Risk Management and Lean Six Sigma

By Adina Suciu & Greg Hutchins

We are living in a VUCA world.

VUCA is an acronym for 'volatility, uncertainty, complexity, and ambiguity':

• Volatility is the accelerating rate of change around competition, business, employment, career, and job challenges.

• Uncertainty may be our biggest challenge and is our inability to cope with volatility.  Things are changing so fast and in so many unexpected ways that it’s overwhelming our ability to cope and to understand what’s going on.

• Complexity entails all the issues and the chaos that surrounds us, that lead to confusion in making smart decisions in what we call the ‘fog of reality.’

• Ambiguity is the difficulty and inability to solve complex problems and make clear decisions because of the ‘fog of reality.’  There doesn’t seem to be a linear cause-and-effect relationship between problems and solutions.  This can result in misreads, poor decisions, or more often no decisions.

Responding Instead of Reacting

VUCA is increasing the dimensions of risk that organizations are facing in today’s competitive environment. One solution is to understand that VUCA is presenting new opportunities to capitalize.  When the answer to VUCA is responding and not reacting, there is the benefit of the innovation opportunities that VUCA is fostering. Responding and reframing VUCA can lead to the following[1]:

Volatility yields to Vision:  Vision implies there is a clear understanding of the desired future state.

Uncertainty yields to Understanding:  Understanding is the critical acceptance of the short and long term factors that can affect one’s career, work, and personal life.

Complexity yields to Clarity:  Clarity is the basis for understanding how to deliver personal value through staying flexible, keeping current with technology, learning new value adding skills, being able to innovate, and being able to deliver increasing value.

Ambiguity yields to Agility:  Agility is the ability to be nimble by responding to new situations with new ideas, new approaches, and new skills. 

Strengthening Business Sustainability

Building the mechanisms to responding to VUCA strengthen business sustainability. Organizational agility encompasses a number of elements including the ability to innovate, collaborate, and manage risks.  In other words, the VUCA responsive organization is an agile organization. An agile organization has mechanisms in place to assess and continuously improve its performance. The Baldrige Criteria for performance excellence defines the following types of performance[2]:

1. Product performance refers to performance relative to measures and indicators of product and service characteristics important to customers. Examples include product reliability, on-time delivery, customer-experience defect levels, and service response time.

2. Customer-focus performance refers to performance relative to measures and indicators of customers perceptions, reactions and behaviors.

3. Operational performance refers to workforce, leadership, organizational, and ethical performance relative to effectiveness, efficiency, and accountability measures and indicators. Examples include cycle time, productivity, waste reduction, compliance, fiscal accountability, strategy accomplishment, and community involvement. Operational performance might be measured at the work level, key work process level, and organizational level.

4. Financial and marketplace performance refers to performance relative to measures of cost, revenue, and market position, including asset utilization, asset growth, and market share.

Enterprise Risk Manager Solutions

Managing performance includes managing risk at enterprise level. There are many Enterprise Risk Frameworks. For example, the COSO ERM[3]:

As we can see, it has all the dimensions of managing performance and addressing VUCA[4].  Managing performance implies managing risk and it is more efficient if they are done together, as part of the value stream. Performance management is effective when processes are well defined and managed. Using Lean Six Sigma methodology and tools proved to be key in ensuring high performance levels.

One best practice in Lean Six Sigma Methodology is to clearly define the quality requirements for inputs and outputs along the value stream. When we also define the assumptions on the inputs and outputs, we have the risks exposed and an opportunity to assess, mitigate and control. We also want to discuss the regulatory and compliance requirements and the response to emergency and business continuity requirements and assumptions along the end to end processes. With this approach, operations incorporate not only quality, but also risk.

Another critical component of agility is collaboration, the bases of a learning organization.  Collaboration or teamwork can foster innovation and product development.  Team work is essential: everybody in the organization, all the process participants, directly involved in day-to-day operations, are the people in the best position to innovate. Looking at risks, will trigger other opportunities for innovation. The leaders’ responsibility is to allow and foster a culture of organizational learning. This means the employees are empowered to continuously improve and make the right risk based decisions. The above characteristics of an agile organization are also characteristics of a high performing organization.

Quality/Lean Six Sigma And Risk Management

The Quality function in organizations is in charge with ensuring and maintaining high performing processes: effectiveness (meeting consistently the customer quality requirements) and efficiency (achieving the goals with least possible cost). Quality does not specifically address VUCA, but it is much easier to start to manage VUCA (build or strengthen the Enterprise Risk Management) when quality systems are in place; in other words, when processes are stable and capability is ensured by managing the risk-controls. By building on an effective quality deployment, organizations can get an early jump by incorporating risk management into their strategic planning and operational processes. External and internal risk factors will be identified, addressed and continuously monitored to be minimized. In this way, organizations will be better prepared to handle rapid changes and unexpected challenging events.

Addressing risk, organizations will strengthen not only operations, but also the product and service offerings because the potential harm to the environment and society (communities, customer, employees) of their offerings will also be identified as another type of risk and it will be managed and minimized. In doing so, organizations ensure their long-term survival in a VUCA world.

Quality offers the ideal platform for risk management. Quality tools assist in risk management and the quality professionals are well positioned to expand their skills to risk management. Systemic thinking and process thinking along with ability to use tools like SWOT analysis, FMEA (Failure Mode and Effects Analysis), Capability Studies, QFD (Quality Function Deployment), Statistical Process Controls, etc, are a strong foundation for VUCA management.

For engineers involved with quality, it is a natural evolution to incorporate risk management in their work. There is an increased awareness regarding risk management: even if the quality compliance is very high, one gap in risk management could have dramatic impacts. Any process has to be effective, efficient, well measured and monitored for key performance indicators and key risk indicators. All the interdependencies between processes within work systems have to be assessed and the risk mitigated.

The shift from quality to risk management is a “must” in this VUCA world. The engineers who recognize this fact and expand their skills to incorporate risk management will be very well positioned in the job market for many years to come.

End Notes

1.  Institute for the Future: http://future.iftf.org/2007/08/get-there-ear-1.html

2.  http://www.nist.gov/baldrige/

3.  http://www.coso.org/default.htm

4.  http://www.todaysengineer.org/2011/Sep/risk-management.asp