Six Sigma and JIT

ACCA P5 Advance Performance Management

Normal Distribution curve is a bell shaped curve that extends indefinitely in both directions, coming closer to the horizontal axis without touching it. Most of data relating to economic and business statistics or even in social and physical science conform to this distribution. The normal curve is not just one curve but a family of curves.

Six Sigma: It is quality management program pioneered by Motorola in 1980s. This uses normal distribution curve as a backbone for quality improvement. Sigma stands for standard deviation. Six sigma is the tolerance level therefore if error is beyond this level there will be fewer than 3.4 defects in every one million unit produced.

Requirements for successful implementation:

Ø  Should focus on customer

Ø  Should be linked to strategy and communicated effectively

Ø  Target for a process should be related to main drivers of performance

Ø  Requires committed senior management

Five steps of the Six Sigma process

Ø  Define Opportunity

Ø  Measure Performance

Ø  Analyze Opportunity

Ø  Improve Performance

Ø  Control Performance

The process is iterated until the quality (99.999%) is achieved. The process is heavy data driven, technical, time consuming and expensive. Employees in bottom-line may not understand the purpose therefore it needs supportive culture for implementation.

Just in time: JIT seeks to eliminate inventory of raw material (using reliable suppliers providing high quality goods rather than lowest cost and suppliers are often located in close proximity to the manufacturing plant) as well as of finished product (eliminate internal or external queues of customers by producing products to meet customer orders).

Impact of JIT:

Ø  Allowance for waste, scrap and rework are moved to the ideal standards, rather than achievable standards.

Ø  Reduce cost of holding inventory

Ø  Makes it easier to switch to backflush accounting

Drawbacks in JIT:

Ø  Product/service costs increase – suppliers demand marginal increase in price than normal price

Ø  Loss of bulk discount

Ø  Not suitable for unstable economy - economy with hyperinflation

Ø  Potential loss of windfall orders because of not holding finished products

Ø  Problems from unreliable suppliers if any