Saturday, January 5, 2013

Making Dough

Unfortunately, no one caught the error in reasoning. The company invested over a hundred thousand dollars in investment, installation and time. And didn't earn a nickel for all that effort.

A Six Sigma team finished a project for a cookie-making company and did an excellent job in their analysis of the process. Their recommendation included buying a new piece of equipment to mix the ingredients for the dough. They calculated savings on their proposal to be over a hundred thousand dollars. Most of the savings were based on greater efficiency in the operation.

Like any good Six Sigma team, they had mapped out the whole cookie-making process. They had even noted the capacities of the variation operations in the process. They had evaluated the quality and efficiency improvements that could be made at each operation. The dough-making step had the highest potential savings.

However, the baking operation had the least capacity. Any efficiency gains at any other step would be wasted because the company wasn't going to be generating any more revenue or real profits until the critically constrained resource was fixed. Like any good Six Sigma team, they focused on profits but thought of increasing profits only through reducing costs. No one thought about throughput or revenues.

Without generating more throughput through the whole operation, the cost savings in the first step were fictitious. It's unlikely that total labor expenses were going to go down. Machine cost/cookie was going to be less, but the dough-making equipment was going to be idle more often. If it ran to its full capacity, dough inventory would increase. The company's cash would be tied up in frozen dough. If it didn't shut down the dough-making operation, then the "old" dough would have to be scrapped. Overhead costs would increase.

Ignoring the effect on revenues and contribution margins is a problem often in our Six Sigma training. We do a good job of teaching people about costs, but not on how to increase the cash flow of the company. If we do more with regard to financial literacy and key paradigm philosophies like Theory of Constraints, we might avoid a lot of wasted effort for our Continuous Improvement teams.

One management person spotted the error but wasn't able to convince the rest of the management team that they would be making a mistake. Since this was the company's first Six Sigma team, they wanted to show support for the effort by approving the team's recommendation. Management congratulated the project team, gave them gift cards to use at a local restaurant and ordered that the equipment be ordered and installed.

A year later, they're losing more money than before. They've stopped forming Six Sigma teams.

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