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Six Sigma, Monte Carlo Simulation, and Kaizen for Outsourcing

  • June 11, 2008
  • By Marcia Gulesian
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@RISK provides a Function Properties window that can be used to enter a RiskSixSigma property function into a RiskOutput function, as shown in Figure 8. This window has a tab titled Six Sigma that has entries for the arguments to the RiskSixSigma function. Access the RiskOutput Function Properties window by clicking on the properties button in the @RISK Add Output window.

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Figure 2: Six Sigma Monte Carlo simulation in @RISK

After simulating, you see in Figure 2 that Vendor 1 has the lowest real unit cost. The simulated mean of each vendor's unit cost is displayed as well, by using a RiskMean function. Finally, Cpm, defined below in the Quantitative Methods Employed in Six Sigma section, is calculated for the component length of each vendor.

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Table 2: Key output cells used in the outsourcing decision

The difference between some of the values in Table 2 and the corresponding values in Figure 2 is explained by the fact that the results of different simulations, especially when a limited number of iterations are used, will vary. However, as suggested in Figure 3, you can set the number of iterations before you run a simulation. As the number of iterations in a given simulation is increased, the variation between different simulations will usually decrease.

Figure 3: One of several windows for real-time monitoring of a simulation

The variation in product from Vendor 1 is illustrated in Figure 4.

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Figure 4: Component length output for Vendor 1 described by Pert distribution functions

You now have information on cost and quality to form a more efficient ordering strategy. A next step might be to analyze how to further reduce costs; for example, by using a Kaizen event to reduce internal inspection time.


The word Kaizen comes from the Japanese words "Kai" meaning school and "Zen" meaning wisdom. It is a Japanese philosophy that focuses on continuous improvement throughout all aspects of life. When applied to the workplace, Kaizen activities continually improve all functions of a business from manufacturing to management and from the CEO to the assembly line workers. By improving the standardized activities and processes, Kaizen aims to eliminate waste. Kaizen was first implemented in several Japanese businesses during the country's recovery after World War II, including Toyota, and has since spread to businesses throughout the world.

Kaizen is based on making changes anywhere that improvements can be made. Western philosophy may be summarized as, "if it ain't broke, don't fix it." The Kaizen philosophy is to "do it better, make it better, and improve it even if it isn't broken, because if we don't, we can't compete with those who do."

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