April 2006 | Case Studies | Casebook

With Six Sigma, Hershey's Kisses Errors Goodbye

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To sweeten operations at its sales fulfillment warehouse, Hershey's turns to Six Sigma. Using the rigorous process analysis methodology, the facility improves productivity and throughput while cutting labor costs.

What does an organizational theory with mathematical roots have to do with chocolate? Plenty, if the theory is Six Sigma, and the chocolate company is Hershey's.

In its continual quest for process improvement, the manufacturer of such products as Hershey's Kisses, Reese's Peanut Butter Cups, and KitKat joined the small, but growing rank of companies applying the Six Sigma methodology to logistics.

While long popular in manufacturing, Six Sigma, which uses data and statistical analysis to identify defects in a process or product, is still fairly new in logistics and supply chain management.

The methodology of Six Sigma stems from the Greek letter Sigma's use in statistics—it indicates the standard deviation from an ideal level of operation. At each level of sigma, the standard deviation decreases. Companies embracing Six Sigma aim for a process improvement goal of near perfection: 3.4 defects per million opportunities, or, literally, six sigma.

Six Sigma's benefits for logistics operations include process improvement, cost reduction, and increased operational efficiency. Ultimately, it helps companies take a long, hard, rational look at their supply chain processes, determine root causes for problems, and find out what—besides blindly applying technology—will lead to process improvement, says Tim Konrad, senior vice president, Six Sigma, for GENCO, a Pittsburgh-based third-party logistics provider.

"Technology applied to a bad process just makes more bad things faster," Konrad explains. "If companies improve the process, then they can apply technology effectively and achieve the desired results."

Biting Into Six Sigma

In partnership with GENCO, Hershey's underwent a Six Sigma implementation to root out errors and increase productivity and throughput at its Lebanon, Pa., sales fulfillment warehouse. The DC supports the company's sales and marketing department, sending samples of chocolates, as well as sales and marketing materials, to nearly 1,400 field sales representatives around the country.

Hershey's was already working with GENCO to manage two of its five U.S. finished goods warehouses, so turning to the 3PL to help improve sales fulfillment operations was a natural fit.

"We had a relationship with GENCO for finished goods, so we looked at its sales fulfillment solution when we decided to outsource," says Andy Bowman, manager, sales fulfillment and administrative services for Hershey's.

GENCO and Hershey's collaborated to develop a web ordering system sales reps use to order samples and merchandising material, as well as a software solution for inventory management and warehousing. GENCO handles distribution, order processing, and customer service, ensuring that the Hershey's reps have everything they need to meet with clients such as Safeway, Albertson's, CVS, and Wal-Mart, or to present at trade shows and conferences.

In all, GENCO helps Hershey's fulfill about 4,000 shipments per month through the Lebanon DC.

Though the fulfillment process was effective, Bowman was looking to further improve the DC's throughput and efficiency. GENCO had achieved success with other clients using Six Sigma and felt the sales fulfillment group could benefit from the rigorous process analysis.

"This Hershey's division had an established workforce, and was open to bringing new ideas into the operation to gain efficiencies, making it a great fit for Six Sigma," says Gary Siefert, vice president, Six Sigma, who headed up the project for GENCO.

Though Six Sigma is a high-end management theory, the Hershey's/GENCO project wasn't limited to suit-and-tie employees. In fact, hourly warehouse workers in the Lebanon DC were central to the project.

"Facility managers tell you the way processes are supposed to work, but employees on the floor tell you the way processes actually work," says Siefert.

After collecting data on the Lebanon DC's facility costs, margin, accuracy, and cycle counts, among other metrics, GENCO developed a "critical-to-satisfaction" tree detailing the elements crucial for customer satisfaction—including cost, quality, and delivery—and what affects them. Then the team drew up a process map of all functions within the four walls.

"We realized workers were performing steps they thought were correct but weren't being done exactly the right way," says Siefert.

This is often the case in warehouses, as layers of processes and requirements put into place by successive managers are absorbed as part of the routine, but are not always necessary.

"Companies gain huge improvements simply by taking unnecessary steps out of processes," Konrad says.

To dig deeper into the DC's fulfillment process, Siefert and his team created a value stream map for each step. The goal was to identify steps that added value, and root out non-value-added tasks that could be eliminated without harming the overall process. The value-stream map also outlined how long it took workers to complete each step, and what it cost.

Next, GENCO put together a fishbone summary of every function in the building, calculating the number of defects per million opportunities (DPMO) for each.

For throughput, for example, Hershey's had a DPMO target number, measured by lines shipped per hour, to achieve each day. "Any day we did not hit that number was considered a process defect," explains Siefert.

"From there, we built a cause-and- effects matrix, using input from the value stream mapping and fishbone summaries to determine potential causes of process defects," he continues. "The key is to look for variability. With Six Sigma, the goal is to eliminate variability and make the process stable."

They also looked at failure occurrence rates and reasons, as well as potential solutions, using a Failure Mode Effects Analysis.

As a result of the Six Sigma process, Hershey's ultimately honed in on two components of the sales fulfillment center it could improve: processes and methodologies. To increase the DC's throughput and productivity, it would need to make changes to one or both components. Hershey's and its 3PL decided to first tackle methodology.

GENCO recommended using a new robotics technology to increase accuracy and reduce time for picking and packing as well as replenishment and putaway. The solution, from Kiva Systems, Woburn, Mass., combines mobile robotic drive units with a software system that outputs control instructions.

"The order picker stays in one location while the drive units move through the facility selecting products, then returning them to the picker," says Bowman. "The system also works for putaway when replenishment orders come in."

Because employees don't have to leave their stations, the Kiva System helps reduce order cycle times and increase labor productivity. Though it worked well, producing an impressive 89-percent productivity increase during the four-month pilot program, Bowman's warehouse ultimately does not have the volume necessary to achieve meaningful ROI from the Kiva System.

"The operation, with only a few people picking orders in one shift, simply didn't pay for the cost of the solution," says Bowman.

Armed with the data they accumulated, however, Hershey's and GENCO went back to the drawing board to focus on an alternate to technology for improving worker processes and productivity.

"We started a manual labor management system. DC workers signed in and out of each job function, so we could determine how long it took to complete a task," says Siefert. They realized employees did not always have enough warehouse work to keep them busy, and were sometimes reassigned to customer service or cleaning chores.

Seeing they were wasting productive time, Hershey's scaled back the Lebanon warehouse staff by 25 percent, or 1.5 full-time employees, a substantial reduction for a six-person team. The move saves Hershey's $45,000 per year in labor costs.

In addition, the workload is now spread more evenly among existing workers, and the company has a clear perspective on the optimal way to perform tasks as well as the time it takes to complete them.

Though using such a labor- and time-intensive process for a small organization is unusual, both Bowman and Siefert say it was effort well spent. In addition to saving on labor costs, the rigorous process analysis and data collection paid off when Hershey's recently decided to install a new warehouse management system (WMS).

"We used the information we collected in the Six Sigma initiative to help with the design and functionality of the new WMS," Bowman says.

Hershey's also plans to apply Six Sigma to other areas of the company.

"This project proves Six Sigma can bring about opportunities even in the smallest and most efficient operations," says Siefert. "If Hershey's can cut costs in a facility with only a few workers, imagine what it can achieve in an operation with 300 people."

Sounds like a sweet recipe for success.

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