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The Link Between Six Sigma Metrics And Profitability

May 9, 2008
The practice of using six sigma metrics as tools of measuring performance gained tremendous popularity because of the increasing number of large business organizations that have used it.

The Six Sigma management practice had its origin at Motorola in response to the challenge posed by its Chief Executive Officer back in the early part of the 1980s. He wanted the company to reduce its product-failure rates tenfold within the next five years. The Motorola CEO issued this challenge because the company was consistently defeated in the competitive marketplace by its foreign competitors that produced higher quality goods at lower costs. It was only in the middle of the 1990s that the company revealed how it was able to achieve their objective of eliminating defects in their manufacturing process. Since then, many manufacturing companies have adopted the quality improvement framework used by Motorola. The main goal of Six Sigma is to improve the level of customer satisfaction. Over the two decades that it had been practiced, the definition of Six Sigma had evolved. Some consider it as only a metric while others consider it a methodology or management system.

The Six Sigma management approach contends that with improved customer satisfaction, a company will benefit from increased profits, and at the same time, enjoy reduced costs that arise from defective products and processes. Aside from being a crucial factor in achieving customer satisfaction, reduction, and elimination of defects, it also influences such factors as high product quality, cost minimization, and schedule adherence. In order to achieve the goal of defect-free products and processes, the Six Sigma methodology is designed. The steps for this approach are "define", "measure", "analyze", "improve", and "control". Usually, an improvement team is formed and tasked to oversee and identify processes, define what will be considered a defect, and come up with applicable measurements.

The "define" stage of Six Sigma requires the benchmarking of processes that need to be improved or its division into sub-processes. Potential effects of any organizational change are also studied at this stage. Once processes or projects have already been defined, it is easier to proceed to the succeeding Six Sigma steps. The use of certain performance measures or Six Sigma metrics is also crucial so as to easily monitor and assess the improvements undertaken. When choosing which metrics to use, it is important to distinguish and determine those that have an effect on the end result. Moreover, the use of the Six Sigma principle require that "quality" be given a new definition as is applicable. Quality is generally assessed through two concepts namely, actual quality and potential quality. Actual quality is defined as the current value added for each input unit. Potential quality, on the other hand, is the determined maximum value added for each input unit. The difference between these two is considered "waste." In relation to Six Sigma metrics, the costs that are proven to be of no value to customers are eliminated. Quality is improved by reducing waste thereby, allowing organizations to produce goods and services faster, better, and cheaper.
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