Six Sigma for Auditors TCTC September 25, 2017

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1 Six Sigma for Auditors TCTC 2017 September 25, 2017

2 Agenda What is Six Sigma and Lean Lean Six Sigma and the IIA s IPPF DMAIC and phases of an audit Identification of Waste Process Capability Control Charts and Histograms Value Stream Mapping Cause and Effect Tools Poka-Yokes

3 What is Six Sigma Developed by Motorola in 1986 Business management strategy focused on eliminating defects and minimizing variability A Six Sigma process in one in which percent of results are free of defects Defect defined as any process that does not meet customer specifications, or could lead to an output that doesn t meet customer specifications

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5 Six Sigma Defect Rates 3 Sigma Level 6 Sigma Level 8.1 million wrong drug prescriptions year worldwide 11,000 newborn babies accidently dropped in hospitals in USA yearly 6 short or long landings at Atlanta airport daily 500 incorrect surgical operations each week 10,000 wrong drug prescriptions a year worldwide 13 newborn babies dropped yearly Three short or long landings at Atlanta airport yearly 1 incorrect surgical operation every 2 weeks

6 Six Sigma Concepts Critical to Quality: Attributes most important to the customer Defect: Failing to deliver what the customer wants Process Capability: What your process can deliver Variation: What the customer sees and feels. Should be reduced and results in stable operations and predictability

7 Lean Principles Set of tools that help identify and eliminate waste. As waste is eliminated, quality improves and production time and cost are lowered Waste is anything that doesn t add value to the product. Identifies problem areas and bottlenecks

8 Six Sigma vs. Lean Six sigma is about eliminating anything that does not meet customer needs i.e. defects Very statistical and numbers driven Lean is about eliminating waste and ensuring that everything we do adds value to the customer Combined they are about using tools that enable your organization to take a more accurate and quantitative approach to identifying and correcting root causes of problems The goal of all Lean Six Sigma and internal audit projects is to improve internal controls by avoiding expenses that add no value to the organization

9 Lean Six Sigma and The IPPF Standards Lean Six Sigma s purpose is to improve the business processes that support an organization s operations Internal audit must evaluate the effectiveness and efficiency of risk management, control, and governance processes Standard 2100-Nature of Work states Internal Audit should use a systematic and disciplined approach Standard 2200-Engagment Planning requires that objectives, scope, timing, and resource allocations should be based upon adequate information and analysis of the process

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11 Lean Six Sigma and The Audit Process Lean Six Sigma project methodology follows the DMAIC improvement Model and can be related to the 5 phases of an internal Audit Define the problem-pre Planning/Preliminary Survey Measure the key aspects of the process-planning Analyze the data for cause and effect relationships- Fieldwork/Execution/Testing Improve the process-reporting/recommendations Control the Future state-follow-up/remediation

12 Waste Waiting: Machine downtown, bottlenecked operations, approvals from others, system down time, sitting in queue Extra Processing: Unneeded steps, re-entering data, extra copies, unnecessary or excessive reports Defects: Production of defective parts, scrap, data input errors, design errors Inventory: Any excess inventory, batch processing Excess motion: Any additional reaching, steps to copier, handling something more than once Transportation: Move materials, parts, paperwork Underutilized Employees: Limited authority, ideas skills

13 Service Processes can be Full of Waste Too many signatures Unclear process steps Too many meetings Unnecessary s Obsolete databases Errors/typos Waiting for info Poor office layouts Unclear job duties Batching

14 Service Processes can be Full of Waste Too many signatures Unclear process steps Too many meetings Unnecessary s Obsolete databases Errors/typos Waiting for info Poor office layouts Unclear job duties Batching

15 Spaghetti Diagram Shows the flow of information, materials, and/or people Often shows an unexpectedly high amount of walking, carrying, waiting, etc Criss-crossing lines may indicate handoffs which often add delays and wait time Can be used to improve the layout of the office for better work flow

16 Spaghetti Diagram

17 Process Capability The capability of a process to meet its purpose All processes have inherent statistical variability Need to determine not just that the process is meeting desired goal, but what specifications the process can meet Need to identify bottlenecks and variations in the process

18 Theory of Constraint A chain in no stronger than its weakest link Need to address the weakest link (constraint) and look forward to the next constraint Helps to address the bottlenecks (constraints)

19 Focusing Steps Identify the constraint Work to exploit the constraint or make better Make other changes to break the constraint This will create new constraint which causes process to start over Don t let inertia become the constraint

20 Process Control Charts Graphs used to study how a process changes over time Helps distinguish between normal and unusual variations Always a central line for the average, an upper line for the upper control unit and a lower line for the lower control unit Use the data to determine if the process variation is in control or out of control

21 Benefits of Control Charts Focus attention of directing and monitoring process variation over time Distinguish special from common causes of variation Serve as a tool for ongoing control of a process Help improve a process to perform consistently and predictably for higher quality, efficiency, and lower cost

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23 Out of Control Signals A single point outside the control limits Two out of three successive points are on the same side of the centerline and farther than 2 sigmas from it Four out of five successive points are on the same side of centerline and farther than 1 sigma from it A run of eight in a row on the same side of the centerline

24 Histogram Helps to summarize data from a process that has been collected over a period of time Shows the relative frequency of occurrence of the various data points and distribution of data Shows outliers that can indicate out of control processes Helps answers the question Is the process capable of meeting customer requirements?

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26 Value Stream vs. Flowchart Quantification-VSM shows the amount of time consumed by tasks as well as specific transactional information Value-how value flows through the process from the customer s perspective Pre-scheduling activities to ensure follow-ups are conducted within goals.

27 Value Stream Map

28 Value Value adding (VA)-creates the product, service attributes and features the customer desires Business value-adding (BVA)-often hidden from the customer but necessary to ensure the product or service meets requirements (IT systems, inspection activities, etc) Nonvalue-adding (NVA)- completely unnecessary and should be eliminated

29 Cause and Effect Tools Fishbone Diagram 5 Whys Pareto Charts Impact/Difficulty Matrix

30 Fishbone Diagram Problems typically are not simple. They often involve the complex interaction among several causes Displays the major causes, sub-causes, and root causes Provide a focus for discussion and consensus Visualize the possible relationships among causes

31 Fishbone Diagram

32 Five Whys Simple technique to get beyond the symptoms of a problem and uncover root cause Why are we late? The copier jammed Why did the copier jam? Paper is Moist Why is the paper moist? High humidity Why is there high humidity? Ventilation is poor Why is ventilation poor? Filter is dirty

33 Pareto Chart A large percent of errors or defects in any process is usually caused by few problems Usually 80% of the quality issues can be corrected by eliminating 20% of root causes Helps identify the significant few problems so we can target them for action Use the chart to draw attention and cooperation to attack the most important issues

34 Pareto Chart

35 Impact/Difficulty Matrix Key Projects Impact Difficulty Resolve software issues 10 1 Design Recruiting Process 10 4 Create Customer Dockets 7 4 Plan for Market Presence 4 3 Replace Truck Fleet 3 1 Pricing Process for Custom 5 2

36 Poka-Yokes Japanese for Fail-safing or Mistake proofing Ensure proper conditions exist to prevent a mistake Help to process work right the first time Usually put into place after other tools have found issues and help correct problems

37 Examples of Poka-Yokes Locks on airline lavatory doors that active lights inside Indented trays used by surgeons to ensure no instruments are left in patient Color coding forms to make it easy to pick out an error All fields in an application entry screen must be completed to move forward

38 Lean Six Sigma at INPRS Quality Management Team is training several people in the organization on methodology 9 days of training Ran projects that are being ran to improve business processes Internal Audit is participating in each project to ensure that controls are not eliminated Continuing team that focuses on process improvement

39 Lean in Audit Everyone in the department has been trained in Lean Sigma methodology One Black belt and One Green belt in the department All audits include some sort of process improvement ascpect

40 Lean in Audit Review metrics and analyze where issues reside using more data than previous audit methodology Utilize other tools, such as control charts, histograms, fishbone diagrams, pareto charts, etc to determine where waste and root causes reside

41 Lean Six Sigma Benefits More efficient and effective processes Improved process quality output Ability to drive improvements and reduce process waste A better understanding of customer requirements Increased customer satisfaction and value More robust products and processes Improved delivery and quality performance Critical process inputs needed to respond to changing customer requirements

42 Lean Six Sigma Challenges Getting management and employee buy-in Time and resources needed to execute process improvement projects/initiatives Training required Data needed

43 Questions? Teresa Snedigar Chief Audit and Risk Officer Indiana Public Retirement Systems