Six Sigma and the Evolution of Statistical Management Methods

Six-Sigma: the Evolution of 100 Years of Business Improvement Methodology by Ronald D. Snee.

The article includes a nice very quick summary of the development of statistical methods to aid management improvement in the last 100 years. Then the article gives a good overview of Six Sigma.

There are four aspects of the Six-Sigma method...

First, Six-Sigma places a clear focus on getting bottomline results...

Next, Six-Sigma builds on improvement methods that have been shown to be effective and integrates the human and process elements of improvement...

The third key characteristic of Six-Sigma is that it sequences and links the improvement tools into an overall approach...

The fourth key characteristic is that Six-Sigma creates an infrastructure of
Champions, Master Black Belts (MBB), Black Belts (BB) and Green Belts (GB) that
lead, deploy and implement the approach...

Six-Sigma is based on the scientific method, utilising statistical thinking and methods (Hoerl and Snee, 2002). Statistical thinking, therefore, is fundamental to the methodology because Six-Sigma is action-oriented, focuses on processes used to serve customers, and defect reduction through variation reduction and improvement goals.

And the article closes with a case study.

Open Source Management Terms

Topic: Management Improvement

Statistical Method Helps Boost Bottom Lines, Batting Averages by Jon Van, Chicago Tribune:

Using statistical techniques embraced by quality guru W. Edwards Deming, Holland has worked for a generation guiding enterprises large and small to boost efficiency.
...
Yet getting management support for an MVT project is vital, Holland said, because experience shows that only 25 percent of ideas intended to improve a process will have a positive effect. The others will either have no effect or will hurt. Managers hate to see experimental results shoot down ideas they were certain would help, he said.

The article also mentions:

While Holland claims MVT as his own, others say it is really just a variation of strategies widely used in business.

"Multifactor experiments have been around for a long time," said Ajit Tamhane, Northwestern University professor of statistics and industrial engineering and management sciences.
...
David Coit, a Rutgers University professor of industrial systems engineering, said that Holland's MVT is very much like a quality-enhancing scheme called design of experiments.

So often we seem to focus on proprietary solutions. Instead it seems to me, most often what is needed is to do a good job of applying the ideas that have been known for decades. Deming ideas, design of experiments, lean thinking, experimentation, etc. are not secrets. There is a long history of how to apply these ideas to improve organizational performance.

QualPro obviously does well marketing itself (see press clippings from their web site) selling the concept of proprietary solutions to press organizations. Raising the question of whether the proprietary solutions really offers unique ideas, as the The Tribune article did was uncommon in my experience.

I like those encouraging the adoption of statistical tools to improvement management but I find the practice of trademarking terms like Six Sigma and MVT a bad way to encourage innovation in the practice of management. While it is nice to see Six Sigma efforts and others use statistical tools (such as design of experiments) I would encourage people to stay with "open source" management terms and remain part of a community looking to improve the practice of management.

China and the Sugar Industry Tax Consumers

Topic: Economics

China to Raise Tariffs On Clothing Exports, from the Washington Post:

The Chinese action would raise export duties on 74 categories of Chinese clothing from token amounts announced late last year to a range of 12 to 48 cents per garment, starting June 1.

If the Chinese government must reduce the amount of the world textile trade that their country is taking, or face retaliation from other countries, this is a very smart move. Essentially China gets to tax the United States, Europe, etc. and be thanked for doing so by the governments of those countries. Such is the odd nature of international trade these days.

The Chinese government is going to tax textiles being exported by China. Therefore when an American picks up a shirt at the mall it will include a new tax to the Chinese government and this is seen as a good thing by the American government. An alternative would be for the American government to tax imports. Then the tax paid by the American consumer would go to the United States government instead. It seems odd that the American government thinks it is better to pay a tax to the Chinese government than to the American government but that seems to be what their policy and statements support.

Another alternative (to regulate trade) is to use quotas (or tariffs so large they are effectively quotas - for example a 10 cent tariff [import tax] on plain t-shirts would still allow foreign competition to compete in the marketplace [even with the extra tax], however, if the tax were $10 a shirt it would effectively be impossible to compete). Quotas benefit those who are protected from foreign competition (the companies themselves, rather than either government, get to pocket the "protection tax"). The American sugar industry support system is a very good example of this. CAFTA (the Central American Free Trade Agreement) is in political danger because those businesses currently pocketing huge amounts in "protection taxes" on American consumers are fearful their special deals under current laws will be weakened.

• Star Tribune Editorial - CAFTA, sí - More would win than lose


• Big Sugar and the Fight Over CAFTA from the Facing South Blog


• Special Interests Often Outweigh the Greater Needs of America by Brett D. Schaefer, The Heritage Foundation


• A Sweet Deal for the Sugar Industry by Doug Bandow, Cato Institute. "You can never get enough from consumers and taxpayers. That apparently is the sugar industry's motto. Collect subsidies. Ban trade. Outlaw your competitors. Let the American people pay."


• Sugar Farmers Flex Muscle by Andrew Martin, The Chicago Tribune. "The result is that U.S. sugar costs about 23 cents per pound while sugar on the world market costs about 9 cents per pound"

International trade is a very complex topic. The arguments for how to make trade "fair" not just "free" are worthwhile. I believe it is healthy to debate the topic. Free market capitalism includes the tenet that free trade benefits the economies of trading partners (due to comparative advantage) also requires that the government regulate the free hand of the market when needed. And international trade includes instances where regulation is needed.

The question of what would be a "fair" international trade agreement for textiles is much more complex than understanding the effect of China's announced move to tax exports. That move is pretty obviously a win for the Chinese government: they get to effectively tax citizens of other countries. Just as companies in the United States are the beneficiaries of the current law that lets them collect the benefits of the "protection tax" (on sugar) from the American consumer (and those beneficiaries remember to pass on a share of the benefits to the politicians that provide them the bounty).

We need to increase the economic literacy of the public so they can effectively participate in the debate over international trade. This debate is going to remain an important topic for decades. It is hard to believe more than a few thousand people in the United States really want to have hundreds of millions of people pay excessive sugar prices (over twice what the rest of the world pays) to benefit a very few. Why politicians support those who give them large amounts of money is not hard to understand. Even those politicians who tend to support free trade seem to find excuses to oppose free trade for those who give them money.

Roger Hoerl's Perspective on the Future of Six-Sigma

One Perspective on the Future of Six-Sigma by Roger Hoerl. Originally published in the International Journal of Six Sigma and Competitive Advantage 2004 - Vol. 1, No.1 pp. 112 - 119.

Six-Sigma has maintained momentum for over ten years now, longer than many pundits expected. However, the key question remains: how long will Six-Sigma remain front-page news? The answer is that it will remain front-page news as long as it delivers front-page results. A second, and related question is: how might the initiative morph and evolve in order to remain relevant going forward? This paper suggests that several emerging trends will continue, such as migration to financial services and healthcare, standardisation of Design for Six-Sigma (DFSS), and further globalisation. Longer term, a key challenge appears to be integration into normal operations, rather than managing Six-Sigma as a separate initiative.

Roger Hoerl, leader of the Applied Statistics Lab at GE Global Research, is one of the leading lights in the Six Sigma movement - in my opinion. He has also co-authored several excellent books:

• Six Sigma Beyond the Factory Floor: Deployment Strategies for Financial Services, Health Care, and the Rest of the Real Economy by Ron D. Snee and Roger W. Hoerl, 2004. Highly Recommended.
• Statistical Thinking : Improving Business Performance by Roger Hoerl and Ronald D. Snee, 2001. A great book on how to apply statistical thinking to improve business results. More details on Statistical Thinking.

You can also view more articles by Roger Hoerl via the Curious Cat Management Improvement Library.

Curious Cat Blogs

Topic: Management Improvement

We have started a new blog, Curious Cat Management Articles, specifically to highlight management improvement articles on topics like: Lean Manufacturing, Deming, Six Sigma, Continuous Improvement, Innovation, Customer Focus, SPC and System Thinking.

We are still working out the best way we can use blogs effectively. Our current plan has several blogs targeted for slightly different audiences (so you may be interested in one, or several or all). The current Curious Cat Blogs:

• curiouscat.com Blog (this blog) - focused on management improvement, economics, investment, travel, the internet and the curiouscat.com web site. These posts will have much more of our own commentary. Right now (this may change of course), we plan on including short posts on several selected management improvement articles that are added to the Curious Cat Management Improvement Library. So if you are pressed for time you can just try the articles and posts we mention here.
  
• Curious Cat Management Articles - focused on short posts mainly linking to articles on systems thinking, continuous improvement, lean thinking, Deming's ideas, customer focus, six sigma, design of experiments, quality management and related topics. We will continue to collect the best online management improvement resources at the Curious Cat Management Improvement Library. We plan on including many short posts here that might be of interest. We hope this will serve as a good source for articles and blog posts on the management improvement topics we focus on. We see this now as a quick way for those focused on management improvement to keep up with what is being said online about the topic.
  
• Curious Cat Science Blog - focused on innovation, research and education in science and engineering.
• Curious Cat Articles and Links Blog - posts about blog posts, online articles and web resources of general interest (largely focused on the internet, economics and business).

Google: Good Service not Arbitrage

Topic: Google

RE: Seth on Arbitrage from John Battelle's Searchblog

Thanks for the great blog. I have to disagree with this post however. First, I think Google chooses not to disclose more to investors mainly because the founders don't go along with conventional wisdom. They would rather examine whether something is a wise use of management resources, and if not, don't just do something just because most everyone else does. I don't think the keeping trade secrets has much to do with their reason for not feeding the wall street analysts.

Google's IPO is another example of their decision to take a different path than other companies. Also the stories I have read about how the founder's reacted to venture capital requests (demands is probably what the venture capitalists thought they were until they capitulated) showed the founders tendencies to go their own way. They could get the money they needed without having to go along with the rules others wanted to impose on them. It is a great benefit to Google that management can focus on more important things, but it will likely become an issue again when the incredible growth of profits Google has been achieving eventually slow.

Second I disagree that what Google does is arbitrage. They do have a great money making machine. But what they did was provide a service that people liked. Then they found a way to get those who wanted access to their users (to advertise) to pay Google well for the privledge. And Google did a good job of finding a solution that those paying the bills liked. That it has worked for those paying the bills shows the advantage of designing a system that benefits you and your customer. Many internet companies got their customers (other companies) to pay them lots of money but when their customers failed to make money (and many then went out of business) then you had fewer (or no) customers left. Just like teaching someone to fish provides a greater benefit than giving them one fish, a customer that is able benefit from your service and prosper and continue to be your customer is better than a customer you lose (because they don't benefit from the relationship with you).

Then Google expanded the market by modifying their technology to provide other web sites a way to be paid by advertisers. The system Google had developed did a great job of getting advertisers to bid against each other to increase Google's revenues. And Google then modified their display of ads to reflect their analysis of the page content to again take great advantage of their existing technology. In this case, Google took some of the money the advertiser pays for the service that Google provides.

For Google to be using arbitrage they would have to, for example, pay your site some amount each month to run ads and then sell that right to someone else. Since they don't, in fact, pay you to run ads on your site with the hope they can charge others more for the right to use the ad space they bought from you. Google takes a percentage what the advertisers pay, that is not arbitrage.

Google, to use a internet bubble phrase, is doing a good job monetizing eyeballs. However, that is not arbitrage it is just doing a good job of maximizing revenue and profits. Yes Google is able to make money because they are paid more by advertisers than it costs them to deliver what the advertisers want. But I don't see how that is more like arbitrage than Toyota selling a car for less than it costs them to make the car.

Google and Paul Graham's Latest Essay

Topic: Management Improvement - Investing

I like Google and enjoy reading about the company. Even so I find the number of articles about the minor moves they make strange. At some point this fascination with the minor moves Google makes will stop but for now it is hard to miss stories about Google anywhere I look.

The post on John Battelle's Searchblog (a great bog) about Google buying Dodgeball was a great example. The entire post:

News is here. What is Dodgeball? I dunno, but is seems like Orkut + Mobile done right, I think. More later.

From the Dodgeball company web site:

As a two-person team, Alex and I have taken dodgeball about a far as we can alone. Since we finished grad school, we've been trying to figure out how to grow dodgeball and make it a better service along the way. We talked to a lot of different angel investors and venture capitalists, but no one really "got" what we were doing - that is until we met Google.

Today I read a new article from Paul Graham (his website has great essays - highly recommended): Hiring is Obsolete. As usual he makes many great points in the essay. The point that most strongly connected with me today was his statement:

What companies should do is go out and discover startups when they're young, before VCs have puffed them up into something that costs hundreds of millions to acquire. Much of what VCs add, the acquirer doesn't need anyway.

Why don't acquirers try to predict the companies they're going to have to buy for hundreds of millions, and grab them early for a tenth or a twentieth of that? Because they can't predict the winners in advance? If they're only paying a twentieth as much, they only have to predict a twentieth as well. Surely they can manage that.

I must admit when I read stories like the acquition of Dodgeball (information Week - CNN etc.) I think of the internet bubble. Paul Graham has given me reason to think that instead of viewing the newscoverage of a very small buyout as a sign of a frenzy it is actual another sign Google is ahead of the rest of the crowd. I think no matter what the widespread coverage of the story is a sign of a media frenzy with anything Google does (among a certain segment of the media). But Paul Graham's article reminds me to examine deeper what such moves might mean.

Google has managed to avoid becoming a bureaucracy run by MBAs trying to do basically doing what everyone else is doing - just a little bit better. They really are making an attempt to be a different kind of company. They have the potential to succeed amazingly (which they have done thusfar), or fail spectacularly. But in any event, Google might actually be worthy of all the attention: they really are taking the road less traveled. I wish them well.

Management Improvement Articles

Topic: Management Improvement

• Michael Porter's Big Ideas by Keith H. Hammonds
  
  
  The world's most famous business-school professor is fed up with CEOs who claim that the world changes too fast for their companies to have a long-term strategy. If you want to make a difference as a leader, you've got to make time for strategy."

• 3 Six Sigma Articles (link to one document in word format) by Gerry Hahn
  
• 20 Key Lessons Learned: May 2002
• What Does it Take to be a Master Black Belt: August 2003
• The Future of Six Sigma: May 2004


MBBs provide day-to-day leadership to the Six Sigma effort. Some of the key things they do are to:



• Provide a strategic vision for improvement and work towards its fulfillment.
  
• Secure continuing commitment and resources from business leaders.
  
• Develop and organize targeted training of the work force in Six Sigma, and participate in providing this training.
  
• Serve as a technical and tactical resource to all in implementing Six Sigma.
  ...



• The Folly of Merit Pay by Alfie Kohn
  
  It may be vanity or, again, myopia that persuades technicians, even after the umpteenth failure, that merit pay need only be returned to the shop for another tuneup. Perhaps some of the issues mentioned here can be addressed, but most are inherent in the very idea of paying educators on the basis of how close they've come to someone's definition of successful performance. It's time we acknowledged not only that such programs don't work, but that they can't work.

Find links to more online management resources on the Curious Cat Management Improvement New Articles Page or search for management improvement articles.

Traffic Congestion and a Non-Solution

Topic: Management Improvement, Problem Solving

I read, Study: Nation's Traffic Jams Worsening, today on CNN.com. That same headline could have appeared in newspapers every day for the last few years.

For decades traffic congestion has been a problem in American cities and one that has continued to get worse. The typical proposed solution is to increase the number of roads. The theory behind this solution is not normally stated but, I believe, it amounts to: "if we build more roads then the system will have more capacity which has to decrease congestion." Unfortunately this theory fails to take into account the past data on the increasing capacity of roads "solution."

I am not an expert in the area of traffic solutions. However, Russell Ackoff has done some work in this area and I trust his judgment more than almost anybody. I have heard him say increasing capacity does not work (unfortunately I can't find a citation for that statement). All that happens is the number of cars increases and the roads get even more congested. Luckily he understands systems and therefore understands that the system as a whole must be examined. Chapter Seven, Transportation Without a Future, of his excellent book, The Art of Problem Solving Accompanied by Ackoff's Fables, has some good material on this subject.

The CNN article continues the claim of most such articles over the last few decades (that I have noticed anyway) that the only solution is to increase capacity. They don't ever seem to show examples of how this has been done successfully. Granted it is theoretically possible that everyplace just fails to increase capacity enough (I just doubt that is the answer - as stated before, while I am not an expert I trust Ackoff's conclusions).

From the CNN article:

Overall in 2003, there were 3.7 billion hours of travel delay and 2.3 billion gallons of wasted fuel for a total cost of more than $63 billion.
...
Urban areas are not adding enough capacity, improving operations or managing demand well enough to keep congestion from growing.
...
The report was released Monday, the same day the Senate resumes debate on a bill that would spend $284 billion on highways over the next six years.
...
Only job loss or major commitments to expand capacity will decrease congestion dramatically, he said.

The only mention of something other than adding capacity was

Congestion can also be reduced by managing traffic better. The report said such techniques as coordinating traffic signals, smoothing traffic flow on major roads and creating teams to respond quickly to accidents reduced delay by 336 million hours in 2003.

See: Russell L. Ackoff, iconoclastic management authority, advocates a ‘‘systemic’’ approach to innovation an interview of Ackoff by Robert Allio.

The car, currently available only through custom production, goes more than 80 miles per gallon, is non polluting, and would, if in general use, eliminate all urban congestion until well into this century.

I must admit I am skeptical it would be as successful as Ackoff says (though I believe it would result in a large improvement over the current system). I put much more faith in Ackoff's ability to re-design the system to achieve the aim of decreased congestion than those claiming an increase in capacity will solve the congestion problem.

Yes Ackoff's solution does require actually changing the system. That is not easy to accomplish. However, if the desire is to reduce congestion the solution is not likely to be to just keep doing what we have been doing (given that it isn't working). Building more and more capacity doesn't seem to achieve the desired results.

Ackoff also has also done work on redesigning the layout of the city. Great stuff and quite interesting reading. Read about it in his excellent new book: Redesigning Society.

Brain Joiner on Dr. Deming

Topic: Management Improvement

The Spring 2005 MAQIN newsletter includes an interesting piece on a recent MAQIN event where the life and work of Dr. W. Edwards Deming was celebrated.

Dr. Brain Joiner, author of Fourth Generation Management, gave a toast that included several Dr. Deming quotes:

• Best efforts are not enough, you have to know what to do.
• A numerical goal without a method is nonsense.
• The most useful numbers are unknown and unknowable.
  
• Where there is fear you do not get honest figures.

Annual Report by Warren Buffett

Topic: Investing

The annual meeting of Berkshire Hathaway is being held this weekend in Omaha (cnn article). Recently the 2004 Berkshire Hathaway Annual Report (by Warren Buffett) was published. The report is excellent reading for anyone interested in investing. Some quotes from the annual report:

• In one respect, 2004 was a remarkable year for the stock market, a fact buried in the maze of numbers on page 2. If you examine the 35 years since the 1960s ended, you will find that an investor’s return, including dividends, from owning the S&P has averaged 11.2% annually (well above what we expect future returns to be - [bold added]). But if you look for years with returns anywhere close to that 11.2% – say, between 8% and 14% – you will find only one before 2004. - page 3
  
• If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains. - page 5
• Finally, there is a fear factor at work, in that a shrinking business usually leads to layoffs. To avoid pink slips, employees will rationalize inadequate pricing, telling themselves that poorly-priced business must be tolerated in order to keep the organization intact and the distribution system happy...
  To combat employees’ natural tendency to save their own skins, we have always promised
  NICO’s workforce that no one will be fired because of declining volume, however severe the contraction...
  Naturally, a business that follows a no-layoff policy must be especially careful to avoid
  overstaffing when times are good. - page 8
  
• Like Hell, derivative trading is easy to enter but difficult to leave. - page 11
• Should we continue to run current account deficits comparable to those now prevailing, the net ownership of the U.S. by other countries and their citizens a decade from now will amount to roughly $11 trillion. And, if foreign investors were to earn only 5% on that net holding, we would need to send a net of $.55 trillion of goods and services abroad every year merely to service the U.S. investments then held by foreigners. At that date, a decade out, our GDP would probably total about $18 trillion (assuming low inflation, which is far from a sure thing). Therefore, our U.S. “family” would then be delivering 3% of its
  annual output to the rest of the world simply as tribute for the overindulgences of the past. In this case, unlike that involving budget deficits, the sons would truly pay for the sins of their fathers. - page 20

Comments by Warren Buffet and Charlie Munger and the Annual Meeting (cnn article):

• Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, DC. "
• On whether pharmaceutical stocks have become bargains

  Buffett: "That industry is in a state of flux right now. It's historically earned very good returns on invested capital, but it could be well be that the world will unfold differently in the future than in the past. I'm not sure I can give you a good answer on that."

  Munger: "We just throw some decisions into the "too hard" file and go onto others."