Six Sigma Black Belt Study Guides

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1 Six Sigma Black Belt Study Guides 1 Powered by POeT Solvers Limited.

2 Introduction to Six Sigma Business Performance Measures 2 Powered by POeT Solvers Limited.

3 Index Introduction Various business performance measures Key performance indicators Balanced scorecard Customer loyalty 3 Powered by POeT Solvers Limited.

4 Introduction Analysis of business performance is essential for an organization to remain competitive. There are numerous Six Sigma tools that can be used to analyze numerical values. The selection of metrics to measure the business performance depends on the business philosophy of the organization. Using too many metrics can hamper the dynamism of an organization and render it incapable of meeting the various needs of the customers. 4 Powered by POeT Solvers Limited.

5 Various business performance measures Some of the important business performance measures are: Balanced scorecard Key performance indicators Customer loyalty 5 Powered by POeT Solvers Limited.

6 Balanced scorecard. Developed in the early 1990s, balanced scorecard is a valuation methodology that converts an organization s value drivers such as customer service, innovation, operational efficiency, and financial performance into a series of defined metrics. So, we can say that the balanced scorecard is a strategic administrative tool employed to optimize the performance and accountability of the entire organization. 6 Powered by POeT Solvers Limited.

7 Balanced Scorecard Four perspectives of balanced scorecard (as recommended by Robert Kaplan and David Norton): Balanced scorecard is a management system (and not only a measurement system). So, all business should be measured in the following four perspectives in a balanced manner: Financial perspective, Customer perspective, Internal business perspective, and Learning and growth perspective. BALANCED SCORECARD DIAGRAM Financial Customer VISION & STRATEGY Internal Business Learning & Growth 7 Powered by POeT Solvers Limited.

8 Balanced Scorecard Financial perspective Finances of an organization play an important role in determining what a company is capable of. It provides a clear picture of an organization s financial status and reveals how it has fared in the task of realizing its broad objectives. Some metrics used are return of investment (ROI), economic value added, profit, sales, cash-flow, net present value (NPV) and internal rate of return (IRR). Customer perspective Customers are the most important stakeholders. They, being the end users of the product or services, are essential for a company to sustain competitive advantage and to remain a major player in the market. It is essential to understand the customer perspective. For a better understanding of the customer perspective one can use customer-satisfaction index, customer retention, complaints, acquisition, repeat sales, market share index, etc. (this will be explained in detail later). 8 Powered by POeT Solvers Limited.

9 Balanced Scorecard Internal business processes perspective Internal business processes are the processes created by an organization to efficiently meet the customer needs and wants. Organizations that possess efficient internal business processes will provide high levels of customer satisfaction and help to maintain good customer relations. Some metrics used are: measures of quality, cycle time, cost, defects, etc. Reduction of defects is an important requirement in Six Sigma. Learning and growth perspective This perspective refers to the ability of an organization to sustain change and improve over time. Some metrics used are: employee retention, skills, training, morale and availability of information required for front line employees. 9 Powered by POeT Solvers Limited.

10 Key performance indicators (KPIs) Key performance indicators are financial or non- financial measures metrics used to measure, control, and improve business performance with respect to the organization s goals. These indicators differ in various types of business organizations with different objectives. For marketing organizations, the useful indicators are customer satisfaction, customer growth rate, etc. On the other hand, manufacturing organizations focus on KPI s such as quality, loading, availability, etc. Once an organization has analyzed its task, identified all its stakeholders, and defined its goals, it needs a way to measure progress towards those goals. The KPIs reflect the key business drivers (KBDs) or the critical success factors (CSFs) of an organization Powered by POeT Solvers Limited.

11 Key performance indicators (KPIs) Objectives of key performance indicators One of the objectives of KPI is to deliver what is expected by the customer internally and externally in order to satisfy their needs and requirements. The key performance indicators have to measure the performance and the product quality to balance customer satisfaction. Here, customer means not only the person who purchases the product or service, but also the internal customer or the employee who needs something from other departments Powered by POeT Solvers Limited.

12 Key performance indicators (KPIs) The principles on which the KPIs are defined are as follows : Quantitative and measurable Goal based Process based Strategy based Time bounded The KPIs can also be defined by the means of the acronym- SMART: Specific Measurable Achievable Relevant Time bounded 12 Powered by POeT Solvers Limited.

13 Key performance indicators (KPIs) Illustration There are numerous performance indicators used in Six Sigma projects. Consider the following example A process produces 20,000 books. Five types of defects can occur. The number of occurrences of each defect type are given below: Defect type Frequency Typographical error 345 Missing pages 45 Incorrect ordering of pages 37 Feeding mistake 41 Hazy printing 25 Total number of defects Powered by POeT Solvers Limited.

14 Key performance indicators (KPIs) Examples of KPI: a) Defects per unit (DPU) = (Number of defects) / (Number of units) = 493 / 20,000 = b) Defects per Million Opportunities (DPMO) DPMO = Total number of defects Total number of opportunities = = 4930 c) Throughput yield = exp ( - DPU) = exp ( ) = Powered by POeT Solvers Limited.

15 Key performance indicators (KPIs) d) Rolled Throughput Yield (RTY): RTY applies to the yield from a series of processes and is calculated by multiplying the individual process yields. If a product goes through five processes whose yields are 0.993, 0.987, 0.975, 0.969, and then RTY = X X X X = e) Parts per Million (PPM) = DPU X = Powered by POeT Solvers Limited.

16 Key performance indicators (KPIs) f) Cost of Poor Quality (COPQ) : Dollar measures depicting the impact of the problems (internal and external failure) in the process as it exists; it includes : Labor and material costs for handoffs Expenses involved in rework Warranty Delayed deliveries Inspection Waste Customer dissatisfaction Other non-value added activities Examples: In a billing process, incorrect numerical data entry can be a KPI. Similarly, sales revenue generated every month is a KPI for the sales team Powered by POeT Solvers Limited.

17 Customer loyalty Business Performance Measures Customer loyalty refers to the customer behavior, where they are completely satisfied with the product or service of an organization, and provide continuous or regular business despite the lure of other similar products and services offered by other organizations in the market. It is generally believed that investing to retain customers is more beneficial for organizations than investing to find new customers. Customer loyalty is an essential aspect of customer retention. Organizations must distinguish profitable customers from unprofitable customers in order to utilize the benefits of customer loyalty. Also, the organizations must be able to differentiate between loyal customers and tolerant customers in order to ensure that customer loyalty sustains Powered by POeT Solvers Limited.

18 In this chapter, we have learned about: Various business performance measures Key performance indicators Balanced scorecard Customer loyalty 18 Powered by POeT Solvers Limited.