Six Sigma

An important part of TQM is to stress quality by comparing products and processes to other "world class" firms. This comparative process is commonly known as benchmarking. Motorola developed a quality-focused management approach that is responsible for billions of dollars in savings. So popular is the approach, that it has been trademarked by Motorola. The company now offers training into their quality management processes. Those processes are known as Six Sigma, and they are being deployed by many other companies. GE is a fan of the approach, and its website notes: "Six Sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products and services."

"Sigma" is a term learned in statistics. It is a measure of deviation from a norm. In the case of production management the "norm" is perfection. With Six Sigma, the organization tracks and monitors "defects" in a process. Then, methods are sought to systematically eliminate the opportunity for such defects. The goal is to achieve nearly "zero defects" - a defect rate that is at least six standard deviations from the norm (hence the name "six sigma"). Such a distribution would have only 3.4 defects per million observations. Importantly, the defects relate not only to final products, but to all business processes, whether they be in manufacturing, record keeping, or whatever!

Six Sigma revolves around the definition, measurement, and analysis of defects. The management accounting group will be heavily involved in this process. And, it is often the management accounting unit's responsibility to suggest improvements and provide controls necessary to drive an organization toward the near-zero defect goal. But, how does this result in cost savings? Companies have learned that quality defects are very costly. The costs come about directly in terms of the of corrective actions like warranty work, and indirectly through lost customer satisfaction that can adversely impact future sales. Significant savings are realized via the reduction in the cost of poor quality.

Reflection on Modern Cost Management

This chapter should serve to highlight an important message: The modern managerial accountant is increasingly deploying technology to deal with the mundane data capture, thereby freeing resources to study and analyze techniques needed to drive business success. While penny-pinching is an important part of building a financially successful business, it is also true that one can be penny-wise and pound foolish. Thus, the management accountant is not solely focused on cost cutting, but must also be mindful of measuring and instituting controls that drive an efficiently produced product of high quality.