Benefits of Six Sigma in Supply Chain Management: Developing Various Frameworks

Pankaj M. Madhani

Introduction
In today’s competitive business environments, firms are under intense pressure to systematically
produce quality control and quality standards and generate positive bottom line results. Six sigma
deployment by organizations reduces cost of poor quality. Cost of poor quality is the cost
associated with poor quality of products and services and connects the improvement priorities of
a firm with its strategic objectives of enhancing financial performance and greater customer
satisfaction. Intensive competition in the market place has enforced organizations to focus on
process performance for enhancing the customer value. In the pursuit of improved operational
performance and higher customer satisfaction, Six Sigma has been recognized as a systematic and
structured methodology that attempts to improve process capability through focusing on customer
needs (Dasgupta, 2003). As per statistics, cost of poor quality is 10 percent of sales for companies
who are at “Six Sigma” level, about 15 to 20 percent of sales for companies who are at “four
sigma” level and about 20 to 30 percent of sales for companies who are at “three sigma” levels
(Clark, 1999).

There are diverse application of Six Sigma such as in manufacturing processes, automobile
industry, services such as healthcare and retail and supply chain management (SCM). Six Sigma
can be a powerful toolbox for supply chain process in terms of continuous improvement and hence
business performance. The Six Sigma can be used to develop a model for assessing, improving,
and controlling quality in the supply chain network. Six Sigma deployment in SCM is important
for overall performance and growth of business as it leads to improved productivity,
competitiveness, superior value creation, and market performance. However, there has been little
theoretical analysis and conceptual development of underlying Six Sigma deployment in supply
chain. It is mainly because practitioner oriented nature of Six Sigma. Hence, this paper works in
this direction, and provides insights of SCM process improvement in terms of efficiency and
effectiveness and resultant business value created by proposing various frameworks.

Literature Review
Six sigma is described as a business excellence strategy (Antony et al., 2007) and as being a
customer-driven (Nakhai and Neves, 2009), a project-driven (Assarlind et al., 2012) or a business-
driven (Savolainen and Haikonen, 2007) methodology, which focuses on decision making based
on statistical and non-statistical tools (Manville et al., 2012), to lead towards improving the
organization’s product, process and service (Savolainen and Haikonen, 2007) or financial
performance (Nakhai and Neves, 2009).

Kumar et al. (2008) studied a case of implementation of the Six Sigma approach for improvement
in service system by a major consumer electronics and appliance retailing company in the USA.
Kumar and Sosnoski (2009) highlighted the potential of Six Sigma inrealizing the cost savings and
improved quality by using the case study of a leading manufacturer of tooling.

______________________________________________________________________________
Madhani, P. M. (2016). “Benefits of Six Sigma in Supply Chain Management: Developing Various
Frameworks.” Materials Management Review, Vol. 13, No. 1, pp. 30-33.

Electronic copy available at: https://ssrn.com/abstract=2864212

Taner et al. (2007) studied and designed five case studies in healthcare to show the performance
improvement accomplished by Six Sigma presenting a road-map for problem solving and
service/process improvement. The findings showed that the healthcare organization gained a
greater ability to address challenges across the system; maximized resource utilization; reduced
redundancies, waste and rework; diminished bottle-necks related to scheduling; and improved
working conditions for healthcare personnel. The results showed that healthcare organizations are
able to increase their market share in the long run after Six Sigma implementation.

Kanji and Wong (1999) and Tan et al. (2002) have investigated the impacts of aligning supply
chain and quality management strategies with manufacturing goals and business performance.
Improving the quality of all supply chain processes leads to cost reduction, improved resource
utilization and improved process efficiency (Wang et al., 2004). Yeung et al. (2005) and Yeung
(2008) have studied quality-based supply chain strategies. A major difference between Six Sigma
and other quality approaches is that Six Sigma aims to achieve 3.4 defective parts per million
(Smith et al., 2002). Six Sigma focuses on reducing the number of opportunities that could result
in defects by shifting the emphasis from fixing defective products to making perfect products
(Antony and Banuelas, 2001).

Six-Sigma DMAIC and DMADV Methodology: Various Stages

Following are various stages of Six Sigma DMAIC methodology:

1. Define: What is the source of problem? What type of defects exists? What is it firms are
seeking to improve?
2. Measure: How is the process measured? What is the current capability of the process? How
is it performing in terms of variability?
3. Analyze: What are the most important causes of defects? Map the process, and prioritize
for action
4. Improve: How do we remove the causes of defects? Re-engineer the process and simplify.
5. Control: How can we maintain the improvements? Use statistical process control and
monitor performance.

Six Sigma DMAIC methodologies improves SCM performance by simplifying processes,

increasing flexibility, inventory reduction, smooth material flow, reducing time between order and
fulfillment and reducing sources of waste and delay.

DMAIC versus DMADV

Nature of supply chain projects may involve either design orimprovement – Six sigma projects
usually focus on either redesigning processes and systems or improvingperformance levels of
existing systems. Hence, Six-Sigma has two branches, depending on the focus for improvement,
as listed below:

(1) For existing products and processes, the DMAIC methodology applies.
(2) For new products and processes, the DMADV methodology applies.

The first three steps of define, measure and analyze in both cases are the same. For DMAIC, the
last two steps focus on improving and controlling existing product or process Inputs while for

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DMADV, the final two steps focus on designing and verifying the future product or process inputs.
DMAIC resolve issues of defects or failure, deviation from a target, excess cost or time, and
deterioration.

Six Sigma Deployment in SCM: Various Frameworks for Performance Measurement

Performance evaluation is one of the key issues in any management philosophy. One of the
pertinent issues in the context of Six Sigma deployment in SCM is to derive the right metrics to
evaluate the performance of the entire supply chain, individual members or subsets of members.
The operational measures such as low stock out level, responsiveness and customer service level
are the drivers of future financial performance, and financial success is the logical consequence of
doing the fundamentals well. It is thus necessary for any organization to consider performance
measurement of the entire supply chain and all of its entities as a strategic issue. In this context,
performance of supply chain network is measured in terms of efficiency and effectiveness drivers
of SCM.

A two stage methodological approach is adopted in this research paper for evaluating benefits of
Six Sigma deployment in SCM. In the first stage, research focuses on development of an
integrative framework for analyzing benefits of Six Sigma deployment in SCM. An integrative
framework identifies key drivers of performance improvement in SCM while business value added
framework developed in second stage identifies key processes of SCM value chain and emphasizes
resultant business value added (Madhani, 2016).

Development of Various Frameworks

A) An Integrative Framework
The deployment of Six Sigma in SCM has twin objectives; the objective of the customer
satisfaction (to mobilize overall supply chainpartners effort to improve levels of service and
enhance responsiveness) and objective of cost reduction (to link supply chain processes effectively
to reduce variability and enhance revenue and generate a profit). It is shown in an integrative
framework of Figure 1.

As shown in Figure 1, an integrative frameworkcombines two kinds of performance measures such

as efficiency (focus on financial performance measures and underlying financial benefits) and
effectiveness (focus on operational performance measures and underlying operational
improvements) in evaluation. In general, increase in sales that result from higher customer
satisfaction and cost reduction that resultfromthe decreases inmaterial, inventory and
transportation expenses are examples offinancial performance measures. Operational performance
measures include improvement in cycle time, lead time, utilization rate and forecast accuracy, etc.
Six Sigma deployment in SCM have positive impact on entire supply chain network and enhances
customer value proposition (Figure 1).

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 - Enhanced competitiveness of firm
- Competitive advantage
- Best-in-class products and services at lowest price
- Higher customer satisfaction and retention
- Processes are focused on efficiency and effectiveness
Customer Value Proposition

Cost Customer
Reduction Satisfaction

6σ

Efficiency SCM Performance Drivers Effectiveness

- Financial benefits - Service levelimprovements
- Better inventory control - Respond quickly to customer needs
- Efficient warehouse management - On time delivery
- Administrative saving - Order completeness and correctness

Figure 1: Six Sigma Deployment in SCM: An Integrative Framework

(Source: Framework developed by author)

B) Business Value Added Framework

Value chain analysis describes the activities within and around an organization and links them to
the organizations’ competitive position. Therefore, it evaluates which value each particular activity
adds to the organizations’ products or services. According to Brown (1997), the value chain is a
tool to segregate a business into strategically relevant activities. This classification enables
identification of the source of competitive advantage by performing these activities more cheaply
or better than its competitors.

Porter describes customer value as the advantage that a firm creates for its customers byeither
lowering its customers’ costs or by raising its customers’ performance in real andperceived terms
(Porter, 1980). Slywotzky and Morrison (1997) used a ‘customer-centric’ approach to propose a
modern value chain in which the customer is the first link to all that follows. The role of added
value has long been accepted as a means of securing competitive advantage (Normann and
RamõÂrez, 1994; Naumann, 1995) and long-term success of the firm (de Chernatony and
McDonald, 1998). To demonstrate the ways in which Six Sigma deployment can generate overall
business values in SCM, Porter’s (1985) value chain framework is used as a basis to present a
business value added framework as shown in Figure 2.

Six Sigma deployment in SCM have positive impact on entire supply chain network and creates
values for an organization in terms of responsiveness, relatedness and refinement. Responding
quickly is essential in current era of intensive competitiveness. With Six Sigma deployment in
SCM, organization is able to respondmore quickly to the market demand. It also helps to deliver
the most relevant information torelated parties in supply chain network.Finally, it refines the

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operational process in the areas of logistics, inventory management, demand management and
customer relationship management (CRM).

The business values that are generated by using Six Sigma in supply chain can help firms advance
the operations in logistics and inventory management. Such Six Sigma deployment can enable
large savings in time and labor costs in inventory management, and enable a rapid response when
unexpected problems occur. In addition, it can help improve the use of space in warehouses,
distribution centers and retail stores. Six Sigma reduces variation within and across the value-
adding steps in a supply chain. Six Sigma deployment in SCM refine the operational process in
the areas of logistics, inventory management and CRM. Improved performance in these major
activities will, in turn, enhance the overall efficiency of a firm, generate more sales volume, and
increase profits eventually. All these will contribute to the competitiveness of individual firms in
supply chain and, subsequently, may change the business ecology of the entire supply chain
partners.

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 Six Sigma Deployment in SCM

Six Sigma Stages

DEFINE MEASURE ANALYZE IMPROVE CONTROL

(Stage 1) (Stage 2) (Stage 3) (Stage 4) (Stage 5)

Improve Efficiency and Effectivenessof Processes

Efficiency Effectiveness

Enhances Efficiency and

Effectiveness of SCM

SCM Key Processes

Cost Reduction / Customer Satisfaction

Network (Provide the Value)

Customer Value Proposition

Sales, Net Income, RONA

Manufacturing flow and supplier

Enterprise Value
Supplier
Product development andcommercialization
Manufacturer
Distributor
Demand management and order fulfillment
Retailer
Customer
Customer service and relationship management

Returns management

SCM Value Chain Business Value Added

(responsiveness, relatedness, refinement)

Figure 2: Six Sigma Enabled Business Value Added Framework for SCM
(Source: Framework developed by author)

The major emphasis of the business value added frameworkis the creation of superior customer
value.Six Sigma DMAIC methodology identifies key requirements, deliverables, task, and
standard tools for SCM when tackling problem. Six Sigma methodology can effectively be
employed in SCM to measure, monitor and improve the performance of the whole supply chain
network. With six sigma deployment in SCM, organizations reduce cost and enhance customer
satisfaction. Such organizations create value for the customers by enhancing customer value
propositions. Organizations also create value for themselves by reducing cost. As such cost
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reduction and higher customer satisfaction result in to higher Sales, profitabilityand RONA
(Return on Net Asset) for organizations and ultimately higher enterprise value.

By deploying Six Sigma in SCM, firms can enhance business competitiveness and overall
customer value proposition.Deployment of Six Sigma by firms will produce profitability estimates
thatare more consistent with actual results and will in turn benefit from more consistent
andpredictable financial returns. These results in decreased information asymmetry between
supply chain partners and other stakeholders, and, with a decrease in information riskpremium, the
market risk of the firm will also decrease. Hence, it also decreasesthe seasonality, cyclicality, and
volatility of operating cycle, and hence ultimatelyreduces the working capital requirement and
investment in assets. As Six Sigma deployment in SCM increases customer satisfaction; it results
in long-term customer relationship and higher customer retention rate. Superior customer
satisfaction coupled with improved operational and financial performance levelsshould lead to
better overall firm performance.

Conclusion
Firms have to analyze, monitor and make improvements of their existing SCM processes in order
to beat market competition and stay competitive. Six Sigma’s analytical emphasis would steer the
improvement projects to investigating and resolving root causes, rather than mere symptoms of
SCM problems. Six Sigma is a customer focused improvement strategy. With Six Sigma
deployment, improvement in the quality of all supply chain processes leads to the simultaneous
reduction of costs and enhancement of services. Both Six Sigma and SCM are complementary in
nature and hence considered as two pillars of business improvement. An integrative framework as
well as the business value-added framework developed in this paper focuses on how efficiency
and effectiveness drivers of SCM and accompanying business values generated by Six Sigma
deployment in SCM may affect an organization’s business performance.

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