Volume 23 February 19, 2003
Message From Charles Loew
Comments From Our Readers
New On The Maset Web Site
Helpful Hints from fellow Practitioners
New Truths on Quality
Top Ten List
Feature Of This Issue
Second Feature Of This Issue
Coming in the Next Few Issues
Welcome to MASET News. A monthly publication dedicated to the communication between MASET and our many interested friends, customers and potential customers
MESSAGE FROM CHARLES LOEW:
A great deal has been written about Six Sigma and Black Belts. The real question that senior management must answer is whether they are looking for a temporary fix or a long term, permanent solution to their problems.
Many quality experts agree that every organization spends between 20 and 40 % of their total costs on poor quality and the results of poor quality. The only real solution is to get every single employee and those involved in the supply chain to develop a customer focused attitude that strives to reduce defects created in every corner of the organization and its partners.
Read this months feature article, titled "What is Six Sigma" to learn more about this concept.
Many of you are aware that one of my interests includes investing in the stock market. I recently read an excellent article that is very appropriate at this time when most investors are in a lot of pain. It suggests we look at history and see if we are really in such a different time.
This article looks back at history and then identifies five "Cruel World Survival Rules". I hope you will be able to gather some solace and possibly learn some things for your personal investment journey.
Can any reader help? I have received the following inquiry from one of the readers of the MASET NEWS. "One thing I would be interested to know is whether you have anything on teleconference etiquette that could be published in your MASET NEWS. I've been asked by a number of people if I had anything on this but I've not found any references that clearly define the process of communicating remotely. In today's world of unrest, businesses are looking for more effective ways of communicating and one of the most obvious and commonly used modes is by video conferencing and teleconferencing, but there is no structured generic approach in managing this. Do you have anything?" Please contact me if you can help at Charles.Loew@masetllc.com.
There are a number of exciting new products and services we are working on that will be added in the March issue. A complete new Project Management Methodology will be introduced in addition to the one we currently offer. There is also some basic training for the first two levels of management that will be available.
COMMENTS FROM OUR READERS:
"First let me thank you for continuing to send me your newsletter and for the information it contains. I look forward to reading it. It appears from each one that you are doing well and expanding. Congratulations." from Colorado
"Thank you for reminding us of the things that we can be thankful for, and yes, so many of us are well and so many more in this world lack the basics that we take for granted." from New York
"At the outset we thank you for the news letters which we read with considerable interest. We are currently implementing a Six Sigma programme." from India
"Thank you for sending me the Maset News Letter periodically. It has been very informative and useful. I learned many new things from it, and practiced it in the work. Keep it up! Best regards for the New Year." from Indonesia
"Hope all is going well with Maset LLC. I do enjoy your newsletter! It is a good read!" from Australia
HELPFUL HINTS FROM FELLOW PRACTITIONERS:
Establish a set of ground rules at the beginning of every session, class or meeting. Use the same ground rules every day and be sure that initially you adhere and enforce them. If you do not, then why should any one else follow them?
NEW TRUTHS ON QUALITY:
Keep measurement data to a minimum.
You Cannot Have Too Much Relevant Data.
TOP TEN LIST:
Key Learnings in - Corporate Turnaround
5 - Keep in mind that there are only two (2) true company distinctive competencies in the long run; people and processes. Processes tend to be the casual factor in under-performing companies, not the employees. Reducing headcount without process optimization will lead to failure.
6 - Education and training - Make education and training mandatory and ongoing for world-class status.
7 - Playing it safe will not fly in this highly competitive economy. Prudent risk is not only acceptable but mandatory.
8 - Re-evaluate your competitive position in terms of customer needs and wants - Need to know what they ought to want - Must strengthen the company's position as a customer - focused, market - driven enterprise. Remember however, that market share without the necessary level of profitability, is unacceptable.
9 - Each position in the company must be competing with their counterpart in the competition.
10- Implement a set of Metrics
- must be meaningful
- must provide rapid feedback
- must be acceptable to those impacted
- must provide an effective recognition and reward process
- management must remember that activity is not necessarily meaningful achievement
- must be coupled with continuous improvement
- cultural changes have to be validated through measurement
If you want to change behavior, change the measurement.
By Carl Cooper
FEATURE OF THIS ISSUE:
What is "Six Sigma"
By Peter Davis & Charles Loew
Why are so many companies in so many different industries deciding to implement Six Sigma? In order to answer this question, it is worthwhile to review the history of Six Sigma.
Motorola originally defined the concept of Six Sigma in the early days of their effort to improve "quality". That effort started in 1979 when the senior management of the company became aware that, although many of its products were considered to be amongst the best in their markets, many of their customers were very unhappy with their overall performance. They were getting the feedback that "your quality stinks".
Soon after this wake up call, the company's senior management made the decision that, in order to survive in the new global economy, they had to change the way the corporation conceptualized "quality" and that every employee needed to thoroughly understand the requirements of their customers. Management recognized that a cultural change would be required throughout the corporation - from the Chairman to operators on assembly lines - and that everyone would have to understand "quality" in the same way, to use the same measurement system and strive to reach the same 10 times improvement goal over five years.
After some initial success in improving product quality, benchmarking of
worldwide competition indicated that orders of magnitude of improvement
would be required in order for Motorola to survive in the new global
economy. A new goal of improving quality 10 times over two years was
established and a concept that had been developed in one of Motorola's major
businesses was chosen as the methodology to drive towards that goal.
Put simply, the concept was that the elimination of defects was the key to providing their customers products and services that would always meet all the customers' requirements. Defects being re-defined as "anything that would cause the customer to be dissatisfied". Additionally, the definition of a customer was broadened to include both internal and external customers.
In manufacturing this meant defects had to be eliminated from the complete make cycle - procurement, manufacturing, and installation. From the beginning of their effort to make significant improvements in Customer Satisfaction, Motorola understood that the reduction and eventual elimination of defects also eliminated waste in many forms; rework, scrap, excess inventory, etc. Elimination of this waste also had significant impact on reducing costs and improving profitability.
It was quickly recognized that the elimination of defects required that product designs must be highly "manufacturable". A highly manufacturable design is one that is immune to the normal variations of the manufacturing processes used to produce it, and therefore can be produced with virtually zero defects occurring during manufacture. This required that design teams had to fully understand both the customers' requirements and the capabilities of the manufacturing processes in order to be able to establish design specifications that would ensure high "manufacturability".
Soon Motorola gave themselves a new stretch goal. The goal required that design specification tolerances would be twice as wide as the variation of the manufacturing processes. The width of a process that is "normally distributed" is defined as the distance between plus 3 standard deviations and minus 3 standard deviations of that process. Therefore the goal was to have design specification tolerances for a characteristic that were as wide as the width between + 6 standard deviations and - 6 standard deviations of the distribution of the process used to produce that characteristic. Standard deviation is noted by the Greek letter sigma (σ), so the goal was to have specifications that were as wide as the distance from "+" to "-"Six Sigma of the process. Or Six Sigma
Based on the statistics of Gaussian (Normal or Bell shaped) distributions it is possible to convert the relationship of a design tolerance width to the process standard deviation into the number of defects that will probably occur within a number of "opportunities'. This probability is termed as the DPMO or defects per million opportunities. Allowing for the anticipated drift of the mean of a process that is under Statistical Process Control, a +/- 6 sigma tolerance width is equivalent to 3.4 defects per million opportunities, whereas a +/- 4 sigma tolerance width is equivalent to 6,210 DPMO.
As Motorola understood their Customers requirements better, they recognized that their customers included in their assessment of Motorola's "Quality Performance" many aspects of business that had not traditionally been considered to be part of "quality". Aspects such as; errors in invoices, mistakes in entering sales orders, etc. The DPMO concept was applied to these types of "transactional" processes and the quality of those "products" measured and compared to other transactional and manufacturing processes in terms of Sigma Level.
Motorola made significant improvement in the quality of its products and transactional processes. As some of the manufacturing, products and processes approached a Five Sigma Level', the rate of improvement slowed. They then realized that more sophisticated problem solving techniques would be required if they were to reach and exceed their Six Sigma goal. Experts were identified and trained across the company who could assist organizations and project teams with advanced statistical tools. These experts became know as Black Belts. The assistance of Black Belts enabled many organizations and project teams to reach and exceed seven Sigma Level in their products.
Additionally, Motorola recognized that very often there was a "time" element included in their "customers' requirements". These time elements ranged from new product availability to meet a customer's window of opportunity in the marketplace to actually delivering a product on the committed date. In order to improve the corporation's ability to meet these "time quality" requirements, a major effort to reduce Cycle Times was implemented. The methodology used is now called Cross Functional Process Mapping and has produced very significant reductions in cycle times from New Product Development to Sales Order Entry. It was also recognized that Defect Reduction and Cycle Time Reduction were complimentary methodologies that would enable Motorola to achieve continuous improvement in their quality performance.
Many other companies worldwide have now implemented Six Sigma and have achieved outstanding results in improving quality and Customer Satisfaction, while achieving significant cost reductions and improved profits. The approaches they have used have often been different from Motorola's, but the same basic concepts have been applied.
Sometimes an organization has already changed their culture to be adaptable to change and to be one that drives continuous improvement using another driver and has then implemented Six Sigma. Others have used Six Sigma to drive the cultural change recognizing that in addition to achieving much-improved customer satisfaction that significant cost reduction and profit improvement results that can be achieved.
More formal approaches to Change Management are also being implemented to ensure effective leadership skills and management competences at all levels. A communication plan must be established to inform all stakeholders of the changes that are being implemented. The change initiative must be aligned with the corporate goals and their attainment plans must be disseminated and understood across the organization. In order to succeed all goals at all levels in an organization must be in line with corporate goals and the appropriate measurements and rewards must be in place.
Any methodology can be used as appropriate to a specific organization. We at Maset LLC recommend a company specific approach that best fits the organization. We would use all elements at the appropriate time. For more information on Maset, please contact Charles.Loew@masetllc.com or visit their web site at www.masetllc.com.
Six Sigma is a Registered Trademark and Service Mark of Motorola, Inc.
SECOND FEATURE OF THIS ISSUE:
Investing In a Cruel World
By John Dessauer
The world can be a cold and cruel place. The bear market of 2000-2002 is a case in point. But look back in history. When has the market NOT been a cruel and harsh place to plant our dreams? Rather than run from all risk, we need to use our recent reverses to build a richer future. Based on my 50 years of investing experience, I have drafted five key rules for "Cruel World Investing,"
We feel betrayed by major bankruptcies at Enron and WorldCom, a rash of corporate scandals, and the collapse of telecommunications stocks. Many Americans are desperate, fearful and terrified. We have awakened to the fact that, when it comes to managing your money, it is a harsh, cruel world. Many are vowing to get out and stay out of the stock market. That is an enormous mistake. In cruel markets, there are more opportunities than there are in inflated or buoyant markets. Irrational selling creates opportunity; irrational buying takes it away. My personal experience says that cruel, volatile markets are in fact "normal." My experience also says that you can do more than "cope" with rough markets. You can see through them, use them to your advantage and make your fortune. I call it "Cruel World Investing," a realistic approach to making money investing in individual companies.
Here are three real-life examples of what I'm talking about:
(1) Hong Kong in 1989. In June of 1989, the world watched in horror as the Chinese army killed innocent people in Beijing's Tiananmen Square. The Hong Kong market crashed. Fear paralyzed Hong Kong banks and investors. I had money invested in Hong Kong stocks. What's more, I had many clients and subscribers owning Hong Kong stocks. We lost 30% overnight and were faced with the ultimate horror, the possibility of losing everything if the Hong Kong stock market was destroyed.
The answer was research. It was too late to sell stocks. They had fallen in a flash. The only practical strategy was to find out if all was lost. My research turned up some pleasant surprises. Many Hong Kong companies had been worrying about the Chinese for a long time. They had moved assets out of Hong Kong, to safer places. They had cut back on Hong Kong production. In a few cases, they had moved headquarters to other countries. The stocks had plunged in a selling panic, driving prices below the value of the assets outside Hong Kong. By concentrating my Hong Kong holdings in companies with substantial assets outside Hong Kong, I was able to avoid a total loss.
It turned out that the battle for political control of China was ultimately won by the reformers. Hard-line Communist military leaders lost control. By November, the balance of power shifted back in favor of reform. In 1990, the Hong Kong stock market recovered. Banks began lending again. Hong Kong stocks not only recovered, but they went on to produce outstanding gains for several years. But had it gone the other way, I would at least have been able to salvage enough to start over. That is what Cruel World investing is all about - always starting over, rather than giving up.
(2) America's Great Depression. When we look back at America's Great Depression, we see two things. First, we see all the companies that went bankrupt and all the investors who went broke. Pessimists use those images to terrify investors. The unspoken but clearly implied message is that, in a Depression, stock market investors will lose everything. That is not necessarily the case. Many stocks paid high dividends all through the 1930s. Those dividends, re-invested, were the source of great fortunes. The second thing we see is that the Depression lasted over a decade. It was not a one-day shock, like Tiananmen Square. There was lots of time to do your research. As long as you were not using borrowed money and weren't forced to sell, you had time to salvage some cash and buy companies that had a high probability of surviving and recovering. Many stocks soared from 1932 to 1937. The Dow rose 372% in the mid-1930s, the largest five-year rise in history. Investors who held on, did their research and concentrated in carefully-selected stocks recovered most of their lost wealth.
(3) The 1970s were also rough on investors. Bonds collapsed when inflation and interest rates skyrocketed. Stocks collapsed for the same reasons. Gold was king. The Swiss franc was the best haven for cash. But you had to be nimble. Gold rose sharply, to $850 an ounce in January 1980, only to fall sharply thereafter. I lost heavily in the 1973-'74 stock market crash. So did Peter Lynch, in his first years managing the Magellan Fund - which fell 54% in a year. The 1970s were very rough. In 1976, I was in my office in Zurich, Switzerland. A trader whom I respected a great deal came into my office and pounded on the table. "John," he said, "you must buy gold!" Gold had fallen to barely $105 an ounce. I was confident that he was right. The problem for me was insufficient funds. I was still struggling to recover from the 1973-'74 market plunge. I was researching a U.S. defense stock, Loral, a turnaround situation. My theory was that the U.S. would expand government spending on military electronics. Because of Vietnam, defense spending was under attack. But electronics, I reasoned, would survive the cuts and benefit. I decided to buy the stock. Believe it or not, in January 1980 it was a tie game. Gold and Loral returned almost exactly the same results. But unlike gold, the stock market kept growing. Better yet, the gain was enough to put me in strong financial position to launch my newsletter in 1980. I had survived the 1973-'74 crash and had more than fully recovered.
From these true stories - Hong Kong in 1989, the Great Depression of the 1930s and the 1973-'74 market crash and recovery - you can already see a few lessons. In all three cases, research proved to be essential to survival and recovery. There is a common saying, investigate before you invest. That sounds good, even logical, but investigating shouldn't stop when you buy a stock. In fact, buying a stock should be a starting point for continuing, intensifying research. The second rule was to accumulate savings from income (or stock dividends) and plan a return to the market.
Research is also your insurance policy against the total loss of a particular stock like Enron and WorldCom. Could your or I see the collapse of Enron coming early enough to salvage our gains? Maybe not, because fraud (by definition) is not disclosed and therefore is not easily discovered. But long before its collapse, it was clear to me that Enron's stock was being inflated by Wall Street emotions rather than solid fundamentals. The company was a natural gas company and did not deserve the lofty stock price it once had. The same was true with WorldCom. Both stocks soared to levels so high that they didn't make sense. How do I know? Because I recommended Enron in 1998 and sold it for a double in 1999. I also sold WorldCom early, about halfway into its collapse.
Does common sense and research always keep us out of bankrupt companies? No! Even with the best research and decades of experience, you still can get caught in a stock where the company goes bankrupt. In my 50 years as an active investor, that has happened only a few times. Recently I got caught owning Global Crossing, all the way down to bankruptcy, but I knew this was a high-risk investment. Therefore, I also knew there were no guarantees that I would not lose. I had seen cases in the past where betting an entire company on a new idea turned a small amount into a fortune. When AT&T laid the first intercontinental telephone cable, the entire company was at risk. Laying cable in the North Atlantic is by itself highly risky. AT&T won and investors made fortunes. Global Crossing took similar chances but they lost. The key here is that when these high-risk investments work, they turn small amounts of money into a fortune. You don't have to invest a lot in such high-risk stocks to enjoy life-changing gains. You don't have to put your whole portfolio at risk.
FIVE "CRUEL WORLD SURVIVAL RULES":
- Study the markets, the economy, and especially the companies in your portfolio.
- Save part of your income. First, accumulate six months living expenses in cash.
- Always have a "Plan B." After you have accumulated a substantial portfolio, keep enough in cash to start over, if the worst happens.
- Be alert when a stock flies high. Sell some or all if valuations rise so high they don't make sense.
- Manage your risks. Rather than diversify for its own sake, focus on your risks, stock by stock. Accumulate stocks with different risk characteristics. Invest smaller amounts in risky stocks, and larger amounts in safer stocks.
CRUEL WORLD INVESTING RULE #1:
STUDY THE BASIC CONDITION OF THE U.S. AND GLOBAL ECONOMIES.
THEN, MAKE UP YOUR MIND, AND STICK TO YOUR PLAN.
Are we in a long-term growth trend, or are we headed for a global economic crisis and low to no growth in corporate profits and stocks? Listen to the experts, then decide and stick to your view until there is a major change in the underlying fundamentals. Pessimism is very popular in the wake of the tech-stock melt down. That is a classic mistake. Pessimism always rises after a stock market meltdown. As we saw in 1987, the stock market can be very wrong. Stocks can plunge even as the underlying fundamentals are gathering new strength. Don't look at the stock market as your only guide to the future. Look around you, at the world we live in. Ask yourself about the basics - the traditional components of economic growth. Are people free to pursue their economic dreams? Do they have the capital to enable them to start new businesses? Is productivity rising, or falling?
CRUEL WORLD INVESTING RULE #2:
SAVE MONEY! LIVE BELOW YOUR MEANS
When you are working and earning, keep your spending levels BELOW your income levels. Put something away out of every paycheck. When I give this advice, I often hear people say they can't save because "the cost of living is so high." But I also see immigrants from Mexico, Cuba and Asia who live far below their very low incomes. They save 35% of their income until they can invest in a business, real estate or stocks. If they can do it, so can we. As our income rises, too many Americans allow their spending to rise even faster. That is a formula for financial disaster.
CRUEL WORLD INVESTING, RULE #3:
PLAN FOR CRUEL MARKETS. ALWAYS HAVE A BACK-UP SURVIVAL PLAN.
I am often criticized for being too optimistic. Yes, I am ordinarily optimistic, but that is because optimism has been a winning attitude for most of the last 50 years. But I am more than an optimist. I am a "paranoid optimist," always worried about what will go wrong next. From my first job, and throughout my career, I always had a "Plan B," just in case I was fired, or the job situation became too difficult. I never was fired, but I believe that being prepared gave me the courage to do things that more complacent people would not do. I took risks on the job, risks that paid off handsomely.
CRUEL WORLD INVESTING, RULE #4:
BE ALERT TO A RAPIDLY RISING STOCK. PLAN TO SELL SOME SHARES.
What would you say to a 50-year-old Enron employee who lost everything in his 401(k) account? Don't tell him he "should" diversify; it's too late now. Or is it? In truth, he's lucky to learn this painful lesson so early. What if he were already retired? In the early 1990s, an elderly couple came to my office. He had retired in the early 1980s and followed the popular strategy of the time. He sold all stocks and invested the cash in short-term CDs and government bonds. All was well until interest rates fell sharply. By 1990, the couple was in financial trouble. They no longer could afford vacations and were worried about rising real estate taxes and the cost of home and car insurance. They asked for my advice. I told them that the only chance for recovery was to take a chance in the stock market. They cringed, admitted their fear, but finally agreed. Half of their cash was invested in conservative stocks. Two years later, they could smile again. With all its ups and downs, the stock market restored enough wealth for them to live out their lives in financial security.
CRUEL WORLD INVESTING RULE #5:
START ALL OVER AGAIN - AND MANAGE YOUR RISKS.
I would give Enron employees the same advice. The only chance for recovery is to buy stocks, even though that includes the risk of investing in another company that goes bankrupt. A 50-year-old Enron worker, suffering the aftershocks of the Enron loss, shouldn't feel hopeless. Start small. For example, start with a monthly contribution to a low-cost, no-load index fund. Wealth accumulation develops faster than you might think with a monthly contribution. Month-by-month, things may appear to go slowly. But when the stock market makes one of its periodic upward moves, your wealth will increase sharply. When the amount in the index fund has increased to more than $10,000, withdraw part to invest in specific stocks. A 50 year-old still has a chance to retire in style by 65.
CONCLUSION: EVEN IN A CRUEL WORLD,
STOCKS ARE STILL YOUR BEST INVESTMENT
If you are young and working to build a substantial portfolio, stocks are your best bet. If you are middle aged, stocks are your best choice. Even after you have secured a substantial portfolio and are ready for retirement, you need stocks to fuel growth to offset the inevitable rise in your cost of living.
The cold, cruel world has always been with us. Our challenge is to meet these reversals head on, by saving and working hard to make this a better world, for ourselves and our families.
John Dessauer's global investing strategy has earned more than 905% gains for his subscribers over the last 20 calendar years. The Hulbert Financial Digest consistently ranks Investor's World among the top five advisories for 20-year gains. Information on John's specific stock holdings is available with membership to his advisory service, Investor's World. For more information about a RISK-FREE membership, click here
COMING IN THE NEXT FEW ISSUES:
Training for Manufacturing Management
Ethics in Business
New Product Developing
Cultural Change Workshops
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