Six Sigma in Context of Analysis of Friends Seminary School Financial and Administration Services Transformation

Introduction

It is seen that this non- profit organization is besieged with a plethora of issues, financial and non-financial inconsistencies, which need to be addressed to and resolved through the use of Six Sigma, which is mainly concerned about improving service efficiencies and reducing errors to the barest minimum.

In the context of Friends Seminary School, the main aspect that needs to be addressed is that quality of education, and this is what provides highest income generation for the institution. The proper utilization of this income source needs to be considered. In order to avoid misappropriation of income funds, it is necessary that proper documentation and stringent overall monitoring of incomes, including receivables need to be made. Internal checks and internet audit procedures, in line with Six Sigma recommendations may be enforced in the revenue sections.

The systems of monitoring could consider daily monitoring of revenues and preparation of daily/weekly/monthly reports based upon physical counts and reconciliation of accounts statements relating to cash, bank, Accounts receivable, payable and expense sheets. The regular enforcement over financial transactions could, to a large extent, overcome present irregularities and ensure compliance over a period of time.

Fish bone diagram

Fish bone diagram proposed by Dr. Kaoru Ishikawa analysis the causes of any problem and the effects thereof. By analyzing the causes the impact of them on the effect can be forecast. In this case, the main problem for the cost escalation in running the school is illustrated by the fish bone diagram given below. So the Management focused its attention on each of the causes so that their impact can be minimized.

Six Sigma analyses

Six sigma refers to the quality or operation which strives for near perfection. In six sigma quality, the process is subjected to a maximum defect of 3.4 defects per million opportunities only. The number six in the six sigma refers to six standard deviation between the mean and the nearest specification limit. A six sigma defects indicates anything outside of the customer specifications. Due to the specification of the accuracy of the results at its maximum level, the six sigma methodology in quality control is capable of avoiding or reducing variation in process. Thus optimum process performance can be ensured. (Six sigma- what is six sigma, 2009).

Six Sigma was firstly introduced by Motorola as a management philosophy in which extremely high objectives are targeted in process performance. To reduce the defects in products and services at the maximum level, data are collected and analyzed to a fine degree. Sigma indicates variation from the standard. It is based on the concept that the defects on process can be avoided through identifying the expected defects and application of controlling measures over it.

“The term “Six Sigma” is a statistical term that refers to 3.4 defects per million opportunities or 99.99966 percent accuracy developed in the 1980’s by Motorola.” (Six Sigma and Quality management Solutions, 2009)

Through the application of Six Sigma in problem solving and business process improvement in organization, it can ensure incredible high level performance with maximum profitability in operations. Statistical symbols are used in the Six Sigma in order to represent the process variation. The Sigma scale of measure indicates the defects per unit with the probability of faults. In 1999, the General Electric Company attained great success in business operation through the applications Six Sigma in its quality control functions. (Six sigma & quality management, (n.d))

Advantages of Six Sigma Strategy

Six Sigma can be used in place of other management strategies such as total quality control, total quality management strategy, quality circles etc. In this strategy, management innovation is carried out by the combination of four fundamentals such as customer, process, manpower and strategy. Six Sigma presents a scientific and statistical approach towards the quality control in processes by measuring the quality level in statistical terms. Through this approach the comparative performance of the process quality with regard to the standard can be measured.

The top management can be better informed about the requirements in process quality improvement trough process innovation in order to ensure the customer satisfaction. Six Sigma facilitates efficient utilization of the manpower resources of the organization through individual performance appraisal. In this approach a belt system is employed for indicating the performance level of the individuals in the organization.

Thus there exist green belt, black belt, master black belt and champion. Individual with black belt is the leader of the project team. There are several Green belts involved in an operation process that supports the black belt to perform the project team function. Well established international companies adopted Six Sigma as a managerial approach achieved great success in their operational performance improvement. (Park , (n.d)).

Successful implementation of Six Sigma involves the following steps

1. Setting up of the Six Sigma team and formation of long term Six Sigma management vision.
2. Provide six Sigma educations to the organizational personnel starting from Champions.
3. Setting up of infrastructure for the Six Sigma such as statistical process control, knowledge management etc.

The vision of the Six Sigma team should be based on the change, customer and competition for quality. (Park , (n.d)).

Importance of Six Sigma

In other quality control techniques such as TQM and quality circles, detection and correction of errors are mainly focused rather restriction of its further occurrence. Where as, in Six Sigma, in order to restrict the further occurrence of the defects the process is completely revised or reengineered. In broadly speaking Six Sigma is based on the statistical version of Total Quality Management to ensure quality improvement and finally customer satisfaction. The quality of the output process is ensured through ensuring the quality of the input as well as the transformation process. “Six sigma is one of the most powerful breakthrough leadership tools ever developed. Six Sigma supports business efforts in gaining market share, reducing costs, and significantly improving the bottom–line profitability for a business of any size.” (Kumar, 2006, p. xi).

Coming to the question of excessive amounts set for auditing, it is seen that at present $1000,000 is spent towards audit costs. While auditing is mandatory under US Commercial laws, and also the requirements of Sarbanes Oxley, this figure seems rather towards the higher side, even for an institution of the magnitude of

Friends Seminary School Financial

Thus, In line with Six Sigma requirements, what needs to be done first to find out the cost break up of this figure and what the major constituents in this figure entail.

Based on these details it would be necessary to issue memos to respective erring departments, or officers to rationalize and control audit costs. While this does not mean that necessary expenses be cut down, it certainly does mean that extravagancies need to be eliminated. It is quite possibly that certain costs or expenses may be grouped under audit expenses to avoid detailed scrutiny, and therefore, in line with Six Sigma, these costs also need to be brought under the scanner.

Use Six Sigma along with DMAIC Rule

The six sigma quality management system with the help of a methodology namely DMAIC (Define opportunities, Measure performance, Analyze opportunity, Improve performance and Control performance) improves the quality of current business operation. (Definition of six sigma, six sigma definition, what is six sigma, 2004)

According to DMAIC methodology, the company has to define a problem or an opportunity and the process performance should be evaluated. Then an analysis should be done in order to find out the main reasons for becoming the performance below standard. And after that corrective measure should be taken to improve the performance thereby attaining the standard and retaining it. It is not compulsory to apply the six sigma model throughout the organization; it can be applied in some departments like production department or human resource department.

With the help of six sigma standard, it is possible to reduce the defects and wastages in the production or manufacturing which are the main area that is being covered by the engineering management. If the six sigma model is applied in the management of the work force, it improves the efficiency of the work force.

Six sigma chart for auditing expense

It is observed that financial aid expenses including that of auditing account for 12% of the total expenditure of $24318440. It is not a productive expense. Hence there is an urgent necessity to cut down this cost although auditing is a statutory obligation. Much of the expenses paid for external auditing could be cut down if there is a proper internal auditing system. If the invoices are properly monitored, the time spent by external auditors on hourly basis can be minimized. The monthly expense per auditing is $ 248000 which is proposed to be cut to $124000.

The expenditure on supplies spent on every student annually is $135. As a cost reduction measure it is proposed to cut it down to $67.5 per annum, by 50% which amounts to $5.6 per month. The six sigma chart for this will be as below.

Directives of Sarbanes Oxley Act

It is observed that Current endowments touch around $9,254,224, and this figure may increase in latter years. While endowments may not be fully liquid assets, it is necessary that records governing endowments are well documented and archived, and the latest position regarding endowments is updated. Only authorized people permitted by the Board of Governors of this institution are allowed to handle the accounts relating to endowments, and correct endowment accounts are reconciled and maintained regularly in conformity with accepted accounting standards and the Directives and recommendations of Sarbanes Oxley Act.

Six Sigma in high cost areas like Teachers Salaries which, at $2974,768 forms nearly 41% of costs need to be well regulated. Keeping in line the demands of Six Sigma in this area of costs would be in analyzing the fixed, semi-variable and variable components of salary costs. It needs to measure costs of such variable payments like overtime, or bonus, or any non routine payments made to teaching faculty, in order to assess differential or abnormal costs. It could also be in terms of how salary expenses may be controlled or rationalized in future in lien with current and future needs.

It would also be not wrong to set up a separate corpus, or fund in later years that could possibly address high cost issues through build up of reserves that could meet unanticipated eventualities in high cost areas. This is primarily intended, in line with Six Sigma to improve current revenues by setting off large portion of expenses against their corresponding reserve accounts.

This could also be successfully used for buying new assets or paying off liabilities over time without impacting current financial conditions.

Excessive use of classroom supplies

Another need is to build selective strategic supply chain management relationships with vendors to obviate the need for excessive use of classroom supplies. The vendor profiles need to be streamlined and supplies need to carry lowest inventory storing and carrying costs. It would not be incorrect to recommend Just in time system for inventory that is the use of minimum quantities to meet current needs, especially if the suppliers are closely located and replenishments could be made without much delay.

By redefining the contours of managerial and administrative skills in waste management, it is first necessary to define and identify key areas that give rise to such problems, seek out its elimination from the systems and rejuvenate the process once again through liberal use of scientific and approved practices and techniques.

In the case of this institution, it is to be seen that the causes and roots of wastes in whichever form, whether material or non material resources, needs to be weeded out and deciminated, for an effective and efficient use of six sigma enforcement.

For a non- profit making organization like this, with surplus of just $1 this year , it is necessary that proper control systems in line with Six Sigma principles, be formulated and executed without much delay. The practical aspects of SS, in the context of financial control and management would need to address matters of monitoring revenues, assigning group and individual responsibility of the same, controlling and streamlining costs, especially where prior authorization and clearances are necessary, and also areas of capital grants, endowments and charities being received for the corpus of the Trust, which needs to be correctly accounted and presented during the course of audit and accounting scrutiny, in line with various US Accounting laws.

Need for HRD Department

By using the techniques imbued in Six Sigma, it is possible to construct a human resource division, whose main function would be to cater to various aspects relating to staff and employees, their appointment procedures, promotion, retrenchment/retirement and all matters concerning work force, including the implications of employment and labor laws and other governing statues.

It is necessary that the HRD need be efficient, effective and understand the overall framework and rubric under which it operates and the need for optimum use of manpower resources, including training and development of personnel at all levels.

Under six Sigma the preassigned goals and objectives of the department would be spelled out and measurement tools to ensure smooth interaction need to be implemented.

At the next stage the constant review of HRD needs to be made, including its deficiencies and how these could be removed, so that the organization could be better managed and works smoothly.

The main aspect of Six Sigma could be seen in the context of arming corporate with organizational and managerial skills that could transform the conduct of business and more importantly, their very thinking process. It could also be seen in terms of creating value for products, services and utilities, like education.

While imparting education is an evolutionary process, which entails many factors, internal and external, Sig Sigma provides a broad framework and guidelines by which greater efficiencies and lesser wastes could augur for the organization.

When the case of this educational institution is being taken up, it is seen that there are many areas that need to be smoothened out and many enforcements have to be made to avoid disaster and run the business in line with goals and objectives.

Six Sigma and customer focus

Though many companies tout their ability to satisfy customers, the reality is that only very few are able to really identify what is really needed by the customer. Even those organizations that incorporate Six Sigma have not really been able to understand customer needs to a large extent. “Although companies have long proclaimed that “The Customer is Number One” or “Always Right”, few businesses have actually succeeded in improving their understanding of their customers’ processes and requirements.” (Pande, Neuman, & Cavanagh, 2001, p.8).

In implementation of Six Sigma, the main focus is on the customer, understanding what they want and satisfying it. Hence, it is of paramount importance that this area is given high focus in the case of Friends Seminary School. In fact it is not only the customers, but also the stakeholders should be focused here. The basic customers in this instance are the school students and their parents.

Other important stakeholders are those philanthropists who contribute to the organization’s funds. The employees, the suppliers, the management, and the society are also stakeholders of the organization. The concept of hearing, listening to, and understanding the ‘Voice of the Customer’ is very important. “The “voice of the customer” is a process used to capture the requirements/feedback from the customer (internal or external) to provide the customers with the best in class service/product quality.” (Voice of the customer VOC, 2009).

Another important aspect with regard to customer in Six Sigma implementation is the factor called CTQ or Critical to Quality. This can be seen as another expression of voice of the customer mentioned above. “Customer requirements and expectations are called “CTQs”.” (Devane, 2003, P.10). In this instance the CTQs relevant in improving the state of affairs at Friends Seminary School is given below. One area of improvement is the costs incurred by the auditing services of the finance department of the organization.

The CTQ in this case is reduction in expenditure incurred yearly by the department. The tangible measure that can be archived by decrease in expenditure is an increase of nearly 45% in profit or ‘excess of income over expenditure’ in this case. But there are limitations to reducing expenditure in auditing especially with the implementation of the Sarbanes Oxley Act implemented by Congress. The ethical issues that were brought to light by the Enron scandal are the main reason why this act was implemented in the country.

So whatever steps are taken to reduce expenditure in this area should not circumvent the provisions and requirements of the Act mentioned above. It is recommended that a proper software that has inbuilt audit procedures be purchased and used by the accounts department. This may result in additional capital cost with regard to the cost of the software, but will result in the reduction in expenses in areas like travel, food and other expenses incurred in connection with auditing. This will also help in reducing accounting errors.

For example, identifying unpaid invoices can jump by approximately 35% if this is implemented. Another area of high expenditure is the wastage incurred by not having the right suppliers. The CTQ in this case is to research ways in which cost effective and quality vendors can be identified and their services utilized.

At present the services of more than thirty vendors are utilized. It is recommended that one or two quality vendors be identified and long term agreements to supply products at reasonable price be carried out. This is expected to bring about a 75% reduction in current spending on supplies. At present about 135 USD is budgeted for each student with regard to supplies. If the recommendations above are carried out, this can be reduced to half the present figure.

Ethics and corporate social responsibility

Ethics and corporate social responsibility are words touted by many companies that claim to take pride in their implementation within their businesses. While many do successfully achieve this to a large extent there have been many instances where greed and lack of responsibility have resulted even in the collapse of large organizations. The biggest example of lack of ethics and individual (and corporate) greed is undoubtedly that of Enron Corporation.

In order to prevent such happenings, managements can now implement the concept of ethics management within their organizations. “For example, successful team performance in a “Six Sigma” quality organization includes high priority on certain operating values such as trust among stakeholders, performance, reliability, measurement, and feedback. Many of these organizations use ethical tools in their quality programs to ensure integrity in their relationships with stakeholders.” (Sims, 2003, p.19).

One example of such an ethics management process is the usage of what is known as the Qualitative Ethical Decision Making Tool or QL-TOOL. “The purpose of the QL-TOOL is to provide a comprehensive, sequentially structured, qualitative framework to responsibly analyze and resolve moral issues and promote management integrity. The QL-TOOL consists of 10 key clusters of ethical decision making questions and incorporates the dimensions of integrity and the ethics dialog process from initial to enacted moral proposals.” (Petrick, & Quinn, 1997, P.341).

The implementation of the tool is generally done in the following manner. As mentioned earlier the ten questions are not individual ones, but are clusters or have sub-questions for each of the ten questions. Each of these clusters can be given scores according to manager perception. Two columns can be drawn against each question. One column represents the current level of ethical practices seen in the organization while the second columns represent the desired level that needs to be implemented.

The perceptions can be with regard to its importance, the level of implementation, and how much this particular factor of ethics contributes to the level of personal and organizational integrity in the organization. A ten point score will indicate the level of importance that is given to the question by each manager (respondent). The highest level of importance is given ten and lower levels are given smaller scores.

So a score of ten will indicate very important while a score of one will indicate very low level of importance. This can be made clearer with an example with regard to sustained reputation development. This section has four sub-questions with regard to manager’s response to ethical issues with regard to domestic reputation and global reputation. These are the first two questions. The next two concerns with the extent to which cultivation of sustainable developmental practices have been cultivated by managers.

These are also analyzed in relation with domestic reputation and global reputation. Each respondent will give his view in the above mentioned score format. In case the scores are different in current and desired levels, then steps are taken to see that this difference is brought down. So also, if there is great difference between individual perceptions, the issue will also be discussed. The instances where the difference is maximum will be addressed first followed by lesser differences. A similar tool that is suited to the environment and activities of Friends Seminary School can be developed and implemented at the earliest.

Conclusions

From the above it is seen that one of the most effective methods by which this educational institution would benefit would be the use of Six Sigma that could not only address its present financial and non- financial problems but could also lay down solid framework for the future course of action that needs to be taken up for future. SS could be seen as a roadmap, a guiding star, that provides the right destiny for companies who wish to go down in history as a successful and service oriented one, having played an active and vital role in redefining of social values, cultures and standards and have played significant roles in achieving them.

The paper has followed DMAIC principles to find solution to the teething financial problems facing Friends Seminary School. The problem / opportunity has been defined as the rising running cost of the school. The performance has been measured by budgetary parameters like salaries paid to staff, supplies made to the students, auditing expenses etc. The reason for the problem has been analyzed through a fish bone diagram. The performance has been monitored by six sigma control chart.

The school unlike an industrial undertaking has to focus on social responsibilities and at the same time maintain suitable profitability. Hence the paper highlights the necessity of revamping in the HRD department to emphasis customer focus. Sample Six Sigma Control Charts for monthly auditing expenses and monthly per capita supplies for students have been elaborated as part of the control system. The same principle can be used for other monthly expenses like staff salary etc.

Ethics and social responsibility programs identify preferred values and ensure that organizational behaviors are aligned with those values. Successful team performance in a Six Sigma organization includes high priority on operating values such as trust among stakeholders, performance, reliability, measurement and feedback. These management techniques are useful for managing strategic goals and objectives. The paper highlights the importance of the QL-TOOL to provide a comprehensive, sequentially structured, qualitative framework to responsibly analyze and resolve moral issues and promote management integrity.

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