Six Sigma in the Supply Chain
Did you know that 10% of orders in most companies have some form of defect? This statistic represents an economic loss and potential damage to a company's reputation and customer satisfaction. In an increasingly competitive business world, efficiency in supply chain processes becomes crucial in reducing costs and ensuring customer satisfaction.
In this article, we'll explore how the Six Sigma methodology, renowned for improving quality and efficiency, can transform your supply chain. We'll take you through four vital Key Performance Indicators (KPIs) and show you how process digitization can be a key component in implementing Six Sigma. Keep reading to discover how to optimize your supply chain and enhance your company's success!
What is Six Sigma?
Six Sigma is a continuous improvement methodology focusing on defect reduction and process optimization. It relies on data collection and analysis to identify areas for improvement and implement effective solutions. The philosophy of Six Sigma centers around quality, reduction of variations, and customer satisfaction.
Implementing Six Sigma in the supply chain involves identifying critical areas for improvement and applying the DMAIC methodology (Define, Measure, Analyze, Improve, and Control) for continuous optimization.
KPI 1: Perfect Order Rate - Making Defect-Free Delivery a Reality
Imagine an online store struggling with recurring defects in orders, such as missing or damaged items. The Perfect Order Rate, which measures the proportion of orders processed without defects and delivered on time, becomes a focal indicator for improving the operations of this company.
To address this issue, a Six Sigma project team gathered to find a permanent solution. They first explore the root of the problem, identifying the most common types of defects and their impact on customer satisfaction. Then, they measure the current perfect order rate, shedding light on the magnitude of the challenge. In the analysis stage, they deploy Six Sigma tools, such as Pareto charts, to uncover the leading causes of defects.
Once the root causes are identified, they implement improvements. These improvements may involve staff training and reviewing packaging processes, ensuring greater accuracy at each step. This is where supply chain digitization comes into play. Using a Warehouse Management System (WMS), product locations in the warehouse can be accurately tracked, ensuring efficient inventory allocation to orders. Additionally, it facilitates seamless, real-time communication between warehouse and shipping teams, reducing errors and improving order accuracy. This translates into a tangible improvement in the Perfect Order Rate, increasing customer satisfaction.
KPI 2: Cash-to-Cash Cycle Time - Streamlining Cash Flow
A manufacturing company faces a critical challenge: the cash-to-cash cycle, measuring the time between paying for raw materials and receiving payment for sold products, affects cash flow and the ability to invest in growth. This key metric becomes a priority for improving the company's financial efficiency.
A Six Sigma team gathers to find solutions to address this significant financial challenge. They begin by defining the problem and measuring the current cash-to-cash cycle time. The analysis stage reveals delays in payments to suppliers and in receiving payments from customers as the primary sources of the problem.
Once critical areas are identified, the team implements improvements. Digitization, once again, plays a crucial role. A Transportation Management System (TMS) becomes an essential tool. The TMS enables precise tracking of cash flow related to product transportation, facilitating the identification of payment delays and revenue receipts. With this information, the company can improve billing and payment processes, reducing the cash-to-cash cycle time and freeing up capital for strategic investments and sustainable growth.
KPI 3: Fill Rate - Efficiently Meeting Customer Demand
Fill Rate, measuring the proportion of orders immediately satisfied with available inventory, is a crucial indicator. It evaluates how many orders can be completed instantly with the stock on hand.
To tackle the challenge of maintaining a high Fill Rate, a Six Sigma team meets and measures the current Fill Rate. Then, in the analysis stage, they use Six Sigma tools to identify the main reasons behind delays and errors in the order preparation.
However, modern technology also plays a crucial role in improving the Fill Rate. Here, a voice-picking system guides warehouse workers through product locations using voice commands, reducing human errors and significantly speeding up the selection process. This ensures products reach customers on time and without errors and increases customer satisfaction, strengthening the company's reputation and success in the market.
KPI 4: Inventory Turnover - Optimizing Stock Management
Consider a food company facing a significant challenge: inventory turnover, measuring how often its complete inventory is sold within a specified period, is lower than desired, resulting in additional costs and product spoilage due to expiration.
Once again, a Six Sigma team must focus on improving this KPI. They begin by identifying the root of the problem and measuring the current inventory turnover. In the analysis stage, they use Six Sigma tools to identify the main reasons behind low inventory turnover, such as excess stock or poor demand forecasting.
The company implements a Demand Planning System to improve inventory turnover, using advanced algorithms and data analysis to more accurately forecast future demand. This system helps prevent over-purchasing of products and ensures inventory aligns with actual demand. This not only reduces costs by avoiding excess inventory but also ensures products are available when customers need them, improving customer satisfaction and the overall efficiency of the supply chain.
Six Sigma is a practical methodology for improving the supply chain by focusing on quality and defect reduction. Implementing advanced technology for the supply chain is crucial in this process, providing tools for data collection, process optimization, and continuous performance measurement.
I have a BSc in Industrial Engineering from Tecnologico de Monterrey and a MSc in Financial Engineering and Risk Management from Imperial College London. I enjoy writing about the issues I’ve helped my clients solve over my almost 20 years’ experience as a supply chain consultant.