How Good Should Your Products Be?

Six Sigma projects can be very profitable to the organization... when they’re properly selected.

Published: Tuesday, March 2, 2010 - 08:45

With the onset of Six Sigma methodology, many organizations have spent large sums of money to make all of their products and processes as close to six sigma as they can. I agree that the higher the level of sigma value, the better the quality of the output is if it’s not screened. But is that the best point in the operating curve for the organization?

We all agree that variation is good for the makeup of a team, but it can be disastrous from a quality standpoint in the products we are delivering. Six Sigma, as the name implies, was designed to decrease variation in outputs, thereby increasing the probability of shipping error-free products (see figure 1).

Figure 1. Six Sigma objectives

I have seen Six Sigma teams spend three months improving a product from three sigma to four sigma—five people working eight hours per week for 12 weeks—to decrease the final test defect rate from three sigma to four sigma. That’s 40 hours per week times 12 weeks at $68 an hour = $32, 640, which is just the Six Sigma team cost and doesn’t include the implementation costs. The product that they were working on had a life cycle of two years and production of 10,000 units at a cost of $20 per unit.

Originally, final test was operating at the three-sigma level, so it would have produced 27 defects per the 10,000 units. Each defect was repairable at a cost of $10 per unit. If you improve the process to the six-sigma level, the maximum savings for the errors would have been $270 (see figure 2).

You will note that at the four-sigma level, the number of errors in the total production run is less than one and the random error rate (example: tool breakage, power outage, etc.) is going to cause more defects than the process capability error.

Now what if the output wasn’t reworkable and had to be scrapped. At the three-sigma level the error cost would have been:

Three-sigma error cost = (27 plus 2 for scrap) × $20 = $580
The total production cost = 10,000 units plus 29 units × $20/unit = $200,580

Errors as a percent of total cost = $580/$200,580 = 0.29 percent

That is less than one third of a cent per deliverable output.

As figure 3 shows, the cost savings for changes in sigma levels becomes a lot smaller and you strive for higher and higher sigma levels. To add to the complexity, the level of difficulty and the associated cost  to define and implement the improvement goes up as you define the improvement for higher sigma levels (see figure 4).

Figure 3. Cost saving from moving from one-sigma level to the next sigma level

Figure 4. Cost to improve from a sigma level to the next sigma level

In the example we have shown, it’s impractical to improve your process past the three-sigma level based on a pure cost analysis, because the maximum cost savings in moving to a four-sigma level is $264.

If you are using Six Sigma methodology to reduce variation, then it is absolutely critical that you select a project that will yield a financially significant return on the investment on the Six Sigma team members. There are six items that need to be considered when you are selecting a Six Sigma project to reduce variation. They are:

1. The present error rate. The smaller the Six Sigma value of the present process, the bigger the opportunity.
2. The cost of the error
3. The number of items that are scheduled to be produced
4. The effectiveness of the detection system
5. The cost of making the improvement
6. The effect on the external customer

The present error rate: Low sigma levels have a much bigger effect upon error-rate costs than larger sigma values. For example:

1 sigma to 2 sigma = 271,800 errors per million
2 sigma to 3 sigma = 42,800 errors per million
3 sigma to 4 sigma = 2,637 errors per million
4 sigma to 5 sigma = 62.43 errors per million
5 sigma to 6 sigma = 0.568 errors per million

The cost of error: Is the output reworkable or is it scrap? What will it cost to repair it?  How long will it take to make the replacement of the scrapped parts? Do you have the equipment to make the additional units? The higher the costs, the bigger the opportunity for it qualifying for a Six Sigma project.

The number of items that are scheduled to be produced: It’s obvious that the quantity of output is a key factor in deciding which project to work on. As a general guideline, if the total quantity per year is less than 10,000, it may not qualify for a Six Sigma project. Remember, the average Six Sigma project team cost by itself is about $40,000 and you should be able to get at least a 3-to-1 return on the total investment ($120,000 per project per year).

The effectiveness of the detection system: I realize that a quality professional’s rule is “You can’t inspect quality into a product.” That may be true from the quality professional’s standpoint, but it’s not true from a customer’s standpoint. I remember one review I conducted of the Mazerati production line. After each workstation, there was an inspection workstation. There were lots of inspection stations and reworks, but the end product was a superb car that was close to error free. From the customer’s standpoint you can inspect quality into a product.

When selecting a Six Sigma project, be sure to consider how effective the detection system is. Items that are detected at higher level assemblies are much more costly to correct.

The effect on the external customer: As long as errors are detected within the internal processes, the major considerations are cost and safety. But once the output leaves the organization and is delivered to an external customer, the ball game changes drastically. Now you have the cost to repair or replace the output and the cost to the customer that he or she must bear to get it repaired or replaced. The customer cost is the cost of his or her time and expenses to return the item. Usually, it’s far more than the cost to the supplier that supplied the output. In addition, there’s the cost of lost reputation. What is the cost of a lost customer to your company? Just ask Toyota; they know.

The cost of making the improvement: Last, but not least, is the cost of making the change. Some problems can be solved by a simple change to the processes, while others require a major, very costly software package. When selecting a Six Sigma project, consider how extensive and costly the potential changes will be. Estimate higher than you think it will be and you will probably still underestimate the actual cost. You need to also consider how long it will take to implement the change, for the improvement will only affect output that is delivered after the change is operating.

Six Sigma projects, when properly selected, can be very profitable to the organization and can have a major positive effect upon the level of external customer satisfaction. More Six Sigma projects fail based upon poor project selection than upon inadequate Six Sigma team performance.

About The Author

H. James Harrington

H. James Harrington is CEO of Harrington Management Systems, which specializes in total quality management (TQM), Six Sigma, lean, strategic planning, business process improvement, design of experiments, executive management mentoring, preparing complete operating manuals, organizational change management, ISO 9000, ISO 14000, and TRIZ. Harrington is a prolific author, having written hundreds of technical reports, magazine articles, and more than 35 books. He has more than 55 years of experience as a quality professional. Harrington is a past president of the American Society for Quality (ASQ) and the International Academy for Quality (IAQ).