Statistical Thinking

Improving Business Performance

Second Edition

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Part One

Statistical Thinking Concepts

Chapter

Chapter

2:

Statistical Thinking Strategy

Need for Business Improvement

Ifyoudontkeepdoingitbetteryourcompetitionwill.
Anonymous
Intodaysglobalmarketplacesuccessevensurvivalhingesonanorganizationsability
toimproveeverythingitdoes.Inthischapter,wedemonstratewhycorporationsneedto
improvehowtheyruntheirbusinessesandhowtheuseofstatisticalthinkingcan
improvebusinessoperations.Statisticalthinkingcanbeappliedtobothbusiness
operationsandmethodsofmanagement.
ThemainobjectiveofChapter1istobetterunderstandtheeffectofglobalcompetition
onbusinessandotherorganizationsinoursocietyandhowthisimpactisforcingusto
improve.Youwillbecomefamiliarwiththevariousapproachestoimprovementandhow
statisticalthinkingplaysaroleineachofthesemethods.Thiswillenableyoutoseehow
thebroaduseofstatisticalthinkingcanhelpbusinessesandotherorganizations
improve.
Webeginwithashortcasestudy.Generalizingfromthecasestudy,wethendiscuss
todaysbusinessrealities,theneedtoimprove,andtherecognitionthatimprovinghow
weworkispartofthejob.Theneedtoimprovewhileweaccomplishourworkis
illustratedwithanoverallmodelforbusinessimprovement.Wethenbrieflyreviewsome
newmanagementapproaches.Commonthemesthatrunthroughtheseapproachesare
identified,andtheroleofstatisticalthinkinginthesethemes,andhenceinthe
improvementeffort,isnoted.
TODAYSBUSINESSREALITIESANDTHENEEDTOIMPROVE

Considerthefollowingbusinessscenario.Alargepublicationcorporation,Kowalskiand
Sons,ishavingtroublewiththeirmonthlybillingprocess.Theyhavediscoveredthatit
takesabout17daystosendbillsouttocustomers.Butthereisalotofvariationfrom
billingcycletobillingcycle,withsomebillstakingmuchlongerthan17days.
Managementsexpectationisthatthebillingshouldbedoneinlessthan10dayswith
minimalvariation.Thistargetisimportantfromboththecompanysandthecustomers
pointofview.Ashortercycletimeforthebillswouldimprovethecompanyscashflow,
anditwouldallowcustomerstoenterthebillinginformationintheiraccountingsystems
promptlysotheycanclosetheirmonthlybookssooner.Thecurrentsituationresultsin
numerouslatepayments,forwhichKowalskiandtheircustomersoftenblameeach
other.Customerscomplainthatotherpublishersarenotastardyinsendingoutbills.
Doesthissoundlikeabadsituation?Actually,thisisatypicalsituationinmany
businesses.Infact,whenoneoftheauthorsconsultedonthisproblemandbegantodig
deeper,thesituationbecameworse!Assessingtheprocessrevealedthatthreedifferent
departmentswereinvolvedinbilling.Eachdepartmentworkedseparately,andnoone
understoodtheprocessfrombeginningtoend.Whenproblemsoccurred,therewasalot
offingerpointing:Theproblemisnotwithus,itswiththem.Iftheywouldcleanup
theiract,thebillingprocesswouldbeokay.Similarly,therewerenostandardoperating
proceduresthatis,formal,agreeduponmethodsofdoingthejob.Everybodydidit
theirownway.Thisresultedinalotoffirefightingtokeepthebillsgoingoutheroic
effortsrequiringlonghoursandshiftingpriorities.
Theoneclearadvantagewasthataquantitativemeasuretomonitorperformancedid
exist:thenumberofdaysrequiredtosendbillsout.Withoutaclearmeasureofsuccess,
itisdifficultifnotimpossibletoeffectivelymanageandimproveaprocess.
Traditionalbusinessleadersfacedwiththissituationmightattempttoassignblameso
thepersonsresponsiblecouldbereprimanded.Theapproachwerecommendisjustthe
opposite.Hereishowweapproachedthisproblem:Asystemsmapwascreatedforthe
overallprocess,alongwithaflowchartofthecriticalprocesssteps.Thesystemsmap
identifiedtheresponsibledepartmentsandtheinformationormaterialsthatflowed
backandforthbetweenthegroups.Theflowchartwasusedtoconstructaproduction
scheduleforthemonthlybillingcycle.Thisscheduleshowedwhathadtobedoneeach
monthbyeachgroupalongwithatimetablefordoingso.
Next,criticalsubprocesseswereidentifiedandcycletimemeasurementsweremonitored
foreachofthesecriticalsubprocessesaswellasfortheoverallprocess.These
measurementshighlightedkeyproblemareas.Crossfunctionalteamswereformedto
troubleshoottheprocessdailyandtoreviewthebillingprocessattheendofthecycle.
Theseteamsidentifiedproblemsandsuggestedproceduresforcreatingand

implementingsolutions.
Effortswerealsomadetodocumenttheprocessandtheproceduresusedinits
operation.Thisdocumentationhelpedreducevariationintheprocessandwascentralto
trainingnewemployees.Aprocessownerwasalsoassigned.Theprocessownersjob
wastocareforthehealthoftheprocessbyseeingthatthevariousaspectsofthe
processmanagementsystemwereusedandimprovedtohandlethechangingconditions
theprocesswouldexperience.
Useofthisstatisticalthinkingapproachsignificantlyimprovedthebillingprocess.Over
a5monthperiod,themonthlybillingcycletimewasreducedfromanaverageof17days
toabout9.5days,withlessvariation.Thisresultedinannualsavingsofmorethan$2.5
million,moresatisfiedcustomers,andalessstressfulworkenvironmentforemployees.
Theuseofstatisticsinbusinesshasgrownovertheyearsasaresultofpolitical,social,
technological,andeconomicforcesthathaveaffectedourworldeconomy.Eachnew
forcehascreatedanewneedforstatisticsthattypicallyresultsinnewconcepts,
methods,tools,andapplications.Forexample,WorldWarIIcreatedtheneedfor
statisticalqualitycontrol:Munitionsneededtobemanufacturedconsistentlytovery
tighttolerances.Theneedforstatisticaldesignofexperimentsresultedfromthedemand
formajorincreasesinfarmproductionintheearly1900s,whichrequired
experimentationwithnewfarmingtechniques.
ThismovementwasacceleratedbothbytheformerSovietUnionslaunchoftheSputnik
satelliteandbytheincreasingfocusonresearchanddevelopmentinthechemicaland
processindustriesduringthe1950sand1960s.
TheU.S.Food,Drug,andCosmeticsActandtheU.S.EnvironmentalProtectionAct
resultedinincreaseduseofstatisticsinthepharmaceuticalindustryandin
environmentalstudiesinthe1970s.Theadventofthecomputeralsomadestatistical
calculationseasierandavailabletoabroaderrangeofpeople.The1980sbroughtanew
economicforceglobalcompetitionwhichhascreatedtheneedtomakemajorchanges
inhowwerunourbusinesses.Theneedforchangeisdrivenbyincreasingcustomer

demandsformoreresponsivecompaniesandforhigherqualityproductsandservicesat

lowercosts.

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Globalcompetitionisaffectingeconomiesaroundtheworldindeedwenowhavea
globaleconomy.EvidenceoftheeffectsoftheglobalmarketplaceontheU.S.economy
canbeseeninthebalanceoftradeandaveragewages(adjustedforinflation)shownin
Figures1.1and1.2.TheseplotsindicatearobustU.S.economyinthe1950sand1960s,
butthingsclearlychangedinthe1970sand1980s.Globalcompetitionbecameaserious

challengetotheU.S.economy.Figure1.1showsthatthetradebalanceofgoodsand
services(exportsminusimports)waspositiveuntil1971,whenitturnednegative.
Despitesomepositiveupturns,itremainedsignificantlynegativeinthe1980,1990s,and
intothetwentyfirstcentury.InFigure1.2,weseethattheU.S.averagehourlyearnings
adjustedforinflationincreaseduntil1973anddecreasedafterthatdateuntilthemid
1990s,whenitbegantoincrease.Butasof2010,U.S.hourlyearningshadnotreached
thelevelsoftheearly1970s.ThisindicatesadecliningstandardoflivingfortheUnited
Statesasawhole.
FIGURE1.1U.S.BalanceofTrade,19642010

FIGURE1.2U.S.HourlyEarnings,19462010(1982dollarsseasonallyadjusted)

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GlobalcompetitionhashadanimpactontheU.S.economyinotherwaysaswell.
Companiesfinditdifficulttocompete,whichresultsinlayoffs,downsizing,mergers,and

bankruptcies.Manyof1960sFortune500companiesarenotinbusinesstoday.The
GeneralElectricCompanyistheonlysurvivingcorporationfromtheoriginalmembers
oftheDowJonesIndustrialAveragein1896.Inthenewmillennium,theInternetand
socialmediaaredrivingforces.Manytraditionalbusinessesarebeingreplacedby
digitalcompetitorswitharadicallydifferentbusinessmodel,suchastheKindleand
otherelectronicreadersreplacingphysicalbooks.
ThechangestakingplaceinU.S.businesshaverippleeffectsthroughoutsociety,
includinggovernment,education,healthcare,andnonprofitorganizations.Forexample,
difficulteconomictimesoftenresultinreducedcontributionstoartistic,charitable,and
religiousgroups.Poorbusinessearningsanddecliningrealwagesreducetaxrevenuesto
governments,andhighunemploymentdemandsgreaterexpendituresbythesesame
governments.Organizationsarecontinuallybeingaskedtodomorewithless,toworkin
differentways,tobemoreresponsiveandcaring,toprovidebetterservice,andsoon.
Thoseorganizationsthatcannotkeepupareleftbehind.
Theincreaseincompetitionisinlargepartduetoprogressintherestoftheworld,as
opposedtochangesintheUnitedStatesalone.AfterWorldWarII,theUnitedStates
dominatedtheworldsmanufacturingcapacity,beingtheonlyworldeconomicpower
thatdidnotsuffersignificantdestructionduringthewar.Thesignificantprewar
economiesofGermanyandJapanwereinshambles,andthoseoftheUnitedKingdom,
France,Italy,andmanyotherssufferedagreatdealofdamage.Overtheyearssince
1945,thesecountrieshaveregainedtheircompetitiveedge,anddevelopingcountriesare
becomingplayersintheworldmarket.Japanbecameamajorplayerintheglobal
economyinthe1980s,andIndiaandChinahavemorerecentlyjoinedthegroup.The
obviousresultofthesechangesisthatahealthyeconomy,abundantjobs,highwages,
andthecomfortablelifestyledesiredbymostpeopleoftheworldcannotbetakenfor
grantedtheymustbefoughtforandearned!Sowhatshouldwedo?
WENOWHAVETWOJOBS:AMODELFORBUSINESSIMPROVEMENT
Weusedtohaveonlyonejobtodoourwork.Wecametowork,didourjob,provideda
productoraservice,andourworkwascomplete.Therewasnoneedtochangehowwe
didthingsbecausetherewaslittlecompetition.Nooneelsewasdoingthingsdifferently.

Tosurviveandprosperinthisneweconomicera,wehavetomakesomechanges.Now
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wemustacceptasecondjobimprovinghowwedoourwork.
Havingtwojobsmeansthatweeachmustworktoimproveourpersonalknowledgeand
skillsandhowwedoourjobsaswellasgetourdailyworkdone.Managersmustlead,
plan,andmanagehowtheorganizationcanimproveitsperformanceaswellasoperate
itsdaytodayprocesseseffectivelyandefficiently.Thiswasillustratedinthebilling

scenariointheprevioussection,whenKowalskiandSonsneededtoimprovethebilling
processtokeepitscurrentcustomers.
Organizedteamsportsprovideanexcellentanalogytobusinessbecauseteamsports
operateinacompetitiveenvironment,havewelldefinedrules,useteamworktosucceed,
andhaveclearmeasuresofsuccess(winningscores)thataremonitoredregularly.(We
willpresentastatisticalthinkingcasestudyinvolvingasoccerteaminChapter2.)The
dualfocusondoingandimprovingactivitiescanbeseenclearlyinsports.For
example,thedoingworkofbaseballisplayingthegameitself.Professionalbaseball
teamsplay162regularseasongamesperyear.Buttheworkactivitiesofbaseballgoway
beyondshowingupforeachgame,playingnineinnings,andgoinghome.The
improvingworkofbaseballisbuildingindividualandteamskills.
Theimprovementcyclebeginswithspringtraining,whereplayersgetinshapeandhone
theirskills.Playersworkonimprovingtheirhitting,running,andpitching.Pitchers
workoncontrollingthecurveball,learningtothrowaknuckleball,anddeveloping
pitchestheydidnothavebefore.Hittersworkonhittingthecurveballorfastballand
otheraspectsofhitting.Thisworkonimprovementgoesonallyear:beforethegame,
afterthegame,inthebullpen,viewingvideotapesofpitchingandhitting,andsoon.In
theoffseasonimprovementactivitiesinvolveweighttrainingtobuildstrengthand
speedorplayingwinterbaseball.Coachesfrequentlystatethatstarperformersarenot
necessarilythemostnaturallytalentedbuttypicallyarethosewhoworkthehardestat
improvingtheirgame.
Figure1.3showsthattheamountoftimeandeffortwespendonimprovinghowwe
workwillincreaseinthefuture.Wewillalsobedoingmoreworkinthefuture,as
depictedbythelargerpieontherightsideofthefigure.Increasingtherateof
improvementiskey.Ifthecompetitionisalsoimproving,theorganizationsthatsucceed
willbethosewiththefastestrateofimprovement.ItislikelythatKowalskiandSons
competitorsarealsoimprovinghence,theycannotviewtheimprovementstothebilling
processasaonetimeeventbutmustmakeimprovementpartofthejob.Companies
mustcontinuallyimproveorgooutofbusiness.

FIGURE1.3WeHaveTwoJobs:DoingandImproving

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Government,healthcare,andnonprofitorganizationsalsooperateinthiscompetitive
environment.Forexample,statescompetewithoneanotherandwithforeigncountries
forinvestmentfrombusinessandindustry,whichcreatesnewjobs.Statesthatcanoffer
businessesthebesteducatedworkforceandthebestinfrastructure(transportation,
communication,etc.)atthelowestcost(taxesandregulations)tendtogetnew
investmentsandjobs.Thegoalforalltypesoforganizationsmustthereforebeto
improvefasterthantheircompetition.
Figure1.4depictsanoverallmodelforbusinessimprovement.Thedoingactivityis
representedbytheBusinessProcessshownatthetop.Aseriesofactivities,eachwithits
owninputsandoutputs,aredoneasasequenceofstepstoproducethedesiredoutput
forthecustomer.Forexample,KowalskiandSonswentthroughseveralprocessingsteps
tosendouttheirmonthlybills.Thepurpose,oraim,oftheprocessistoprovidea
productorserviceofvaluetothecustomer.Notethatacustomerneednotbesomeone
outsidetheorganizationwhopurchasesaproductorservice.Acustomerisanyonewho
usestheoutputoftheprocess,whetherwithinoroutsidetheorganization.Internal
customers,theemployees,arethekeycustomersofthepayrollprocess.
FIGURE1.4ImprovementModel

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Theimprovingactivityisshownatthebottomofthefigure.Therearemanydifferent
approachestoimprovement,butwewillfocusontwotypesofimprovement:process
improvementandproblemsolving.Processimprovementisaseriesofactivitiesaimed
atfundamentallyimprovingtheperformanceoftheprocess.Sometypicalprocess
improvementactivitiesare:
Flowchartingtheprocesstounderstanditbetter
Collectingdatatoassessthecurrentperformance
Identifyingareaswheretheprocesscouldbefundamentallyimproved
Changingtheprocesstoimplementimprovementideas
Checkingtheimpactofimprovementefforts
Makingtheimprovementspartofthestandardwayofdoingbusiness
Problemsolvingaddressesspecificproblemsthatarenotpartofthenormalbehaviorof
theprocess.Theseissuesareoftendiscoveredintheprocessimprovementanalysisand
canberesolvedwithoutfundamentallychangingtheprocess.Forexample,ifonlyone
customersbillwasaproblematKowalskiandSons,theywouldinvestigatewhat
happenedtothatparticularbillratherthanchangethewholebillingprocess.Problem
solvingusuallyinvolvessignificantlylesstimeandcostinvestmentthanthatrequiredfor
trueprocessimprovement.Thebasicproblemsolvingstepsare:

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Step1.Documentthescopeoftheproblem.
Step2.Identifytherootcauses.
Step3.Select,implement,andstandardizecorrections.
Acompanymaygothroughtheprocessimprovementandproblemsolvingcyclemany
timesinthecourseofimprovingaprocess.Problemsolvingstrategiesandtoolswillbe

discussedingreaterdetailinChapters4and5.KowalskiandSonsusedtheprocess
improvementmodel,whichcanrequiresignificanttimeandeffort.Iftheprocessneeds
tobecompletelyredesignedfromscratch,theredesignactivityisoftencalled
reengineering.(ReengineeringisbrieflyoutlinedinAppendixH.)
Dataaretheconnectorsorlinksbetweenthedoingandimprovingactivities.Datafuel
processimprovementandproblemsolvingactivitiesandincreasetheireffectiveness.
Datahelpusdocumentprocessperformance,identifyproblems,andevaluatetheimpact
ofproposedsolutions.ThiswascertainlythecaseatKowalskiandSons.Butdataisnot
synonymouswithinformation.Forexample,wepresentedaveragetimesforbillstobe
sentout,buttheactualtimevariesfrombilltobill.Howshouldweinterpretthis
variation?Customersdonotcareaboutaveragetimetheyonlycareabouttheirbill.
Therefore,weneedboththeoreticalunderstandingandpracticalexperiencetoproperly
translatethesedataintoactionableinformation.Athoroughconceptualunderstanding
ofstatisticalthinkingprovidesuswiththetheoreticalunderstandingweneed,anda
personalproject(seeChapter2)willhelpprovidetheexperience.
NEWMANAGEMENTAPPROACHESREQUIRESTATISTICALTHINKING
Newdemandstoimprovehavecreatedtheneedfornewmanagementapproaches,anda
widerangeofapproachesonhowtochangehavebeenproposed.Amongthese
approachesare:
Reengineering
Totalqualitymanagement
Learningorganizations
Selfmanagedworkteams
Benchmarking
SixSigmaandLeanManufacturing
InadditiontothislistarethephilosophiesproposedbyPeterDrucker,StephenCovey,
W.EdwardsDeming,JosephJuran,TomPeters,PeterSenge,andmanyothers.Asyou

cansee,managementhasmanychoicesintodaysbusinessclimate.Letuslookatafew

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oftheseapproachesinmoredetail.

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Reengineeringisthefundamentalrethinkingandradicalredesignofbusiness
processestoachievedramaticimprovementsincritical,contemporarymeasuresof
performance,suchascost,quality,service,andspeed. 1 Theapproachistostartwitha
cleansheetofpaperandredesigncriticalprocessesandthebusinessasawhole,if

needed,tobecomeandremaincompetitive.Thekeydistinctionofthisapproachisto
replaceratherthanimprovekeybusinessprocesses,oftenutilizinginformation
technology.
Totalqualitymanagement(TQM),asgenerallypracticed,isabroader,lessradical
approachtobusinessimprovement. 2 ThebasicelementsofTQMaretofocuson
improvingthequalityofallaspectsofthebusinesstobettersatisfytheneedsof
customers.Thisinvolvescooperativeeffortsfromallemployees,fromthechiefexecutive
officer(CEO)tothosesweepingthefloor,andtypicallystressesdatabaseddecisionsand
useofstatisticaltoolstoreduceprocessvariation.
Learningorganizationscreatechangeandimprovementbylearninghowtoworkin
moreeffectiveandefficientways. 3 Thisincludesbothindividuallearningandlearning
bytheorganization.Learninghowtoviewtheorganizationasasystemofinterconnected
processesiskeytothisapproach.Thefocusisonimprovingthesystemasawholerather
thanlookingatproblemsofindividualdepartments.Thisapproachrequiresanopen
mindandroutinegatheringofdata,bothquantitativeandqualitative,fromwhichto
learn.
Selfmanagedworkteamswerecreatedinresponsetotheneedtoreducelayersof
managementandtoempowertheworkforce.Inselfmanagedworkteamsemployees
workasateamwithoutdirectsupervisionfrommanagement,usingprinciplesand
guidelinesdevelopedjointlywithmanagement.Akeyrationaleforthisapproachisa
beliefthatthosewhoworkwiththeprocesseverydayunderstanditbestandtherefore
shouldmakemostofthedaytodaydecisions.

Benchmarkingistheprocessofimprovementthatfindsthebestpracticesinother
organizationsandadaptsthosepracticestomakeimprovements. 5 Thebestpractices
areoftenidentifiedinoutsideindustries.Examplescouldincludethebillingprocess,
approachestonewproductdevelopment,compensationplans,organizationalstructure,
andsoon.Thisapproachavoidstheproblemofreinventingthewheel.Internal

benchmarking,identifyingandusingthebestpracticesofonedepartmentinothers,also

helpsreducevariationfromdepartmenttodepartment.
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SixSigmaisabusinessimprovementapproachthatseekstofindandeliminatecausesof
mistakesordefectsinbusinessprocesses. 6 SixSigmaisastatisticaltermthatroughly
translatestoonly3.4defectspermillionopportunities.TheSixSigmaapproach
emphasizesunderstandinganddocumentingthebusinessprocess,developingmetrics

andharddata,andreducingvariation.Thisapproachusesabreakthroughstrategythat
consistsoffourprocessimprovementphases:Measure,analyze,improve,andcontrol.
Thegoalistoimprovetheprocessinsuchawaythatcustomersatisfactionincreasesand
thereisapositiveimpactonthebottomline.
TheSixSigmaapproachwasoriginallypioneeredin1987byMotorola,whichfocused
primarilyonmanufacturing,andwaslaterappliedbyothercompaniesincludingAllied
SignalandGeneralElectric(GE),whichbroadenedtheapproachtoincludegeneral
businessactivitiessuchasfinancialservices.UseoftheSixSigmaapproachexpanded
rapidlyintheUnitedStatesandaroundtheworld.TheSixSigmabreakthroughstrategy
isdiscussedingreaterdetailinChapter4.
TheSixSigmamethodologycontinuestobedeveloped.Inthelate1990sGEaddedthe
projectdefinitionphasetothemethodology,creatingDMAIC(Define,Measure,Analyze,
Improve,andControl).Intheearly2000sLeanSixSigmawascreatedbyaddinglean
manufacturingconcepts,methods,andtoolstomoreeffectivelyimprovetheflowof
informationandmaterialsthroughtheprocess,therebyincreasingprocessspeed.

Eachoftheseapproachesandphilosophiesisuseful,andthebestaspectsofeachcanbe
integratedwiththemanagementapproachanorganizationiscurrentlyusing.Theresult
isanewmanagementapproachthathelpstheorganizationbetterservetheneedsofits
customersandcompeteeffectivelyinthemarketplace.Threecommonthemesrun
throughthesemanagementapproaches:
1.Viewingworkasaprocess
2.Usingdatatoguidedecisions
3.Respondingwiselytovariation
Thesethreeitemsarepartofthebodyofknowledgeknownasstatisticalthinking.This
bodyofknowledgeanditsassociatedskillsareessentialtothesuccessfulmanagement
andimprovementofanybusiness.Statisticalthinkingisaphilosophyoflearningand
actionbasedonthesefundamentalprinciples:

Allworkoccursinasystemofinterconnectedprocesses.

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Variationexistsinallprocesses.

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Understandingandreducingvariationarekeystosuccess.
Theseprinciplesworktogethertocreatethepowerofstatisticalthinking.Thestepsin
implementingstatisticalthinkingareshowninFigure1.5.Webeginbyrecognizingthat
allworkisaprocessandallprocessesarevariable.Wemustanalyzetheprocess

variationtodevelopknowledgeoftheprocess.Youcannotimproveaprocessthatyoudo
notunderstand.Notethatthesecoreprinciplesaresimilartothecommonthemesof
recentmanagementimprovementeffortspresentedearlier.Withknowledgeofthe
process,weareinapositiontotakeactiontoimprovethatprocess.
FIGURE1.5StepsinImplementingStatisticalThinking

Fromastatisticalpointofviewimprovementactivitybothfundamentalprocess
improvementandproblemsolvingcanbeviewedasworkingoneitheroftwoprocess
characteristics:(1)reducingvariationthroughtightercontroloftheprocessor(2)
improvingtheoveralllevel(averagevalue)bychangingtheprocesstarget,whichmay
alsoresultinreducedvariation.Forexample,theprimaryobjectiveofKowalskiand
Sonsbillingeffortswastoreducetheaveragetimetogetbillsout.Theyalsowantedto
reducethevariationfrombilltobill.Theendresultofusingstatisticalthinkingis
businessperformancethatsatisfiesthestakeholders:customers,employees,the
communityinwhichthebusinessoperates,andtheshareholders.
Thetermsaverageandvariationarecriticaltoapplyingstatisticalthinking.Formost
processestheaverageisthecentralvaluearoundwhichtheprocessvaries.Variation
resultswhentwoormoremeasuresoftheprocessaredifferent,whichistherulerather
thantheexception.

Figure1.6illustratestheseconceptsbyplotting15consecutiveprocessmeasurements.
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Althoughanyunitscouldbeusedhere,asanexample,letususemonthlygrosssales.
Theprocessiscenteredbetween$10,000and$11,000,withanaveragevalueof
$10,600.Theaveragevalueiscomputedbyaddingthevaluestogetthetotalandthen
dividingbythenumberofvaluesthatis,159,000/15=10,600inthiscase.The
observedvariationintheprocessisfromabout$8,000to$13,000,resultinginarange
ofabout$5,000.Anothercommonmeasureofvariationiscalledthestandard

deviation,whichcanbethoughtofasthetypicaldeviationofindividualdatapoints
fromtheaverage.(Seetheboxonstandarddeviation.)
FIGURE1.6ProcessAverageandVariation

Withanunderstandingofthemeaningofstatisticalthinking,wecannowdiscussthe
principlesunderlyingstatisticalthinking.
StandardDeviation
Thestandarddeviationisanoverallmeasureofhowfarindividualdatapointsvary
abouttheaverage.Mostdatapointswillfallwithin1standarddeviationofthe
average.Thestandarddeviationcanbethoughtofasthetypical(average)deviation.
Itiscalculatedbytakingthedeviationofeachdatapointfromtheaverage,squaring
thesedeviations(sotheyareallpositive),averagingthesquareddeviations,andthen
takingthesquareroottogobacktotheoriginalunitsthatis,thestandarddeviation
=squarerootofthesumofsquareddeviationsdividedbyn,wherenisthenumber
ofdatapoints.Forexample,tocalculatethestandarddeviationof1,3,5,7,and9,we
firstcalculatetheaverage,(1+3+5+7+9)/5,thenwesubtractthedeviationsof
eachvaluefrom5,15=4,35=2,55=0,75=2,and95=4.Next
wesquarethedeviationstoget16,4,0,4,and16.Theaverageofthesevaluesis8,
andthestandarddeviationis2.83.Notethatinmostcaseswedividethesumofthe
squareddeviationsbyn1ratherthanbynwhencalculatingthestandard
deviation.ThereasonsforthisarediscussedinChapter9.

PRINCIPLESOFSTATISTICALTHINKING

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Thefirstprincipleofstatisticalthinkingisthatallworkoccursinasystemof
interconnectedprocesses.Thisprincipleprovidesthecontextforunderstandingthe
organization,improvementpotential,andsourcesofvariationmentionedinthesecond
andthirdprinciples.Aprocessisoneormoreconnectedactivitiesinwhichinputsare
transformedintooutputsforaspecificpurpose.ThisisillustratedinFigure1.7.For
example,mailingbillsrequiresthatrecordsarekeptoncharges(inputs).Theserecords

mustbeprocessed(aggregatedforamonth,reducedbypaymentsmade,checkedfor
accuracyandapplicablediscounts,andsoon),oftenwiththeaidofcomputersystems,
intoamonthlybill.Anydiscrepanciesorerrorsmustberesolved,oftenthrougha
manualprocess.Thesebillsmustthenbephysicallyprintedandstuffedintothe
appropriatelyaddressedenvelopes(orsenttoappropriateelectronicaddresses)and
deliveredtothedesiredmailingsystem(U.S.PostalService,FederalExpress,United
ParcelService,etc.).Thebillacustomerreceivesistheoutputoftheprocess.Fora
simplerexample,theseriesofactivitiesonegoesthroughtogettoworkorschoolinthe
morning(gettingoutofbed,bathing,dressing,eating,anddrivingorriding)canbe
thoughtofasaprocess.Anyactivityinwhichachangeofstatetakesplaceisaprocess,
asdepictedinFigure1.7.
FIGURE1.7SIPOC:AProcessViewofWork

Weencouragepeopletoblametheprocess,notthepeoplewhenworkingon
improvement.JosephM.Juranpointedoutthatthesourceofmostproblemsisinthe
processweusetodoourwork.Hediscoveredthe85/15rule,whichstatesthat85%of
theproblemsareintheprocessandtheremaining15%areduetothepeoplewho
operatetheprocess.W.EdwardsDemingstatesthatthetruefigureismorelike96/4.

Wemaydebatethecorrectfigure,butitisclearthatthevastmajorityofproblemsarein
theprocess.Businessesandotherorganizationsaremadeupofacollectionofprocesses.
Businessprocessesinterconnectandinteracttoformasystemthattypicallyprovidesa
productorserviceforacustomer(thepersonwhoreceivestheoutputofthesystem).
ViewingbusinessasacollectionofprocessesisdiscussedindetailinChapter3.Some
typicalbusinessprocessesare:

Customerservice
Businessplanning
Newproductdevelopment
Employeerecruitingandorientation
Companymaildelivery

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Manufacturing
Equipmentprocurement
Patentapplication
Accounting
Laboratorymeasurement
Thesecondprincipleofstatisticalthinkingisthatvariationexistsinall
processes.Thisprovidesthefocusforimprovementwork.Variationisthekey.Ifthere
werenovariation:
Processeswouldrunbetter.
Productswouldhavethedesiredquality.
Servicewouldbemoreconsistent.
Managerswouldmanagebetter.
Focusingonvariationisakeystrategytoimproveperformance.Ofcourse,incertain
situationsvariationisdesirable,suchaswantingvarietyinmenuitemsinarestaurant,
valuingdiversityamongteammembers,andsoon.Intendedordesirablevariationis
valuableandshouldbepromoted.Itisunintendedvariationthatwewillfocusonhere.
Variationisafactoflife.Variationisallaroundus.Itispresentineverythingwedo,in
alltheprocessesweoperate,andinallthesystemswecreate.Variationresultswhentwo
ormorethings,whichwemaythinkareexactlythesame,turnouttobedifferent.Some
examplesare:
Restaurantservicetimevariesfromdaytodayandfromcustomertocustomer.
Tireswearatdifferentrates.
Tomatoesofthesamevarietyvaryinweight.
Shirtsofthesamesizefitdifferently.
Carsofthesamemodelperformdifferently.

Tounderstandandimproveaprocesswemusttakevariationintoaccount.Variation
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createstheneedforstatisticalthinking.Iftherewerenovariation,therewouldbelittle
needtostudyandusestatisticalthinking.
Thethirdprincipleofstatisticalthinkingisthatunderstandingandreducing
variationarekeystosuccess.Thefocusisonunintendedvariationandhowitis
analyzedtoimproveperformance.Firstwemustidentify,characterize,andquantify

variationtounderstandboththevariationandtheprocessthatproducedit.Withthis
knowledgeweworktochangetheprocess(e.g.,operateitmoreconsistently)toreduce
itsvariation.
Theaverageperformanceofanyprocess(e.g.,averagetimeindaystogetbillsout,
averagewaitingtimeinminutestobeservedinarestaurant,oraveragepoundsofwaste
ofaprintingprocess)isafunctionofvariousfactorsinvolvedintheoperationofthe
process.Whenweunderstandthevariationintheoutputoftheprocess,wecan
determinewhichfactorswithintheprocessinfluencetheaverageperformance.Wecan
thenattempttomodifythesefactorstomovetheaveragetoamoredesirablelevel.
Businesses,aswellascustomers,areinterestedinthevariationoftheprocessoutput
arounditsaveragevalue.Typically,consistencyofproductandserviceisakeycustomer
requirement.Forexample,customersofashippingcompanydonotwantshipmentsto
arrivesometimesinadayandothertimesinaweek.Suchvariationwouldmakeit
difficulttoplanwhentoactuallyshipgoods.Similarly,inaccountspayable,wedonot
wanttopaybillstoolatebecausewemaylosediscountedterms(oftena2%discountfor
promptpayment).Ifwepaytooearly,however,weloseinterestonthecash.Ifwecan
reducethevariationintheprocess,wecanconsistentlypayrightattheduedateand
receivediscountedtermsandminimizelossofinterest.Thisresultsinmany
improvementeffortsthatfocusonreducingvariation,forexample,reducingrestaurant
waitingtimefrom0to10minutesto0to5minutes,reducingthevariationinrealestate
salesfrom20to40units/monthto25to30units/month,orreducingbillmailingtime
from104daysto101days.Lowvariationisimportanttocustomers,andtheywill
sometimesacceptlessdesirableaverageperformancetoobtainbetterconsistency.
Twotypesofvariationthatwemayneedtoreducearespecialcauseandcommon
cause.Specialcausevariationisoutsidethenormalortypicalvariationaprocess
exhibits.Normalortypicalvariationiscalledcommoncausevariation.Thedistinction
betweenthesetypesofvariationwillbediscussedinmoredetailinChapter2.Theresult
ofspecialcausevariationmaybeunpredictableorunexpectedvaluesthataretoohigh
ortoolowforthecustomer.Someexamplesincludewaitingforservicefor30minutes
when10minutesorlessistypicalperformanceforaparticularrestaurant,arealestate

salesofficeselling10unitsthismonthwhentypicalsalesare20to40units,oraprinting

pressrunningat10%wastethismonthwhentypicalwastevariesfrom1to3%.
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Becausespecialcausevariationisatypical,wecanofteneliminatetherootcauses
withoutfundamentallychangingtheprocess.Usingaproblemsolvingapproach,we
identifywhatwasdifferentintheprocesswhenitproducedtheunusualresult.For
example,intheprintingpressscenariotheymayhavepurchasedtheirrawpaperstock
fromanewsupplierthatmonth.AhypotheticalexampleisshowninFigure1.8.Thetwo

pointsthatclearlystickoutfromtherestareduetospecialcauses.Thereshouldbea
specific,identifiablereasonthesewastevaluesweresohigh.Evenifweeliminatethe
causesforthesepointsthroughproblemsolving,however,weareleftwiththenormal
levelofwasteduetocommoncauses.Tomakefurtherimprovement,weneedto
fundamentallychangethesystemthatis,weneedtoimprovetheoverallprocess.
FIGURE1.8SpecialCauseandCommonCauseVariation

Reducingtheinherentcommoncausevariationtypicallyrequiresstudyingtheprocess
asawholebecausetherearenounusualresultstoinvestigate.Inotherwords,thereisno
single,identifiablereasonwastewashighonedayandlowthenext.Usingaprocess
improvementapproach,westudythenormalvariationandtrytodiscovertheinputand
processfactorsthatarethelargestsourcesofvariation.Knowledgeandunderstandingof
commoncausevariationisbestobtainedusingastatisticalapproachandplanned
experiments.Historicalprocessdataanalysiscanalsobehelpfulbutisnotaseffectiveas
plannedexperiments.Oncetheprimarysourcesofvariationareidentified,wecan
determinehowtomodifytheprocesstoeliminateormitigatetheireffects.Usingthe
printingpressexample,wecouldexperimenttofindoptimalcombinationsofpaper
stock,ink,andprintingconditions,whichwouldresultinthefundamentalimprovement
oftheprocess.
APPLICATIONSOFSTATISTICALTHINKING
Statisticalthinkingcanbeusedinallpartsofanorganizationandinalljobfunctions.

Forexample,thejobofthemanageristoleadtheorganizationinacommondirection.
Themanagermustgainagreementonthedesireddirectionandgetemployeestoalign

alltheiractivitieswiththiscommondirection.Theresultofthisreducedvariationin
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activityislesswastedeffort,lessrework,reducedcosts,andfasterimprovementof
organizationalperformance.Anengineerinafactorymaywanttoreducethevariationin
aproductcharacteristictomeetcustomersspecificationsahigherpercentageofthe
time.Thismayrequireusingabetterprocesscontrolprocedureordevelopingadeeper
understandingoftheprocesssothatfundamentalchangescanbemadetobetteroperate
theprocess.

Abusinessanalystmaywishtofindwaystochangetheclosingprocess(calculating
finalprofitandlossforaspecifictimeperiod,suchasquarterlyorannually)sothat,on
average,theaccountingbooksareclosedin2daysratherthanthecurrent15day
average,therebyreducingovertimeworkrequiredandincreasingcustomersatisfaction
(customerswouldincludecorporatemanagementandthefinancialcommunity).This
objectivewilllikelyrequireabetterunderstandingofhowtheclosingprocessworksand
whatpersonsandgroupsareinvolved.Armedwiththisknowledge,wecanfindwaysto
improvetheprocesstomeetbusinessneeds.
Arestaurantmanagermaywanttounderstandwhyitistakingalongtimetoservesome
customers.Dataoncustomerservicetimeisneededtodocumentcurrentperformance
andtodeterminewhethernewlyintroducedproceduresareworking.Properlycollected
dataarealsousefulinidentifyingcausesofpoorperformanceandpossiblesolutions.
Alloftheproblemsidentifiedintheseexamplescanbeaddressedusingstatistical
thinking.Asnotedearlier,statisticalthinkingalsoappliestovariouskindsofworkinall
organizationsandfunctions,including:
TypeofOrganization TypeofFunction
Manufacturing

Marketing

Financialservices

Sales

Education

Manufacturing

Government

Researchanddevelopment

Healthcare

Engineering

Retailsales

Humanresources

Transportation

Informationsystems

Software

Purchasing

Restaurants

Finance

Statisticalthinkingisalsousefulinthemanagementoforganizations.Wenotedearlier
thatthejobofthemanageristomovetheorganizationinacommondirection.Todo

thisthemanagermustgainagreementamongtheemployeesregardingthedirectionthe
organizationshouldgo.Thiswillreducevariationinemployeeactions.
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Similarly,manyorganizationshavereducedthenumberoftheirsuppliers.Thisactionis
basedonthefactthatalargenumberofsuppliersincreasesthevariationinincoming
supplies,whichinturnincreasesthevariationintheoutputoftheorganization.
Customerswantconsistentproductsandservices.Whenacompanydecreasesthe

numberofsuppliers,thecompanygenerallydecreasesthevariationintheirproductor
service.
Anytimeyouimproveaprocess,product,ormanagementsystemyouarerequiringthe
involvedemployeestochangehowtheyworkandthedesignoftheprocessestheyuseto
dotheirwork.Suchactionsrequirealeadertohelptheorganizationmaketheneeded
changes.Suchleaderscanbeanywhereintheorganization,includingscientists,
engineers,financialanalysts,managers,andothers.Statisticiansandquality
professionalsoftenserveinleadershiprolesaswell.10
SUMMARY
Inthischapter,wehavediscussedtodaysbusinessrealitiesandtheneedforbusinesses
toimprove,amodelforbusinessimprovement,somenewmanagementapproachesthat
havebeenproposed,andprinciplesandapplicationsofstatisticalthinking.The
followingisalistofthemostimportantideasandconclusionsaddressedinthis
discussion:
GlobalcompetitionhasforcedU.S.companiesandorganizationsaroundtheworld
tochange.
Improvementisneededforanorganizationtosurvive.
Wenowhavetwojobs:todoourworkandtoimproveonhowwedoourwork.
TheU.S.systemofmanagementischanging,andmanynewapproacheshavebeen
proposed.
Statisticalthinkingisanintegralpartofthecommonthemesthatrunthroughthese
newapproaches.
Statisticalthinkingisbasedonthreeprinciples:Allworkoccursinasystemof
interconnectedprocesses,variationexistsinallprocesses,andunderstandingand
reducingvariationarekeystosuccess.
Broaduseofstatisticalthinkingcanhelpanorganizationimproveoperationsandits

managementsystem.
NOTES

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1 .M.HammerandJ.Champy,ReengineeringtheCorporation(NewYork:HarperCollins,1993),32.

2 .T.H.Berry,ManagingtheTotalQualityTransformation(NewYork:McGrawHill,1991).

3 .P.Senge,TheFifthDiscipline:TheArtandPracticeoftheLearningOrganization(NewYork:Doubleday/Currency,1990).

4 .P.Scholtes,B.Streibel,andB.Joiner,TheTeamHandbook,3rded.(Madison,WI:Oriel,Inc.,2003).

5 .R.C.Camp,Benchmarking:TheSearchforIndustryBestPracticesthatLeadtoSuperiorPerformance(Milwaukee,WI:Quality
Press,1989).
6 .F.W.BreyfogleIII,ImplementingSixSigma:SmarterSolutionsUsingStatisticalMethods(NewYork:JohnWiley&Sons,1999)
H.HarryandR.Schroeder,SixSigma:TheBreakthroughManagementStrategyRevolutionizingtheWorldsTopCorporations(New
York:Currency2000)R.D.SneeandR.W.Hoerl,StatisticalLeadershipAsTraditionalWorkplaceRolesChange,Learnto
TransitionfromConsultanttoLeader,QualityProgress(October2004),8385andR.D.SneeandR.W.Hoerl,SixSigmaBeyond
theFactoryFloor:DeploymentStrategiesforFinancialServices,HealthCareandtheRestoftheRealEconomy(UpperSaddleRiver,
NJ:PearsonPrenticeHall,2005).
7 .M.L.George,LeanSixSigmaCombiningSixSigmaQualitywithLeanSpeed(McGrawHill,NewYork,2002).

8 .StatisticsDivisionoftheAmericanSocietyforQualityControl,GlossaryandTablesforStatisticalQualityControl,3rded.
(Milwaukee,WI:QualityPress,1996).
9 .B.L.Joiner,FourthGenerationManagement(NewYork:McGrawHill,1994),3334.
10.LeadershipactionsandskillsrequiredtomakesuchchangesarediscussedbyR.D.SneeandR.W.Hoerl,StatisticalLeadership
AsTraditionalWorkplaceRolesChange,LearntoTransitionfromConsultanttoLeader,QualityProgress(October2004),8385.

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