Include Customer Value in Lean Six Sigma

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Include Customer Value in Lean Six Sigma
Harry E. Cook, Ph.D. harrycook66_at_yahoo.com
8th Annual Lean Six Sigma and Process Improvement
in Healthcare March 18 19, 2008
Intercontinental Hotel, New Orleans
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Topics Covered

• The Fundamental Financial Metrics
• Value Assessment Tools
• How to Include Value in Design of Experiments
• The Payoff

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The Fundamental Metrics

• There are three Fundamental Financial Metrics
  that define the Prospects of each New, Innovative
  Idea
• Value,
• Cost,
• Pace of Innovation.
• They control the score cards for the
  Bottom-line Metrics of Demand,
• Price,
• Profit.

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Lean Six Sigma Today
The full strategic power of the Lean Six Sigma is
not being realized. Root cause Customer Value
(Value) in dollars is not used in forecasting
demand, price, and profit of new innovative ideas
early in the planning process.
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Timeline for ForecastingJob 1 Financials
Start of Planning Many Competing Ideas
Job 1
Forecast the Bottom-line Metrics of for the
Competing Ideas using the three Fundamental
Financial Metrics
Actual Bottom-line Is a Lagging Metric
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The Fundamental Metrics Quantify the
Competitiveness of a New Idea

• Value (To the Customer) is computed from
  customers willingness to pay for improvements in
  Critical To Value (CTV) attributes of the product
  or service.
• Cost (To the Company) includes all aspects
  associated with lean such as minimal inventory,
  elimination of waste, plant efficiency, supply
  chain efficiency, piece cost, etc.
• Pace of Innovation is the reciprocal (1/t) of the
  time (t) needed to take a new idea from concept
  to production.

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Defining Customer ValueUsing Demand Curve
Demand
Value 20 The price where demand goes to zero
0
20
Price
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Proof of Definition of Value from Demand Curve
(Willingness to Pay for Two 100 Lottery Tickets
with different odds )
P is the price of the ticket. EEV is the
expected economic value of the 100 lottery
tickets. 50 50 80 80
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How the Fundamental Financial Metrics Couple to
the Bottom-line Metrics
Customer and societal value are determined
outside the company by its customers and by
society. Inside the company there are only
costs. (Peter Drucker)
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Four Simple Questions to Support Decision Making
When Considering a New Idea
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How Value and Cost Influencethe Target for a CTV
Attribute
Target is where V C is maximum.
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How Value is Affected by Variation

• Continuous CTV attributes are almost always
  concave which causes manufacturing variation to
  lower value.

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Relation to Taguchi Methods
The Value curve and Taguchis CIQ are Inverse to
Each Other.
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What Attributes are Critical to Value?
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A Generic Set of CTV AttributesExists for all
Products and Services!

• Five senses (visual appeal, odor, sound/noise,
  touch, taste)
• Time between events (turn-on to run, start of
  task to finish)
• Friendliness (ease of learning how to operate)
• Robustness quality (insensitive to variation)
• Dimensions (volume, moment of inertia, weight,
  etc.)
• Legal/Ethical (Federal Social standards)
• Safety (injury minor, moderate, severe, fatal)
• Longevity quality (product life and patient life)
• Environmental impact (on air, water, soil)
• Operating costs (reduce customer value)

This is an Incomplete List!
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Some Healthcare CTV Attributes

• Access to doctors office or hospital
• Friendliness of receptionist
• Wait time for patient
• Waiting room amenities (seat comfort, noise
  level, beverages, Wi-Fi, etc.)
• Length of stay
• Quality of diagnosis
• Quality of treatment
• Time to recover
• Annual cost of medications to patient
• Speed to Mitigate Crisis
• Mortality rate

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An Increase in Value minus Cost Increases Demand,
Price, and Cash Flow
Annual cash flow
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How to Quantify Value

• 1. Surveys
• 2. Computations
• 3. Internal Company Estimates
• 4. Analysis of Trends in Demand Price of
  Competing Products and Services

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The Direct Value (DV) Survey
The DV survey determines the neutral price PN for
an alternative relative to a baseline at a fixed
price P0. The neutral price is the price of the
alternative which makes the two demands equal in
the survey. The relative value ?V of the
alternative in is equal to ?V PN P0.
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A Simulated Survey for Brand Name Value
BRAND X
Assume you are in the market for a Vital Signs
Monitor. For each paired price comparison,
select the monitor on the left or the one on the
right.
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Proprietary Brand Name Value Survey
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The Plot (Logit form) for Determining the
Neutral Price for Alternate Brand A
Here the neutral price is less than the baseline
price which shows that the total value of Brand A
less than the baseline machine.
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Actual Results for Relative Brand Name Valuesof
the Earthmoving Equipment
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Softer Side of Value

• The products of a major earth moving equipment
  maker has had a long term value advantage with
  respect to competitors.
• CTV performance attributes of equipment are about
  the same.
• Added value comes from
• 1. DEEP DEALER KNOWLEDGE in getting customers
  into right product for the job at hand.
• 2. FAST REPAIRS in the field.

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Value of Interior Noise DV Survey delivered on
computer screen
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Value Curve Outcome Car Interior Noise at 70 mph
From Computer DV Survey
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Computation of Value of Fuel Economy Relative to
25 mpg Baseline (3.50/gal)
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Empirical Form for Value Curve
Exponential weighting coefficient. It is
approximately equal to the fraction of time the
attribute is important during use.
A parabolic function of CTV attribute.
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Empirical parameters for 3 Value
Curves(Automotive Examples)
Interior noise critical and ideal levels were
from human factor studies and gamma was from best
fit to DV survey results.
Acceleration critical and ideal levels were from
jury evaluations and gamma was from best fit to
DV survey results.
Turning radius critical and ideal levels radius
were from company internal jury evaluations and
gamma was also from jury evaluation.
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Total Value Trends from Demand Price Analysis
Chrysler introduces all-new design plus second
rear sliding door (worth 1,250 in value!).
mvA is Chrysler mvB is Ford
All-new Windstar replaces Aerostar.
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Introducing Value into Design of Experiments
(DOE)
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Analysis of a DOE for Maximizing Value(Value
Only used for Simplicity)

CTV Attributes
Control Factor Levels
CTV 1 CTV2 Net
Trial Factor A Factor B Factor C
Mean Var. Mean Var. Value
X 1 2 1
6 1.2 15 2
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1. The control factors are varied according to
the experimental design (OA). 2. The mean and
variance of the affected CTV attributes are
measured for each trial. 3. The
value curve for each CTV attribute is used to
compute value for each trial as a function of the
mean and variance. 4. Using linear algebra, the
influence of each factor on value is computed to
determine which combination yields max value.
(Log value is used to improve additivity.)
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RECALL The Fundamental and Bottom-line Metrics
are Coupled in two never ending Loops
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Summarizing using DMAIC

• Define The never-ending problem is that Your
  Value is too Low, Your Costs are too High, and
  Your Speed is too Slow.
• Measure Value, Cost, Speed versus Competition.
• Analyze Status of CTV Attributes versus
  Competition.
• Improve CTV Attributes because they improve the
  Bottom-line Metrics.
• Control Make Control of CTV attributes part of
  Standard Work.