Applying Six Sigma to Increase Cash Flow

Thanks to Six Sigma, companies around the world now operate at optimum efficiency. Six Sigma is a goldmine of innovative and effective strategies for continuous improvement and global market share. Evolving technologies and new markets mean there are plentiful opportunities to create innovative and customer-focused products. But, as with all businesses, issues like waste and variation slip through the cracks. None-value adding processes and over-processing are two of the main culprits of inefficiency. Consequently, they also increase costs, sapping your cash reserves. It’s important to maintain a strong cash flow for everything from the day-to-day running of your business to corporate expansion. If you wish to maximize profits and save money, you must first improve quality. Six Sigma can help.

Take Care in Selecting Projects

Simply applying a bit of Root Cause Analysis or some DMAIC won’t see any drastic improvements. If any. Improving processes, quality, cash flow, and so on, takes time. If you don’t put the effort in, you won’t see the results. Improvement projects are a cornerstone of Six Sigma work. It’s important to consider them carefully. Firstly, make sure you can link any potential cost savings to Six Sigma implementation. Secondly, be sure to analyze any potential projects for their financial benefits before pursuing them. Thirdly, techniques like Pareto analysis can help shed light on greater opportunities for investment return and cost savings.

Six Sigma tools allow you to analyze your current processes to see where inefficiencies and defect are holding you back. Factors like defect affect the quality of the products you produce, leading to losses further down the line. Similarly, over-processing (a Lean problem) and others wastes create unnecessary costs, bleeding your cash reserves. Once you remove these negative factors, however, you will start to see great increases in efficiency, profit, and overall cash flow.

Defining Your Project Selection Measures

It’s important to define, confirm, and observe strict financial guidelines throughout Six Sigma improvement efforts. This will help lay down any expectations you may have, as well as verify whether your plans are appropriate for an improvement project. Setting out your priorities early on will help allocate resources, maintaining strong cash reserves, while only spending when and where necessary.

Moreover, you could use financial guidelines if a manufacturer discontinues a low-cost part. The fact that the part is no longer available poses a problem. How are you to deliver a quality product, and generate high revenue, if you can’t replace the missing parts? You could launch an improvement project here to locate a new provider for the part, without affecting your gross margins or lead time. Six Sigma is a useful tool that can help you maintain strong cash flow for all your activities. Don’t underestimate what it can do for you!

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The Start of Six Sigma

Back in the seventies, Motorola invested their time primarily in manufacturing Quasar television sets. This was long before the advent of mobile phones, modern computers, the internet, and many of the technologies associated with Motorola. A Japanese company took over control of Motorola’s Quasar factory at the time and began implementing unheard of changes. They set about revamping and restructuring the way factory operations, rebuilding it from the ground up.

Soon, while under new management, Motorola’s Quasar factory began to produce TV sets with one-twentieth the number of defects than before. Simply put, there was something Japanese management brought to the factory that Motorola didn’t. The factory even maintained the same workforce, machinery, and design work. It soon became clear that Motorola management was the problem.
It was in the next decade that Motorola knuckled down and started treating quality with the seriousness it deserves. Their then CEO, Bob Galvin, redirected Motorola towards on the quality achieving Six Sigma levels of quality. It was this decision that made Motorola a top quality and profit leader in the business world. Six Sigma was the secret to their success. And it’s just as popular and effective today as it was then!

How Does Motorola Use Six Sigma Today?

For Six Sigma, quality is about helping an organization increase profit. In Six Sigma, quality is a value contributed by a productive enterprise or activity. Motorola uses Six Sigma to maintain high efficiency by eliminating waste and defect as they discover them. This may be on a production line or even in administration.

Six Sigma aims to improve quality by minimizing variation and (overlapping with Lean) reducing waste. This helped Motorola improved its products and services, producing them faster and for less. In basic terms, Six Sigma’s goals are preventing defect, reducing cycle time, and minimizing costs. Six Sigma’s effectiveness comes from its ability to identify and eliminate waste costs, i.e. those that provide no value for customers.

Unlike Motorola, companies that eschew or dismiss Six Sigma ideas tend to have extremely costly operating processes. For those operating at low sigma, the cost of (poor) quality tends to be high, often spending 25%-40% of their revenues addressing issues. Companies operating at Six Sigma, however, typically expend less than 5% to fix problems. The dollar cost of this gap is often considerably large. This has cost companies like General Electric between $8 billion and $12 billion annually. Motorola, however, has enjoyed and still enjoys the benefits of Six Sigma. As one of its leading pioneers, they have perfected it over the years. Their success is not surprising.

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What is Your Working Capital Ratio?

In case you don’t know, your working capital ratio is a liquidity ratio. It measures whether your business can pay off its current liabilities using current assets. As such, your working capital ratio allows you to gain a deeper understanding of your company’s liquidity. It’s essential for business owners to understand the necessity of the working capital ratio. You can calculate your working capital ratio as follows:

Working Capital Ratio = Current Assets/Current Liabilities

But what are current assets and liabilities? Well, they are usually debts and other payments that you should make. It’s best to pay them using current assets such as cash, cash equivalents, or marketable securities. You can quickly convert current assets into cash. They are also more flexible than fixed ones. This means you are far more likely to have cash on hand to pay debts when you need to. We call it the working capital ratio as it relies on working capital calculation. As your current assets exceed your liabilities, your company will have enough cash to maintain everyday operations.

Improve Your Cash Flow with Six Sigma

Using Six Sigma and related methodologies like Kaizen, you can cultivate a culture of continuous improvement. It is this precise discipline that allows you to transform your business. You can apply Six Sigma ideas at just about any level of your organization. Six Sigma can also help where cash flow is concerned. Using Six Sigma ideas, you can drastically increase your cash flow so you can easily manage liabilities like debts and other costs. It’s important to note one of the most powerful driving factors behind strong cash flow.

Accounts Receivable and Revenue Growth

For accounts receivable, you should not consider the order completed until you have received payment. Your ultimate goal should be to receive payment as quickly as possible following a sale. But the perfect order can be a tricky thing to achieve. You must ensure the customer receives the right product at the right time, in the right quantity and condition. By consistently delivering perfect orders and reducing order-to-delivery lead times, you can receive payment quicker. Six Sigma will help you streamline this process so you can maximize customer satisfaction and your company’s success.

Similarly, using Six Sigma techniques, you can identify positive and negative customers. Base your assessment on how profitable their individual accounts are. This allows you to retain your good customers while developing new and profitable ones that increase cash flow. Then, reducing your inventories to become most cost-competitive helps pave the way for a Six Sigma level of quality.

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