General Electric’s Quality Gamble The Implementation of Six Sigma General Electric (GE) is among the most profitable companies and, according to Fortune magazine, the most admired. It stock is the most highly valued in the world. Some critics would argue, if it’s not broke, why fix it? Jack Welch, CEO of GE, believes in the “infinite capacity to improve everything.” Why does a company that has experience so much success recently invests over a billion dollars in a quality initiative? Increase competition has GE adopting the attitude that businesses that stand still become obsolete as businesses that continue to grow pass them by.
General Electric’s Quality Gamble
The Implementation of Six Sigma
General Electric (GE) is among the most profitable companies and, according to Fortune magazine, the most admired. It stock is the most highly valued in the world. Some critics would argue, if it’s not broke, why fix it? Jack Welch, CEO of GE, believes in the “infinite capacity to improve everything.” Why does a company that has experience so much success recently invests over a billion dollars in a quality initiative? Increase competition has GE adopting the attitude that businesses that stand still become obsolete as businesses that continue to grow pass them by. Also by implementing Six Sigma GE is preparing itself for future profitability opportunities. Finally, research indicated a need for improvement in the way GE does business. GE had been straining for years to increase operating margin and six sigma is a way to do that.
What is Six Sigma?
Six sigma, the mother of all quality efforts, can mean different things to different organizations. The Six Sigma Academy defines it as tactics and tools to improve profitability through focusing on improving the sigma capability of an organization’s processes. GE defines six sigma as first as a management philosophy; a never ending to competitive leadership by satisfying customer requirements profitability. Second they define it as a measurement system; a measure of a processes inherent ability to meet customer requirements. In general six sigma is a statistical non-financial performance measurement at which you should design, operate, and control every process in your company in such a way that none of yield more than 3.4 defects per million units of output. Six Sigma is a tool that measures in a clear, accurate, mathematical terms how good or bad their quality levels are, how much they can improve, and what progress they are making along the journey.
On a global perspective, companies that have not begun their quality journey are around one or two sigma. The worldwide average is around three sigma. The majority of the companies utilizing six sigma in India are at a low two sigma. An average domestic company is at three sigma, while a good company is at three and a half. Today GE is around three and a half with goals of reaching six sigma by the year 2000. Companies operating at three to four sigma lose 10-15% of their total revenue due to defects.
Background of Six Sigma
Motorola created the originals formulas in the 1980’s. The result was a culture of the quality that permeated throughout Motorola and led to a period unprecedented growth and sales. Its genesis lies in a classic stretch-target set in 1981 by Motorola’s CEO, Bob Galvin, to his people: effect a ten-fold improvement in product-failure levels over a 5-year period. Bill Smith, an engineer at the company, realized that such results could not be achieved without going into the core of what caused defects in the first place So, he conducted a statistical correlation between the field-life of a product and the number of flaws that had been spotted and corrected while the product was being manufactured. The results arrived at in 1985, turned out to be positive. In other words, if a product had been found defective and corrected during the production-process, changes were high and other defects had been missed and would show up later during usage.
An observation had been made that products rarely failed in the first 3 years of customer-usage. Therefore, the simplest way to prevent product-breakdowns was to ensure that the process prevented defects of any kind, making detection and repair redundant. External support for this argument came from the best-in-class benchmarking that Motorola had been conducting simultaneously. It showed that total quality companies were turning out products that had not been reworked at all. The question: how could Motorola minimize-and, ideally, eliminate-defects from the manufacturing process?
That’s when Mikel J. Harry, a Motorola Engineer, introduced the concept of Six Sigma to Motorola. The idea was to set a steep quantitative target for all processes and then, parse each process into smaller and smaller sequences, each of which could be examined for their potential for errors, then that potential was eliminated. Breaking down and studying processes is a key element of result-oriented quality programs because this helps in tracking down the root-cause of defects.
Until 1994, Six Sigma remained a guarded secret at Motorola. The outside world knew about it, but not how to use it. In 1995, however, CEO Gary L. Tooker decided to throw open the source-code. Six sigma did not gain acceptance globally until GE’s CEO, Jack Welch, introduced Six Sigma across the length and breadth of his organization. Four years after Six Sigma was inserted into GE’s culture it contributes 20 percent to the conglomerate’s earnings that has spurred many others to follow suit.
What Makes Six Sigma So Powerful?
Six Sigma is a tool that can ratchet up quality-levels in every single process in your company, in fact that what makes it so versatile. From your accounts to your customer-service, from your supply chain management to your advertising, every process can be evaluated on the basis of its adherence to Critical to Quality (CTQ) parameters. After all, defects can-and do–occur in an engineering design, in the time it takes to treat a patient–or even in a banking transaction. All your processes, therefore, can deviate from the ideal level, and cost you additional time, labor, and material.
By using the sigma scale from 1 to 6, you can study competing levels of capability and, then, raise yours to those standards. GE, for instance, has used Six Sigma with great success at GE Caps, whose processes are transactions-driven. Says Pramod Bhasin, 46, President, GE Capital Asia:
“In a services company, you measure your output. A courier company carries so many parcels, and you say so many of them reached on time. What Six Sigma does is to allow you an efficient way of finding out where your greatest need is and what your softest point is, and of addressing them in a measurable, analytical, and objective way.”
The mathematical interpretation of Six Sigma is crucial to implementing the tool. The output of any process in your company can be analyzed in terms of the number of errors in it. What Six Sigma analysis does is to measure every process on each of the
CTQ factors. For example, a process that produces 100 units of a particular component every hour has a CTQ of 100 mm in length. Measurements may show that while 95 out of the 100 units produced are 100-mm long. The remaining 5 deviate from that ideal length, each to a different extent This data can be used to calculate the sigma, or the likelihood and extent of deviations from the norm of the process. Assume that the value of sigma for this process turns out to be 0.01.The upper and lower specification limits of the product will determine whether these deviations will be counted as flaws under the given CTQ. If the upper and lower control limits of the process fall beyond the upper and lower specification levels, the customer won’t have a problem, but if they do not the capability of the process has to be changed.
Six Sigma offers two approaches to changing a process. One approach is to change the design of the product in which this component is used so that it can accommodate some of the variations in the length without malfunctioning. Thus, for instance, the so-called design-length could be three sigma, accommodating components with 3 times the standard deviation of the process. In other words, components that measure between 99.07 mm and 100.03 mm will also be acceptable. Units that exceed three sigma are still eliminated, but the number of defects in every sample is decreased.
The second approach is to make improvements in the process itself so the chances of defects are lowered. That will reduce the value of the standard deviation, or sigma, of the process. If, say, the value of the sigma can be halved through this method to 0.005, the acceptable specification limits 99 07 mm and 100.03 mm, will automatically become 6 times and not 3 times the standard deviation. To take a process to a Six Sigma level, you must, ideally, adopt both approaches: changing the design to increase the range of acceptability in the CTQ, and improving the process to reduce its chances of variance.
You can also expect your Six Sigma analysis to show up faults you were not even aware of Recalls Anand Outta, 40, President, GE Motors “We thought there was a bias against us when our parent began insisting on a Pareto rating of our products before shipment. But, when we quantified our defects using Six Sigma tools, we realized that we were generating 20,000 faults per million spares, and the faults weren’t even major; most of them were just the results of carelessness.” Adds V. Rama Kumar, 45, Corporate Vice-President, Wipro: “In addition to the quantitative gains, Six Sigma has helped us streamline our processes. That will help us in future too.”
Some may argue is 3.40 defects per million too high of a standard. Why isn’t 6,210 (Three Sigma) defects per million parts, which is the upper end of the corporate average in the US not good enough? The average product rolling off your assembly lines today could consist of as many as 10,000 different parts, which all have risk of being defective. Therefore, 3.4 defects per million parts actually amount to 34 defective products out of every 1,000. In other words, an average of 34 out of 1,000 customers will still be unhappy about their product. In terms of quality of everyday life, Four Sigma would mean 1,24,200 wrong prescriptions a year, 4 60 hours of toxic water supply a month, 62 10 minutes of telephone services shutdown a week, which most people would find unacceptable. Therefore Six Sigma is not the ceiling; it is a direction in which quality should be delivered.
Six Sigma Improves Your Score
If you played 100 rounds of golf per year, and played at:
Two sigma You would miss 6 putts per round
Three sigma You would miss 1 putt per round
Four sigma You would miss 1 putt every 9 rounds
Five sigma You would miss 1 putt every 2.33 rounds
Six sigma You would miss 1 putt every 163 years
What Makes Six Sigma Different
Six Sigma share some characteristics with the classic quality initiative Total Quality Management (TQM). Its philosophy is the same as that of TQM reducing defects, and the tools that are used to reach this philosophy are even similar. Six Sigma can be plugged into such initiatives as TQM and add power to its punch. Six sigma’s metrics of performance are more sharply-defined than most quality initiatives, which have a multiplicity of objectives, ranging from broad operational goals, like reducing cycle-times, to micro-level ones, like reducing waste. The difference between Six Sigma and other quality approaches are that the others measure your abilities to meet some quality. “Six sigma actually measures the output of your processes, therefore it’s less theoretical and more real world,” points out Scott Bayman, CEO GE India.
One way six sigma is different from other quality drives because it relies on the customer to define what a defect is, then uses rigorous data gathering and statistical analysis to drive out defects. Six Sigma is so attractive because it quantitative instead of anecdotal, therefore you know whether you are making progress.
Six Sigma Implementation Issues.
Some organizations get too involved in “how to count defects” and report defect rates that they lose sight of the real value of Six Sigma. The real value creates process improvement and re-engineering (and bottom-line benefits) through the implementation of statistical techniques. If an organization does not apply Six Sigma techniques wisely, it will fail. When this occurs there is the tendency to believe that the statistical techniques are ineffective, when in fact the real problem is how the program was implemented and/or how the techniques were not effectively applied.
A good Six Sigma business strategy involves the measurement of how well business processes meet their objectives and offers strategies to make needed improvements. The application of techniques to all functions result in a very high level of quality at reduced costs with a reduction in cycle time, resulting in improved profitability and a competitive advantage. It needs to be emphasized that organizations do not need to use all the measurement units that might be associated with Six Sigma. It is most important to choose the best set of measurements for their situation and focus their emphasis on the wise integration of statistical and other improvement tools.
Some companies how tried Six Sigma and have not shares the success as GE and Motorola. GE’s success is due largely to the fact that it under went a culture change before implementing Six Sigma. An effort to focus the company, get good employees, a company wide change in thinking (boundaryless), and a change in the management processes, all took place before Six Sigma was inserted into the GE culture.
The Benefits of Six Sigma.
Corporations implementing Six Sigma experience a breakthrough in profitability. Breakthrough is achieved by reducing direct cost. Direct costs are driven down through Six Sigma projects, which are performed by Black Belts. (quality leaders) Having Black Belts in an organization will produce on an average $230,000 in cost reduction per project. In addition to the material and labor savings which flow directly to the bottom line, a company engaged in Six Sigma can expect to see: reduced cycle times, increased productivity, improved capacity and output, decreased work-in-progress, and improved process flow. Companies operating at 3 to 4 sigma generally loses up to 10-15% of their total revenue due to defects, on the contrast a company that operates at 6 sigma generally loses less than 10%.
Six Sigma stars Motorola has reported savings of $2 billion over 10 years of implementation while GE shaved off 750 million of cost in 1998. In 1999, GE has projected a 1.5 billion in savings due to Six Sigma, and if they reach their goal of six sigma in the year 2000 they will add between 8 to 12 added to the bottom line.
In conclusion, GE has decided to ride Six Sigma into the next century. The year 2000 is the deadline for reaching Six Sigma, which is also around the time its CEO Jack Welch plans to retire. If GE’s quality gamble pays off, Jack Welch will go out a winner, leaving behind his most admired company on top.
“The Enigma of Six Sigma.” (1999, May). Business Today. Online
Romeo, Mary. Six Sigma Quality. GE Capital FMP Conference, Stamford, 1999.
Curran, John. “GE CAPITAL: JACK WELCH’S SECRET WEAPON.” Fortune July 1999.
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