Six Sigma’s Effect on Shareholder Value

                According to the dated 2001 Fortune Magazine article on Six Sigma, there is little shareholder value in Six Sigma and it has little effect on stock price.  Lee Clifford argues that Six Sigma is hokey and may improve quality, but has negligible upside to the investor (Clifford, 2001).  It is important to note that, although Six Sigma started at Motorola in the 1980s, causing them to win the Malcolm Baldridge National Quality Award, its adaptation by GE and other companies did not take place until 1995 (GreyCampus, n.d.).  Lee Clifford wrote is article near the beginning of the Six Sigma movement.

                Twenty years later, it is plain to see that Six Sigma is effective in reducing costs and improving quality, but so are other models such as Total Quality Management (TQM) by Deming, Theory of Constraints (TOC) by Goldratt, and the Toyota Production System (TPS) by Taiichi Ohno.  Each model has a different focus.  TQM focuses, similar to Six Sigma, on reducing variation and statistical process control.  TOC focuses on bottlenecks and increasing throughput.  TPS focuses on value creation and lean, just-in-time processes (Stamm, n.d., p.6).  Each of these overlaps and improve processes, increasing value to the customer and to the company.  Many companies are implementing a combination of Theory of Constraints, TPS, and Six Sigma.  Since each of these models can be used for process and systemic improvement, they are all well-accepted.

                To counter the idea that Six Sigma does not offer any shareholder value, many companies are quick to show the effects of Six Sigma.  Lockheed Martin, for instance, won the Joint Strike Fighter contract worth over $100 billion due to Six Sigma, in addition to implementing Six Sigma in white-collar areas, reducing waste by $5 million in its second year of implementation (Flylib, n.d.).  DuPont credited Six Sigma for $3 billion in savings (Breyfogle, n.d.).  While stock price may not significantly outperform the S&P 500 (Goh, 2003), the increased quality and performance, increased throughput, increased revenue, and reduced waste drive shareholder value.  Stanford Hospital and Clinics saw that Six Sigma helped them gain market share from competitors while saving them $25 million annually in material costs (Flylib, n.d.).  Aveta Business Institute says “Increased stock value is another benefit of using this strategy. When a company uses this methodology in its practices, it is guaranteed to increase its revenue and client/customer loyalty. In doing this, returns for the shareholders are also set to increase” (Aveta Business Institute, n.d.).

                Six Sigma is valuable to any company, not just early adapters.  Even companies that already are implementing TQM, TPS/Lean, etc. can take advantage of the statistical process control capabilities of Six Sigma.  Aside from statistical process control. Six Sigma has a strength in the DMAIC method (Define, Measure, Analyze, Improve, Control) for improvement projects.  Once a DMAIC project is identified and implemented, it often has an ROI impact for the company.  The median project annual ROI is $150,000., according to TMAC Lean Six Sigma, although some projects have an annual ROI as high as $7.2 million (Yáñez-Moreno, 2015).  An improvement is an improvement, regardless of where a company is in its growth or maturity.

                According to Lee Clifford’s article, it is easy to use Six Sigma to identify defects and variation in the manufacturing industry, but it is not easy to apply Six Sigma to service industries like call centers (Clifford, 2001).  The key to implementation is create measures that can be collected in those service processes.  Identifying those key metrics and finding ways to measure those service processes can be a challenge.  According to Graeme Knowles, service industries have a human element and may have limited opportunities to inspect quality.  Despite the challenges, Six Sigma has improved service in emergency rooms, delivering $6 million in annual savings.  Logistics companies have seen $400,000 in annual savings due to reduction in shipping delays (Knowles, 2011, p.132).

                Since defects, errors, and waste may not be visible in-service industries in order to apply Six Sigma, it has a more limited role.  Not every statistical measure may be applied, as much data may be subjective or qualitative, thus more difficult to measure.  Process mapping, brainstorming, root cause analysis techniques, run charts, benchmarking, Pareto analysis, and change management are the most commonly used Six Sigma tools in the service realm.  Less common are statistical process control, design of experiments, and poka-yoke (Knowles, 2011, p.134).  Despite the additional difficulty of measuring defects in the service industry, companies in healthcare and other service industries find advantages from implementation of Six Sigma.

                Peter Peterka of SixSigma.us says that service organizations “are full of waste and ripe for the benefits of Six Sigma” although it is harder for service environments like financial, healthcare, retail, and hospitality organizations to apply Six Sigma principles.  Process transformation and training service managers in Six Sigma process analysis and problem solving will create the possibility of breakthrough process improvement.  Service companies that implement Six Sigma experience higher quality, therefore increased customer satisfaction, increased profit margins, reduced costs, and higher turnover (Peterka, 2008.).

                Six Sigma projects can also be used to identify market and improvement areas for products and services (Antony, 2011, p.187).  In addition, a quick Google search shows that many sales and marketing firms use Six Sigma to identify opportunities as well as to perform market research.  This makes sense because Six Sigma is a part of the organizational learning and improvement of a company when it Is implemented throughout an organization (Knowles, 2011, p.22), so it should affect sales and marketing departments as well as administrative, engineering and production.  Adopting a Market-In approach enables active engagement, collaboration, and feedback (data) from customers, assuring that products are in alignment with customer desires (Knowles, 2011, p.26).  The QFD Process (Quality Function Deployment), turns the voice of the customer into a product of service change.  The competitive assessment as a part of QFD identifies gaps in the market so that a product may be designed to meet customer requirements and fill that gap (Knowles, 2011, p.96).  Six Sigma can help find (or create) a market for a product or service.

                While, to Clifford’s credit, there is no sufficient evident supporting significant increase in stock price of companies that implement Six Sigma, it is actually quite difficult to measure.  Why?  Almost every company worth measuring is already implementing Six Sigma, whether successfully or unsuccessfully.  82% of Fortune 100 companies are using Six Sigma.  More than 53% of Fortune 500 companies have implemented Six Sigma, amounting to savings of $427 billion.  In other words, there is no data causation or correlation between Six Sigma and stock price.  It is a fair assumption that any successful business has some statistical process control program, whether Deming’s Total Quality Management (TQM), Six Sigma, or Lean driving process improvement and quality.

References:

Antony, J. & Kumar M. (2011). Lean Six Sigma: Research and Practice. London, UK: Ventus Publishing ApS; Bookboon.

ASQ Six Sigma Business Solutions. (). Save Your Company a Fortune. Retrieved from http://asq.org/public/six-sigma-training/asqsigma.pdf

Aveta Business Institute. (n.d.). Benefits of Financing Employee Six Sigma Training. Retrieved from https://www.sixsigmaonline.org/benefits-of-financing-employee-six-sigma-training/

Breyfogle, F. (n.d.). Debunking Dubious Statistics from a Six Sigma Critic.  Retrieved from https://www.isixsigma.com/implementation/debunking-dubious-statistics-six-sigma-critic/

Clifford, L. (2001). Why You Can Safely Ignore Six Sigma The management fad gets raves from Jack Welch, but it hasn’t boosted the stocks of other devotees. Retrieved from https://money.cnn.com/magazines/fortune/fortune_archive/2001/01/22/295545/index.htm

Flylib. (n.d.). The ROI of Lean Six Sigma for Services. Retrieved from https://flylib.com/books/en/2.527.1/the_roi_of_lean_six_sigma_for_services.html

Goh, T., Low, P., Tsui, K., Xie, M. (2003) Impact of Six Sigma implementation on stock price performance, Total Quality Management & Business Excellence, 14:7, 753-763, DOI: 10.1080/1478336032000090969

GreyCampus. (n.d.). History of Six Sigma. Retrieved from https://www.greycampus.com/opencampus/lean-six-sigma-green-belt/history-of-six-sigma

Knowles, G. (2011). Six Sigma. London, UK: Ventus Publishing ApS; Bookboon.

Peterka, P. (2008). Why Six Sigma Will work in Service Environments. Retrieved from https://www.6sigma.us/six-sigma-articles/why-six-sigma-will-work-in-service-environments/

Stamm, M., Neitzert, T., Singh, D. (n.d.). TQM, TPM, TOC, Lean and Six Sigma – Evolution of manufacturing methodologies under the paradigm shift from Taylorism/Fordism to Toyotism? Retrieved from https://core.ac.uk/download/pdf/56363032.pdf

Swift, P. (2016). What are the Key Benefits of Lean Six Sigma. Retrieved from https://www.pacific-international.com/blog/2016/05/what-are-the-key-benefits-of-lean-six-sigma

Yáñez-Moreno, A. (2016). What Payback Can You Expect from Your Lean Six Sigma Project. Retrieved from https://texasleansixsigma.com/financial-impact-from-lss-project/

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