RLM & Associates LLC
Your Lean Six Sigma & Project Management Trainers
Lean Six Sigma DMAIC Workshop
Green Belt Part 4
4/9/2015
© 2010 RLM & Associates LLC
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Financials
Financials
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© 2010 RLM & Associates LLC
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Why We Measure - Recipe for Success
CSF: Quantifiable
Measures & Results:
6σ projects should be
designed to pay their
way…
Quantifiable benefits
must be traceable to
the organization’s
bottom line
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© 2010 RLM & Associates LLC
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Why We Measure the Financial Impact
Primary reason is to ensure financial benefits
from projects are real … validates success
and establishes credibility
 What gets measured, gets done
 Drives bottom-line focus
 Forces value-add mind set
 Facilitates filtering and prioritization of projects
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Establishing the Financial Baseline
 Baselines reflect the current “as-is” state of the
process
– Current revenue or cost structure
– Use budgetary approach
 Determine the ORGANIZATION’s resources
consumed at each step of the process
– Head count, material, overtime, external
charges (contracts, etc.), expediting charges,
etc.
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© 2010 RLM & Associates LLC
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Establishing the Financial Baseline
 Baselines should concentrate on the relevant
costs – those costs that will be impacted by
your project
 For example, a project targeted at reducing
packaging costs could ignore freight,
forwarding, and duty costs if they were
unaffected by the packaging
 It is still important to understand all costs to
be sure the project is targeted in the most
appropriate area
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© 2010 RLM & Associates LLC
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Establishing the Financial Baseline
 Baselines for period costs or costs that
have little variation should generally
represent the most recent month’s
cost structure
 Baselines impacted by seasonality
will generally need to be established
over a longer period of time
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© 2010 RLM & Associates LLC
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Establishing the Financial Baseline
 Areas with great variability will also
generally need to establish their
baselines over a longer period of time
 Regression can be used to project
historical baselines of measuring
incremental sales
 Sound judgment will be required
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© 2010 RLM & Associates LLC
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Level I Benefits
Nature…
Examples…
 Direct and certain impact
on the bottom line
 Clear cause and effect
 90% confidence required
 The improvement must
be real…there must be
economic substance
 Each cost element must
be analyzed separately
 Period cost reallocation
doesn‘t count
 Demonstrated
improvement required
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 Material cost reduction
 Certain warranty
reductions
 Reduction in overtime
 Cancellation of external
lease
 Enterprise headcount
reduction
 Incremental volume
 Price realization
 Direct freight reduction
 Scrap reduction
© 2010 RLM & Associates LLC
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Level II Benefits
Nature…
Examples…
 Productive redeployment
of resources
 Must be whole person
 The improvement must
be real…there must be
economic substance
 Need must be
demonstrated
 Level II resource
redeployments
 Efficiently by reducing
additional resource
requirements
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 People redeployed in
support of enterprise
growth with
documented senior
management approval
 Equipment
productively
redeployed to a
different plant/process
thereby avoiding
capital spend or
outsourcing of
operation
© 2010 RLM & Associates LLC
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Level III Benefits
Nature…
Examples…
 Generally less direct &
certain than Level I
benefits
 70% confidence
required
 Includes avoidances
 Benefits measured on
Net Present Value
 People made available
for redeployment
 Demonstrated
improvement required
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 Benefits from projects
that qualify for NPV
based measurement
 Margin on incremental
volume with 70%
confidence
 Cost or capital
avoidance
 Reduction in current
manpower requirements
where headcount is not
redeployed.
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Analyze
Analyze
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Analyze Process Flow
Review
Analysis Tools
Apply
Graphical
Analysis Tools
Identify
Sources of
Variation
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Key Concepts
 Graphical Analysis
 Root Cause
 Root Cause Verification
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Analyze Objectives
 State the definition and purpose of
the basic tools for graphical analysis
 Describe the application and use of
the basic tools for graphical analysis
 Describe the methods for verifying
root cause(s)
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Analyze Phase
 Looking to target further
improvement opportunities by
taking a closer look at the data
 ”News you can use!”
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Graphical Analysis Tools
 Produces a graphical representation of
the data based on a chosen set of
parameters
 Attribute Data Tools
– Pareto Charts
 Variable Data Tools
–Run Chart
–Histogram
–Scatter Plots
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© 2010 RLM & Associates LLC
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Pareto Analysis
Pareto Charts –A Way to Stratify Data
 Pareto analysis is used to organize data to
show what major factors make up the
subject being analyzed. It is frequently
referred to as “the search for
significance.”
 The basis for building a Pareto is the
80/20 rule. Typically, approximately 80%
of the problem(s) result from
approximately 20% of the causes.
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© 2010 RLM & Associates LLC
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Pareto Construction
How to Construct a Pareto Diagram
1. Identify data to be used.
2. Select categories to be explored. Remember you are
“searching for significance”, some of those stratifications may
not yield the “significant few.”
3. Sort the data into categories and make the graph with the
bars ordered in decreasing frequency beginning from the left.
4. Check your Pareto for the 80/20 pattern, a “flat” Pareto
categories having similar percentages indicates the need for
different stratification of the data.
5. Check to make sure you haven‘t mixed dissimilar categories
or separated similar categories.
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Charting
Standard 3 UP Charts consist of:
 A Trend Chart in the upper left hand corner
 Trend charts show how a process or issue perform over time
 Trend charts may be line charts or bar charts
 Trend charts contain goal lines that increase (or decrease) over time
 Trend charts could contain trend lines that demonstrate the general
direction of the activity
 A Pareto Chart in the upper right hand corner
 Pareto charts display the causes of key issues leading to trends.
 Pareto charts prioritize the issues so action plans can be developed
 Pareto charts are bar charts that run most to least or worst to best
 Action Items go across the bottom of the page
 Action items are commitments/plans to address the issues
presented in the Pareto chart
 Action items are accompanied by owners and dates of completion
 Action items lead to an understanding that measurement alone will
not lead to change
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© 2010 RLM & Associates LLC
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Charting
Standard 4 UP Charts consist of:
 A Trend Chart in the upper left hand corner
 Trend charts show how a process or issue perform over time
 Trend charts may be line charts or bar charts
 Trend charts should contain goal lines that increase (or decrease)
over time
 Trend charts could contain trend lines that demonstrate the general
direction or the activity
 A Pareto Chart in the upper right hand corner
 Pareto charts display the causes/reasons/breakdown of key issues
leading to trends.
 Pareto charts prioritize the issues so data-based action plans can
be developed
 Pareto charts are bar charts that run from most to least or worst to
best
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© 2010 RLM & Associates LLC
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Charting
Standard 4 UP Charts consist of:
 Action Items go in the lower left hand corner of the page
 Action items are commitments/plans to address the issues
presented in the Pareto chart
 Action items are accompanied by owners (1 per action) and dates
of completion
 Action items lead to an understanding that measurement alone will
not lead to change
 Barriers and Issues go in the lower right hand corner
 Barriers and issues are things or situations that prevent owners
from completing their action items
 Barriers and issues provide updates when no action items have
been completed
 Barriers and issues explain delays
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Problem Statement
 Stratification of the data gathered should result in the
construction of the problem statement. An effective problem
statement summarizes findings with clarity and objectivity.
 Good problem statements describe in specific terms what the
data reveals and the target to be achieved. It will also present
the undesirable state while avoiding solutions.
 Criteria
– States effect: What is wrong, why it is wrong (to business)
– Focuses on gap: Deviation from what is to what is expected
(targeted performance)
– Measurable: How often, when, how much
– Focus on the pain: Highlights the affect it has (to customer)
– Targeted performance: Performance level expected to
achieve
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© 2010 RLM & Associates LLC
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Notes of Caution
Sigma
High Sigma
(Few Defects)
Low Sigma
(Many Defects)
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Big Contributor?
Yes
Big Contributor?
No
Use Impact (Defects vs. Don’t bother with these
Target) to determine
problems at this time
whether to work on
these problems
Work on these
problems first
© 2010 RLM & Associates LLC
Use Impact (Defects vs.
Target) to determine
whether to work on these
problems
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Analyze
Analyze
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Run Charts
 Used to monitor process measures to see
if the average is changing
 Actual number is not as important as the
observable trend
 DANGER!! Beware of averages
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© 2010 RLM & Associates LLC
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Run/Trend Charts
What:
 Displays a representation of the data over
time
 Monitors a system or process to see
whether or not the long range average is
changing
 Most valuable in identifying meaningful
trends in shifts of the average
 Use for simplistic trend display within
observation points over a specified period of
time
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© 2010 RLM & Associates LLC
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Run/Tend Charts
How:
1. Determine process and time period
2. Collect the data
3. Build the Chart
 Determine scale
 Time across bottom - Frequency on the vertical
4. Plot data points
5. ”Connect the dots”
6. Determine desired state and time frame
7. Plot improvement goal line
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© 2010 RLM & Associates LLC
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Histogram Charts
What: A visual representation of the distribution, or
variability of your data
When: You want to analyze a specific measurement
for variation or capability of meeting customer
expectations
How:
1. Review your data for the minimum and maximum
number
2. Compile like numbers
3. Plot on vertical bar graph
 Frequency of occurrence on the vertical axis
 Data/number/criteria on the horizontal axis
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Histogram of Material Spend %
Defects (Over 50%)= 826
Opportunities (Jobs)= 11593
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Overall DPMO= 71,249.89
Overall Sigma Level= 2.95
© 2010 RLM & Associates LLC
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Next Steps
 Correlation vs Causation
 Items that appear to be related show …..
 Items that have been proven to be
related show …..
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Scatter Plots
 Identifies possible relationships between two
different variables
 One variable is plotted on the horizontal axis, the
other on the vertical axis
 Direction and ―tightness‖ of the plotted points
provide a clue as to the strength of the relationship
 A straight line indicates a strong positive
relationship in the two variables -correlation
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SAT Scores by Year
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Hypotheses Testing
Correlation
– ”P” Values
– If “P” is low, the null must go”
– The null hypothesis indicates that
there is not a relationship between
two variables
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© 2010 RLM & Associates LLC
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Graphical Tools Tips
 Consider what might be discovered in the
data and select the tool that offers the
appropriate analysis
 Try various tools to look at the data in as
many different ways as possible
 No single tool will provide all of the
answers
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© 2010 RLM & Associates LLC
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Team Exercise
Determine Potential Root Causes
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Root Cause Objectives
 Develop potential root causes
– Possible explanations for the problem
 Refine, reject, or confirm ( hypothesis) using
– Data
– Process Analysis
– Experience
 Select the most important root cause
– The vital few x‘s
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How?
 Re-examine existing data and analysis
 Collect additional data if needed for
further clarification
 Turn the problem situation on and off
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Guidelines
 DO NOT use opinions to verify root causes.
Do not assume that this is the cause.
Check it out.
 Use the existing cause and effect diagram
to focus on a few deeper causes
 Visually note whether or not ―verified‖
root causes have been addressed on the
diagram
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© 2010 RLM & Associates LLC
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Sources of Variation
Determine the Root Cause of the Problem
The objective of sigma process improvement is to
permanently eliminate the root cause of defects, which are the
source of customer‘s dissatisfaction and poor business results
Y = f (X) = X1 + X2 + X3 . . .
Suppliers
Process
Inputs
Business
Processes
Process
Outputs
CCRs
Defects
X’s
Y
are activities or factors within the process that
are the root cause of variation in Y
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© 2010 RLM & Associates LLC
Variation in the
output of
processes causes
defects
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Searching for the Sources of Variation
Problem Investigation
 Identify events that occurred “What happened?”
 Identify conditions that exist now or before failure
 Keep in mind “What changed?”
 Single case boring –walk through failure/event
 Investigate location of defect
- Environment
- Position
 Investigate the defect type
- Material
- Differences in products
 Investigate symptom
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Searching for the Sources of Variation
 Clues to solving the problem lie in the
problem itself
 Some of the information/knowledge
obtained in the field can not be put into
data form. But works as a catalyst in a
chemical reaction and gives us new
hints for solving the problem during
the ‘thinking’ process for probable root
causes.
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Searching for the Sources of Variation
Obstacles
Guidelines for Surmounting Them
1. Root causes are not easy to find
•Challenge initial assumptions.
•Be persistent.
•Seek input from as many sources as
possible.
2. Pressure for quick solutions
(managers, customers,
stakeholders, etc.)
•Be patient. Do not jump to conclusions.
•Do not overlook easy opportunities.
•Communicate interim results to outsiders
3. Preconceived notions for causes
•Let data reveal the true picture problems.
•Bring out and explore dissenting views.
•Use analytical tools.
4. Resistance to collecting more
•Look for data that is already available.
•Collect data intelligently. Look for
opportunities to collect cause data during
initial data collection efforts.
•Distribute the workload evenly among all
team members.
•Plan data collection. Use good checksheets
and collect the right data the first time.
data
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Ishikawa Diagram
 Perhaps the most useful tool for identifying root
causes is the cause and effect diagram. It
goes by several names (Ishikawa, fishbone, etc.)
and there are a variety of ways to use it. The
cause and effect diagram is primarily a tool for
organizing information to establish and clarify
the relationships between an effect and its main
causes.
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Ishikawa Diagram
 The cause and effect diagram identifies the potential root
cause(s) of the problem so that collective actions can be taken
to eliminate their recurrence. The cause and effect diagram
assists in reaching a common understanding of the problem and
exposes the potential drivers of the problem.
Receipt
Process
Rushed salespeople
Hourly
completion
required
Rushed salespeople
Too many sales
Salespeople
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Analyses were
unable to verify
40% of January
receipts
Not enough
sales
coverage at
peak times
© 2010 RLM & Associates LLC
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Ishikawa Construction
Major Categories
There are different approaches used to determine the
major categories.
1. Most common approach utilized is using “generic”
categories (6Ms) of:
–
–
–
–
–
–
Man
Method
Machine
Material
Mother Nature (environment)
Measurement
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Ishikawa Construction
2. Use the major activities of the process from
your flowchart, assigning each a major bone on
the diagram
3. You may brainstorm possible causes of the
observed effect. After the list is generated,
affinitize into major categories to be used as
major bones on the diagram
4. “Prioritize” the major categories in descending
order, with your “most likely” closest to the
effect
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How to Construct a Why-Because Diagram
1. Write the cause you want to analyze (from the Ishikawa
diagram) in the left box
2. Ask “why” the cause occurs
3. Note the answer(s) in a connecting box
4. Repeat steps 2 and 3 until a particular path is exhausted
5. Pursue other paths until the exercise is completed
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Potential Root Causes
Once the fishbone is set up with the major categories, begin with the
“most likely” –the questioning of “why.”
• Why does this occur?
• Why does the condition exist?
Root Cause –Most Basic Reason a Problem Has or Could Occur
1. Ask “Why” 3 -5 times
–Why is this failure mode active?
Progressively becomes more difficult and
a more thought provoking assignment
Symptom 1
‘why”
Symptom 2
‘why”
Early questions are usually superficial,
obvious; the later ones more substantive
Symptom 3
‘why”
Why did this
happen?
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Symptom 4
And more “why’s”
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Probable Root Cause
50
Potential Root Causes
2. Get to something “Actionable”
- Something can be done that will, if fixed,
prevent problem from existing or recurring
- Revisit each sub-bone for additional causes
- Complete the entire cause and effect diagram
using this same methodology
- Identify the most likely root causes and circle or
cloud them –the last element in the chain you
identified
- Verify the potential root causes using data
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Root Cause – Most Basic Reason a Problem
Has or Could Occur
3. Check the logic in reverse direction
– Probable root cause can cause symptom 4 to occur
– Symptom 4 can cause symptom 3 to occur
– Symptom 3 can cause symptom 2 to occur
– Symptom 2 can cause symptom 1 to occur
– Symptom 1 can cause failure
Why is this failure mode active?
Symptom 1
‘can
cause”
Symptom 2
‘can
cause”
Symptom 3
‘can
cause”
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Symptom 4
“can
cause”
© 2010 RLM & Associates LLC
Probable Root Cause
52
Histogram of Material Spend %
4. Check the logic from probable root cause to problem/top event
– If the probable root cause is eliminated or corrected, would it
prevent the problem from existing or occurring?
– When the probable root cause occurs, does the problem occurs?
5. No procedure and no training are usually potential solutions, not a
potential root cause
No Procedure
Identify the Knowledge Gap
No Training
Identify the Skill Deficiency
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Example
 Why do we mop the walkways?
– Because oil gets tracked onto them
 Why?
– Because oil collects under one of the machines
 Why?
– Because the machine leaks
 Why?
– Because a valve is broken
 Why?
– Because it is worn out and we did not notice it
 How can we get it fixed?
– Maintenance will order the part and replace it
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Team Exercise
Determine Potential Root Causes
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