April 29, 2009 / 4:09 AM / 11 years ago

ANALYSIS - Six Sigma mystique takes beating in downturn

CHICAGO (Reuters) - U.S. companies have spent hundreds of millions of dollars adopting Six Sigma, the popular business management system inspired by Toyota Motor Corp’s legendary approach to manufacturing.

They justified the investment by claiming Six Sigma, and its emphasis on measuring and improving processes to eliminate waste and cycle times and improve quality and delivery times, would make them leaner and more nimble — in good times and bad.

So why are companies that embraced Six Sigma — like General Electric Co, Caterpillar Inc and Motorola Inc — doing no better in this downturn than the companies that ignored it?

Caterpillar, for instance, reported its first quarterly loss in 17 years last week and lowered its full-year profit and sales forecast. Earlier this month, GE reported a sharp drop in income because of troubles at its hefty finance arm. And Motorola has already warned of a deeper-than-expected loss when it reports this week.

Given the vast sums these companies have collectively spent on the quality-improvement system over decades, it seems reasonable to ask whether the global recession has taken the bloom off the Six Sigma rose.

In his new book “Enough,” John Bogle, the legendary investor and founder of the Vanguard Group, partially blames the focus on metrics — a hallmark of Six Sigma — for the disastrous business decisions that led to the current crisis.

“With Six Sigma,” Bogle told Reuters this week, “you’re counting just about everything that can be counted. And my problem is that process triumphs over judgment.”

Tom Peters, the management guru, agrees. “You can measure everything except what’s important,” he said. “And you could say that it was exactly that which couldn’t be quantified, that which wasn’t real, that got us in this trouble.”

BETTER PRODUCTS TOMORROW

Developed in the 1950s by Japanese companies like Toyota under the tutelage of U.S. manufacturing guru W. Edwards Deming, the practices now referred to as Six Sigma were originally just a way of reducing waste and cost on the factory floor, while improving quality and delivery times.

In the 1970s, U.S. manufacturers began adopting it in response to the threat posed by the Japanese. And it worked.

“Americans were getting hammered because we produced crappy quality, period,” Peters said. Thanks, in part, to Six Sigma, “we did a pretty damned amazing job at coming back.”

Over the years, its process improvement techniques were adopted by plenty of nonmanufacturers, including Bank of America, Countrywide, Merrill Lynch, and Amazon.com.

Measurement is at the very heart of Six Sigma.

Practitioners collect data, create matrices and charts and generate statistics to determine relationships.

“Six Sigma is a very alluring, scientifically coded way of saying, ‘Tomorrow, we have to build better products than we built yesterday,’” said James Schrager, a professor at the Booth Graduate School of Business at the University of Chicago.

“Here’s the problem: The game isn’t just who builds the best products. Life is a battle against uncertainty.”

Six Sigma, with its focus on metrics and certainty, can lure companies into believing they have better visibility than they really do, Schrager and others argue. This leaves companies vulnerable to getting blindsided by events.

“It can be overdone,” Peters said. When it is, he said, the result is “big companies getting caught flat-footed.”

‘SICK SIGMA’

It has always been easy to ridicule Six Sigma. The name — given by Motorola Inc, which codified Six Sigma in the 1980s and trademarked it — is a statistical term, meaningless to lay ears and yet vaguely sinister, perhaps conjuring thoughts of a certain medical procedure involving the lower colon and a semi-rigid probe.

The association, wags insist, is not inapt.

In practice, it looks like a cross between “The Principals of Scientific Management” and “The Teenage Mutant Ninja Turtles,” deploying teams of workers — with titles based on the colored belts used in the martial arts — to karate-chop waste and inefficiency out of their businesses.

Then there is the almost cultish devotion it inspires in some corporate adherents, a psychological effect that has prompted skeptics to dub it “Sick Sigma.”

And that’s the rub. So many top U.S. companies have embraced Six Sigma that it feels a bit unwise to mock it. What if its proponents are really on to something?

Dave Burritt, the chief finance officer at Caterpillar, who took a lead role in championing Six Sigma when his company adopted it in 2001, certainly thinks so.

Asked if there were any areas of business life where Six Sigma was not relevant, Burritt did not hesitate. “Six Sigma,” he told Reuters, “can be applied to everything.”

SUBSTANCE, NOT HYPE

Defenders say the current downturn, far from denting Six Sigma’s reputation, is enhancing it.

While they acknowledge Six Sigma did not help them predict and avoid the downturn, they insist no one ever claimed it would.

“You’re dealing with a global economic problem that is a one-in-80-year event,” Keith Sherin, GE’s CFO, told Reuters. “I wish Six Sigma had been able to keep us out of this.”

What it is allowing them to do, they claim, is respond to the crisis more quickly than in the past. Sherin and Caterpillar’s Burritt both claim that Six Sigma is helping them improve their working capital positions and reduce cost structures.

Alex Blanton, an analyst at Ingalls & Snyder who has covered Caterpillar for nearly four decades, says Six Sigma’s benefits were evident in the company’s latest results.

While Caterpillar reported a first-quarter loss because of more than $550 million in layoff charges, it actually reported a better-than-expected profit on an operating basis.

Even more remarkably, it managed to increase gross margins and reduce inventories, even as sales slumped.

“In the past it would have gone the other way. The company would have increased inventories when sales went down because it couldn’t reduce its production fast enough,” Blanton said.

“So Six Sigma isn’t just a bunch of buzzwords. Yes, they use this funny-sounding terminology ... But it’s a very serious effort. It works and you can see the results right here in this quarter.”

Additional reporting by Scott Malone in Boston

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