Magazine article The CPA Journal

Six Sigma Primer for CPAs

Magazine article The CPA Journal

Six Sigma Primer for CPAs

Article excerpt

TOLERANCE IS AN ALLOWABLE DEPARTURE FROM A NOMINAL VALUE established by designers that is deemed nonharmful to the functioning of the product or service.

Six Sigma has been called the latest incarnation of Total Quality Management (TQM). The name simply means that customer-specified tolerances for acceptable output are six standard deviations (sigma) from the mean. Major corporations that practice its apple cation include Motorola, General Electric, and Allied Signal. Companies whose products or services are produced under a Six Sigma philosophy are, essentially, perfect.

Six Sigma management has high training costs, ranging anywhere from $1,300 to upwards of $20,000 per employee. Outside organizations and consulting firms also offer Six Sigma training, with costs running as high as $30,000 per person. Six Sigma management is implemented through teams whose goal is to improve or innovate processes such that they produce approximately 3.4 defects per million opportunities.

Many observable phenomena can be graphically represented as a bell-shaped curve that looks something like Exhibit 1. The interval created by the mean plus or minus two standard deviations contains 95.44% of the data in a normal distribution, and the interval created by the mean plus or minus three standard deviations contains 99.73% of the data in a normal distribution. The interval created by the mean plus or minus six standard deviations contains 99.9999998% of the data in a normal distribution.

Normal distribution. When measuring any process, it can be shown that its outputs vary in size, shape, look, feel, or any other measurable characteristic. This variability is measured by a statistic called the "standard deviation." If stated specification limits of unacceptable output is equal to three standard deviations from the mean, statisticians expect 2,700 defects per million. When stated specification limits are six standard deviations from the mean, static ticians expect two defects per billion opportunities.

Voice of the Customer

Specifications state a boundary that applies to individual units of a product or service. In Six Sigma these specification limits are called the "voice of the customer."

An individual unit of product or service is considered to conform to a specification if it is on or inside the boundary. Individual unit specifications are made up of a nominal value and an acceptable tolerance from that. The nominal value is the desired value for process performance mandated by the customer's needs or wants. The tolerance is an allowable departure from a nominal value established by designers that is deemed nonharmful to the functioning of the product or service. Specification limits are the boundaries created by adding and/or subtracting tolerances from a nominal value, for example:

USL (upper specification limit) = Nominal + Tolerance

LSL (lower specification limit) = Nominal - Tolerance.

An example of a specification can be seen in a monthly accounting report that must be completed in seven days but no earlier than four days (lower specification limit) and no later than ten days (upper spec&ation limit).

Voice of the Process

Six Sigma management promotes the idea that the voice of the process should take up no more than half of the tolerance allowed by the voice of the customer, a process that transforms inputs into outputs through the addition or creation of value. Exhibit 2 shows the "voice of the process" for the accounting function with an average of seven days, a standard deviation of one day, and a predictable normal distribution. It also shows a nominal value of seven days, a lower specification limit of four days, and an upper specifi cation limit of 10 days. The accounting function is referred to as a Three Sigma process because the process mean plus or minus three standard deviations is equal to the specification limits in other terms, USL = M + 3 sigma and ISL = M - 3 sigma. …

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