A Six Sigma Guide to Speaking Business

DMAIC and COPIS are not business terms, says contributor Gene Rogers. This year, he says, the challenge is to become fluent in the language of business. Here's his translation guide.

In my last article, I challenged Six Sigma practitioners to change the very nature of how we demonstrate and communicate value to our business leaders. Part of that challenge was to "communicate only in business terms".

In 2011, successful Six Sigma practitioners must learn to fluently speak the native language of business. This inherently assumes stopping the use of Six Sigma-specific terms - DMAIC and COPIS are not business terms!

Instead, we need to substitute our terms-of-art with the results they bring; quicker inventory turns, better cash flow, lowering fixed costs, and increasing profit margin. Be careful, though, not to throw these terms around ad-hoc. Using them in the proper context is critical for your success.

The guide below will help you get started. This is not a guide for dummies, however. It’s a guide for thoughtful, enterprising quality practitioners who want to increase their credibility with business leaders.

Before we get into the definitions, however, there are a few laws of business that are worth reviewing (1).

Rule #1: The individual who says nothing is usually credited with having nothing to say.
Translation: the squeaky wheel gets the grease. So, speak up or forever hold your peace.

The first rule does have a downside, hence, rule #2.

Rule #2: If you are not criticized, you may not be doing much.

Translation: As a Six Sigma practitioner you are by default a change agent, so get ready for some resistance when you speak up.

With that in mind, let’s begin.

The first two words are the most important; CAPEX and OPEX.

CAPEX: Short for Capital Expenditure. These are investments a company makes that will be used over a long period of time. It can include things like real estate, vehicles, machinery, and PC’s. These assets are usually depreciated in value over time. CAPEX is commonly found on the cash flow statement as "Investment in Equipment" or other related items. The general rule is that if the acquired asset has a useful life longer than the taxable year, the cost must be capitalized. Capitalized expenditures show up on the balance sheet.

OPEX: Short for Operating Expenses. This term refers to expenses incurred in the course of ordinary business, such as wages, maintenance and repair of machinery, utilities, and rent. Management’s job is to determine how low operating expenses can be reduced without significantly affecting the firm’s ability to compete in the market.

It is important for Six Sigma professionals to know how their improvement projects impact the balance sheet. In most cases, your project should avoid CAPEX and reduce OPEX.

As an example, if your improvement project requires an investment in technology, consider leasing instead of an outright purchase. This allows for better cost control and avoids having to write off long term investments.

ROI: Short for Return on Investment. Here is where the proverbial rubber meets the road. Return on Investment is the performance measure used to evaluate the efficiency of an investment, e.g. your time and effort. Return on investment is a very popular metric because of its simplicity. If the ROI on a project is negative, or if there are other opportunities with a higher ROI, then the project should be cancelled. It is good practice to provide an ROI projection for your project during the "Define" stage. Use caution; however, as ROI calculations can be easily manipulated. When using this metric, make sure your audience understands what inputs are being used for the calculation.

Inventory turns: This is a measure that calculates the number of times inventory is sold or used over a period of time, typically a year. The speed at which materials move through a facility (or through an entire value stream) effects ROI, cash flow, and in most cases, the ability to generate higher profit margins. As a rule of thumb, higher inventory turns are better; however, standards vary between industries. Generally, if you have too much inventory the company is wasting money. Capital is tied up in inventory instead of being used elsewhere. If a company has too little inventory, customer demand may go unfulfilled. As quality practitioner, always use a balancing metric if you are working on an inventory project. Receivables turnover, asset turnover, and income & revenue per employee are good candidates (2).

Cash Flow: Cash Flow is often used as a measure of financial performance and is based on the amount of cash that comes into or out of a business. Cash Flow is generated by Operations, Financing and/or Investments. Operational cash flow is a result of a company’s operational activity. (My experience is that most Six Sigma projects are done in Operations because of the transactional nature of operational activity). Financing cash flow is from issuing debt and equity, paying dividends, or debt repayments. Investment cash flow results from the sale of a long-life asset - or the purchase of one (see CAPEX above).

Six Sigma professionals need awareness of all three areas; however, for this discussion we will focus on Operations.

Each business organization is unique in terms of its products or services; however, when it comes to internal operational and administrative transactions, most everyone is on equal footing. All companies must process orders, issue invoices, purchase supplies, write checks, and apply payments like any other business organization. It could be argued that the key to making a profit lies in the effective administration of the operational processes (3).

Six Sigma and LEAN have been proven to work especially well in these areas. It is worth your time and effort to look for the opportunities.

OK, enough with the definitions already.

The bottom line is that understanding the terms of business and applying them to your Six Sigma projects will only benefit you and your company by creating a significant link between what "the business" deems important and what your project will deliver. To create this link, work with the Accounting Department early in the lifecycle of your project, to define where the biggest financial impact of your project will be.

Remember, in most cases, your project should avoid CAPEX, reduce OPEX, and generate a high ROI and positive Cash Flow.

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Sources:

1 The Unwritten Laws of Business by W.J. King and James Skakoon.
The book is based on three articles written by W. J. King which were first published in 1944 in the "Mechanical Engineering Magazine". The American Society of Mechanical Engineers later decided then to release the articles in book format.

2 From Advisor FYI Definition: Inventory Turnover Increased, (nd),
http://moneycentral.msn.com/investor/alerts/glossary.asp?termid=45

3 From Aveta Business Institute, Six Sigma Online article, (11-26-2007), http://www.sixsigmaonline.org/six-sigma-training-certification-information/articles/transactional-six-sigma.html