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Lean Six Sigma: A Tool for Innovation

Nikunj M. Prajapati
Sardar Patel Institute of Technology Gujarat Technological University, Gujarat, India nmprajapati@spitcp.ac.in

ABSTRACT
Innovation has recently emerged as the latest focus of the popular business media, replacing established approaches, such as Lean Six Sigma (LSS). Some have gone so far as to suggest that LSS inhibits organizations from being creative and innovating. This paper aims to dig beneath the surface of the companies total quality management practices specifically lean six sigma (LSS) to examine does LSS lead towards innovation or is it a tool for innovation.

KEY WORDS:

Lean sigma; six sigma; innovation tool; manufacturing; Production.

INTRODUCTION Lean Six Sigma Lean production, as a concept, was originally developed by Toyota in Japan. Essentially, the term lean was used by Womack and his colleagues to denote a system that uses less, in terms of all inputs, to create outputs similar to those of the traditional mass production system, while offering increased choices for the final consumer.

the point of reversal. It is important to increase our understanding of how this might occur and how it can lead towards innovation. Innovation In the recent hype over innovation, authors seem to be using the words innovation and creativity interchangeably. This is unfortunate, because the two terms have very different meanings, although they are related. A positive exception is Bisgaard (2008), who defines his terms very carefully. Innovation can be defined as the introduction of new things or methods (Random House, 1981). As Bisgaard (2008) explains, innovation can be either incremental innovation making modest enhancements to an existing product or service, or radical, disruptive innovation delivering something totally new to the marketplace. For example, Google is an example of a disruptive innovation. Tatas 1 lakh Rs. Nano, which it released in India in early 2008 and the iPod are other examples. Federal Express, when it introduced overnight mail delivery years ago, was also clearly innovative in a radical way, as no other overnight mail delivery service existed at the time, and many thought such a service would be impossible to implement. While most of the media attention today is focused on radical innovation, it is important to remember that incremental innovation can also be lucrative. LITERATURE REVIEW While stemming from the roots of the mass production concepts developed in the U.S. by pioneers such as Samuel Colt and Henry Ford (Chase et al., 2006, p. 471; Flanders, 1925; Ford, 1926; Womack et al., 1990), lean production (hereafter, just lean for short) is broadly considered to have emerged from the innovations in the Toyota Production System (TPS) in Japan since the 1940s (Fujimoto, 1999), especially the just-in-time (JIT) delivery of materials between work stations to minimize work-in process (WIP) inventories. While several historical reviews of lean are available (e.g., Hines et al., 2004; Holweg, 2007; Hopp and Spearman, 2004), a commonly accepted specification of the theory of lean in the scholarly

Lean Sigma

Six

Speed + Low Cost


Lean Speed enables Six Sigma Quality defects (faster cycles of experimentation/learning)

Culture + Quality
Six Sigma Quality enables Lean Speed (fewer means less time spent on rework)

Typically, organizations use Lean Six Sigma to make improvements inside their operations for everything from managing their supply chain processes and billing processes to new product design and customer relationships. For some, it becomes a new offering a process improvement service they offer to their clients.CEOs today face mounting pressures to innovate; yet finding ways to actually enable innovation remains a challenge for many. Top companies with successful track records of innovation, however, have discovered one possible solution. Lean Six Sigma, a relatively well-known approach for achieving operational excellence, can, as it turns out, do more than simply improve processes. It can help leaders discover innovation opportunities far beyond operations, enhance financial performance and create organizations that have an inherent inclination toward innovation. A central tenet in the theory of lean production is that the implementation of lean practices will reduce waste and thereby decrease costs. However, not all lean implementations have led to such results. Apparently, this effect is moderated by several factors, potentially even to

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literature is not. Therefore, we review the literature to isolate the theoretic tenets underpinning lean. We begin by noting that the mere definition of lean varies widely. Various authors have equated or differentiated the TPS, JIT, and lean. Sugimori et al. (1977) wrote the first paper in English about the TPS, emphasizing JIT production and the use of good thinking by all employees to continuously improve performance. Several books and papers on JIT and the TPS emerged in the 1980s (e.g., Hall, 1983a,b; Monden, 1983; Ohno, 1988; Schonberger, 1982a,b,c; Shingo, 1989). According to Hopp and Spearman (2004), Ohno (1988) described the TPS as designed for continuous flow and based on two main principles: autonomation (best practices and standard work) and JIT (kanban and level production). Automation gives rise to practices pertaining to visual control, mistake proofing, and housekeeping (or 5Ssort, straighten, sweep, standardize, and self-discipline), while JIT drives changeover reduction. Sohal et al. (1989) and WatersFuller (1995) provided reviews of the literature on JIT, and Fullerton et al. (2003) found a significant relationship between the implementation of JIT practices and improved financial performance at the firm level. The term lean production was first used by Krafcik (1988) and popularized by Womack et al. (1990). To some, lean is just a repackaging of JIT. For example, according to Hopp and Spearman (2004), Womack et al. (1990) freshened JIT by recasting it as Lean Manufacturing. Gaither and Frazier (2002, p. 464) equated lean with the philosophies and approaches embodied in JIT. Krafcik (1988) and McLachlin (1997) viewed lean and JIT as closely related. Meanwhile, other authors such as Chase et al. (2006) equated lean instead with the TPS and considered it a compilation of many practices, of which JIT is only one. Some others have an effort to distinguish JIT and lean e.g., The major difference between JIT and lean production is that JIT is a philosophy of continuing improvement with an internal focus, while lean production begins externally with a focus on the customer (Heizer and Render, 2006, p. 641, emphasis in original). Despite these differences, there is much stronger agreement that the salient characteristic of lean, JIT, and the TPS is an emphasis on the reduction of waste (Brown and Mitchell, 1991; Chase et al., 2006; Hines et al., 2004; Monden, 1983; Ramarapu et al., 1995; Schonberger, 1982a; Sugimori et al., 1977). Most sources describe the essence of lean production as waste reduction (Hopp and Spearman, 2004). Ohnos main focus was to reduce cost by eliminating waste (Holweg, 2007). This emphasis on waste reduction drove practices such as inventory reduction (e.g., Hall, 1983a,b), process simplification (e.g., Hall, 1983a; Schonberger, 1986), and the identification and elimination of non-value-adding tasks (e.g., Blackstone and Cox, 2004), for which Womack and Jones (2003, p. 20) classified tasks into three types: 1. Those that add value (by directly transforming the

product into the form desired by its user), 2. Those that do not add value but are necessary with current production methods (Type 1 muda), and 3. Those that do not add value and are unnecessary (Type 2 muda or obvious waste). Lean manufacturing focuses on elimination of waste from within the firms production systems through continuous improvement and process changes for reducing non-value added activities or elimination of wastes (Womack etal.,1990; Florida,1996). Prior knowledge capacity related to JIT flow activities (e.g., value stream mapping, differentiation of value-added and non-value added tasks, use of metrics to track and reduce in-process waste and team problem solving) and ISO quality certification experiences might be relevant to the organizational efforts of wastes (Cohen and Levinthal, 1990; Kingand Lenox, 2001). The importance of lean sigma leading to innovation has been highlighted in existing research (Kornbluh etal., 1989; Florida, 1996). Lean manufacturing creates, within an organization, the orientation to increase employee responsibility and involve employees in waste reduction efforts (Shah and Ward, 2003; Tuetal. 2006). Such lean orientation may also help firms in innovating processes and products as per changing customer requirements. Despite its heritage, Lean Six Sigma is well suited for this step change in target and scope. The leading companies we studied are proving that the Lean Six Sigma approach has Applications far beyond process improvement; they are using it to innovate in all areas of their businesses their operations, their products and services and even their business models. RESEARCH METHODOLOGY Methodology: Case study methodology is best when the objective is to build theory in preliminary phases of a research study or to add new perspectives to previous research (Yin 1994). Part of this research can be considered as preliminary, because there is still little evidence on how lean six sigma (LSS) can be a tool for innovation. The objective of the case study is not the statistical generalization, but the analytical one. This methodology tries to generalize from case to theory; it does not attempt to extrapolate facts from sample to population. Relating to the number of cases, the lower number will allow the researcher to obtain more information (Voss, Tsikriktsis, and Frohlich 2002). However, a multiple case study increases reliability and external validity. Each case should be selected in order to (Yin 1994): Predict similar results (literal replication) Get different results due to predictable reasons (theoretical replication)

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The authors chose a multiple case study instead of a single one to increase external validity and reliability. Two companies among the biggest manufacturing companies were selected for the study. The cases were selected with the condition of implementing LSS. In order to test the proposed hypotheses, we use the exploratory case study method. Basically, a case study is an in depth study of a particular situation rather than a sweeping statistical survey. It is a method used to narrow down a very broad field of research into one easily researchable topic. Data was collected from secondary source. Data Collection Multiple sources of evidence were used to validate data. Yin (2008) identifies six major sources of evidence. For that two MNCs were selected by random sampling. We employed few of all six in this study. First, qualitative data were collected through documentation obtained in the form of letters, memoranda, minutes of the meeting, progress reports, and strategic planning reports, etc. Second, quantitative data were collected in the form of archival records of financial data, customer complaint reports, ordering processing, quality reports, purchase orders, operational data (such as personnel utilization), routing information, performance measurements (such as annual sales and responsiveness). Data Analysis The primary form of data analysis in case study is the reflection by the researcher on his own experience. The researcher identified patterns and common themes by analyzing the experiences of themselves and other participants. Content analysis worked well for identifying possible root causes and prioritizing alternative solutions. In essence, content analysis is the counting of words, sentences, or ideas within categories of interest. In this study, we used it to collect ideas on how lean Six Sigma can lead to innovation. Three general guidelines are applicable to content analysis. First, two judges were used for performing the analysis so that the consistency of results could be estimated. Second, the categories of interest must be applicable to the research objectives. In this study, we collected data specifically on the implementation and use of Lean Six Sigma leading to innovation. Third, the units of analysis must be appropriate for representing the topic under examination (Rosenthal andRosnow, 1991). In this study, the unit of analysis was the operational/department level where Lean Six Sigma was designed to be used. Case Study A: Caterpillar Company Background: For more than 85 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. With 2011 sales and revenues of $60.138 billion, Caterpillar is the world's leading manufacturer of construction and mining

equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. LSS implantation and result: Although, Lean Six Sigma has traditionally been used for operational improvement, leading companies have demonstrated its potential for driving broad-based innovation. The launch began with a nine-month training period for 4,200 employees. These trained professionals with varied backgrounds from engineering to finance then each led their own projects and served as mentors to the rest of the organization. Perhaps the most far-reaching transformation came from applying 6 Sigma approaches to strategy development. Using these disciplines to collect and analyze hard data on customers, markets and Caterpillars capabilities, the CEO and a strategic planning committee crafted a detailed vision for Caterpillar in 2020. The vision was subdivided into three five-year plans. The immediate plan set out specific, measurable targets for market position, quality, order-to-delivery performance, safety and other critical success factors. The plan was companywide, spanning all lines of business and cascading down through the organization. Through the rigor and discipline enforced by the initiative, the entire company aligned behind the same specific objectives. It is always about control. 6 Sigma forces you to have the processes and the people accountable to make sure the results are enduring. Dave Burritt, Vice President, Chief Financial Officer, Caterpillar The initial 6 Sigma launch spawned over 1,100 projects some generated subtle (though financially beneficial) operational improvements, while others resulted in innovative new products and radically different ways of working. One of the first process changes involved revamping R&D to include more direct interaction with the customer. Engineer to engineer, employees and clients began working collaboratively to pinpoint problems and develop solutions, steadily building closer relationships. Through alliances it built with Canadian oil sands mining customers, for example, Caterpillar learned about the nuances involved in extracting oil from sand. These application-specific insights led the company to develop a completely different kind of mining truck. Instead of offering a one size- fits-all model, its new mining truck is available in five unique configurations each suited to a particular type of terrain and haul profile. Now, customers in extremely cost sensitive industries, such as oil sands mining, can select the configuration that offers the best blend of price and productivity.

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You can use 6 Sigma for anything; we used it for Sarbanes-Oxley compliance. When people talk about SOX, they dont know how much it costs them but we do because we tracked it. Dave Burritt, Vice President, Chief Financial Officer, Caterpillar Teams also developed a tremendously successful diesel engine breakthrough that set Caterpillar apart from competitors. The ACERT Technology significantly reduces emissions and offers higher fuel efficiency, saving customers money and allowing the company to command premium pricing. This approach also led to major operational changes, particularly in Caterpillars supply chain. Caterpillar has, in its own words, systematically de-bottlenecked its order -to- delivery process. For example, teams redesigned the production scheduling process at Caterpillar manufacturing facilities, which cut lead times by more than 50 percent. They have also reduced delays caused by supplier-sourced pumps. Historically, if a pump failed during initial testing, Caterpillar had to take time to fix the pump or wait for the supplier to send someone to repair it. Now, based on suggestions from the 6 Sigma team, the supplier has its own pump test cell and breaks in new pumps before sending them to Caterpillar plants. And the supplier faces a financial penalty if it fails to meet specific quality goals. Overall, the results from Caterpillars initiative have been phenomenal. Caterpillar launched 6 Sigma globally and delivered benefits that surpassed implementation costs in the first year. Since then, it has become a critical component of Caterpillars success. The rigor and discipline have enabled the record profits of the past few years and are helping the company achieve its 2010 strategic goals. According to Caterpillar Vice President and CFO Dave Burritt, Caterpillars competitiveness has improved...6 Sigma has been applied to increase our percent of industry in all of our principal lines of business. The machine, the engine, and financial products businesses have all benefited from the rigor of 6 Sigma. Without question, we are in the best of times at Caterpillar, and the improvements would have been much less without 6 Sigma. Case Study B: POSCO Company Background: After decades of government ownership, the Korean steel company POSCO was privatized in 2000. Long sheltered from market forces, the company then faced serious competitive pressures. In particular, its low-cost competitive advantage was evaporating as cheaper competitors emerged from other regions, notably China. Its limited regional footprint also left the company exposed to a declining Korean economy. LSS implantation and result: It takes strong leadership to create enduring change that produces continual innovation. With increasing globalization, every steel company must innovate to prosper and compete in this new environment.

POSCO was in a difficult situation you might almost say a crisis a few years ago as we faced this new global competitive threat. As a management team, we felt that Six Sigma was a good vehicle to change all employees way of thinking, current working styles and mind-sets. Ku-taek Lee, Chairman and CEO, POSCO Undaunted, POSCO was determined to remake itself, shifting from a local, low-cost producer to a global, valueadded steel maker. To do so, its entire way of working had to change. The company made a fundamental commitment to use a Lean Six Sigma approach to transform its business and create a market-driven mindset throughout the enterprise. Initially, R&D resisted the Lean Six Sigma approach, feeling it was too Western to be practical for an Asian company. But after special training sessions, designed with these engineers in mind, opinions began to shift. Instead of sending marketing or salespeople to research customer needs, senior management sent engineers. This empowered the people who were making the pivotal design decisions to talk directly with key customers and make recommendations. For the engineers, this approach provided opportunities to learn directly from customers. The in-depth client discussions helped POSCO engineers pinpoint several product areas where customers were looking for more innovative solutions. As the POSCO management team developed its strategy for becoming a value-added rather than a low-cost steel provider, it again relied on Lean Six Sigma. Using the engineering teams input on customer needs, senior management analyzed market potential and the companys capabilities in those product and service areas. The optimal strategy seemed to revolve around two high-potential markets: shipping and automotive. Senior managers then aligned the entire company behind these strategic priorities. R&D concentrated on these two areas, and pet projects that did not contribute to the value-added vision were cancelled. (Its important to note that these priorities were not static. With Lean Six Sigma helping POSCO maintain a perpetual watch over customer needs and market opportunities, the company has since added a construction vertical to the mix.) The business model shift to focus on the shipping and automotive industries led to major product innovations. For example, the company invented steel that remains rust-free in salt water, creating significant opportunities in shipping and floating dock construction. Using Lean Six Sigma to drive interactions with global automakers, POSCO developed 21 varieties of high-grade steel designed to meet special industry needs, such as coated steel that paint adheres to more easily. Lean Six Sigma analysis soon led to another realization: in order to expand its products and markets, POSCO would have to expand its operations as well. Although China is the worlds biggest producer of steel (and therefore a competitive threat), the expanding gap between its own production capabilities and rapidly rising demand provided

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a growth Driving operational innovation using Lean Six Sigma opportunity for POSCO. To fill this gap, POSCO has orchestrated 14 joint ventures and invested US$780 million in China. Just a decade ago, that investment figure was zero. Using Lean Six Sigmas relentless focus on customer demands, POSCO developed process and IT innovations that dramatically reduced finished steel inventories and cut lead times from 28 to just 14 days by 2003. At the same time, however, the companys focus on customer needs sometimes created additional challenges. For example, POSCO found that filling orders faster left too many partly used steel slabs, which hurt margins. Determined to meet customer needs profitably, POSCO developed sophisticated production scheduling algorithms that allowed it to pack multiple orders on a slab. This allowed the company to optimize slab utilization (and profitability), while still responding rapidly to customer demand.9 In addition to growth and profitability, the Lean Six Sigma approach helped POSCO realize an altruistic objective to help restore and protect Koreas natural environment. The years following the Korean War were hard on Korea ecologically; in the drive to improve economic conditions, companies too often ignored the environmental impacts of their actions. In an effort to contribute positively in this area, POSCO, through its Lean Six Sigma efforts, was able to introduce diverse environmental management programs and processes, including an iron-making approach that eliminates the sintering and coking processes, which, in turn, reduces environmental pollutants. As the Lean Six Sigma way of thinking spread across POSCO, virtually no area of the business was off-limits. The company was equally comfortable (and confident) applying the approach to corporate strategy and budgeting as manufacturing and logistics. Through its Lean Six Sigma efforts, POSCO has produced over US$1 billion in financial gains to date, including strong savings and record sales volumes. Even in 2001, the first year of its Lean Six Sigma initiative, when twenty-five-year lows in prices hit other steelmakers and their investors hard, POSCO achieved double-digit profitability. By 2005, in less than four years, the company had transformed itself from a regional, low-cost producer to a global, value-added provider of high-quality steel. POSCO is now the third largest steelmaker worldwide. It also ranks high in terms of efficiency and profitability and has been selected as the worlds most competitive steel firm for three consecutive years in a global study conducted by World Steel Dynamics. As we became privatized and more globally oriented, we had to dramatically change everything within the entire enterprise all processes and ways of operating. But you cant make these kinds of changes overnight, especially not employees mind-sets and attitudes. We are using Six Sigma as a way to do this gradually and continuously Ku-taek Lee, Chairman and CEO, POSCO

CONCLUSIONS Innovation begets innovation; what starts as a seemingly minor operational change can result in new products or even an entirely new business model. As Lean Six Sigma disciplines steadily infiltrated the thought processes of employees and company leaders, POSCO experienced a domino effect. As the company innovated in one area of the business, it triggered transformation in another. For example, in POSCO the business model decision to focus on high-potential segments such as the automotive industry inspired new, innovative steel products. These new products, in turn, led to new processes to produce higher-grade steel. Collectively, these ripples of innovation enabled POSCO to accomplish a top-to-bottom transformation from government-owned business to profitable private enterprise; from low-cost producer to value-added provider; and from regional player to global competitor. Applying Lean Six Sigma to strategy development sends a clear message about how serious management teams are about making an enduring change. In the case of Caterpillar, strong leadership prompted strong participation, unifying 27 disparate organizational units around common strategic goals. Teams saw how their efforts were linked and contributed to the whole. Results were measurable and visible to all. While its 6 Sigma initiative helped make the changes enduring, strong leadership and broad participation made them happen fast. Caterpillar recouped its initial investment in less than a year. And its story is not an isolated case. Although most demonstrated solid results from their Lean Six Sigma programs, those with a high degree of CEO commitment and a top-down corporate deployment approach experienced a much faster transformation. As we can see from figure 1 that how LSS can lead to innovation starting from idea generation to product development, product launch and finally continuous improvements. Innovation appears to be the next business fad promoted by the popular and professional media, replacing lean and Six Sigma.

Idea Generation Opportunity Identification Conceptual Design Concept Development Feasibility Assessment Idea Generation

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Product Development Product Definition Design Product Launch Commerci - alize Ongoing Operations Product Ramp Feasibility Assessment

Design for Six Sigma (DFSS) methodology to develop a product right the first time. Clearly define problems that need to be solved in the system, solve them, and understand the variability in the system

Lean and DMAIC (Manufacturing services)

Continuous Improvement

Fig.1. The process of innovation with LSS


Lastly, this research provides a model to effectively guide the implementation of Lean Six Sigma programs leading to innovation to reduce variation or waste from the operations. This is particularly relevant because todays competitive environment demands that companies reduce variation (waste) to meet or exceed efficiency and responsiveness requirements of customers. There is increasing pressure to pursue new ways of thinking as a source of competitive advantage. More research in this area is necessary to contribute to the science and practice of implementation of Six Sigma or any other process improvement model, to reduce waste and create value which will turnout to be a tool of innovation. Organizations seeking long-term success will need a balanced approach to business improvement that includes methods for basic problem-solving, approaches to continuous process improvement, such as LSS, and also systems to identify opportunities for disruptive and operative innovation. We advocate for further research on lean six sigma projects which leads to innovations in any of product, process or project field. This is going to be a promising research field. REFERENCES
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Usage of business strategy tools to understand industry, customers, competition, and internal business capabilities; idea management system to collect and nurture an idea to maturity; session with business to get buy-in

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Ohno, T., Toyota Production System, Beyond Large-Scale Production, Portland, Oregon, Productivity Press 1978) The Gartner Fellows Interviews: Ku-taek Lee, Chief Executive Officer, POSCO. Gartner, Inc. April 12, 2005. http://bvit2.gartner.com/research/fellows/asset_140300_1176.js p

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Womack, J.P., Jones, D.T., 1996, Lean Thinking, Banishing Waste and create Wealth in Your Corporation, (New York, N.Y. Simon & Schuster 1996) Womack, J.P., Jones, D.T., 1994. From lean production to the lean enterprise. Harvard Business Review 72 (2), 93103. Xu, K., Sikdar, C. and Gardner, M.M. (2006), Six Sigma roles in innovation, paper presented at the IEEE International Conference on Management of Innovation and Technology, Singapore. Yasuhiro, M., Toyota Production System: Practical Approach to Production Management, Norcross, Georgia, Industrial

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