August 16, 2015

Six Sigma Process Performance Metrics

Resource: Traditional performance metrics Operation level Metrics Process Metrics Defect Relationships DPU Benchmarking Determine Current Practices Identify Best Practice Analyze Best Practices Model Best Practices Repeat the cycle ROA = Net Income / Total Assets ROI = Net Income / Investment Defects per unit opportunity: DPO =DPU/O = D / UxO

Process Performance Metrics

Traditional performance metrics
Business level metrics
Business level metrics are typically financial (external) and operational (internal) summaries for
Shareholders and management.
Kaplan and Norton (1996) introduced the Balanced Scorecard for business level management Metrics in the following areas:
•Customer Perception
•Internal-Business-Process (operational)
•Company Learning and Growth
•Employee satisfaction

Traditional end-of-period cutoff reports are not sufficient for Six Sigma projects.It is Recommended to use statistical process monitoring and control techniques to process raw Business data.

Operation level Metrics

•Operational efficiency measures
•Cost measures
•Time measures

Process Metrics

Six Sigma Metrics
Harry (2000) introduced a significant new group of metrics for Six Sigma that serve to:
•Measure customer opinions
•Determine customer critical to quality (CTQ) factors
•Measure product outcomes (throughput yield, rolled throughput yield, normalized yield)
•Correlate process outcomes to CTQs(measure processes with metrics that correlate to company’s fundamental economics)

Widely used symbols
•Defects = D
•Units = U
•Opportunities (for a defect) = O
•Yield = Y
Defect Relationships
•Total opportunities: TO = TOP = U x O

•Defects per unit: DPU = D/U also = -ln(Y) (See yield)

•Defects per normalized unit: = -ln(Ynorm) (See yield)

•Defects per unit opportunity: DPO =DPU/O = D / UxO

•Defects per million opportunities: DPMO = DPOx106

Yield = Probability (Defect free unit), when Yield= 1 = 100%, zero defect.

Yield or first pass yield: Y = DPU= e^-DPU


Benchmarking sequences

Determine Current Practices
•Select problem area •Identify key performance factors •Understand your own processes and processes of others •Select performance criteria based on need and priorities

Identify Best Practices
•Measure the performance within the organization •Determine the leader(s) in the criteria areas •Find an internal or external organization to benchmark with

Analyze Best Practices

•Visit the organization as a benchmark partner•Collect information and data of benchmark leader•Evaluate and compare current practices with the benchmark•Note potential improvement areas

Model Best Practices

•Drive improvement changes to advance performance levels•Extend performance breakthroughs within the organization•Incorporate the new information in business decision making•Share results with benchmark partner•Seek other benchmark leaders for further improvement

Repeat the cycle

Project Financial Benefit Analysis

Return on Assets (ROA)

ROA = Net Income / Total Assets
Net income for a project is the expected earnings and total assets is the value of the assets applied to the project.

Return on Investment (ROI)

ROI = Net Income / Investment

Payback period

Payback period is the smallest n such that Cash InFlow >= Initial Investment

Net Present Value (NPV) and Internal Rate of Return (IRR)