Why you can safely ignore Six Sigma
Fortune January 2001
Abstract:
Six Sigma, and a couple of similar-looking knockoffs, are nothing short
of a full-on corporate fad, the latest in a long line of must-have efficiency
crazes that perpetually spread through corporate America. Fueled in large
part by GE CEO Jack Welch-who frequently talks it up to the media-companies
today are constantly pumping out press releases hyping their own Six Sigma
initiatives. In the right hands, admittedly, it works. But like a lot of
management trends, certain aspects of Six Sigma can get downright silly.
The management fad gets raves from Jack Welch, but it hasn't boosted the
stocks of other devotees.
BY LEE CLIFFORD A few years back Whirlpool, the appliance maker that had
been reliably pumping out dishwashers and dryers for decades, decided to
tackle quality head-on. Executives at the company implemented their own
proprietary version of the highly touted principles of Six Sigma, a quality-assurance
strategy that has come into vogue in the past several years. Companies
like Motorola and General Electric swear by Six Sigma. But as an investor,
can you use it as a litmus test of whether a stock is going to appreciate?
Probably not.
Six Sigma, and a couple of similar-looking knockoffs, are nothing short
of a full-on corporate fad, the latest in a long line of must-have efficiency
crazes that perpetually spread through corporate America. Fueled in large
part by GE CEO Jack Welch-who frequently talks it up to the media-companies
today are constantly pumping out press releases hyping their own Six Sigma
initiatives. What's more, consultancies have sprung up across the country
to help CEOs muster the troops, and the term itself has turned into the
financial equivalent of a Good Housekeeping seal of approval. (Incidentally,
the name comes from statistics, where the Greek letter sigma is used to
measure how far something deviates from perfection. Six Sigma means a company
tries to make error-free products 99.9997% of the time-a minuscule 3.4
errors per million opportunities.)
In the right hands, admittedly, it works. Welch wrote in GE's 1999 annual
report that its initiatives had saved the company more than $2 billion
in 1999, just three years after implementing Six Sigma. And there's certainly
nothing wrong with a company's trying to improve quality and reduce errors.
Whirlpool wanted to make itself more efficient by building its products
right the first time rather than spending cash later to fix malfunctioning
dryer doors and appease disgruntled consumers.
But like a lot of management trends, certain aspects of Six Sigma can get
downright silly. The corporate efficiency experts who implement it are
coined "black belts"-martial artists who get deployed to chop, kick, and
block until errors are virtually nonexistent. Raves Mikel Harry, one of
the founders of Six Sigma at Motorola in the 1980s and now head of the
Six Sigma Academy, a consulting firm that helps companies train their warriors:
"A black belt can save $300,000 to $400,000 per project and return that
to the company, and they can do four to six projects a year. On the conservative
side, they can save the company $1 million to $1.5 million per black belt!"
So what happened at Whirlpool? Though a company spokesman says the program
has resulted in "substantial" efficiency gains, analysts aren't quite as
impressed. "You'd have to get out an electron microscope" to see any real
impact, says Nicholas Heymann, an analyst who follows the company for Prudential.
And incidentally, the stock is down 12% over the past two years. So much
for the martial arts.
"It can be wildly successful," says David Fitzpatrick, the worldwide leader
of Deloitte Consulting's Lean Enterprise Practice, "but I would say fewer
than 10% of companies are doing it to the point where it's going to significantly
affect the balance sheet and the share price in any meaningful period of
time." Why? First are the obvious pitfalls: a CEO who isn't really committed,
an inability to motivate employees, or a company that allows its initiative
to trail off before there's been any progress. But beyond that, Six Sigma
can be mindnumbingly vague. If you're manufacturing pills, defects are
easy to track, but what about at a customer service center? Exactly what
constitutes an "error" or "mistake"? You guessed it-it depends on which
black belt is counting.
Then there's the latecomer issue raised by some analysts. "Six Sigma's
ability to incrementally improve performance and shareholder value is highly
correlated to how early a company has implemented it," says Heymann. Bob
Hendricks, the CEO of international consulting concern Holt Value Associates,
also ventures that the competition is a factor: "If Whirlpool implements
it, and then Maytag does too, who wins? The consumers-those savings will
mostly get passed along to them."
But the main reason Six Sigma is no guarantee of stock market success is
also the most obvious one: Defects don't matter much if you're making a
product no one wants to buy. As one consultant notes, referring to Motorola's
disastrous foray into satellite-linked mobile phones: "Remember, Iridium
came out of a company that's famous for Six Sigma."
So while dozens of companies may be saving money with these error-reduction
programs, a lot of others are spending valuable time and resources for
something that may never have any tangible payoff for shareholders. Even
the concept's biggest booster can't argue with that. Says Mikel Harry:
"I could genetically engineer a Six Sigma goat, but if a rodeo is the marketplace,
people are still going to buy a Four Sigma horse."