Shaw Industries Six Sigma and Quality Improvement Strategy

Introduction and Industry Context

Competing in a mature, contracting industry that shrank 3.7% in 2008 with continued contraction of industry sales in 2009 (Stewart, 2009), Shaw Industries — a subsidiary of Berkshire Hathaway — relies on quality improvement, process improvement, lean manufacturing, and supplier management to remain profitable. According to the latest quarterly financial statement (Form 10-Q) that Berkshire Hathaway filed with the Securities and Exchange Commission on June 30, 2009, the company generated $2 billion in revenues, reporting Earnings before Interest and Taxes of $85 million. Year-over-year declines for Shaw Industries are currently at 21%, with a 23% reduction in revenues from Q1 2008 to Q1 2009. Berkshire Hathaway claims in the latest 10-Q that the ongoing global recession — specifically the slowdown in residential real estate activity and tight credit — has severely impacted Shaw Industries' performance. The 10-Q dated June 30, 2009 also states that there have been plant closures to reduce costs.

To combat these challenges, the company is investing heavily in Six Sigma-based quality improvement programs and currently employs approximately 320 Six Sigma blackbelts and greenbelts on staff. The company has also adopted lean manufacturing core concepts, including benchmarking process performance (Ghosh, 1999), and has intensive efforts underway to streamline supply chain performance. The objective of integrating Six Sigma programs with supply chain management strategies is to significantly reduce operating expenses by increasing product and process quality while alleviating unnecessary costs. Shaw Industries has been effective in the integration of Six Sigma, supply chain management, and reverse logistics processes as part of their intensive commitment to sustainability as well (Rondinelli & Berry, 1998). The adoption of Six Sigma methodologies, supply chain integration, supplier quality management, product configuration, and production management as part of their lean manufacturing strategies is generating the cost reductions the company requires.

Organizational Structure and Culture

Shaw Industries is a $4 billion manufacturer of carpet, carpet fiber, hardwood, laminate, ceramic tile, and flooring systems for businesses. Operating over 90 production plants that produce more than 3,000 combinations, styles, and textures of surface flooring — many of which are built to order for specific business clients — the company must contend with exceptionally complex build-to-order process workflows. Shaw Industries also markets just over 30 different brands of carpets and flooring systems, which further underscores the need for intensive supply chain management, coordination, and supplier quality audits and programs. Over the last decade, the company has worked aggressively to adopt lean manufacturing strategies to minimize the constraints imposed by wide variations in product quality. The industry in which they compete is known for its commoditization, and quality has emerged as the most potent differentiator over companies that rush carpet or flooring products to market only to have them fail at customers' installations.

Shaw Industries derives the majority of its revenue through indirect channels, comprised of approximately 54,000 retailers, distributors, and dealers throughout North America (Stewart, 2009). As of the last fiscal quarter of 2009, the company employs 30,000 people globally. Berkshire Hathaway has chosen in its 10-Qs filed with the Securities and Exchange Commission (SEC) to provide company-specific financial performance data and reporting relationships. The organizational chart provides an overview of the top management structure of the company. There are roles specifically dedicated to hard surfaces — the product area that generates the majority of the firm's revenue — and a shared leadership model in which Rand Merritt, President, and Vance Bell, CEO, co-own the leadership of the company. Operations and Logistics are senior-level positions, as they are crucial for the company's value chain to continually improve in terms of performance and cost reduction. Analyzing Shaw Industries' organizational structure illustrates a deliberate strategy of ensuring that critical roles for managing the value chain are integral to the company's strategic decision-making process. The organizational structure at Shaw Industries is known for being flat with wider spans of authority (Rondinelli & Berry, 1998).

A strategic view of the carpet and mill value chain highlights several areas of opportunity. From an enterprise compliance and quality management (ECQM) standpoint, this value chain presents many areas for cost reduction and performance improvement. Operational Compliance, Sourcing and Procurement, and Supply Chain Planning are all areas where greater quality management can deliver rapid cost reductions and greater process efficiencies.

The intersection of the organizational structure and the requirements of the industry value chain has created an organizational culture at Shaw Industries that is heavily reliant on key performance indicators (KPIs) and metrics of performance. The culture is one of exceptional accountability and measurement of results, illustrated by the high value the company places on Six Sigma blackbelts as change agents throughout the organization (Phillips-Donaldson, 2004).

Six Sigma and Supply Chain Quality Management

The role of the Six Sigma blackbelts and greenbelts is to apply the DMAIC methodology to areas where constraints to supply chain quality management have become the most acute and difficult to control (Mukhopadhyay & Ray, 2006). These supply chain processes include consistency of supplier audit analysis, the development of benchmarks for evaluating supplier adherence to audit requirements, and the establishment of specific targets for quality management. Also included is the use of DMAIC-based methodologies for refining the Non-Compliance/Corrective Action (NC/CA) and Corrective Action/Preventative Action (CAPA) quality audit workflows used in evaluating and continually managing suppliers to a high level of performance.

For Shaw Industries, quality is speed. The more effectively the company can manage to quality levels that are free of aberrant or high levels of variation, the more profitable each financial period can be. The NC/CA and CAPA processes are also used to manage the DMAIC-based Six Sigma strategies aimed at increasing overall audit accuracy. The use of supplier audit data is critically important for the redefining of mill machining and the calibration of tools as well.

With a strong culture focused on measurable performance and the centralization of the PMO function, there still exists the significant challenge of potentially discontinuing product lines as the recession's effects on sales continue. The 21% drop in sales is the primary catalyst for considering the discontinuation of the lowest-performing product lines and eliminating their associated expenses. This decision, however, has many implications for how suppliers are negotiated with regarding volume discounts, delivery schedules, and relative priority on allocated products. Adding to the complexity is the need to create a more stable set of quality management, audit, and compliance systems and processes that can scale with the company over time. This is why the use of Six Sigma, lean manufacturing, the adoption of an ERP system, and the development of entirely new workflows for NC/CA and CAPA are all currently underway. The need for compliance and the alleviation of potential tariffs when entering new global markets is also a concern.

Shaw Industries is investing heavily in quality management as a means to continually reduce operating expenses over time, in addition to significantly increasing yield optimization of their assets and production processes. The company also has the objective of achieving greater cost reductions through quality management's contribution to lean manufacturing than through the savings generated by closing a plant. Strategically, Shaw Industries has chosen to invest in making their quality management, lean manufacturing, and information systems as efficient as possible in order to avoid the need to reduce the number of plants they operate or the product lines they produce.

Conclusion

Yield optimization attained through the use of Six Sigma methodologies in conjunction with lean manufacturing techniques to streamline the production process delivers financial results over the long term. Validation and verification of the effects of ATP accuracy on customer satisfaction in the process-based and mill-based production industries has not yet been completed. Empirical studies from the high-technology industry, however, indicate that the greater the level of ATP accuracy and downstream coordination with installation and integration teams, the higher the level of customer satisfaction.

For process-based and mill-based production industries, yield optimization, lean manufacturing gains through supplier coordination to enable ATP accuracy, and cost reduction through Six Sigma remain the primary priorities. Six Sigma and its use in attaining lean manufacturing objectives tactically is most effectively realized through the integration of these two methodologies — especially in industries that can become commodity-driven (Shah, Chandrasekaran, & Linderman, 2008). Shaw Industries' sustained investment in these integrated strategies positions the company to weather industry contraction while preserving both its operational capacity and its competitive differentiation through quality.