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FRATERNAL
TWINS:
SIX
SIGMA & ABM
by Tom
Pryor
My
twin grandsons celebrated their first birthday on July 1, 2001. And while the
majority of people reading this article don't know Alex and Austen, there is another
set of twins celebrating their fifteenth birthday this year whose names are familiar.
Born in 1986, their names are Six Sigma and Activity Based Management
(ABM). I'm proud to say that I was present for the birth of both sets of these
twins. CTQ
The need for an improved quality and costing method confronted most manufacturers
during the 1980's. Pressure from Wal-Mart in the consumer sector and the Big Three
in the auto sector for lower prices, just-in-time delivery and defect-free products
caused manufacturers to heighten their search for process improvements. Customers
in all sectors of the economy grew to expect products and services with "CTQ"
… a combination of low Cost, quick cycle Time and high Quality.
This was especially true for my employer in 1985 … Motorola.
"While it's great
that the Fort Worth factory is meeting its defects and cost per unit goals, how
do the best manufacturers in the world measure quality, cost and cycle time?"
Dick
Buetow, Motorola's Director of Quality, asked this question during a quarterly
operations review at our Texas factory. None of our management team, including
me, the division controller, had the answer. Like most organizations, managers
at Motorola set quality, cost and cycle time improvement goals by looking at our
previous year's performance. To answer Dick's question, we had to benchmark outside
the company and our industry. After several months of research we identified
a twin-set of best practice methods … Six Sigma and ABM. Separated
at birth
Six Sigma and ABM were separated at birth. Six Sigma,
a rigorous and focused method of creating error free processes, was grown and
nurtured by Motorola's engineering staff from 1986-90. Most organizations operate
at three sigma … 67,000 defects per million. In 1990, using new methods and
measures, Motorola achieved Six Sigma … 3.4 defects per million! ABM,
on the other hand, took a different path of development. ABM was defined and developed
by a cooperative research project team from 1986-88. The research was supported
by over fifty worldwide organizations, including Motorola. Serving as the Project
Manager, I watched Activity Based Cost Management (ABM/ABC) grow from a simple
principle … activities consume resources and products consume activities
… into a universally accepted method of cost management by 1990. ABM
and Six Sigma grew at different rates during the 90's. Very few organizations
adopted Six Sigma following Motorola's success. With the exception of General
Electric's Jack Welch and Allied Signal's Larry Bossidy, most leaders did not
believe Six Sigma was possible or practical in their own organizations. Activity
Based Cost Management (ABM/ABC), on the other hand, was widely accepted as "organized
common sense". Thousands of manufacturing, service and governmental organizations
worldwide implemented ABM/ABC systems during the '90's. By year 2000, a family
reunion took place. Together
again
Best practices should be combined, not separated, to maximize
benefits. Costs are not predictable when processes are out of control. As a result,
unpredictable costs caused by poor quality processes negate many of the advantages
of an ABC system. Correspondingly, if costs and profits do not improve as the
result of Six Sigma projects, the commitment to improving quality often wanes.
Six
Sigma brings processes under control thereby enhancing the benefits of ABM cost
management. And by quantifying and eliminating the non-value added waste associated
with poor quality, ABM enhances the benefits of Six Sigma. They're fraternal twins.
They belong together. A
recent search of case studies shows that more and more organizations are combining
ABM and Six Sigma to maximize and sustain CTQ. Here are three examples:
- Honeywell
In 1999, Honeywell's Six Sigma/ABM savings amounted to $600 million. According
to Ed Romanoff, communication director of Honeywell's Six Sigma program, "ABM
helps us to understand the profitability of our products and services and to tailor
our business models appropriately." Ken McIntyre, instrumental in refining
their ABM system says, "Moving from direct costing to ABM has been very beneficial
in helping Six Sigma to be successful." - Navistar
Six Sigma savings measured by ABM totaled $15 million in fiscal 1998 at Chicago-based
Navistar. They have an ABC/ABM analyst at each plant site that works on the Six
Sigma teams. "ABM knows where activity waste lies, and Six Sigma chases defects,
so the convergence of the two was a natural." stated Max Gordon, manager
of the company's Six Sigma initiative in Business Finance magazine. - Amazon.com
Using a combination of Six Sigma and ABM techniques the past few months, Amazon.com
has moved from last year's three sigma (30% waste) to this summer's four sigma
(10% waste). Taymour Tamaddon, Amazon.com finance manager, is self-implementing
ABM to support Six Sigma. In addition to quantifying the cost of poor quality,
Taymour was quoted in the New York Times saying, "The system analyzed a $10
pack of Polaroid instant film. It starts with a reasonable margin, but after all
the costs of handling the product, Amazon loses $1 a pack." Six Sigma will
turn that loss into a profit. Fraternal
Just like my grandsons, Six Sigma and ABM are not identical. They are fraternal
twins. Fraternal twins don't look alike, but they're from the same family, have
the same birthday and share much in common. Six Sigma and ABM both focus on work,
not the worker. Both Six Sigma and ABM use series of process improvement projects
to achieve benefits. And Six Sigma and ABM use the same five steps to create process
improvements … Define, Measure, Analyze, Improve and Control (DMAIC).
Dr. W. Edwards Deming developed the five DMAIC steps. He is also famous for his
14 Points for Management. Point five is "Improve constantly and forever
the system of production and service, to improve quality and productivity, and
thus constantly decrease costs." If Deming were alive, I feel certain
he would openly embrace the twin techniques of Six Sigma and Activity Based Management
"to improve quality and productivity". Are you ready to double the benefits
in your organization? Now you know how. For
additional information on how ICMS can help you link Six Sigma to ABM, check out
our new workshop: Fraternal Twins: ABM &
Six Sigma, or send an e-mail for more information to tompryor@icms.net.
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