Principle 6: Variability (Item 9)
All systems and processes exhibit variability, which impacts
on predictability and performance.
The concept of Process Capability was discussed in detail in Principle
4 (`To Improve the Outcome, Improve the System'). If your processes
are not capable, they cost you money, you cannot deliver what you
promised, you end up having to 'work harder'. Because you cannot deliver
what you said you would, you are over-promising and your customers
will not be satisfied. Some of them may seek damages.
Calculate your process capabilities for our main products and services.
Process Capability is formally defined as the degree a process is
or is not capable of meeting customer requirements. When variation
is consistently in a range, the system is said to be `stable'. A stable
system will provide outputs within a predictable range for long periods,
changing only slowly as the elements of its processes deteriorate.
Stable systems are predictable.
However, being `stable' still does not describe goodness or badness
o f the variation. Your process might
be very stable and consistent but it may not be able to meet its targets.
It might not be capable. To be capable the system output must be compared
to some external reference — usually a specification. Process
Capability can be calculated mathematically from the variation compared
with the specification.
You can represent a stable process by its variation or standard deviation.
Process Capability Cp uses six standard deviations of the process
compared with the customer specification.
If Cp = 1, it is just capable of meeting its specifications. If Cp
is less than 1, it is not capable, it is producing rubbish.
Note that Cp relates only to the spread of the process relative to
the specification width. It does not consider how well the process
average is centered relative to the target. Cpk is used to take into
account the location of the process average.
If the process is close to normally distributed and in statistical
control, Cpk can be used to estimate the expected percentage of defective
material.
We provide a Process Capability Calculator. (Don't forget to come back.)
ABC Lawyers have entered into an agreement
with their major client to always produce their initial advice within
14 days of receipt of instructions. This generous term was included
in a tender response and so is a contractual obligation.
The target was set by gut feel i.e., "we
can easily meet a 2 week turnaround so lets say 14 days!"
The Facts (28 actual recent delivery
times from ABC Lawyers)
Days to deliver 33 22 38 20 16 17 40 6 21 36 25
19 41 11 16 35 24 22 22 20 17 28 17 6 9 10 33 17
The Average The sum of all 28 observations
divided by 28 is 22 days
This means that on average ABC Lawyers miss
the mark by 8 days!! Wait, it gets worse.
The Standard Deviation using the standard deviation formula in the spreadsheet gives s
= 10 days
Process Capability. If the upper specification
limit is set at 14 days (i.e., the agreement with the client) and ABC firm wants
to allow damages claims on only one in one hundred cases (i.e. 99%),
the Process Capability Index Cpk is:
Because this number is less than one, the process
is not capable. ABC Lawyers will not be able to meet their obligations.
What is their risk exposure? To do this, first
calculate Z 
We will assume that the data is normally distributed.
We can then determine from statistical tables that with a Z value
of -0.81, ABC Lawyers will meet its obligations only 21% of the time.
[If you do need to look this up, we give a
link to our Normal Distribution calculator here.
Or use our full Process Capability Calculator. Don't forget to come back.]
What if ABC's clients impose financial penalties
for failure to meet this commitment? If the profit margin on each
of the 28 matters is $1,500. Of the 28, only 6 will be completed on
time (ie, 28*21%). This means that 22 (ie, 28-6) will incur a penalty.
If the penalty for each is $300, then the $6,600 penalty takes a big
chunk out of the expected $42,000 profit (ie 28 * $1,500). Failing
to meet its obligations will also greatly annoy ABC's clients. Initial
advice is used to prepare for court action. Late advice may mean ABC's
clients could lose their cases. ABC could expect to be sued by some
of these customers that received late advice. Only one of the 22 needs
to sue of $35,400 to wipe out all the profit.
Obviously, ABC Lawyers will just have to work
harder to get the matters finished on time. The thing about Process
Capability is that working harder is not a solution. Of course, you
can put in an extra effort and get a few done. But an extra effort
is by definition, `extra'. You cannot sustain it. Process Capability
describes your 'average' ability to get the work done. As we see here
79% of the time, ABC Lawyers will not meet its obligations.
We frequently hear people say, "That usually takes us two weeks,
but we made a special effort and did it in three days". The three
days is not in the same data set as the two weeks. Different processes
produced the numbers.
Taking the contract with the 14 day limit was
clearly a mistake. The outcome is a long way short of the expected
profit of $14,000. It cost ABC Lawyers $10,000.
If you were ABC Lawyers, what should you do?
The customer clearly wants the work done in 14 days. If you don't
do it your competitors will. The answer is to fix your processes so
that you are capable of doing the work in 14 days. You can do this
by measuring and knowing your Process Capability and working to eliminate
errors in the data; rework; waiting for information; the causes of
strange outliers.
Until that happens, this firm should not commit
to the 14 day constraint.
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