What Should You Measure?
By Jay Arthur
While most traditional improvement methods focus on manufacturing, the value in the marketplace has shifted away from manufacturing to transactions. Airline reservation systems are more valuable than the airlines themselves. To maximize the benefit of Transactional Six Sigma, you'll want to find ways to use Six Sigma on your transaction processes and errors.
Larry Downes and Chunka Mui identified six types of transaction costs in their book, Unleashing the Killer App, to which I'll add one:
- Search Costs - How much does it cost you in time and money to find new suppliers and customers?
- Information Costs - Buyers have to learn about your product or service. Sellers have to identify and "qualify" the customer.
- Bargaining Costs - How much does it cost to negotiate the terms of a sale? For a CD, not much; for a fleet of airplanes, probably much more.
- Decision Costs - How much does it cost in time and money to make the decision to buy one thing or another? How many sign-offs are required? Meetings? How many alternatives need to be evaluated?
- Policing Costs - What does it cost to ensure the terms of sale and service are met?
- Enforcement Costs - What does it cost to resolve unmet terms?
- IT Costs - And I'll add the information technologies cost of ordering, invoicing, purchasing, and payment processing.
Your Product or Service May Be Different, but...
Whenever I talk to business people, they all tell me how their business is different. Your product or service may be different or how you deliver it may be different, but you still have to take orders, purchase supplies, issue invoices or bills, write checks, apply payments, and handle the same financial transactions as any other business. The core of your business may be a product or service, but the key to whether you make a profit lies in how good you are at transaction processing.
With financial transactions, your cash flow depends on:
- Accuracy - right quantities, pricing, taxing, etc. It doesn't matter if you build the perfect product, if the customer asked for something else.
- Speed - How fast the transaction is created and processed (and how fast you can fix an incorrect one.) It doesn't matter if you make the best product, if it takes too long to get it ordered, delivered, installed, or paid for.
- Cost - What does it cost to create and process the transaction (and what are the scrap and rework costs when you have an incorrect transaction)?
The basic tools of Six Sigma - line, pareto, and fishbone - can be used to find and fix errors in orders, bills, and so on. A p chart and XmR chart can be used to monitor transaction errors and cash flow.
The basic tools of Lean can be used to find and eliminate the delays in transaction processing in ways that will accelerate your cash flow.
Here's my point
If you're only using Lean Six Sigma on your product or service, you're missing a golden opportunity to plug the leaks in your cash flow.