Key Points

• There is no question that Six Sigma can have a big impact on a business.
• Quantifying the financial impact of Six Sigma is easier than most people think.
• It goes without saying that implementing Six Sigma can yield more than just financial benefits.

In the world of Six Sigma, you have a strategy and methodology that have helped countless businesses grow and achieve more success than they ever thought possible. As one of the best-known quality improvement methodologies, Six Sigma is arguably one of the most common terms in the world of process management.

Of course, there is a lot that goes into successfully rolling out a Six Sigma strategy, but even more attention needs to be given to understanding its financial impact. Even though it’s a data-driven methodology, this doesn’t mean there are not easily quantifiable numbers available to be utilized as a way to measure success and impact.

What Is Six Sigma?

If you have ever stopped to think about how some businesses are able to turn their chaotic environments into precision working operations, Six Sigma might very well be the answer. Ultimately, this data-driven methodology has the unique focus of trying to reduce the number of defects coming out of a company to 3.4 errors per million opportunities.

While this might sound technical, and it is, it is this way because you have Motorola to thank for its introduction and GE to thank for its popularity. Both of these companies are factory and manufacturing-driven operations, so the way Six Sigma was grown was through their view and focus on reducing defects.

At its core, Six Sigma revolves around the DMAIC framework, also known as Define, Measure, Analyze, Improve, and Control. It’s these six steps that help guide teams that are working on Six Sigma rollouts. In other words, these steps are going to help every company that is working on a Six Sigma implementation solve its problems step by step, which in turn should lead to financial opportunity and profits.

Six Sigma and Your Return On Investment

When you start to look at the return-on-investment of improved quality, it becomes clear that this is a main goal of Six Sigma’s financial impact. It’s helpful to think of Six Sigma and ROI as something of a perfect match, especially if you take a few moments to think about why this is true.

Try to picture this: you are running or working for a company that is looking to make quality improvements, but they aren’t sure if the financial investment will yield the right return. It’s here that Six Sigma comes into play as it shows a direct line between the process enhancements that can be made and your bottom line through clear KPIs like cost savings and revenue growth. The bottom line is that you should be able to show your executive team exactly how reducing errors is going to boost profit levels.

The good news is that brands like GE have saved billions and talk about these savings through the execution of Six Sigma programs. This is the exact proof you are looking for that quality isn’t just a cost, it’s something that can be shown as an investment that has deeply measurable returns.

This is a competitive business world we’re living in, and it aligns perfectly with an ROI-focused strategy, so you can justify bigger budgets for training around programs like Six Sigma implementations.

Of course, what really makes Six Sigma and ROI an ideal match is that they are both focused on seeing data-driven results. This isn’t just a game of thinking things are going well, you’re going to know definitively through measurable impacts, and if these impacts are having the right effect, it’s going to turn any Six Sigma skeptic into a believer. Finding new believers isn’t the goal, but it sure does help with convincing others that the rollout is working as planned.

The Cost of Poor Quality

Try to imagine another scenario in which you have already calculated what bad quality is doing to your bottom line. Between the cost of warranty claims, reworking production lines, and scrapping materials and products, you might be seeing as much as 15-20% of your potential sales being eaten up and tossed out.

Worse yet, it isn’t just the obvious concerns you have to worry about, but also hidden things as well. This includes but is certainly not limited to lost productivity, reputation hits, customer service troubles, and missed sales opportunities, all of which add up faster than most executives want to admit or acknowledge.

You have a few different categories at work here, including prevention, which is the upfront investment, appraisal, or inspections, and failure, or the internal errors/external complaints, all of which add up. A company might not notice these figures adding together initially, but when compiled together, there can be and often is a massive erosion of profits, which means that any potential quarterly gains you might have hoped for are now losses.

The bottom line is that if you ignore quality today, it’s going to mean paying more later. Whether this is through customers leaving, competitors pulling ahead, or a drop in efficiency, something is going to happen.

How Six Sigma Drives Financial Impact

Reducing Defects and Waste

Here’s another potential scenario for you, as you might imagine, an opportunity to cut defects by as much as 90%. This is the magic that Six Sigma can deliver, as you can directly see the costs of scraps and rework, which might turn into millions of savings for large manufacturers.

If a company can measure its defect rates or defects per million opportunities, it’s a whole lot easier to pinpoint waste and then eliminate it. This, in turn, frees up resources for growth elsewhere in the business. The ROI is calculated as savings divided by the project cost, and if you are hitting a 3:1 measurement (or better), then the financial return is strong.

Enhancing Process Efficiency

Another financial impact meansurement is known as enhancing process efficiency, in which Six Sigma helps to streamline workflows. Even something as measurable as reducing cycle times by as much as 20% or as high as 50% can not only mean faster production cycles, but more sales as a result of a faster flow of products getting into the hands of customers.

In these cases, you’ll look at metrics like tracking how many products are making it through a production cycle without any need to be reworked. If you see this happening, you know that your operational costs are going to stay low and you will, in turn, calculate success by looking at how much output has increased.

This matters in a big and measurable way because inefficient processes are time wasters as well as money holdups, which is why Six Sigma’s efforts show real value. If you can hit a target like halving the lead time necessary to build a product, you can see the financial strength of implementing Six Sigma.

Boosting Customer Satisfaction

It shouldn’t come as any surprise that happy customers are going to be loyal and stick around, and Six Sigma is bound to lift customer satisfaction scores like Net Promoter Score. All it takes is fixing even the most minor or trivial pain points, and you can earn repeat business, which in turn leads to higher revenues.

Tracking metrics like customer retention rates, which might be something along the lines of a 5% increase, can boost profits by numbers ranging from 25% to 95%. If this happens, the ROI becomes self-evident through lifetime value calculations. If you, as a business, are seeing a Net Promoter Score above 70, there is a direct correlation to reduced churn costs, which means the bottom line should see immediate growth.

Tracking these results is as important as tracking defects per million, because customers are expensive to replace. This is a world where businesses have to earn the trust of their customer base, and when customers believe the product, no matter what it is, is reliable, an organization should see the financial rewards follow.

Key Tools to Quantify Six Sigma ROI

At the end of the day, if you want to quantify the ROI of Six Sigma, there is no question that DMAIC is going to be the go-to option. You can Define the problem with financial baselines, Measure key defects, Analyze the data for root causes, Improve with targeted fixes, and Control to sustain gains, all while tracking the ROI at each stage.

It’s conversational if you think about, it’s basically a story where someone has to detect where the data reveals the money-saving culprit. The same can be said for Cost of Quality, in which the analysis can show how focusing on prevention rather than failure costs can help you calculate the ROI as a savings investment.

Benefits and Outcomes of Six Sigma on ROI

If you look at a company like GE, which initially reported around $12 billion in savings over five years of enacting Six Sigma, you see, definitively, just how much cash can be saved with an implementation of this methodology.

There is no question that you are going to get higher margins from reduced waste, which can lead to 5-10% in profit boosts. Remember, it’s not about the numbers, but about building an organization that is ready to tackle any kind of business challenges.

In addition, you also see the benefits of employee engagement as teams see their work directly impacting the bottom line. If employee efforts show the bottom line increase, so too does the buildup of customer loyalty, which can be gained from developing and releasing reliable products, without a single cent of extra marketing spend.

Other Useful Tools and Concepts

If you’re unfamiliar with Six Sigma, that’s okay, but now is the best time to really familiarize yourself with one of the most critical business methodologies around. This means it’s a great time to read an article on demystifying Six Sigma. Alternatively, you can examine how Six Sigma is applied in education, which is another significant use case.

When you’re ready to move away from Six Sigma as a topic, try looking at how to create an environment where you have precision inventory through Kaizen. Since we’re also on the topic of manufacturing, you can take a read on Lean versus Agile in manufacturing, which is a fantastic discussion about choosing the right path for process excellence.

Conclusion

As we wrap up, there is no question that Six Sigma is far more than just a story of quality; it’s all about transforming a business into a financial powerhouse that seeks to bring improvements that add dollars and cents. The ROI of Six Sigma is all about maximizing the strategy you have in place for reducing defects to boost efficiency. The more businesses that look to embrace Six Sigma in the future, the more they will easily turn the quality into profits.