February 15, 2009
Every business has three options, when facing reduced demand for their products or services.
- Increase sales
- Reduce Expenses
- Add equity and or debt
The problem for most small businesses and we are seeing the same now in even the largest, is cash flow. In an economy where credit is scare and sales are difficult, how should we consider maintaining profitability?
The answer lies in the sources of our cash flow. Fundamentally, we have two.
- The first is from our external customers. They pay for products and services with cash.
- The second is from our internal processes. Most of our internal processes spend time and money while delivering little value to the customer. They are akin to a bucket with holes. The cash, in the form of water coming into the bucket is leaking out!
What is the cost of these waste, delays and re-work? The diagram below provides a very simple example of the differences between a Three, Four, Five and Six Sigma company or process.
Every business has three big “leaks.” The first is delays. Many people think they need to look hard at their employees, making sure they are working hard, but also smarter. Managers and executives look at their employees and want to improve and “fix” them.
The Lean Six Sigma viewpoint is that you should look at your processes, products and services first. Pretend you are your service or product for a day and just see how much you wait around. You don’t need any high tech tools, just a notebook, pen and watch. I think you will be surprised.
It is not surprising to find your employees busy, while your products and services are waiting. Lean Six Sigma focuses upon improving processes.
The second “leak” is defects. The old adage, “measure twice and cut once” is true, but to really improve, you have to use more than common sense. When companies start or when they are operating in an optimum environment, common sense and your five senses can accomplish a lot. Just as in medicine, you need X-Rays, MRI’s and over advanced tools to really diagnose problems, so too in business, you need more advance tools. Some of these tools are:
Control Charts and Histograms
Using these tools allows you to Increase your speed of decision making and operation without working harder.
They allow you to increase your quality without adding costs.
They allow you to cut costs and boost profits.
The third area of “leaks” is variation. Variations mean products or services that do not meet specifications or do not meet the needs and expectations of your customers. Since your customers are the main source of your cash flow, reducing variation increases customer satisfaction and ultimately sales and profits.
To reduce variation in your performance you will want to establish benchmarks and improve upon them. Using histograms and control charts, you can begin to understand the scope of the problem, find the root causes and reduce or eliminate them.
So if you’ve been thinking that the concepts of Lean and Six Sigma were only for manufacturing or the largest companies, think again. When you are in a hostile environment, where sales may be falling, you can still increase your contribution to overhead, cash flow and profitability by focusing on improving your processes.
Lean Six Sigma Demystified
By Jay Arthur
Copyright 2007 and published by McGraw-Hill