Fraternal Twins: Six Sigma and ABM

My twin grandsons celebrated their first birthday on July 1, 2001. And while the majority of people reading this article don’t know Alex and Austen, there is another set of twins celebrating their fifteenth birthday this year whose names are familiar. Born in 1986, they are Six Sigma and Activity Based Management (ABM). I’m proud to say that I was present for the birth of both of these sets of twins. CTQ
The need for improved quality and costing method confronted most manufacturers during the 1980s. Pressure from Wal-Mart in the consumer sector and the Big Three in the auto sector for lower prices, just-in-time delivery and defect-free products caused manufacturers to heighten their search for process improvements. Customers in all sectors of the economy grew to expect products and services with CTQ—a combination of low cost, quick cycle time and high quality. This was especially true for my employer in 1985, Motorola.

"While it’s great that the Fort Worth factory is meeting its defects and cost per unit goals, how do the best manufacturers in the world measure quality, cost and cycle time?" asked Dick Buetow, Motorola’s director of quality, during a quarterly operations review at our Texas factory. No one on our management team, including me—the division controller—had the answer.

Like most organizations, managers at Motorola set quality, cost and cycle time improvement goals by looking at the previous year’s performance. To answer Buetow‘s question, we had to benchmark outside the company and even our industry. After several months of research we identified a twin set of best practice methods: Six Sigma and ABM.

Separated at birth
Six Sigma and ABM were separated at birth. Six Sigma, a rigorous and focused method of creating error-free processes, was grown and nurtured by Motorola’s engineering staff from 1986–90. Most organizations operate at a three-sigma level, with about 67,000 defects per million. In 1990, using new methods and measures, Motorola achieved Six Sigma: just 3.4 defects per million.

ABM, on the other hand, took a different path of development. ABM was defined and developed by a cooperative research project team from 1986–88. The research was supported by more than 50 worldwide organizations, including Motorola. Serving as the project manager, I watched Activity Based Cost Management (ABM/ABC) grow from a simple principle (Activities consume resources and products consume activities.) into a universally accepted method of cost management by 1990.

ABM and Six Sigma grew at different rates during the ‘90s. Very few organizations adopted Six Sigma following Motorola’s success. With the exception of General Electric’s Jack Welch and Allied Signal’s Larry Bossidy, most leaders didn’t believe six-sigma quality levels were possible or practical in their own organizations. Conversely, ABM/ABC, was widely accepted as organized common sense. Thousands of manufacturing, service and governmental organizations worldwide implemented ABM/ABC systems during the ’90s. By 2000, a family reunion took place.

Together again
Best practices should be combined—not separated—to maximize benefits. Costs aren’t predictable when processes are out of control. As a result, unpredictable costs caused by poor quality processes negate many of the advantages of an ABC system. Correspondingly, if costs and profits don’t improve as the result of Six Sigma projects, the commitment to improving quality often wanes.

Six Sigma brings processes under control, thereby enhancing the benefits of ABM cost management. By quantifying and eliminating the nonvalue-added waste associated with poor quality, ABM enhances the benefits of Six Sigma. They’re fraternal twins. They belong together.

A recent search of case studies shows that more and more organizations are combining ABM and Six Sigma to maximize and sustain CTQ. Following are three examples:

• Honeywell. In 1999, Honeywell’s Six Sigma/ABM savings amounted to $600 million. According to Ed Romanoff, communication director of Honeywell’s Six Sigma program, "ABM helps us to understand the profitability of our products and services and to tailor our business models appropriately." Ken McIntyre, instrumental in refining their ABM system says, "Moving from direct costing to ABM has been very beneficial in helping Six Sigma to be successful."
• Navistar. Six Sigma savings measured by ABM totaled $15 million in fiscal 1998 at Chicago-based Navistar. The company has an ABC/ABM analyst at each plant site working on the Six Sigma teams. "ABM knows where activity waste lies and Six Sigma chases defects, so the convergence of the two was a natural," stated Max Gordon, manager of the company’s Six Sigma initiative in Business Finance magazine.
• Amazon.com. Using a combination of Six Sigma and ABM techniques for just the past few months, Amazon.com has moved from last year’s three-sigma (30 percent waste) to this summer’s four-sigma (10 percent waste) level. Taymour Tamaddon, Amazon.com finance manager, is self-implementing ABM to support Six Sigma. In addition to quantifying the cost of poor quality, Taymour was quoted in the New York Times saying, "The system analyzed a $10 pack of Polaroid instant film. It starts with a reasonable margin, but after all the costs of handling the product, Amazon loses $1 a pack." Six Sigma will turn that loss into a profit.

Fraternal, not identical
Just like my grandsons, Six Sigma and ABM aren’t identical. They’re fraternal twins. Fraternal twins don’t look alike, but are from the same family, have the same birthday and share much in common.

Six Sigma and ABM both focus on work, not the worker. Both Six Sigma and ABM use a series of process improvement projects to achieve benefits. Six Sigma and ABM use the same five steps to create process improvements: Define, Measure, Analyze, Improve and Control (DMAIC).

W. Edwards Deming developed the five DMAIC steps. He’s also famous for his 14 points for management. Point five is: "Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs."

If Deming were alive today, I’m sure he’d openly embrace the twin techniques of Six Sigma and Activity Based Management to improve quality and productivity. Are you ready to double the benefits in your organization? Now you know how.

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