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The Six Sigma Supply Chain

RFID gives companies, for the first time, the ability to measure their supply-chain performance—and most are not even close to Six Sigma.
Posted By Mark Roberti, 11.10.2006
Nov. 10, 2006—Companies such as Dow Chemical, General Electric and Honeywell adopted the Six Sigma approach to manufacturing in an effort to drive down defects and improve quality. The Six Sigma philosophy, as advocated by a Motorola engineer named Bill Smith, called for reducing defects to less than 3.4 per million units created, and it called for constant analysis and refinement of processes to achieve that lofty goal.

Six Sigma has not been applied to the supply chain simply because there has been no way to measure supply-chain excellence. Companies do measure, or try to measure, how accurate they are in picking goods from a warehouse for shipment to a customer, how accurate they are in shipping those goods and so on. But there are few retailers that measure how long products sit in the back of the store, or how well they do at restocking the shelves or getting promotional items out on time.

Shai Verma, RFID practice leader for IBM Canada, and Venkat Krishnamurthy, chief technology officer at OATSystems, an RFID software company and a partner of IBM, did a presentation at RFID Journal LIVE! Canada. The presentation focused on how RFID could be used as a tool to measure supply-chain efficiency. Using RFID data supplied by one retailer to one of OAT's customers, Verma and Krishnamurthy found that the retailer's ability to comply with a promotional plan was 0.5 sigma. Even getting to Four Sigma would have resulted in a 20 percent increase in sales.

RFID can help companies measure their supply-chain performance, and it can help improve performance, Verma and Krishnamurthy said, by reducing the time people spend looking for goods, improving their ability to count cases or items correctly and making it possible to track which products were the first in and need to be the first out.

They recommended that companies do some experimentation with RFID and examine the results. Then companies should determine what their success criteria is (lowering inventory or improving pick accuracy, for instance) and check to make sure they have the right metrics for measuring success. If you have the right metrics, examine your performance, then change the process and measure it again. By constantly improving the process and measuring the results, companies can move from 0.5 Sigma much closer to Six Sigma.

Verma said that companies do not need to tag every single product they manufacture, transport or sell. One way to measure in a cost-effective way is to pick products that are representative of a product category and tag and measure only that product. The process improvements can be applied to others in the same group.

Companies can also use what Krishnamurthy called the "tracer-bullet approach." A tracer bullet leaves a luminous or smoky trail, so that the shooter can see where he is shooting. By tagging one case per pallet, a company might get enough data to determine the movement of all cases in that pallet.

Embracing the philosophy of Six Sigma, or continual process improvement, is not easy. It requires a constant re-examination of what a company is doing wrong, then fixing it. But the results can be transformational. After Motorola embraced Six Sigma manufacturing, the company said that it saved $16 billion per year. Given that some of our supply-chain processes are only at 0.5 Sigma today, the savings for large companies could be even greater for companies that adopt the Six Sigma approach in their supply chain.

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