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Costs and Savings of Six Sigma Programs: An Empirical Study

Since the early 1990s several empirical studies have been undertaken linking quality efforts such as total quality management (TQM) and Six Sigma to organizational performance. In the majority of these studies the organizational performance indicators typically include sales growth, operating income, profits, employee turnover, employee satisfaction, and customer satisfaction. Direct costs and savings of implementing quality management programs have seldom been studied, and many of these studies lack statistical rigor and objectivity. For example, sales growth could be affected by a number of other business environmental factors, so how can one isolate the effect of quality improvement programs on sales growth? Due to these limitations, the results of these studies are mixed, with some showing significant relationships between quality constructs and organizational performance measures and others not. This study also attempts to quantify the financial impact of Six Sigma programs. It differs, however, from previous studies in two ways. First, it evaluates the direct costs and direct operational savings of implementing Six Sigma programs, which, to the author's knowledge, was never done before. Second, it differs in terms of the research methodology used. The author undertook an extensive search of organizational annual reports and other published materials on Six Sigma organizations that provided the actual costs and savings related to implementing Six Sigma in 28 organizations. The main finding of this research is that effective implementation of Six Sigma led to an average savings of 1.7 percent of revenues over the period of implementation and an average return of more than $2 in direct savings for every dollar invested on Six Sigma. The findings of this research are useful for organizations implementing Six Sigma to have realistic expectations of the program and to monitor and benchmark the progress of their programs.