Management And Accounting Web

Lucier, G. T. and S. Seshadri. 2001. GE takes six sigma beyond the bottom line. Strategic Finance (May): 40-46.

Summary by JoAnn Quartararo
Master of Accountancy Program
University of South Florida, Summer 2002

Quality Related Main Page | Six Sigma Summary | SPC Main Page

The purpose of this article is to show how empowering employees and focusing on quality production can benefit companies today. The authors explain the concept of Six Sigma and the benefits this program can provide for a company. More specifically, the article focuses on GE’s use of Six Sigma and how it has worked for them.

Getting Started

In this section the authors, who are both members of management at GE, discuss how GE came upon the Six Sigma approach. It started with a member of top management named Jack Welch who, since 1981, has been working to improve GE’s processes in order to maximize profits and return on investments. Welch realized the need and importance of the changing business structures from management decision-making to employee decision-making. Therefore, he first implemented a program called "Work-Out" which was designed to "facilitate focused decision making, resolve issues, and improve processes"(42). This program was used to empower employees by giving those employees that worked with a particular process the opportunity to develop a better plan of action. These employees would decide which steps or tasks were most essential, and eliminate any unneeded processes. This program essentially "worked out" the wasteful and unproductive tasks in certain processes.

However, after several years of using this approach to decision-making, management found that although GE as a whole was performing better, the important aspect of quality was missing. This is when Welch realized that Six Sigma was the best approach to use.

A Closer Look At The Six Sigma Approach

In this section the authors describe Six Sigma and how it is supposed to work. Six Sigma is a strategy for statistical process control that was first initiated by Motorola in the 1980s. This program focuses on measuring and eventually eliminating process defects. The level at which Sigma lies equates to the amount of defects out of a million opportunities. Reaching a level of Six Sigma means that a company has nearly error-free performance in its processes (see Exhibit 1).

Exhibit 1: Level of Sigma
Sigma Defects Per Million Opportunities
2 308,537
3 66,807
4 6,210
5 233
6 3.4

More specifically, the Six Sigma approach is made up of the following five steps.

1. Defining the problem,
2. Measuring what you care about,
3. Analyzing by statistically finding root causes,
4. Mobilizing change initiatives, and
5. Sustaining improvements.

At the define stage, teams define problems that are related to the business or to customer satisfaction. Preliminary tasks are performed so that the problems can be overcome in an efficient and effective manner. Next, at the measure stage, the teams measure and establish the defects in the existing process. This is also the stage in which customer expectations are defined.

Then, at the analyze stage, teams use statistical analysis to determine the root causes of the defects. Afterward, at the mobilize stage, the teams attempt to come up with the best solution for the problem by creating and testing a plan of action. During this stage the teams are looking for a way for the results to be within customer expectations. Finally, at the control or sustain stage, teams continuously monitor the processes in order to ensure that the changes made are still in place and being followed. In this way the teams can make sure that the original problem does not reoccur.

Implementing The Program

In this section the authors illustrate how GE has used this Six Sigma approach in the training program for its employees. Employees of GE learn about Six Sigma in a classroom setting over a course of several months in their first year. First, they learn the basic concepts of Six Sigma. Then, in teams, they apply their knowledge to an existing business problem at GE.

All employees, including the clerical staff, are required to go through this training within the first year of their employment. However, not all employees must achieve the same level of training. That is why GE has set up a level of progression for the Six Sigma training. These levels include Green Belts, Black Belts, Master Black Belts, and Champions. The position that employees hold in the company determines what level they need to achieve.

Green Belts represent the lowest level of competency in the Six Sigma training program. All employees from clerical staff to top management must complete this level of training. They must also complete post-certification training each year following. Those employees that only achieve Green Belts are considered to hold "non-Six Sigma positions" within the company (44).

Black Belts are one level higher than Green Belts. These employees are responsible for quality at GE. They are the team leaders who oversee Six Sigma in the business projects. In addition, these people coach the Green Belts on their projects.

Next in line are the Master Black Belts. Employees at this level are the teachers of the Six Sigma process.

Champions correspond to the highest level that employees can reach in the training program. These people work with the executives on achieving Six Sigma during daily operations.

The Payback

Here the authors explain the payback that GE has received from implementing the Six Sigma program. Since this program’ implementation in 1995, GE has seen significant benefits in monetary terms. For example, in 2000 GE gained more than $2 billion from using Six Sigma. Also, during this time one division at GE was able to reduce its annual teleconferencing expense by $1.5 million as a result of this program. These substantial monetary benefits come as a result of an increase in quality production, and a reduction in cycle times and defects.

Lucier and Seshadri point out that consistency in the use of Six Sigma is key to the overall benefits and payback achieved (See Exhibit 2). They make a comparison with the payback achieved from using Six Sigma to popping popcorn. They say that popping one kernel, or this case completing one project, won’t make much of a difference. However, by keeping the heat on for an extended period of time, many kernels will pop, producing exponential results. Furthermore, these authors state, "Complete dedication to the program and enterprise-wide implementation is attainable and rewarding in terms of quality, productivity, and the bottom line." (46)

GE's Six Sigma Results in Millions of Dollars

Conclusion

From reading and learning about the Six Sigma approach, one can see how important employee empowerment and quality production is to a company’s overall success. The benefits achieved from using such a program far out weigh the costs incurred. With commitment and ongoing dedication to this program, any company can achieve significant paybacks.

___________________________________________

Related summaries:

Albright, T. L. and H. Roth. 1993. Controlling quality on a multidimensional level. Journal of Cost Management (Spring): 29-37. (Summary).

Deming. W. E.1993. The New Economics For Industry, Government and Education. Cambridge: Massachusetts Institute of Technology Center for Advanced Engineering Study. (Summary).

Francis, A. E. and J. M. Gerwels. 1989. Building a better budget. Quality Progress (October): 70-75. (Summary).

Holmes, D. S. and R. E. Hurley. 2003. How SPC enhances budgeting and standard costing - Another look. Management Accounting Quarterly (Fall): 57-62. (Summary).

Martin, J. R. Not dated. Chapter 3: Cost Behavior Analysis & Statistical Process Control - Part II. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. https://maaw.info/Chapter3PartII.htm

Martin, J. R. Not dated. What is Six Sigma? Management And Accounting Web. https://maaw.info/SixSigmaSummary.htm

Nolan, T. W. and L.P. Provost. 1990. Understanding Variation. Quality Progress (May): 70-78. (Summary).

Reeve, J. M. 1989. The impact of variation on operating system performance. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 75-89. (Summary).

Roehm, H. A., L. Weinstein, and J. F. Castellano. 2000. Management control systems: How SPC enhances budgeting and standard costing. Management Accounting Quarterly (Fall): 34-40. (Summary).

Walter, R., M. Higgins and H. Roth. 1990. Applications of control charts. The CPA Journal (April): 90-93, 95. (Summary).