C OV E R STO R Y

How Caterpillar Uses

6 SIGMA
to Execute Strategy

By John Gillett, CPA; Ross Fink; and Nick Bevington

In 2001, Caterpillar launched its 6 Sigma program to drive change

to achieve the companys long-term strategic goals (Caterpillar
uses 6 Sigma to identify its Six Sigma initiatives). This 6 Sigma
process was, and continues to be, extremely successful. Some of
the results include first-year benefits that exceeded implementa-
tion cost and achievement of the revenue goal two years earlier
than planned. Well briefly discuss Six Sigma in general, describe
Caterpillar, and show the entrenchment of 6 Sigma within the
companys strategic planning process.

April 2010 I S T R AT E G I C F I N A N C E 25
 C OVE R S TO R Y

What Is Six Sigma?

Six Sigma is a total quality management (TQM) tech-
nique pioneered by and applied to Motorola processes in
the 1980s by Bill Smith, a Motorola engineer who became
known as the father of Six Sigma. Since then, other
companies, such as Bank of America, Honeywell Interna-
tional, Raytheon, and General Electric, have taken these
learned processes and expanded them. Even though many
people have reservations about the potential savings from A Six Sigma project is designed
Six Sigma, a story by Charles Waxer (Six Sigma Costs
and Savings: The financial benefits of implementing to improve a process. Each step
Six Sigma at your company can be Significant,
www.isixsigma.com/index.php?option=com_k2&view= of the process that needs
item&id=1228&ltemid=187) reports that GE saved
more than $12 billion over five years, Honeywell saved improving is mapped to analyze
$800 million, and Motorola saved $15 billion over
11 years. Each company takes the Six Sigma process and where problems exist.
best practices and makes the technique its own.
The methodology, which was created in the 1920s,
comes from mathematician Walter Shewharts introduc-
tion of how processes could be corrected. It uses the
Greek symbol sigma to represent a standard deviation
away from the mean. The sixth sigma is a representation
of six standard deviations away from the mean of the
population. In the most common use of Six Sigma, the
goal is to create only 3.4 defects per million parts manu-
factured. Contrary to the name of the process, 3.4 defec-
tive parts per million is only 4.5 standard deviations away
from the mean.
To combat the defects referenced in the Six Sigma goal,
companies have adopted methodologies to make a linear
map of the process. Two common methodologies are
DMAIC (Define, Measure, Analyze, Improve, Control)
and DMEDI (Define, Measure, Explore, Develop, Imple- ma with the terminology of the belt system of martial
ment). The website www.iSixSigma.com defines DMAIC arts and use Green Belts, Black Belts, and Master Black
as a data-driven quality strategy for improving processes, Belts to undertake and lead projects. Black Belts generally
and is an integral part of the companys 6 Sigma Quality drive and run projects with the help of Green Belts.
Initiative. DMEDI is defined as a creative approach to Green Belts assist the Black Belts with projects but arent
designing new robust processes, products and services. working full-time on a project, whereas Black Belts are
Thus the difference between DMAIC and DMEDI is that fully dedicated to process improvements and are respon-
DMAIC examines processes already in place, and DMEDI sible for leading the team of Green Belts in completing
helps put a new process in place. the projects. Master Black Belts are teachers of the process
A Six Sigma project is designed to improve a process. and lend a hand to Black Belts as coaches.
Each step of the process that needs improving is mapped Caterpillar embraced this methodology in 2001 when
to analyze where problems exist. The problems are ana- then CEO Glen Barton challenged the company to
lyzed with many different tools, such as Pareto diagrams, change. To introduce his ideas, he had three karate Black
tree diagrams, root cause analysis, and process mapping. Belts put on a dramatic show of power by breaking pieces
Then a Six Sigma team takes on the improvement project. of wood that represented quality, cutting costs, and a goal
Many companies have defined the mastery of Six Sig- of attaining $30 billion in revenue. Barton realized that
26 S T R AT E G I C F I N A N C E I April 2010
he needed a tool that would allow the company to ana- however, it became obvious that he believed in the pro-
lyze where changes were needed, to help make the gram that Barton had started. His speech was short, but
changes, and to help the company grow, so he chose 6 his commitment was apparent. The Black Belts, Master
Sigma. Caterpillar had a long road in front of it, but the Black Belts, and anyone else associated with 6 Sigma proj-
initial rollout of 6 Sigma used more than 300,000 hours ects were relieved as they realized that the methodology
of training in its first year. Dan Campion, Caterpillar and their roles in the company would continue.
Master Black Belt, points out that when Allied Signal sent Many individuals throughout Caterpillar participate in
its people through Black Belt training, the average num- 6 Sigma projects each year, from the factory workers to
ber of years of company experience was five to seven. At the group presidents who support the strategies. Accord-
Caterpillar, the average number of years of company ing to the company, there are approximately 2,000 active
experience was more than 20. Black Belts at Cat. Each employee knows and understands
that major initiatives and changes will take place using
Who Is Caterpillar Today? the 6 Sigma strategy. If a problem exists, 6 Sigma is the
Caterpillar, or Cat, is the worlds largest manufacturer of tool that will help solve it. On a side note, employees even
construction and mining equipment (most consumers take the lessons they learn from work to other organiza-
would recognize the huge yellow equipment), diesel and tions in which they volunteer their time.
natural gas engines, and industrial gas turbines. It also The 6 Sigma culture has permeated Caterpillar in all
delivers many related services, including financial, logis- aspects of the business. Craig Brabec, the current Global
tics, and remanufacturing. Finance and Strategic Support 6 Sigma Division Champi-
Caterpillar reaches every continent with its products
and services and, as of 2008, employs approximately
113,000 people. Caterpillar typically doesnt sell to the
end customer but uses a global dealer distribution net-
work. As of 2008, 180 dealerships span North America,
Europe, Africa, the Middle East, Asia, and Latin America.
These dealerships, which have more than 131,000
employees, act as the contact from the end customers to
Cat.
The company has had great financial success as well. In
2006, Caterpillar recognized $41.5 billion in total sales Caterpillar has introduced 850
and revenues, easily exceeding its 2001 goal, and this led
to $3.5 billion in profit from a highly capital-driven suppliers worldwide to 6 Sigma,
industry. The company spent $1.6 billion in plant, prop-
erty, and equipment as capital expenditures in 2006. Cat which has created more than
has an aggressive growth strategy that requires high levels
of funding. For example, Caterpillar spent $1.4 billion in 1,000 supplier Black Belts to
research and development in 2006. Caterpillar is also on
the list of Fortune 100 companies. According to the 2009
help run the projects.
Fortune 100 list, Caterpillar is first in its class, is No. 44
overall, has $51.3 billion in revenue, and has almost on, came from a consulting business that helped compa-
$3.6 billion in profit. nies go through change. He noticed something different
about 6 Sigma at Cat: 6 Sigma didnt exist only in the
6 Sigma at Caterpillar manufacturing or the engineering side of the businessit
Caterpillar CEO Glen Barton started the 6 Sigma culture also entered the financial world and the human resources
change in 2001 when he challenged every officer for his or side. When the company faced the challenge of the gener-
her personal commitment to the program. And he got it. al population of its workforce retiring, it turned to 6 Sig-
But many in the company became worried when Barton ma, using a 6 Sigma team to identify whether its benefits
announced his retirement in 2004 and that the helm package was competitive with ones at other top compa-
would be passed on to Jim Owens. In Owenss first speech, nies. For example, Cat matches up to 6% of an employ-
April 2010 I S T R AT E G I C F I N A N C E 27
 C OVE R S TO R Y

ees base salary in a 401(k) program from the day the 2020. For simplicity, the following metrics will be used in
employee begins, and its compensation plan is rated in Caterpillars 2010 strategic goals: Peoples metrics include
the top 10% of plans in the S&P 500. Caterpillar recog- a highly engaged workforce and achieving world-class
nized that its greatest asset was its people and that it safety. Performance Product & Processs metrics include
would have to competitively replace the knowledge base being No. 1 in quality, market leadership, and market-
that was going to be leaving the company. leading availability. Finally, Profitable Growths metrics
In 1990, Caterpillar reorganized to a business unit include $50 billion in revenue and earnings per share
structure, which sometimes makes the transfer of knowl- growth in the top half of the S&P 500 companies.
edge between business units more difficult. But 6 Sigma Over the last eight years, Caterpillar has demonstrat-
provided an effective change mechanism and a means of ed the usefulness of 6 Sigma in achieving its strategic
integrating the knowledge learned through 6 Sigma proj- goals. This was accomplished by fully integrating the
ects across the various business units. methodology and its principles into all aspects of the
In addition to its own use of 6 Sigma, the company has business, including suppliers and dealers. It also allowed
taught its suppliers and dealers about the benefits of using the integration of knowledge from Black Belt projects
the technique to refine the entire sales model. Caterpillar across business units. Further, Caterpillar believes that,
has introduced 850 suppliers worldwide to 6 Sigma, which by using 6 Sigma to drive change, its new goals are
has created more than 1,000 supplier Black Belts to help obtainable.
run the projects. One supplier that said it was interested in One example that exemplifies Caterpillars continuing
the Caterpillar 6 Sigma methodology allowed Cat to con- integration of 6 Sigma into all aspects of the business is a
sult and transform the business. When implementing 6 project that will improve threaded joint design in the
Sigma, Caterpillar used facts and data to show the results assembly process. This project focuses on continuous
the supplier could expect, so it didnt take long for the improvement in Caterpillars quality culture and provides
supplier to totally buy in to the methodology. an opportunity to leverage best practices and replicate
Dealers have also taken on the 6 Sigma commitment. solutions across the enterprise.
More than 165 dealerships have produced more than The company is also working on a 6 Sigma project that
1,000 Black Belts to help with projects. Dealers find it focuses on ergonomic improvement. This project is help-
amazing that they can share their projects with one ing Caterpillar put processes in place that allow a proac-
another on a Caterpillar website that depicts best prac- tive and, ultimately, preventive approach to ergonomic
tices among the dealers. Even though each dealership is injuriesproviding a better work environment for
run as a separate business, 6 Sigma has helped give all of employees.
them a common feel across the world. Not only are deal- As you can see, Caterpillar is continuing to embrace
erships learning about projects that need to be done in the 6 Sigma methodology, not only in manufacturing
their business, but theyre following the steps of the and engineering, but across the organization. This way
process and learning which projects to do first. Just as of working and thinking continues to be successful in
Caterpillar embraced the methodology, dealers have also driving the companys strategy for change. SF
accepted the idea of making 6 Sigma a top-down
methodology that pushes the training and concept down John W. Gillett, CPA, Ph.D., is professor of accounting and
to the workers at the lowest level. chair of the Department of Accounting at Bradley Universi-
ty in Peoria, Ill. He also is a member of IMAs Central Illi-
Attaining Strategic Goals nois Chapter. You can reach John at (309) 677-2290 or
When Glen Barton introduced 6 Sigma to Caterpillar, jwg@bradley.edu.
he envisioned using it to help the company achieve the
$30 billion mark in revenue by 2006. Instead, it achieved Ross L. Fink, Ph.D., is professor of operations management
this goal in 2004two years ahead of plan. Current in the Department of Business Management and Adminis-
Chairman and CEO Jim Owens continues to execute tration at Bradley University. You can reach him at (309)
strategy using the 6 Sigma methodology. New strategic 677-2271 or rf@bradley.edu.
goals include People; Performance Product & Process;
and Profitable Growth. Metrics have been developed for Nick Bevington is a staff accountant at Caterpillar Inc. in
each of the strategic goals for the years 2010, 2015, and Griffin, Ga.
28 S T R AT E G I C F I N A N C E I April 2010