Tough Economic Times Call for Lean Six Sigma

Investing in quality in a slow economy

Criteria changes and lean Six Sigma

In these difficult economic times, organizations are looking at all possible means to operate profitably. As demand for products and services drops and customers expect the lowest possible price, organizations are feeling urgent pressure to cut costs as a response to lower revenues and decreased margins.

However, many companies are missing the mark by cutting resources indiscriminately when they should be revamping their business processes to achieve improved, sustainable business results.

Many businesses react to such pressure by going into panic mode. Cost-cutting targets—often in proportion to the budget or staff headcount—are handed down from senior management to various departments. With across-the-board cost cutting comes the risk of throwing out the good along with the bad. In the rush to cut back, there’s always the danger that an “anything goes” mentality may prevail, with little focus on determining what adds value to customers and what can be considered waste.

Organizations engaging in this practice inevitably find themselves in a downward spiral.  By not paying careful attention to and investing in the value-adding components of their business, these organizations cannot differentiate themselves from the competition to stand out during challenging times when it’s the most critical. More than ever, customers are looking for value. Organizations unable to demonstrate a unique value in a tough economy fall out of favor, invariably responding with more cost cutting, leading to a decimated internal structure lacking the necessary resources to support core processes.

This directly affects the ability to satisfy customer expectations. In a growing economy, imprecise decision making—or even outright mistakes—can be forgiven. Often in prosperous times, companies end up with superfluous processes, created in reaction to immediate needs. In a shrinking economy, however, there is no room for error or redundancy. Cost cutting is effective only when focused on areas of waste. A paring knife is more valuable than an ax; organizations need to streamline costs yet still provide optimal value through exceptional product or service quality.

In the proactive mode, the organization recognizes the need to continually improve its processes to meet the challenges of the future. With the business results in an ascending path, resources can be made available for improving existing processes or designing new processes. In this mode, the focus on effectiveness prevails, with inefficiencies being either dismissed or tolerated.   In the reactive mode, with business results being at risk due to internal or external factors, it’s essential that the organization seeks not only effectiveness but also efficiency. The sense of urgency is key to prevent the erosion of assets that might lead the organization into the panic mode.   In the panic mode, the cost cutting prevails. With it, comes the good (improved cash position), the bad (loss of key personnel and institutional knowledge), and the ugly (loss of customers and market segments).

Investing in process improvement while cutting costs may appear counterintuitive. However, by understanding how the processes work to produce the desired output, organizations can pare back in a manner that ensures the quality of the output and continues to meet customer needs. In fact, a well-designed and well-implemented improvement effort will identify nonvalue-added activities that can be eliminated, thereby saving money while positively affecting customers. In contrast, a rash effort to cut costs without an understanding of the effect on processes will most likely end up disappointing customers and further deflating revenue.

In tough economic times, business leaders must understand that although eliminating resources to reduce costs may result in short-term gains, it will prove detrimental in the long run. Improving organizational processes is the sustainable way to reduce costs and maintain quality.

But how can organizations improve their processes with the urgency required to face the challenges of a financial downturn?

The list above is at the core of good process management and includes the application of lean Six Sigma methodologies to achieve measurable, sustainable process improvement.

Successful, profitable organizations adhere to these guidelines judiciously. In poor economic times, it’s especially important to follow these steps effectively and exigently.

This requires leadership determination and organizational commitment to the correct application of lean Six Sigma, which like any other methodology, is only effective when its tools are applied within a holistic approach to process management.

In closing, cutting costs during an economic downturn for the sake of reducing expenses won’t ensure what Peter Drucker called “the first priority of business: To avoid loss." Rather, organizations should manage their processes with the goal of improved, sustainable business results.

Lean Six Sigma has accomplished this for many successful enterprises.