Key Points

• Implementing Six Sigma can be an opportune way for a company to reduce defects and improve customer experience.
• If a company wants to see how well Six Sigma is performing, it needs to know what metrics are necessary to show results.
• The hope is that Six Sigma integration receives top-down approval so all employees are on board.

One of the world’s most common and best-known quality improvement methodologies, Six Sigma, is seemingly everywhere. Developed in the mid-1980s, it reduces the likelihood of defects and ensures that organizations or businesses use quality management techniques that directly lead to bottom-line profit improvements. 

As a result, there is always a question about how directly an organization should invest the return on investment into Six Sigma, especially beyond increased profits or margins. If a company is going to make a strategic investment in updating its processes through Six Sigma, there has to be a tangible way to measure whether it’s performing well or needs additional refinements. 

Why Return On Investment Matters

Ultimately, justifying a return on investment will help explain precisely why a program like Six Sigma has been integrated into a company’s structure. Leadership levels, like the C-Suite, and potentially even stakeholders, e.g., shareholders, will want to justify significant expenses paying off. The last thing anyone wants is to spend money only to see it wasted through no serious process improvements.

In a Six Sigma world, return on investment matters a lot, and it will be defined differently than just profits, which might be the most essential definition under other circumstances. However, in the world of Six Sigma, the return on investment might be reducing defects or increasing customer experience with products. 

The hope is that, from a straight ROI perspective in Six Sigma, it can be justified by showing both operational and financial value. This is likely the best way to show success to those who are writing the checks for programs such as these, like shareholders or a board of directors. 

Challenges of Measuring Return on Investment

As useful as measuring return on investment can be, it’s also important to note that it’s imperfect and has plenty of challenges. First, you must consider the timeframe as Six Sigma isn’t an overnight or even a six-month process. 

Instead, it can take over a year to see measurable results showing the impact of implementing such a program. Even for experienced Six Sigma black belts, a period can be necessary to see detectable improvement in manufacturing processes. Regardless, it’s essential to know that these programs benefit the company, so even with any challenges, there is a definitive need to ensure Six Sigma aligns with an organization’s goals. 

Another consideration is to look at any data accuracy issues, as incomplete data can quickly skew ROI calculations. The more unreliable your results, the less likely you are to see tangible improvements from Six Sigma. The same can be said if Six Sigma programs are operating in a silo, as these programs need to be integrated into a company’s bones to see the best possible overall impact. 

Lastly, the single biggest challenge to measuring the ROI might be if you don’t have full and complete leadership support. If leaders are skeptical, then so too are employees, which means they might not put their all into providing the right amount of data or only consider short-term defect reductions minor, whereas Six Sigma defect results are a long game that can take up to 12 months (if not longer). 

The Key Metrics You Need To Know First

At the start of any Six Sigma program rollout, you want to start by identifying exactly what you are trying to achieve. 

Cost Savings

Understandably, cost savings that can directly benefit the bottom line will be at the top of any Six Sigma process rollouts list. Reducing benefits can help drive down production errors, and the fewer production errors, the less waste accumulates, which means time is spent reworking processes. Reduced defects also mean less worry about customers complaining about products or needing to warranty their purchases, which means the company is eating a loss on a product. 

Implementation Costs

As you start to roll out Six Sigma, you must factor in what it costs to train and certify these programs internally. Unsurprisingly, this could mean a fairly big upfront expense that won’t pay off for at least 12 months, if not longer. The hope is that these early costs are calculated using savings that can be annualized if defects can be reduced by X percentage or if customer complaints are lessened by X amount. 

Intangible Benefits

While intangible benefits won’t be at the forefront of a Six Sigma program rollout, they are no less important. This includes, but is not limited to, the level of customer satisfaction that will increase if defects are eliminated. 

The more customers believe your company has good quality, the more likely they are to not just purchase but also spread the word about your company to friends, family, colleagues, etc., bringing you new customers. Any opportunity where happy customers talk about your company will also improve a brand’s overall reputation, which has very real benefits and can often be just as good as paid marketing tactics. 

Calculating ROI With Six Sigma

First and foremost, before an organization launches any sort of Six Sigma project, it must thoroughly understand what success will look like and the return on investment. Given this, an organization must also know where things stand today to measure progress. 

Identifying Improvements

At the very top of the list for providing ROI, you’ll want to look at what improvements have been made. Have updates been made that have reduced waste or defects or streamlined workflows across different teams? Outlining every single improvement will help show the depth of how Six Sigma has been implemented and integrated organization-wide. 

Quantifying Improvements

With the improvements outlined, you now want to attach some measurable data to each of these improvements. Can you calculate the amount of time saved per unit with reduced defects? How about the overall percentage increase in yield with fewer defects coming off the line, or most importantly, how about the reduction percentage of defects? If anyone in a senior position asks, you should be able to provide specific measurements on how well Six Sigma is performing. 

Introduce Financial Benefits

It’s now time to examine the quantifiable data and consider how it can be translated or converted into bottom-line KPIs. Is there a cost associated with the amount of reduced waste or defects? 

Are there faster delivery times if defects have been reduced? What kind of bottom-line increase can come from improved customer satisfaction? Have labor costs improved with reduced waste? All of these answers can help make a convincing argument to show precisely how Six Sigma is paying off. 

You can even take this one step further and annualize the savings that Six Sigma provides to an organization. To do this, you could use a simple formula like multiplying the day or per-unit savings by the number of units being produced in a year. This gives you an accurate calculation, or at least one specific calculation, about total savings over a 12-month period. 

Discuss KPIs With Management

No one will be more interested in organizational effectiveness than management levels, so it’s important to bring the annualized savings, financial benefits like labor cost reduction, and quantifiable improvements directly to management’s attention.

In this stage, you will want to show just how good the return on investment of Six Sigma can be. It’s one thing to say Six Sigma is working for management while action is taking place behind the scenes, but it’s another thing to show measurable data that cannot be ignored, especially if there is a bottom-line improvement. 

Communicate KPIs to Teams

One final step to measure the return on investment is more of a nice-to-have in that sharing metrics with teams is a great way to boost morale and showcase success stories. Employees will feel more inclined to contribute to projects that they know have a meaningful impact on their work and, more importantly, are recognized by an organization. 

Other Useful Tools and Concepts

If you’re unfamiliar with Six Sigma, there has never been a better time to familiarize yourself with its strengths. Whether it’s understanding how Six Sigma works well in service industries or how well Six Sigma and Design Thinking play well together, there is never a bad time to start learning. 

In addition, you might want to start exploring Lean Six Sigma to understand how Six Sigma and Lean are different yet alike. There is often a lot of confusion about whether these are the same, but some differences are worth knowing. 

Conclusion 

Quantifying how well Six Sigma is performing inside an organization is critical, no question about it. Between training and implementation, getting it off the ground can be a considerable expense, so a company will want to see a return on investment. You can show ROI in several ways, but you will want to show something measurable so that organizational leaders believe they see bottom-line benefits. 

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