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When the Best is the Enemy of the
Better
We have a
standard for producing the very highest quality of goods and
services. It is called six sigma a concept from statistics that
says that if you deliver or produce something with an error rate of
3.4 per million, you are meeting this high standard. Very few
companies can do this, but most try because six sigma is the current
buzzword in management.
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The best you can
achieve in quality is zero errors per million
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There is no ceiling on
what you can achieve in productivity.
Quality and productivity are exact
opposites. Here is why.
Productivity is this
ratio: Output /Input Improving this ratio is the only way we
can improve upon wealth creation. There is no other way that, over
time, we can increase wages, or profits, or add to our net wealth
except for improving that ratio: Thus, productivity improvement
requires that the ratio must change for the better. We must produce
more output with the same or less input for productivity to improve.
But when we
have reached the magical 3.4 errors per million, almost perfect
quality, the output
χ
input ratio will not change so the change will be exactly zero.
Why? Because all variability has been taken out of the products and
processes that we deliver; productivity improvement requires
variation.
That is why we
only see productivity improvement in the first phases of a six-sigma
program. It will last until all the waste is gone. Then
productivity improvement will fall to zero.
This
is what happened to Japan. Japan became the second largest economy
in the world largely by squeezing out the waste and redundancy out
of its economy. But for the last fourteen years, the economy has
been flat and annual productivity improvement has remained at or
near zero.
The
same happened to many fabled companies that implemented six-sigma:
Motorola, Ford, GM, and GE. And the same happened to the American
economy between 1982 and 1995 the Quality Revolution was
accompanied by a drop in productivity improvement from 3% to 0.9%
per year, and we forfeited at least $10 trillion in annual GDP by
not paying attention to productivity.
Why does a
successful six-sigma program eventually lead to a dramatic reduction
in productivity improvement?
Think of
something you are very, very good at. Maybe even the best in the
world. What incentive would make you change?
Kodak was the
best in the world at making films. Then came digital photography.
Think how hard is has been for that iconic company to survive.
Boeing
airplanes were flying at eight-sigma meaning that you were safer
in a Boeing airplane than you were in your own living room. But
while Boeing focused their attention on quality, Airbus tried a
different route, and with new technology and new ideas. Last year,
Airbus passed Boeing in aircraft sales. Airbus had become more
productive than Boeing.
Motorola is
struggling to recover from a time when they had mastered quality
but for analog devices and then their digital challenge appeared.
Some 25% of the work force had to be laid off. GM has recently been
touting that it has the three highest-quality-ranked plants in the
U.S., but we note a negative bottom line. Do you remember, "Job
One?" Ford is only making money on its finance arm now.
Seemingly, everyone looks to Toyota Motor Corporation to set the
standard, but even the dowdy Dow Jones Industrial Average has
outperformed Toyota every year over the last decade. Honda is
actually a better-performing automaker, and BMW is outperforming
both Toyota and Honda.
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Now the U.S. health sector is contemplating introducing
six sigma. Health sector productivity improvement has
been negative over the last thirty years
its productivity is actually getting worse every year.
Should it focus on productivity improvement instead?
What happens to those companies that do?
Surprise! Highly productive companies are known for
their high quality! Why? Because any quality error is
also a performance glitch you focus on performance,
and you get quality for free.
The most productive companies in the U.S. have three
times the profit ratio of the average U.S. business
sector company. They have increased
hiring over the last six years, and they pay better than
the average U.S. business sector company.
Which are these companies? In the health sector, we
find United Healthcare Group now Minnesota's largest
company, with a stock price that has appreciated 800%
between 2000 and 2005. It has built its business model
on doing the right thing, in the right way, all the time
the exact definition of productivity. Choosing
"Output" is deciding what is the Right Thing,
or effectiveness; turning input into output, doing it
the Right Way, or efficiency; and doing it
All the Time, or occupancy, is the third
leg of the Productivity Chair.
We
have identified the most productive companies in the
U.S. of the 7,009 companies for which we have data.
United Healthcare Group ranks 2,612 (in the upper 37%)
in multifactor productivity, and its rank has been
improving every year. But the most productive companies
tell a similar story: Outperforming the U.S. business
sector, increasing their hiring, and creating the new
wealth that makes our future more secure. There is no
ceiling on productivity.
The U.S. health sector does not have anywhere near 3.4
errors per million its record is 25,000 errors per
million. Should it model itself after Toyota Motor
Corporation, GM, Ford or Motorola? What do you think?
If
the U.S. health sector just had been as productive as
the U.S. business sector, we would have had a decrease
in health care cost over the last decade, even after
paying the 50% premium in pay that the sector enjoys
over the rest of the economy. And we would have been
able to receive twice the care for those same dollars.
That is what the health sector should do! Improve the
productivity of its highly educated work force, its
splendidly equipped facilities, and its admirable
progress in medicine and bioengineering.
Productivity improvement has given us some breathing
room after 1995 in the form of low interest rates, low
inflation and significantly improved purchasing power.
To take full advantage of the Productivity Revolution
that is now beginning will mean no future Medicare/
Medicaid Crises, no Social Security funding problem, and
no federal deficits.
It
would be worth doing. We can't afford not
to do it.
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