Quality Magazine

Quality Management: Show Me the Money

October 1, 2006
A well-run Six Sigma initiative helps achieve strategic goals for business success, including financial growth.

Business leaders talk about strategy, goals and objectives as critical factors to business success. At the same time, these leaders seem to apologize that the business they lead is in business to make money. Unless the business strategy leads to financial success-making money-the business future is uncertain. Therefore, financial improvements, and methods to measure them, must be included in the strategic goals for a business.

As a leader and manager in an organization, the job is to grow the business- sales, profits and shareholder value, including customer and employee satisfaction. Helping businesses grow is noble work. A good return on invested capital keeps people employed making goods and services available in a capitalist system. Currently one of the best tools available to meet strategic goals for business success, including financial growth, is a well-run Six Sigma initiative.



Finances and Strategy

When correctly focused, Six Sigma targets improvements for strategically important processes. Strategy is how assets are deployed to accomplish goals. Six Sigma is strategic only when a manager deploys his people to accomplish goals. Because one of the manager's most important goals should be to make a good return-or to use resources wisely if working for the government or nonprofit entity-selecting projects that result in bottom-line improvements is vital.

The profit impact of market strategy research has proven that high relative perceived quality drives market share and profitability. Projects that improve customers' perceptions of either product or service quality also help improve returns in the long run.

An active executive steering committee selects Six Sigma projects that will meet defined strategic needs including financial benefits. In this way each organization is positioned both to improve customer satisfaction and make money.

But projects selected to meet strategic goals do not succeed without organizational support. A Champion from management owns each project and provides resources needed for the project to meet improvement and financial goals. In an organization where Black Belts are selecting, owning and running projects, the focus may not be on strategic or financial benefits. If an organization is not getting financial benefits from a Six Sigma initiative, the source of the projects is the first place to look.

Financially focused projects fall into two major categories: top-line growth, or sales, and cost savings. For top-line growth, use direct margins-direct margins over 35% indicate top-line growth opportunity-for guidance.

Also, focus on good customer relationships using direct cost-to-serve analysis to know which customers to grow-the ones providing excellent return on the relationship; which to work on-those where direct margins or costs to serve can be improved through process improvement; and which to fire-these customers do not value a manufacturer enough to allow a profitable relationship.

Breakeven margin analysis can be used to know where to work on processes that lead to substantial changes in nondirect and overhead costs.



Projects for Financial Success

There are five steps that management must lead to ensure project results are strategically focused and achieved: prequalify projects, manage projects, post-verify projects, and sustain and institutionalize the gains achieved from the project.

Prequalify projects based on an organization's most important financial strategic goals and objectives. Determine potential project payoff while tying project goals directly to those strategic goals and objectives that the project is meeting. Prioritize projects based on strategic importance and projected financial payback. In the project charter, write a business case for action that both the team and other top managers can understand and support. Include a project financial analysis that shows what improvement is targeted and how the stated financial goals were determined.

Often, the project champion does not have as much or as detailed information as would be ideal, but the organization needs to understand the financial justification for the project-at this phase, sharing something is better than nothing. To do this, it is often necessary to show managers how to do reasonable financial estimates based on activity costing principals using available information and data. In addition, acquiring additional needed information and data in order to make the best-informed decisions may be essential to success.

Champions must help the teams manage projects to achieve desired results. Champions must deploy resources sensibly. Resources are limited in every organization and should be used where the biggest payoff will result. Projects with vital impact may justify Kaizen events or rapid result teams. Choose whether to use part-time or full-time team support based on the project's return. As a Champion, allocate resources, lead and remove roadblocks.

Another step in managing projects is project reviews. Project reviews help the team focus on both deliverables and time. Schedule the review well in advance and hold the team to a schedule; it will focus them on getting things done. Too often, managers are "nice to the team" and reschedule or eliminate reviews. Do not do this-managers and their teams are responsible for project results.

When the project is completed, post-verify actual project achievements against desired and projected outcomes. Be both supportive and honest with the team when evaluating the impact of their work. Use conservative project financial evaluation based on activity-costing principles. Do not forget to capture additional benefits and results that may not have been anticipated as the project was chartered.

There should be no surprises to management at the end of a project. As a Champion, lead project selection and, through the project reviews, be knowledgeable and remain informed throughout the process of running and completing the project. Communicating with fellow managers about the project helps the organization manage and learn from the improvement process.

Be sure improvements are real and maintained in order to sustain the gains. Schedule follow-up audits and ties to cost accounting. An organization's financial leaders also should have policies in place such as audits of projects above a specified value and the incorporation of savings into product and service costs to hold the organization financially accountable.

Finally, managers are responsible to institutionalize gains. Managers are responsible for organizational learning-systematically spread and share knowledge gained from running and completing projects across like facilities or processes. This will only happen with systematic follow-up by responsible managers. Learning from every project not only increases the ability of the organization to repeat this success, it also helps everyone in nominating, prequalifying, and selecting and prioritizing future projects. Again, projects should only be done if the strategic payoff is critical to the success of the organization.



Time Allocation

To use their time most profitably, organization leaders should consider four major work categories: strategic work, leadership work, control work and action work. Strategic work deploys organization assets to achieve desired outcomes. Leadership work mobilizes the organization to achieve those goals. Control work ensures that the organization is operating systematically while action work is done when the manager is doing rather than managing. Allocating time appropriately to each of these categories will maximize leaders and managers most precious resource-time.

Using time correctly is the responsibility of every leader and manager. They have to control how their time is spent. Leadership work should take 75% of a manager's time. Strategy, control and action should take only a quarter of the time. This will only happen when a manager takes control of his calendar and his interactions.

Generally, time is allocated very differently before a Six Sigma project begins. Consider all that is necessary to lead a project; Six Sigma is a leadership activity. Dedicating one's self to leadership is critical to success.

Manager actions to make Six Sigma successful include:

• Work together to have a clear strategy that includes financial goals.

• Know what needs to be accomplished and create measures that will verify accomplishments.

• Use the correct analyses to help focus the organization on the best ways to improve and achieve financial benefits.

• Pick projects to get the needed improvements and charter those projects with clarity. Financial

projects and quality projects are both key.

• Deploy organization assets to achieve results. Do fast approaches, such as lean Kaizen events, when the return justifies it.

• Hold people accountable for results. Include an aggressive amount of improvement each year in strategic goals and objectives.

• As a Champion, help teams be accountable so they meet their chartered goals.

• Measure results and do things that cause improvement. Do not accept mediocre results. Expect and demand excellence.

• Communicate so all can help and coordinate their efforts.

• Verify projects' results, and ensure that they continue and are sustained through time.

• Share what is learned throughout the organization.

• Grow the business; improve financial results every year. Do not think short term-steady improvement over long term is better.

Do all of this and fulfill the role as a key manager in a Six Sigma initiative that supports achieving strategic and financial goals. Show me the money is a critical focus for the long-term survival of every organization for the benefit of all stakeholders. If all the managers in an organization understand and follow the disciplined approach, unprecedented results will follow. Q



Tech Tips

• If an organization is not getting financial benefits from a Six Sigma initiative, the source of the projects is the first place to look.

• Communicating with fellow managers about the project helps the organization manage and learn from the improvement process.

• Be sure improvements are real and maintained in order to sustain any gains.

• To use their time most profitably, organization leaders should consider four major work categories: strategic work, leadership work, control work and action work.



Glossary

• Direct margin analysis. This technique uses activity cost principles to eliminate distortions caused by allocations and absorptions in classic cost accounting.

• Direct cost to serve. This technique considers all the costs associated with a customer relationship to evaluate profitability.

• Breakeven margin analysis. This technique allows a manager to see the relative profitability of a business unit at a projected time.