Lean Six Sigma for Small and Medium Sized Enterprises

A Practical Guide

Jiju Antony, S. Vinodh, E. V. Gijo

• Publisher: CRC Press
• Year: 2017
• ISBN:
  9781315354972
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

It is no secret that Lean Six Sigma (LSS) is not as popular with small and medium-sized enterprises (SMEs) as it is with larger ones. However, many SMEs are suppliers to larger entities who are pushing for superior quality and world-class process efficiencies from suppliers.
Lean Six Sigma for Small and Medium Sized Enterprises: A Practical Guide provides a roadmap for the successful implementation and deployment of LSS in SMEs. It includes five real-world case studies that demonstrate how LSS tools have been successfully integrated into LSS methodology. Simplifying the terminology and methodology of LSS, this book makes the implementation process accessible.

• Supplies a general introduction to continuous improvement initiatives in SMEs
• Identifies the key phases in the introduction and development of LSS initiatives within an SME
• Details the most powerful LSS tools and techniques that can be used in an SME environment
• Provides tips on how to make the project selection process more successful

This book covers the fundamental challenges and common pitfalls that can be avoided with successful introduction and deployment of LSS in the context of SMEs. Systematically guiding you through the application of the Six Sigma methodology for problem solving, the book devotes separate chapters to the most appropriate tools and techniques that can be useful in each stage of the methodology.Keeping the required math and statistics to a minimum, this practical guide will help you to deploy LSS as your prime methodology for achieving and sustaining world-class efficiency and effectiveness of critical business processes.

chapter one

Introduction to small and medium sized enterprises (SMEs)

1.1 Introduction

Small and medium-scale enterprises (SMEs) contribute significantly to the global economy. SMEs form the backbone of developing countries and represent the rapidly growing sector. SMEs’ key role is to promote entrepreneurial focus and innovation, thereby ensuring competitiveness. SMEs enable several larger companies and have a significant contribution to the world economy. This chapter reviews the definition of SMEs and their economic share, analysing the characteristics of small firms and their comparison with large businesses.

1.2 Definition of SMEs

While formulating plans and policies for any organisation, it is of the utmost importance to know the nature and type of business you are dealing with. Businesses across the globe are categorised based upon their magnitudes with respect to their size, capacity, capital invested and workforce employed. On a broad scale, large companies are grouped as one type while all other businesses are grouped as another. Though all enterprises falling under the second group enjoy the same social status as per legal norms followed by most countries across the globe, their economic levels are substantially different. Based on the creation of better development plans for such organisations, they are further categorised based on their magnitudes as SMEs. Broad classification of enterprises has been further extended to include micro enterprises along with SMEs to form micro, small and medium enterprises (MSMEs), due to continuous research efforts in recent years into the nature and functioning of enterprises.

Various regional authorities have classified SMEs based on vital criteria such as size of the plant, capacity, workforce size, investment and returns, which play a major role in deciding on the amenities and services to be provided and enjoyed by the firm. Studies on SMEs in the past found these criteria to be the appropriate definition of SMEs.

The definition of SMEs, based on enterprise categories of the European Union (Classen et al. 2014), is based on factors such as headcount and turnover in euro (EUR). A firm with <10 headcount, <EUR 2 million in turnover is defined to be a micro enterprise, whereas a firm with 10–49 headcount, EUR 10–49 million in turnover is defined to be small enterprise, and a firm with 50–250 headcount, ≥EUR 50 million in turnover is defined to be a medium enterprise. These are active definitions for MSMEs followed by various European economies.

Alarape (2007) defined Nigerian SMEs as enterprises with labour size of 11–100 employees or a total cost of ≥50 million in Nigerian naira, which includes working capital and excludes land cost. Shehab (2008) defined Libyan SMEs as organisations having an employee count ranging from 50 to 250, making turnover in the range of 2–12 million in Libyan dinar (LYD) and LYD 1–8 million of turnover on the balance sheet. Du Toit et al. (2009) defined South African SMEs as enterprises which satisfy one or more of the following conditions: fewer than 200 employees, annual turnover of less than 64 million rand (ZAR), capital assets of less than ZAR 10 million and direct managerial involvement by owners.

There is more than just one definition for SMEs in Malaysia. The meanings based on several factors as described by Husin and Ibrahim (2014), which include SMEs based on sales turnover as published in the SME Performance Report and full-time employment as cited in the SME Annual Performance Report 2013/14, are that micro businesses are those having fewer than five employees in both the manufacturing sector, which contributes less than 250,000 Malaysian ringgit (MYR), and the services sector, which contributes less than MYR 200,000 to the nation’s economy. Similarly, small businesses are those having employee counts within the range of 5–50 in the manufacturing sector, which contributes in the range from MYR 250,000 to less than MYR 10 million, and 5–19 employees in the service sector, which contributes in the range from MYR 200,000 to less than MYR 1 million. Medium businesses are those having employee counts within the range of 51–150 in the manufacturing sector, which contributes in the range of MYR 10 million to MYR 25 million, and 20–50 employees in the services sector, which contributes about MYR 1 million to MYR 5 million.

Olusegun (2012) defines SMEs as firms with engagement in one form of business or another. The author states that definitions of SMEs differ across countries, industries, number of employees and asset value.

In the UK, the number of SMEs is estimated to be around 4.9 million. An enterprise in the UK context is termed as an SME if it has a turnover less than £25 million and the number of employees engaged is fewer than 250 (Maurya et al. 2015). About 99.3% of private sector businesses in the UK are SMEs with an annual turnover of £1.6 trillion that contribute 47% of the private sector turnover. In order to support SMEs, about 25% of the UK government’s funding goes directly to SMEs.

Grover and Suominen (2014) define SMEs in the US as firms with fewer than 500 employees. SMEs are considered to be the backbone of the US economy. In the US, there are around 28 million SMEs functioning, and they are responsible for 34% of US export revenues. About 99% of the private firms that operate in the US are SMEs, and they employ over 50% of private sector employees (Parnell et al. 2015). They produce around 65% of the net new jobs in the private sector. Around 543,000 new business firms are getting started each month in the US. Only 25% of the SMEs around the US sustain for more than 15 years, and nearly 70% of the SMEs fail to survive for more than 2 years (Williams 2014).

In Canada, there are around 1.2 million SMEs, and they represent 54% of jobs generated by private sector businesses. SMEs in Canada represent 54.3% of the economic output generated by the business sector (Sui and Baum 2014). About 98.1% of Canadian SMEs have fewer than 100 employees, and about 55% of SMEs employ fewer than four employees.

In Australia, SMEs are defined as any business or company with revenues less than 20 million Australian dollars (Chong 2014). There are over 1.2 million SMEs in Australia, and they contribute 96% of all businesses and generate nearly 33% of the country’s gross domestic product (GDP). About 63% of total employees engaged in the Australian private sector are from SMEs. The annual turnover of SMEs contributes to 9% of the Commonwealth revenue in Australia.

In South Africa, companies with fewer than 200 employees are termed as SMEs. They contribute to 91% of the formalised business and produce about 60% of the labour workforce. Their total economy contributes nearly 34% of GDP.

1.3 SMEs’ contribution to world economy

SMEs account for 90% of businesses across the globe and 50%–60% in terms of employment (Jenkins 2004; Sannajust 2014). SMEs are major contributors to the social and economic development of Poland, since Poland has SMEs employing over 6 million people and generating 50% of its GDP. Of the total operating companies in Poland, 99.8% are SMEs (Walczak and Voss 2013). Of Dutch firms, 70.7% are small sized (10–49 employees), and 29.3% of firms are medium sized (50–250 employees) (Kraus et al. 2012).

In the beginning of 2014, 5.2 million small businesses accounted for 48% (12.1 million) of the UK private sector. The cumulative annual turnover of small businesses is £1.2 trillion, representing 33% of private sector turnover. In the beginning of 2014, 31,000 medium-sized businesses existed. These businesses contributed an annual turnover of £480 billion and employed 3.1 million people. In the context of the UK private sector, 5.2 million SMEs accounted for 60% (15.2 million). The cumulative annual turnover of SMEs is £1.6 trillion, representing 47% of turnover in the private sector (White 2014).

In the European Union context, SMEs are economically significant, with 99% of an estimated 23 million enterprises defined as SMEs. European SMEs generate 65 million jobs. Among those all are small enterprises, with 23 million companies (96.8%) which have fewer than 10 staff members and only 75,000 enterprises which employ more than 250 employees (Wach 2014). In the context of the European private sector, about two-thirds of jobs pertain to SMEs and generate 59% of added value.

In the world scenario, China has the highest number of SMEs in the world with 50 million. India is in second place with 48 million SMEs. SMEs in India contribute about 40% of its employment, 45% of its manufacturing output and 17% of the country’s GDP (Malini 2013). SMEs are a vital contribution to the national economy of Malaysia. SMEs serve as a technology facilitator to industries and encompass 96.1% of total Malaysian firms (Hilmi and Ramayah 2009).

SMEs represent the backbone of the US economy. They form about 99% of all firms in the US, and 50% of the country’s private sector employees are employed by SMEs. SMEs generate 65% of net new jobs in the private sector. They contribute over half of US non-farm GDP and form 98% of all US exports. SMEs contribute to 34% of US export revenue (Grover and Suominen 2014).

Over the last 12 years, the Mexican government has strengthened SMEs and its entrepreneurship policy framework and budget. This move has resulted in extensive improvements in the business environment for SMEs and entrepreneurship in Mexico. Mexico has an expanding SME sector. They account for 99.8% of enterprises and 72.3% of employment in the country. Micro enterprises (employing fewer than 10 people) of Mexico account for 96.1% of all businesses (OECD 2013). Brazil presently has around 6.3 million SMEs, and its annual operational revenue is US $39 million. SMEs in Brazil contribute 20% to the country’s GDP and create around 47,000 new jobs, representing 52% of the formal jobs (Cravo et al. 2012).

Indonesian SMEs represent more than 90% of all firms external to the agricultural sector and also form the highest source of employment (Tambunan 2007). SMEs in Russia are crucial for its socio-economic prosperity, growth, employment and technical innovations. There are six SMEs per thousand people in Russia, 45 in the EU, 49.6 in Japan and 74.2 in the US (Zhuplev 2009).

India has nearly 36 million units of SMEs, which account for almost 50% of industrial output and 45% of the country’s total exports (Nayak et al. 2014). Indian SMEs contribute about 8% to the country’s present GDP and have significant opportunities to facilitate industrial growth across India. The Micro, Small and Medium Enterprises Development Act was framed by the government of India to address policy issues that affect the financial performance of SMEs and thereby enhance their competitiveness. As per the new Micro, Small and Medium Enterprises Development Act 2006, the number of Indian SMEs ranges from 7.8 million to 13 million. The total share in GDP of SMEs in India is more than 80%, and more than 90% of all the enterprises are SMEs.

1.4 Characteristics of SMEs

SMEs are being classified based on their size and structure, which includes employee headcount, assets and financial turnover that is below a particular limit. SMEs are the key drivers of growth and are important for efficient and competitive markets to facilitate job opportunities (Beck and Demirguc-Kunt 2006). The difference between an SME and a large enterprise originates from how the business entity is conceptualised and managed. SMEs might have a flat hierarchy and an integrated set of business functions, whereas large enterprises have a matrix organisation and a set of business units which focus on specific market segments and business domains. Business ownership patterns are different between the two entities (Hoffmann and Schlosser 2001). SMEs must evolve the focus of their enterprises in a manner compatible with the phases of the industries they serve. The roles of technology evolve in a similar manner (Hallberg 2000).

1.4.1 Low start-up costs

Start-up costs for small-scale businesses are normally lower, pertaining to specific business models and the kind of products or services provided (Blair and Marcum 2015). This contrasts with larger businesses requiring huge investments during the start-up stage.

1.4.2 Portability

A small-scale business is normally portable, enabling set-up and tear-down (Simatele 2014). Small-scale businesses also require an avenue to accept payments such as small credit card terminals.

1.4.3 Leadership

An SME’s success often relies on its owner’s leadership skills, characterised by unity of ownership, management, liability and risk (Aslan et al. 2011). Due to flat organisational structure and limited resources, the ownership and management of day-to-day operational activities rests with the owner/leader in SMEs compared to larger organisations where leadership is shared, dispersed and institutionalised.

1.4.4 Management structure

The management in small businesses is mostly through direct supervision or supervision by owner(s)/manager(s) as compared to delegation or decentralisation of responsibilities to employees as witnessed in large firms. Understanding the management of small firms is an essential component in perceiving the relationship among ownership and decision-making, managerial styles, organisational structure and culture and business development pattern (Walczak ...