Six Sigma Method for evaluating Energy Conservation Portfolio

Introduction

Six Sigma is often promoted as framework for organizational excellence. The Six Sigma concept started around 1987 at Motorola manufacturing division, where millions of parts were made using the same standardized process repeatedly. Eventually Six Sigma evolved as a concept and currently is applied to other non-manufacturing processes. Today Six Sigma Methodology and tools are successfully used in many fields such as Services, Medical, Insurance, Call Centers, Government and Utilities. The following article presents a practical application of Sigma Levels to managing Energy Conservation Program Portfolio.

 

What is Six Sigma?

Six Sigma [6σ] is a methodology that improves any existing business process by constantly re-evaluating and optimizing the business processes or the program as a whole, while striving to achieve a virtually error free process running at the yield of 99.9997% or 3.4 defects per million opportunities. Six Sigma Methodology can be applied to Energy Conservation in Utilities Industry for evaluating the overall program performance in order to put in place measures that will increase its overall benefits.

What is Sigma [σ] Level ? It is a statistical term that measures how much a process varies from its target and can be used as measure of assessing the process performance.The opportunities for error are predefined customer specifications in order to satisfy the customer who wants a defect free product. DPMO is a measurable number that stands for Defects per Million opportunities for error. DPMO is calculated using the following equation:

In process improvement efforts, the process capability index (Cpk) is a statistical measure used to identify the ability of selected process to produce output within the specification limits. The following formula is used to calculate Cpk:

The following is the minimum recommended Process Capability index based on the type of process being examined:

Existing Process                   Cpk = 1.33

New Process                      Cpk =1.50

Existing critical parameter            Cpk=1.50

New critical parameter               Cpk=1.67

Six Sigma quality process            Cpk=2.00

 

A capable process normally falls between 4 to 5 Sigma Level. Some industries have standardized required Process Capability and demand capable processed to be put in place in order to produce quality product.

 Calculating the Sigma level for Energy Conservation Program Portfolio 

The Energy Conservation Program Portfolio (ECPP) Management can be viewed as a process managing a program portfolio that includes a number “Energy Conservation Projects” as its process output or product. Conservation Projects are different in nature, size, complexity, intended real users, and degrees of opportunities that must go right. Therefore, it appears very difficult or impossible to apply the simple concept of Sigma level in the case of the overall Program Portfolio management . The question is how to determine the set of standardized measures and specifications, or in other words the things that must go right in order to satisfy the program anticipated outcome. However, if we assume that the basic intent of the Energy Conservation Program Management is improving its processes and reducing the variation, then we can follow simple steps to apply Six Sigma Process Metrics that can be used as a performance assessment tool for the overall program capability performance. We can further use Plan–Do-Check-Act (PDCA) technique to drive process improvement for this process.

 Define: Define the process. The Energy Conservation Program Portfolio Management (ECPPM) Office is responsible for the management of energy conservation projects which may include initiative from simple energy efficient lighting replacement to very complex retrofits of large heavy equipment. Projects must be evaluated based on performance and financing in order to determine the overall program portfolio capability and benefits. The ECPPM Office has to ensure also that managed processes are repeatable and reproducible and at the end to meet their objectives.

Identify the Opportunities for Error. In order to be successful, an Energy Conservation Project as any project must satisfy “the vicious triangle” of Time, Cost, and Scope. In other words this means that a project is considered satisfactory completed when it is completed On-time, On-budget, and agreed Scope (or within the regulatory schedule requirements). Therefore, for our calculation of Sigma level, we can use these three values as measurable opportunities for error.

Identify the Tolerance Target. The target of the selected measures of opportunities for error must be defined in order to allow identifying defects. It is very unlikely that projects can be completed exactly on their defined target or exactly on-time, on budget, and on-scope. Therefore, realistically the Program Management Office will be satisfied if the projects are completed within a pre-established tolerance for each of these opportunities for error. So, for example, a target for the “On-Time” measure can be defined as “a project is satisfactory when it is completed within +/- 10% of its initial agreed time”. It is important to select a tolerance target that can be achieved and that is below the current process performance level.

Define the Defect. According to Taguchi, who is known as the father of Quality Engineering in Japan, any deviation from the target results in cost to society. Thus, for our purpose whether a process is producing below or above the target should be irrelevant to calculating Sigma level because at this phase of the process improvement we are only concerned with the variation. Therefore, the defect for our purpose is defined as “any measure above the target”. The measure then is calculated as follows:

Measure: Set up a Spreadsheet in Excel:

Set up a spreadsheet in Excel to capture the result of project performance and determine process Sigma calculations. Suppose we can start with 10 projects as shown in figure 1.

Figure 1- Sample Spreadsheet

Fill out the spreadsheet. Identify the projects and populate the spreadsheet. Suppose we have 10 projects that we have completed. We fill in the Planned and Actual values for each of the three Opportunities of Error. Observe the Process Sigma level of our process (figure 2)

Figure 2: Sample ECPPM Process Sigma Level

 

In this example, the current Process Sigma is 1.58 (Cpk 0.52) or 466,667 DPMO which is a long way from 6σ level of 3.4 defects per million opportunities. For conversion you can use the table on Figure 3 or various calculators.

Figure 3: Sigma Level Conversion Table

Analyse: Monitor the Process. As it can be seen at the start of this process the process Sigma is low; Management should put various plans in place to improve the process.

Improve and Control: Reduce the Tolerance Target. Once the desired level of Sigma is achieved, reduce the target tolerance and continue monitoring and improving the process. Process sigma is 2.78 (Cpk = 0.92)

Figure 4: Sample ECPPM Process Sigma Level

Conclusion

Six Sigma principles can be applied to most processes. This article provided a methodology for evaluation of the performance of an Energy Conservation Program Portfolio. Time, Budget, and Scope were selected as opportunities for error and target tolerance as a means of identifying defect was defined. Process Sigma is a way to benchmark and track the overall program optimization.

I will be happy to hear more about your performance evaluations of project portfolios and other analytic. Sample excel spreadsheet is available upon request.

 

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