CASE-3 ‘Six Sigma aT GE ‘Six Sigma — GE Quality 2000 — will be the biggest, the most personally rewarding, and, in the end the most profitable undertaking in our history. We have set for ourselves the goal of becoming, by the year 2000, a Six Sigma quality company, which means a company that produces virtually defect-free products, services and transactions Jack Welch, CEO, GE, at the company’s annual meeting, in 199, INTRODUCTION By 2001, with revenues of $ 125.91 billion and net earnings of $ 13.68 billion, the US-based Genera Electric Company (GE) was easily the largest diversified company in the world. Out of the company’s different businesses, some were so large that they could independently feature in the Fortune 500 list of companies. GE operated in more than 100 countries and had over 250 manufacturing plants in 26 coun- tries. The company was one of the largest employers in the world with strength of around 275,000 employ. ees. GE remained the only company listed in the Dow Jones Industrial Index that had been included in the original index in 1896, GE's products ranged from plastic for small compact discs to powerful locomotives. The company was the world leader in light bulbs and power generation equipment. Its diagnostic medical imaging equipment were well known all over the world, In addition, GE had a strong presence in the financial services, con sumer durable goods and entertainment businesses (Refer to Exhibit I for GE's businesses). In the late 1990s, GE initiated various measures to transform itself into a services and solutions-oriented company. GE was well known for its strong focus on R&D and quality since its inception. The GE Research and Development Center was one of the world’s largest and most diversified industrial laboratories, It employed 1,600 people that included around 1,100 scientists, engineers and technicians. The center provided GES businesses and strategic partners with cost effective technical innovations for various products, processes and services. During the 1990s, quality became a major issue of concern for the company. ‘This made GE's CEO Jack Welch (Welch) to consider the benefits being derived due to a quality ini tiative called Six Sigma by companies such as Motorola.’ Though Welch felt that quality programs were only theoretical and did not show any substantial results, he was impressed by the Six Sigma concept and decided to implement it at GE in 1995 (One time permission to reproduce granted by ICMR, Copyright © 2002, lei Center for Management Research (ICMR), Hyderabad, India. This case was prepared by D. Sirisha, under the direction of A. Mukund. ‘The US-based Motorola is one ofthe world’s leading electronics goods manufacturers offering wireless communi tion equipment, semi-conductor, advanced electronic equipment and services,Six SIGMA Sigma is a well-structured, data-driven methodology for eliminating defects, waste, or quality control in ll kinds of business activities. It is based on a combination of well-established statistical qual- control techniques, simple and advanced data analysis methods and the systematic training of all per- 1 at every level in the organization involved in the targeted activity or process. Iti based on the statistical concept thatthe output of most of the physical processes follows @ normal Astibution,” with the processes centered at the mean (Refer to Exhibit II for the concept of Six Sigma), Theoretically, any process would have a natural spread of 3 Sigma (standard deviation) from the normal isribution mean on either side of the center. This spread contains 99.9999998% of the process output. ‘Thus, only 0,002 parts per million are out of the design specification. However, in practice, itis difficult ‘control the processes and any typical physical process would deviate from the natural centre by up to 1 standard deviation. Thus, Six Sigma in real life denotes a defect rate of 3.4 parts per million (Refer to Table I for the Sigma quality levels) Defects per million (OPM) Cost of quality 2 308,537 (Non competitive companies) Not applicable 3 66,807 25.40% of sales 4 6,200 15.2596 of sales : 233 5.1596 of sales 6 3.4 (word class) << 196 of sales “Each sigma shift provides a 10% net income improvement. Snurce: Mikel Harry and Richard Schroeder, tx Sigma, First ed., New York: Doubleday, January 2000. ‘Six Sigma is a sophisticated quality program that is designed to reduce defects to 3.4 per million oppor- tunities. The program focuses on streamlining all the processes in the organization to improve productiv- ity and reduce capital outlays while increasing the quality, speed and efficiency of the operations. The con- ‘cept was pioneered by Motorola in the early 1980s. Motorola’ initiative stemmed from its belief that improving quality would reduce costs and that the highest-quality producer should be the lowest-cost pro- ducer. Six Sigma enabled Motorola to achieve defect-free performance in its manufacturing, designing, engineering, and business processes. Six Sigma was originally developed to be used for ‘physical process’ ~ those performed in manufac- turing and easy to observe, record, analyze and measure. However, in the years to come, it was extended to processes that were not as explicit as the physical processes. It encompassed some business areas like bid and proposal, and procurement and contract management. While Six Sigma comprised strict meas- urements for physical processes, it involved identifying waste in the form of delays for other processes. The primary objective of Six Sigma was to increase customer satisfaction through continuous improve- ment in quality. The US-based Motorola is one ofthe world’ leading electronics goods manufacturers offering wireless communica- tion equipment, semi-conductors, advanced electronic equipment and services. The normal distribution is one of the ‘most important distributions used in probability It is useful for describing a variety of random processes. A normal di tribution i fully described with just two parameters: its mean and standard deviation. The distribution is a continuous, bell-shaped distribution, which is symmetric about its mean and can take on values from negative infinity to positive infinityeee ae Six Sigma became more popular than the conventional quality programs as its scope was much broader. While the traditional quality control programs focused on detecting and correcting commercial, industria and design defects, Six Sigma offered specific methods to redesign the process so that defects and errors ‘would not occur in the first place. Analysts believed that when managers and companies understood how ‘Six Sigma worked, they realized that the traditional quality control methods were less than optimal. The concept emerged as an initiative that at first concentrated on improving the quality by using exact meas- ‘urements to anticipate the problem areas, not just react to them. Thus, it enabled a company to be proac- tive and not reactive, to quality issues ‘Organizations that use the Six Sigma concept follow the ‘Six Sigma Breakthrough Strategy,” which spec- ifies a certain methodology. The strategy is a disciplined method of data collection and statistical anay- sis to find out the root eauses of errors and the ways to get rid of them. As per this methodology, employ- ces are trained as Champions, Master Black Belts, Black Belts, and Green belts. Champions are individuals who lead Six Sigma within specific businesses in the organization and ensure that all the key functions of the organization were linked to Six Sigma. There are two types of champions ~ deployment champions and project champions. The deployment champions functioned similar to a CEO, president and executive vice presidents in terms of leadership and commitment. They nurture the success of Six Sigma in the ‘organization. Project champions work at the business unit level and oversee Black belts. They concentrate ‘on Six Sigma at the project level. Master Black Belts are people selected by the Champions to play the role of in-house experts respon- sible for spreading the Six Sigma knowledge throughout the organization. Black Belts work full-time under the Master Black Belts and use the tools and knowledge of Six Sigma in specific projects. Green Belts ‘were employees throughout the organization and executing Six Sigma is a part of their jobs. They con centrate more on projects that are part of their routine work and have less Six Sigma responsibilities Belts are made responsible for helping the spread the success of Six Sigma techniques, and lead st scale improvement projects. ‘The ‘Breakthrough Strategy’ has eight fundamental stages to achieve Six Sigma performance in process, unit or a company. These are — Recognize, Define, Measure, Analyze, Improve, Control, San- dardize and Integrate (RDMAIC), Each of these phases is designed in such a way so as to ensure companies use the strategy in a methodical and disciplined way. The stratezy is applied to all the levels of an organization namely, the business, operations and process levels (Refer to Table 1 for breakthrough strategy at different organizational levels) TABLE Il The Breakthrough Strategy at Different Organizational Levels Business Level Recognize the true states of busines, Define what plans must be in place to realize improvements of each sate. ‘Measure the business systems that support the plans. [Analyze the gaps in system performance benchmarks, Improve system elements to achieve performance goals. Control system-level characteristics. ‘Standardize the systems that prove to be the best in clas. Integrate the bestn-class systems into a strategic planning framework Operations Level Recognize operational issues that link to key business systems, Define Six Sigma projects to resolve operational isues. ‘Measure performance of the Six Sigma projects.“Analyze projet performance in relation to operational goals Improve Six Sigma project management system. Control inputs to project management system. Standardize best.in-class management system practices. Integrate standardized Six Sigma practices into policies and procedures. Process Level Recognize functional problems that link to operational issues. Define the processes that contribute to the functional problems. Measure the capability of each process that offers operational leverage. ‘Analyze the data to assess prevalent pattems and trends. Improve the key product/service characteristics created by the key processes. ‘Control the process variables that exert undue influence, ‘Standardize the methods and processes that produce best in class performance. Integrate standard methods and processes into the design cycle Adapted rom Mikel Harry and Richard Schroeder, Stx Sigma, First ed., New York: Doubleday, January 2000, ‘Six Sigma’ success was measured by the extent to which it improved the quality and profitabi all level of an organization. At the business level, Six Sigma could be used to improve profitability and ‘market share, and also ensure the company’s long-term viability. Six Sigma could increase productivity, climinate hidden factories’, and reduce labor and material costs at the operational level. At the process level, Six Sigma could be used by Black Belts to reduce defects and variation. Six Sigma could also be used to enhance process capability so as to increase profitability and customer satisfaction. By the late 1990s, Six Sigma had emerged as the ‘most powerful breakthrough management tool’ ever devised. Companies began to adopt Six Sigma to achieve high quality, cost reduction, and high customer satisfaction. Moreover, as the competition intensified, many companies began to use Six Sigma to reduce the defects in their products. Almost every company that used the Six Sigma tool efficiently reported a 20% rise in profit margins year after year Six Sigma helped some of the best Fortune 100 companies to achieve excellent financial results. Com- panies like AlliedSignal, Sony, Honda, Lockheed Martin, Canon, Texas Instruments and Polaroid adopted Six Sigma, However, it was GE that came to be known as one of the most successful examples of a cor- porate house deriving benefits from Six Sigma. Ge's Six SIGMA EXPERIENCE Before beginning the implementation, studies revealed that GE's operations were carried out between 3-4 sigma, ie., about 35,000 defects per million opportunities. According to company estimates, avoidable expenditure of $7-10 billion was being incurred in the form of scrap, reworking of parts, correction of transactional errors, inefficiencies, and lost productivity. According to analysts, the groundwork for the implementation of Six Sigma at GE had begun in 1988 in the form of an initiative known as the ‘WorkOut’ program. The company realized that employees were ‘an important source of intellectual power for new and creative ideas. The WorkOut program gave each 5 Hidden factories are those costs that cannot be broken down and traced to specific operations or are not made known to management, making higher quality more expensive.employee an opportunity to influence and improve GE's gperations. The program had set four major goals that later helped to lay the groundwork for Six Sigma. The goals were as follows: ‘* Build Trust: Employees were encouraged to criticize GE and the way they performed their jobs withe out negative consequences to their careers ‘+ Empower employees: As employees who performed a particular task knew how to do it perfectly, granted them more power, to encourage them to take more responsibility for their jobs. ‘+ Eliminate unnecessary work: GE wanted its workers to work smarter, rather than putting too m effort. * Create a new paradigm for GE: The program made efforts to create a ‘boundaryless organization’ 50 that the entire workforce worked towards achieving a common goal. Employees were encouraged to identify problems and come up with solutions, and any manager who hampered their efforts being forced out of the company. The WorkOut program helped in inculcating the Six Sigma principles of being open to new ideas GE’s culture and encouraged people to work more productively and efficiently. The program redefined way GE employees behaved while Six Sigma redefined the way they worked. In 1991, in what later to be a major step towards adopting Six Sigma, GE allocated resources, coordinated traning pa ‘grams, and made efforts to change the work culture and the management style as well. GE did not all its existing corporate culture to stand in the way of implementing Six Sigma. Unlike some companies tk customized Six Sigma to their existing culture, GE did not reconstruct the Six Sigma initiatives to iti existing processes. Instead, the company made efforts to avoid bureaucracy and create new cultures. ‘Training was the most important part of the Six Sigma implementation at GE, Training in the Six S quality program gained more importance over other professional development programs over the next f years. There was an in-house training in the Six Sigma methodology at the Crotonville facility’. Empla es were trained in a semi-circular amphi-theater known as The Pit. The instructor stood at the base The Pit. There were 150 students who were supposed to be the best and most aggressive business at GE. They were encouraged to speak candidly. Instructors whose ideas or concepts triggered an ar ‘ment from The Pit received a mantle of credibility, and thereafter his or her ideas were implemented i the company. GE asked each business unit to identify and develop Champions, Master Black Belts, and Green B In 1996, the company invested US$200 million to train 200 Master Black Belts, and 800 Black Beit March 1997, Welch asked every manager at GE to start Black Belt or Green Belt training by January 199 and complete the training by July 1998. He linked this training to their promotions as wel. It took for GE's large number of employees to take tothe idea of Six Sigma. When the employees were convinc that some form of training was necessary for even a minimal advancement within the company, they be to sign up for training in greater numbers. In 1997, GE invested US$2S0 millon in training about 40 Black Belts and Master Black Belts and more than 60,000 Green Belts (Refer to Table Ill forthe tai ing courses offered at GE at various levels). "The Crotonville facility was established as the center for corporate leadership development in New York. Other teaching leadership and management skills, GE Crotonville served as an agent of cultural change in GE, and as a to spread knowledge and corporate values throughout the company. In September 2001, it was renamed asthe Joa ‘Welch Leadership Development Cente.TABLE Ill Training Courses Offered at GE at Various Levels ‘Quality Overview Seminars: Basic Six Sigma awareness. ‘Team Training: Basic tool introduction to equip employees to participate in Six Sigma teams, Master Black Belt, Black Belt and Green Belt Training: in-depth quality training to prepare the team to use high level statistical tools, basic quality control tool, Change Acceleration Process and Flow technology tools Design for Six Sigma (DFSS) Training: Prepares teams for the use of statistical tools to design It right the frst time, Source: hitp:/Fwww:ge.com/sisigmaySSigma pdf As Six Sigma placed a strong emphasis on the customer, GE developed a tool that became an integral part of its ‘Six Sigma’ process. The tool was known as ‘Customer Dashboard’ and sought feedback from key customers. Customers were expected to list the most critical-to-quality measurements of any of the ‘company’s products or services. The tool helped employees find out how well the company was fulfilling customer needs, in quantifiable, objective terms. GE also developed an Intranet site, which enabled employ- ‘ees to concentrate on the Six Sigma process. The site offered information and status reports on Six Sigma projects. Employees could also share the best practices for completing the projects. GE made its employees realize that Six Sigma could be used not only for improving the quality of products but also for the quality of services offered. Thus, the company applied the tool to its transactions land services businesses also, which was a first. The managers were trained in DFSS, to help the company design and induce Six Sigma into every product and service. DFSS could be used for everything ranging from designing an engine blade to answering a phone call about a credit card. GE also believed that its products might never satisfy a customer's expectations of quality, without the DFSS's statistical processes. ReapinG THe BENEFTS ‘Analysts felt that the implementation of Six Sigma enabled Welch to transform an old-economy industrial ‘giant into a competitive and growing company. No other corporation seemed to have integrated Six Sigma in to its operations as widely as GE. Within five years of its implementation of Six Sigma at GE produced annual benefits of more than $2.5 billion for GE worldwide. Analysts remarked that Six Sigma was an indisputable success at GE. whether in terms of customer satisfaction, improvement in internal perform- ance, or in the improvement of shareowner value. Six Sigma transformed every product and process at GE. The company realized that quality products and services could be offered only with the help of educated and empowered employees. Therefore, GE continued to invest in training its employees. Its investment in training was more than any of the 15 largest corporations in the US. In 1998, GE's profitability improved significantly and Welch attributed this suc- cess largely to the company’s Six Sigma initiatives. Not only did the company’s revenues increase by 11% to $100 billion, the net earnings went up by 13% to $ 9.3 billion. While the earnings per share increased 14% to § 2.8 per share, the operating margin increased to 16.7% and the working capital turnover rose to 9.2% from 7.4% in 1997 (Refer to Exhibit III for GE's statement of earnings for the period 1997-2001). ‘Six Sigma also helped GE's services’ functions. GE Capital achieved a 62% reduction in turnaround time for its railear-leasing business. It turned around the repair shops that resulted in productivity gain for railroad and shipping customers. Six Sigma helped this business to become 2 to 3 times faster than its competitors. There was a follow-up phase that redesigned the overall leasing process. This further resulted in a 50% further reduction in the cycle time.‘The Six Sigma initiatives were not limited to GE's US operations. The GE Aircraft Engines (Canada) used Six Sigma when it imported marine/industrial engines, parts or tools for the Canadian customers With Six Sigma, the Green Belts reduced delays by 50% apart from reducing customers’ costs. GE also ‘measured the dead airtime’ on NBC television network, whether salesmen had the right information to answer a customer's call, and whether GE Capital Services executed a contract on time and in accordance with the customer's expectations. Questions FoR Discussion 1. Explain the rationale behind Jack Welch's decision to implement Six Sigma at GE. What kind of organ- izations, do you think stand to gain by undergoing such an exercise? Give reasons to support your stand, 2. Explain the concept of Six Sigma and the Six Sigma Breakthrough Strategy. Also comment on the RDMAIC model and the employee involvement issues associated with Six Sigma. 3. Examine the way in which the Six Sigma tool was implemented at GE and explain how the company ensured the success of the initiative by focusing on employee involvement issues. ‘Six Sigma enabled GE not only to improve its manufacturing efficiencies, but also its services also? ‘Comment on the benefits derived by GE as a result of implementing Six Sigma. EXHIBIT | GE's Businesses ‘Structured Finance Group Global Consumer Finance ‘Vendor Financial services Specialty Materials Commercial Equigment Financing Commercial Finance GE Financial Assurance Nac Mortgage Insurance Corporation Plastics Capital Services Medical Systems Global Exchange Services Industrial Systems ‘Commercial Aviation Services Employers Reinsurance Corporation Power Systems Appliances GE Equity Real Estate GE Aircraft Engines Lighting ‘Transportation System GE Supply ‘Source: www ge.com. EXHIBIT Il The Concept of Six Sigma "As @ normal result of the manufacturing proces, all manufactured lems are subject to lem-tovter variation, (@) Is the standardized statistical measure of the variability or the dispersion within a given population of Specifically its the distance between the standard deviation and the mean of the population ‘The formula foro is = Dead airtime isthe time during which no voice or image is transmitted.Where 17 = Standard deviation X= individual measures of the parameter of interest k= mean of the process 1h = umber of items in the population Based on the above information, the sclence of Statistical Process Control (SPC) Is used to measure and control the product variation within acceptable limits. This helps in ensuring thatthe vast majority of items produced are accept able. An inspection is caried out to identity and subsequently remove non-conforming items before the product is elivered to the customer. beat een al ee Controling a manulacturing process to a nominal + or ~ three-sigma variation results in 99.73% ofthe items being Within the specification and only 0.2796 being out of the specified quality limits. However, ths is not acceptable in today’s highly complex, competitive and quality-conscience marketplace. The Six Sigma concept, while based on the SPC, carries the concept a great deal further. A manufacturing process actually controlled to + of ~ Six-Sigma (a total spread of 120) assures that 99.9999998% of the items are within the specification, or only 0,0000002% (or 2 parts Per billion) are out of the quality limits Source: www hrgme.com. EXHIBIT Ill GE~Statement of Earnings (1997-2001) (av $ milion, except per shore data) For the year ended December 31st 1997 1998 «+1999 +~—«2000.~=—=«2001 Revenues Sales of goods 40,675 43,749 47,785 $4828 52,677 Sales of services 12729 14938 16,283 18,126 18,722 Other income 2300 649 Bites «aM, Earnings of GECS Es : = = = GECS revenues from services 35136 41,333 46,764 56,463 54,280 Total revenues 90,840 100,469 111,630 129,853 125,913 Costs and expenses Costs of goods sold Costs of services sold 31772 34,554 39,312 35,678 10508 11,404 12,511 13,419 (Contd)For the year ended December 31st Interest and other financial charges Insurance losses, policyholder, annuity benefits Provision for losses on financing receivables ‘Other costs and expenses Minority interest in net earnings of cons. Af. Total costs And expenses Earnings before income taxes Provision for income taxes Earnings before accounting changes ‘Cumulative Effect of accounting changes Net earnings Per-share amounts Pershare amounts before accounting changes Diluted earnings per share Basic earings per share Per-share amounts after accounting changes Diluted earnings per share Basic earings per share Dividend declared per share 1997 8,384 8.278 yaar 21,250 240 79,661 1,79 2976) $8,203 $2.46 $250 $1.08 1998 9.753 9,608 1,609 23477 265 86,992 13477 ast) $9,296 $280 $284 S125 1999, 10,013 11,028 1s7t 27018 365 96053 1557 (4860) 10717 10717 1.07 1.08 1.07 1.09 048 2000 1,720 14399 2,045 30993 427 a1407 18446 omy 173s wars 127 1.29 127 129 057 2001 11,062 15,062 2.481 2162 348 106212 19701 (5573) 14128 444) 13684 oa 1a 137 138 0.66 ‘Source: Company Annual Reports. ADDMONAL READINGS & REFERENCES wwwge.com www.hrgme.com Dave Harrold, Designing for Six Sigma Capability, www.controlengineering.com, January 1999 ‘Training and Development, wwv.ge.com, July 2000, Les Porter, Six Sigma Excellence, Quality World, April 2002. ‘Mastering Six Sigma Excellence, www.best-in-class.com. Six Sigma for Manufacturing and Non-manufacturing Processes, www.airacad.com. ‘Mikel Harry and Richard Schroeder, Six Sigma, First ed., New York: Doubleday, January 2000. i ; j i |