Lean Six Sigma for Small Business

08-May-2014 11:35
in Process & Performance Improvement
by Admin

I am passionate about small businesses and the impact that they can have, not just on individual lives but also upon the UK economy as a whole.  Small businesses are the engine room of the UK economy.  According to the Federation of Small Businesses (FSB),

  • There were an estimated 4.8 million businesses in the UK which employed 23.9 million people, and had a combined turnover of £3,100 billion
  • SMEs accounted for 99.9 per cent of of all private sector businesses in the UK, 59.1 per cent of private sector employment and 48.8 per cent of private sector turnover
  • SMEs employed 14.1 million people and had a combined turnover of £1,500 billion
  • Small businesses alone accounted for 47 per cent of private sector employment and 34.4 per cent of turnover

Small businesses face many, if not all, of the challenges of their larger counterparts, but are typically not as well equipped in tackling these challenges.  One of the business improvement methodologies that has had a tremendous impact on a huge number of larger companies such as Toyota, Motorola, 3M, General Electric (GE) and Amazon is Lean Six Sigma.  These large, multinational companies have saved billions and substantially streamlined their businesses using this approach.  

However, small businesses have generally not adopted this approach due, in large part I believe, to a perception that it will cost too much, take too long and that it is fundamentally better suited to bigger organisations.   Indeed, many Lean and Six Sigma experts have expressed doubts that Lean Six Sigma methodologies can be properly deployed in small, or even in some medium-sized, organizations.  

Our experience at Continuous Business Planning has been that, whilst the approach to deployment must be modified,  small businesses can successfully implement Lean Six Sigma with stunning results.  Small businesses can succeed with Lean Six Sigma far more easily than their larger counterparts because they are faster to adapt, more flexible and lighter on their feet.  When you simplify Lean Six Sigma down to it's essence, you can achieve big benefits with a relatively small investment of time, effort and money.  

It is true to say that the traditional textbook approach to Lean Six Sigma deployment has been developed within the big businesses who were amongst the early adopters of this process and performance improvement methodology.  However, with judicious application of the 80/20 rule when it comes to deployment, small businesses can derive almost all of the benefits of Lean Six Sigma with only a fraction of the costs, effort and in much shorter periods of time.

Why Do Small Businesses Need Lean Six Sigma? 

My experience is that small businesses, especially those that have bootstrapped their businesses to where they are now, are sitting on a goldmine.  The day to day business processes, whether documented and formalised or ad hoc, that have brought you this far almost always hit a wall at about a 10% error rate.  My experience is that this is about as far as trial and error, gut feel and common sense can improve your business.  Most small businesses hover around a 20% error rate.  

Give this some thought yourself and you will quickly get a feel for the error rate in your business.  How many customers are affected by some error, mistake or delay at some point in the ordering, billing, purchasing, payment and fulfilment processes? What percentage of your customers enjoy a "zero defect" interaction with your small business?

If you reduce the number of customers impacted by an error, mistake or delay in their interaction with your business to 10%, you are doing remarkably well.   Trial and error, gut feel and common sense will have served you well and you will probably be a leader amongst your small business peers.  We believe, however, that further improvement is possible.  Small business owners should never simply accept that significant levels of waste, mistakes and delay are inevitable for a small business.  

We believe at Continuous Business Planning that Lean Six Sigma can pick up where trial and error, gut feel and common sense leave off and can take process and performance improvement efforts within any company, large or small, to the next level.  We have seen small businesses who were undoubtedly doing well reduce their 10% error rate to a 1% error rate or even less.

Sounds good doesn't it?  Let's look at the impact could such a reduction have upon your business.

The Financial Impact of Error & Waste 

As a customer, you will have experienced the frustration of things going wrong.  Products have defects.  Parts to assemble are missing.  Stores or toilets are dirty.  Salespeople lack knowledge.  Deliveries arrive late.  Your food arrives cold.  These typical errors, mistakes and delays at some point in the customer's interaction with your business cost money in terms of either waste (e.g. food thrown away in a restaurant) or rework (e.g. a car getting fixed under warranty).  

Waste - The cost of this can be significant.  A recent study estimated that the cost of waste to UK businesses amounted to an average of 4.5% of turnover.  In a small business turning over £1 million per year, that is a whopping £45,000.  When we consider that most small businesses operate at a net profit of less than 20%, 4.5% could represent anything from a quarter to more than half of the annual pre tax profits.  If this waste could be succesfully addressed, these savings would go straight onto the bottom line of your business.  

To put this another way, eliminating all of this waste in your small business would equate to an increase in sales, assuming a 20% pre-tax net profit, of £225,000.  Focusing on the waste in your business is a powerful way of improving performance and Lean Six Sigma provides all the tools for this task, as well as a systematic and what Jay Arthur calls a "common scientific" approach to tackling these problems. 

Rework - It's obvious that the cost of having to fix something that has broken or not working properly can undermine the profitability of a product line or service offering.  Once you factor in exposure to ruinous legal action for having produced defective products, a business owner should quickly see that it makes great financial sense to take the time and expense to engineer a product (or service) that is acceptable to your customers.  Lean Six Sigma provides a way to consistently create products and services that meet or exceed customer requirements and a way to consistently improve upon products and services to achieve and sustain competitive advantage in the market you serve.

Whilst the costs to your small business of both waste and rework will almost certainly be considerable in and of themselves, they are not the biggest reasons why your business should adopt Lean Six Sigma.  Errors, mistakes and delays at some point in the customer's interaction with your business will lead to disatisfaction and, ultimately, defection.  Customer defections have a surprisingly powerful impact on the bottom line. They can have more to do with a company’s profits than scale, market share, unit costs, and many other factors usually associated with competitive advantage. As a customer’s relationship with the company lengthens, profits rise. And not just a little. Companies can boost profits by almost 100% by retaining just 5% more of their customers according to Frederick F Reichheld in his classic book, The Loyalty Effect.  For a service organisation, the goal of "zero defections" is every bit as important as the goal of "zero defects" for manufacturing organisations.  

I invite you to spend some time now reflecting upon the cost of waste and rework as well as the cost in lost revenue of customer defections in your small business.  Regardless of how well your small business is doing, I'm confident you will sense a huge opportunity to significantly enhance the profitability of your business by tackling these issues.  Many small businesses will be actively employing  trial and error, gut feel and common sense to tackle these issues.  I applaud these efforts and wish you luck.

However, from extensive personal experience and a decade of observation of small businesses, I am absolutely convinced that this approach will only get them so far.  Lean Six Sigma deployed in a manner appropriate for small businesses will take participants all the way to a position of significant advantage over their competitors.  

It is important to stress though that small businesses cannot simply adopt the Lean Six Sigma deployment methods of the larger companies, for whom much of the literature and training that is available on the market has been created, or the benefits of Lean Six Sigma will be cancelled out by the extortionate costs of training and consultancy.  However, with careful application of the 80/20 rule, small businesses can derive almost all of the benefits of Lean Six Sigma with only a fraction of the costs.  

If you are interested in the benefits of the Lean Six Sigma approach in your small business, contact our project managers at Continuous Business Planning today and take a step in the right direction towards "zero defects" and "zero customer defections".