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Cost Cutting With Six Sigma

Aug 17, 2007
Hospitals, manufacturing industries, and services industries are all experiencing tremendous pressure on the cost front. For hospitals, if it is not the declining reimbursement from insurance companies, it is the overall decline in revenue due to increased competition and the ever-climbing costs.

How Does Six Sigma Contribute To Cost Cutting

Although Six Sigma was never perceived as a cost cutting tool, it nevertheless contributed to that end. Six Sigma went about cutting cost in unique ways in all aspects of business operation.

1. First, the voice of the customer helps in defining not just the appropriate quality but also quantity, which cuts down on wastage such as over and under-utilization of capacity.
2. Stabilization of process variation saves a lot on the material conversion which results as improved productivity and quality and reduced cost of reworking and rejection.
3. In graduating from 3 or 4 Sigma to Six Sigma, the overall reduction in COPQ is tremendous taking into consideration the huge saving originating from almost no rejection.

Take for example the case of a hospital, which after implementing Six Sigma in its cardiology department, could effectively cut down the overall process time required for admission. This produced a double-edged advantage; one, the reduction of 45 minutes meant less labor costs and two, the department could accommodate more patients due to increased productivity.

In a generalized context, Six Sigma can be easily mistaken for a quality control tool in the traditional mold, which leads to thinking that quality always means higher expenditures and costs. However, the rational approach and some practical cost saving efforts by Master Black Belts and Black Belts turned the tables in Six Sigma's favor. You should not forget to acknowledge the basic tenets of Six Sigma lies in its core philosophy of increased ROI and Total Customer Satisfaction.

Now, let's see how this is approached by the implementation team:

1. Systematic innovation to generate and evaluate ideas aimed at market and safer cost control
2. Better risk management by early identification of risk factors provides opportunities to devise risk mitigation plans and execute.
3. Higher yield from project portfolios can result from optimized loading of resources by resolving occurrences of low intensity risk/gain combination from being pursued at the cost of better ones.

The Big Challenge

The biggest challenge that Six Sigma faces today is from off-shoring of business processes. The rise of developing third world countries with their lower cost structures is offering large corporations with the opportunity to improve their ROI. This is a major area of concentration for medium and smaller companies after larger corporations, having tested the model with considerable success.

The challenge of efficient utilization of capital exists in the western world because of a different socio-economic equation unlike in the developing world where market forces just dictated the cost of labor.
About the Author
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution's Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.
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