one or more of its underlying determinants Y=f (X) Y=f (x1, . . ., xn), where x1, . . ., xn is a set of determinants Leverage Principle Leverage principle: Not all variables are created

equal; some exert more influence than others. Y=f (x1, x2,. . ., xn) Those xs (x values) that exert a large influence are said to have leverage Those xs that exert a disproportionately large amount of influence on Y are often called the quality of the business relationshipvital few variables (<> quality of the business relationshiptrivial many variables) QUALITY DEFINITION SPC/QC: Conformance to standards

A subjective term for which each person has his/her own definition, based on the perceived degree to which the product or service meets customers expectations 6: A state in which value entitlement is realized for the customer and provider in every aspect of the relationship QUALITY DEFINITION Phases of quality:

Quality of the product / service Product / service offering Quality of cost conformance Provider cost reduction Quality of creating value VALUE CREATION Evolution of 6: 1984-1994: reduction of defects through quality improvements (Motorola)

1994-2001: verifiable cost reductions (ABB) 2001-present: creation of value VALUE CREATION U A V C Where: V = value of product or service, event or activity U = utility of the product/service in terms of form, fit,

and function A = access by the customer to the product/service in terms of volume, timing C = cost VALUE CREATION 4 phases of Lean Sigma 1. Innovation: Marketing for Six Sigma (MFSS) 2. Configuration: Design for Six Sigma (DFSS) 3. Realization: Processing for Six Sigma (PFSS) 4. Attenuation: PFSS

Leading for Six Sigma (LFSS) BUSINESS, OPERATIONS, PROCESS, AND INDIVIDUAL (BOPI) GOALS Business Level. Achieve best-in-class performance for each critical-to-business (CTB) characteristic over a 5-year period. (market share, return on net assets) Operations Level. Realize an annualized 78% baseline improvement over a 5-year period for each critical-to-value

(CTV) characteristic that links to a business goal. (total defects per unit, late deliveries, and warranty returns) Process Level. Realize no more than 3.4 defects per million opportunities for each critical-to-quality (CTQ) characteristic. (part thickness, absolute weight, reaction speed, material strength, and telephone hold time) Individual Level. Achieve a level of capability equivalent to Cp=2.0 and Cpk=1.5 for every critical-to-process (CTP) characteristic.

Product and Process Capability Process Capability: 3 or 6 Specified Tolerance: USL-LSL Distance to Nearest Specification (DNS) Min{ USL-, -LSL} Capability ratios: a simple way of expressing the relationship between the voice of the process and voice of the customer (VOC) USL LSL

Cp 6 C pk DNS 3 UNDERPINNING ECONOMICS

Cost-of-Poor-Quality (COPQ) Average: 25-30% of sales for 4 companies, but only 1-2% appears on accounting records HW2: Calculate the number of defects per million for 4 process with the same assumption found in HW1 . Process A process is any activity or group of activities that takes an input, adds value through these activities,

and provides an output to an internal or external customer Industrial process: at least 80% of the product or service value is derived from machinery Commercial process: 80% or more of a process depends on human activity DESIGN COMPLEXITY Complexity is the aggregate quantity of all independent critical-to-quality (CTQ)

characteristics that are assignable to a unit of product or service. SOFTWARE APPLICATIONS Excel MINITAB JMP

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