Sure shot Methodology for Business Success
Using deceptively simple and incredibly powerful lean principles
Service operations comprise more than 70% of the world GDP and growing rapidly. Even within manufacturing companies, it’s common to have only 20% of product prices driven by direct manufacturing labor—the other 80% comes from costs that are designed into the product or costs associated with support and design functions such as
Finance
Human resources
Product development
Purchasing, engineering, etc.
Moreover, in-service applications, the costs related to work that adds no value in your customers’ eyes (“non-value-add”) is higher than in manufacturing, in both percentage and absolute dollars. The revenue growth potential of improving the speed and quality of service often overshadows the cost reduction opportunities work that adds no value in your customers’ eyes typically comprises 50% of total service costs. This represents enormous “white collar” potential for achieving significant speed, quality, and cost improvements, all of which can give organizations a major strategic advantage over their competition.
Lean arose as a method for optimizing automotive manufacturing; Six Sigma evolved as a quality initiative to eliminate defects by reducing variation in processes in the semiconductor industry.
What Does Lean Six Sigma Mean for Services?
Lean Six Sigma for services is a business improvement methodology that maximizes shareholder value by achieving the fastest rate of improvement in customer satisfaction, cost, quality, process speed, and invested capital. The fusion of Lean and Six Sigma improvement methods is required because:
• Lean cannot bring a process under statistical control
• Six Sigma alone cannot dramatically improve process speed or reduce invested capital
• Both enable the reduction of the cost of complexity
The two methodologies interact and reinforce one another, such that percentage gains in Return on Invested Capital (ROIC%) are much faster if Lean and Six Sigma are implemented together. (Some people might question whether ROIC is a valuable metric for service businesses, and the answer is yes:
Many service businesses—hotels, airlines, restaurants, health care—are very capital intensive. In most other service businesses— software development, financial services, government, etc.—the biggest costs are salaries/benefits, so invested capital is really the “cost of people.”
Why Services Are Full of Waste— and Ripe for Lean Six Sigma
There are three key reasons why service functions need to apply Lean Six Sigma
- Service processes are usually slow processes, which are expensive processes. Slow processes are prone to poor quality… which drives costs up… and drives down customer satisfaction and hence revenue. The result of slow processes: more than half the cost in service applications is a non-value-add waste.
- Service processes are slow because there is far too much “work-in-process” (WIP), often the result of unnecessary complexity in the service/product offering. It doesn’t matter whether the WIP is reports waiting on a desk, emails in an electronic in-box, or sales orders in a database. When there is too much WIP, work can spend more than 90% of its time waiting, which doesn’t help your customers at all and, in fact, creates or inflicts substantial waste (non-value-add costs) in the process.
In any slow process, 80% of the delay is caused by less than 20% of the activities. We only need to find and improve the speed of 20% of the process steps to effect an 80% reduction in cycle time and achieve greater than 99% on-time delivery.
Lean is not cost reduction. If you’re doing cost reduction you’re taking out people, you’re skimping here, you’re cutting back on investment there; that’s cost reduction.
“Lean is process change.”
5 Lean Principles that will help you escalate your business processes and will bring tremendous profits are
- Most processes are “un-Lean”—that is, have a Process Cycle Efficiency of <10%
- A primary goal is reducing controlling WIP (if you can’t control WIP, you can’t control lead time)
- Every process should operate on Pull, not push, to eliminate variation in lead time
- Only 20% of the activities cause 80% of the delay
- Invisible work can’t be improved: we need visual management, based on data
Solved Practice Questions
Answers to practice questions mentioned in the video
Mortgage Back Office Processing
A mortgage Back office Processing receives on an average 320 applications per day. It takes around 30 minutes to process each application form. Each shift has nine hours with a one-hour break in between. How many people are needed to process the application form?
Solution
In this problem, we need to find WIP which is people.
The first step is to convert all into the same unit.
Throughout time is 30 minutes = 0.5 hour
Rate at which application is received per hour = 320/8 = 40/hour
WIP = Throughput time x Completion Rate
WIP = 40 x 0.5 = 20 people
Given the current throughput time, the processing requires 20 people.
Using little’s law it is evident that is required action must be taken to improve the productivity of employees so that more applications can be processed.
Inventory in a store
A mom-and-pop store sells 700 kg of chicken every week. The owner wants to ensure that the stock of chicken is never more than two days old. What quantity of chicken the owner store to ensure that none of the inventory crosses the two-day threshold?
Rate at which chicken gets bought = 700kg/7days = 100 kg/Day
Ensure all items have the same unit.
Throughput Time = 2 Days
Average Inventory that should be in the shop (WIP) = 100x2 = 200 kg.
In short, if you start implementing lean, you will create a profitable and agile business by relentlessly focusing on what is of value to the customers. It is a philosophy that not only makes your businesses profitable but also provides you with an engine for continual improvement.
Important Links
5S Course - Begin your Lean journey
7 Quality Tools - Reap benefits of low hanging business opportunities
Link to Video Lecture