Six Sigma Case Study: Defect Reduction in the Service Sector

by Chris Bott

This case study discusses the effective use of Six Sigma tools to improve our plastic issuance processes. It will take you through a project American Express completed, “Eliminate Non-received Renewal Credit Cards.?This analysis demonstrates how we applied Six Sigma techniques to reduce the defect rate with ongoing dollar savings.

Define and Measure the Problem
(Data has been masked to protect confidentiality.)

• On average (in 1999), American Express received 1,000 returned renewal cards each month.
• 65% (650) were due to the fact that the card members changed their addresses and did not tell us.
• The U.S. Post Office calls these forwardable addresses. Please note: Amex does not currently notify a card member when we receive a returned plastic card.

Analyze the Data

We applied various Six Sigma tools to identify Vital Xs, or the root causes of the defect. The use of Chi Square indicated the following:

• By type of card/plastic: We isolated significant differences in the causes of returned plastics among product types. Optima, our revolving card product, had the highest incident of defects but was not significantly different in the percentage of defects from the other card types.
• Issuance reason: Renewals had far and away the highest defect rate in the three areas in which we issue plastic—replacement, renewal, and new accounts.
• Validated reason for returned: Because we suffered scope creep early in the project, it was important to confirm what our initial data was telling us. After testing the five reasons for returns, returns with “forwardable?addresses were overwhelmingly the largest percentage and quantity of returns.

Improve the Process

An experimental pilot was run on all renewal files issued. This “bumping?against the “National Change of Address?service was implemented on all renewal cards in mid August. Due to the strict file matching criteria, this solution will impact 33% of the remaining population (or 333 cards monthly).

As a result of a successful pilot, we were able to reduce the defect rate by 44.5%, from 13,500 to 6,036 defects per million, reflecting annual savings of $1,228. Figure 1 outlines the combined test results.

Fig. 1 Combined Test Results

Non-Received Renewal Credit Cards	Baseline	Test Results
Defect rate	1.35%	.6%
DPMO	13552	6036
COPQ		$3,360
Total annual savings		$1,228
Sigma level	3.71	4.01

Control the Process

To ensure that we perform within the acceptable limits on an ongoing basis, it is important to monitor the new process. To achieve “control?status, we will be using the p chart, a tool that tracks proportions of returns over time.

In addition, our vendor has constructed reporting, which gives us the ability to monitor the defect rate on a monthly basis. The report will tell us if any credit cards that were “bumped?against the "National Change of Address" database were returned back to our warehouse.

Impact on Customer Satisfaction

Using the "National Change of Address" will enable over 1,200 card members to get their credit cards. Prior to this implementation, these card members would have never received their cards automatically. Revenue and customer satisfaction will undoubtedly increase.

How Much Do Defects Truly Cost?

by Jerome A. Blakeslee, Jr.

The following examination of an airline's difficulties with baggage handling provides a compelling illustration of the escalating costs of seemingly simple defects.

The Defect Identified ?/B>

On a recently completed round-trip flight from Philadelphia to Vienna on “My Favourite Airline (MFA),?I passed twice through London’s Heathrow airport. Arriving in Vienna, after a long wait at the baggage claim area, it became clear that my bag had not arrived quite as efficiently as I had.

I was informed by a very courteous baggage services person, “Frequently MFA baggage does not make the transfer at Heathrow, especially on weekends.?

My bag did arrive on the next flight and was efficiently delivered to the hotel in Vienna about eight hours after my arrival.

?And Repeated

I returned to Philadelphia the following Saturday, again through Heathrow, and was surprised to hear my name being paged when I entered the baggage claim area. Again, a very polite and concerned MFA agent informed me that my bag had, unfortunately, not made the transfer at Heathrow and would arrive on the next flight. “Heathrow is like a giant tornado,?she said. “The bags get sucked in, they fly around, and sometime later they come out . . . maybe.?/P>

My bag had still not arrived on Sunday evening. While on the phone with the customer service agent, I received a call from the baggage delivery service: “We have your bag and can deliver it by 2 A.M. on Monday morning.?

Now I was curious. “How many bags do you deliver a day for MFA in Philadelphia??I asked the delivery service agent.

“At least 50 a day, many times 100 to 200,?was the answer.

Further questioning revealed the service charges were $0.75 per mile for delivery. The delivery to my home cost $65 and was typical.

A conservative estimate of costs to MFA of the baggage handling process:

• Special Baggage Services: 50 deliveries/day x $65/delivery = $3250/day per city.
• Extra MFA employee wages: 5 people x 8 hours x $20/hour = $800/day per city = $1.4 million/year at Philadelphia.

If this occurred at 10 destinations:

• $4050/day x 365 days/year x 10 destination cities = $14 million/year
• 20 destinations would result in potential savings = $28 million/year
• And 30 cities experiencing the same problem = $42 million/year

The calculation does not include other costs such as the extra baggage handling costs at Heathrow, the extra customer service time necessary to handle the complaints, or lost revenues. Still, as you can see, the cost of this level of defects (estimated at 3.0 sigma) is staggering.