Six Sigma Pricing Part 3: Turn Your Data into Knowledge and Action
In our previous article, we continued exploring how to bring a Six Sigma mindset to your pricing strategy. This approach provides a proven framework to drive continuous improvement, using data, to help drive profitable growth.
In this third and final installment, we’ll discuss the “analyze” and “control” phases of the Six Sigma “define-analyze-measure-improve-control” process. Identifying and understanding opportunities to grow margins is the crux of the “analyze” and “control” phases in this process for improvement.
We’ll explore how to turn your analytics into action and why you should continue to cycle through this process even after moving through all five phases.
Identify and Understand Opportunities to Grow Margins
A company must properly analyze anything that impacts pricing performance and then use data insights to make meaningful improvements that will help achieve business goals. This data analysis is necessary to understand which customers behave like their peers. By doing so, business leaders can then segment those customers to differentiate strategies which enable the profitable growth of their company.
The next step is to create clear reporting of the data. This is a crucial step that leverages the measurements and metrics you have mindfully constructed (the data) to identify what needs improvement and what the sources of defects are in the process.
With visibility into the key data points you are measuring, you can truly analyze and look for opportunities by drilling down. Below are two key analyses that can help you better understand challenges and potential opportunities for improvement.
- Diagram the relationship of the five sources of variation.
- Build a cause-and-effect matrix to quantify impact of each process step.
- Select key sources of variation throughout the process.
- Capture two to three potential root causes from diagram.
Process map analysis:
- Diagram the process and hunt for bottlenecks or other defects of each process step.
- Chart metrics to see if the process appears stable or not.
- Use Pareto Charts, histograms, box plots, scatter plots, etc. to visually determine data distribution and variation.
Once you understand what the key inputs are, you can then construct predictive models that inform outcomes. When you know what is going to occur next, you can take advantage of an opportunity before others realize there is one.
Control the Process of Turning Your Analyzed Data into Knowledge
The “control” phase is the last in the process, but improvement doesn’t end here. In the “control” phase, our job is to make sure the improvements we’ve made continue. To achieve this, you want to chart performance against upper and lower control limits. A run chart for example, is a good analytical tool that shows single values plotted over time and indicate trends of process and shifts in process performance.
The key to success is to continuously monitor performance and measure against the control limits via control charts. These charts allow you to study process variation over time, monitor and improve process performance, and maintain “in-control” processes.
Measure What Needs Improvement
This crucial step lays the foundation for success and requires building measurements and metrics to identify what needs improvement thoughtfully, completely, and in alignment with your business goals.
A company must properly identify anything that impacts pricing performance and measure it mindfully. Identifying “Critical to Quality” components for each person’s role in the process is foundational to correct measurements. It is particularly important to choose wisely which measurement is appropriate for each role and incentives must be tied to these. Few things can motivate people more than performance measures tied to their pay and incentives. Focus on a limited set of measurements that are tied closely to profitability and then hold your team accountable for their performance against those measurements.
Measurements must be simple, possess real business impact, reflect improvements over time, and be compared to business goals and market realities.
Additional benefits of the “control” phase include:
- Developing an effective “Control Plan Audit Process”
- Identifying opportunities for improvement in processes, tools, and or behavior
- Establishing a “Pricing Authority Matrix”
- Developing “Profitability Improvement Plans” for every customer
- Developing “Change Management” strategies and plans
Following the “control” phase, look at your data and go through the phases of defining, measuring and analyzing again to improve and control the output.
By understanding the true performance of a customer or channel, you’ll realize if the opportunity is effectively driving the business results that you want. Many companies gauge performance high–level information, such as gross margins versus net margins. Think about your business and customers as owners instead of employees.
Six Sigma as a Price Improvement Strategy
Over the course of three articles, we’ve explored how to apply Six Sigma methodology to pricing by focusing on three areas of the process: transfer function, the concept of continuous improvement and how to make your data work for you. By properly applying Six Sigma, we you can put yourself in a position to sustain the gains and automate the pricing process.
Six Sigma is based on data. You have to know the right data to look at in order to shape and change the results you want on the backside of the transfer function. The big takeaway from this third and final installment is to turn the data you’ve analyzed into actionable business decisions.
We’d be happy to help you, no matter where you are in your pricing improvement journey. Check out our price optimization solutions to see what kind of improvement can be made to your bottom line. Be sure to view our webinar to learn the four profit levers distributors must master to optimize the profitability of your accounts.