Lean Thinking and Six Sigma in Banking Sector - Barclay Bank - Case Study Example

Lean Thinking and Six Sigma in banking Sector Name Professor Institution Course Date Lean Thinking and Six Sigma in banking Sector Introduction In growing competitive and complex global market, organizations are rethinking for new ways of improving their business strategies so as to remain advantageous. In an aim to improve from scientific management, the emergence of lean thinking and Six Sigma has drawn the interest of managers who have adopted in the recent years (Antony et al., 2007, p.295). Amongst the financial service institutions, the concept of adopting Six Sigma is turning out to be more popular. This concept is in particular true in the European nations, particularly in the UK. However, several financial institutions especially banks have had problems in the implementation of lean thinking and Six Sigma within those organizations (Augusto, Cauchick, de Carvalho 2014, p.64). However, these institutions are trying to reduce barriers in the implementation of the two approaches in the banking sector. Based on the information, this paper several literature reviews to discuss the history of lean thinking and Six Sigma and provide benefits of these approaches. The paper will also identify ways of reducing barriers of implementation lean thinking and Six sigma in the UK banking sector. The History and benefits of Lean thinking in banking sector In the 1940’s, the Toyota Motors founders Taiichi Ohni and Eiji Toyoda defined the company production approach of Toyota production system (TPS) and this is where Lean thinking emerged (Chakravorty, 2009, p.4). The lean thinking application has made an important effect both in the academic and business circles in the last few decades. This approach has been promoted by a fast spread into several other industries beyond the car sector. The major goal of Lean thinking is the eradication of the three renowned M’s. They include Muda (waste), Muri (overburden) and Mura (unevenness) (Chakravorty 2009, p.6). In this perspective, they are described as activities which do not add value to customers. Therefore, lean thinking is described as a logical waste eradication from each value stream, by a group endeavor. According to Maleyeff (2006, p.675) the “value stream” is described as a range of activities that make up the process. All endeavors have to be done in such a manner that every activity provides value to the client. Benefits of lean thinking Some of the banks in the UK that have adopted lean thinking are HSBC and Barclays among others. Heckl, Moormann & Rosemann (2010, p.437) think that Lean Thinking adoption offers numerous benefits to these banks, as productivity increase, cost reduction, lead time reduction, quality enhancement, supplies reduction, customer satisfaction enhancement and flexibility. Arnheiter & Maleyeff (2005, p.6) claim that lean thinking has five main principles which enable them to attain Lean business model. The principles include value, value stream, pull, perfection and flow. As mentioned earlier, Lean thinking in the recent times have been used in the financial service industry to create lean principles, entrench lean culture and communication and to improve service in general (Davison & Al-Shaghana 2007, p.249). Recent publications have shown devotion to the use lean thinking in the financial sectors. Antony (2008, p.294) claims that this trend is likely to grow considerably in the future especially in the UK given the significance of this sector to the economy of the country. The quality and image in the banking sector perspective is a strategic factor because it enables gaining competitive edge, cost reductions and improvement of market profits and share (Kumar & Antony 2008, p.1154). In the consequences of the global financial crisis, several banks in the UK have been requiring to cut their cost-to-income ratios by drastically enhancing their operational models in so as to maintain the deleveraging process and create capital buffers as necessitated by their financial regulators. Bearing that objective in their minds, cost reduction programs have been integrated across the whole UK banking industry (Kumar & Antony 2008,p.1156). Departmental budgets have been cut, the back-offices are being transferred and jobs are being shed win the UK, particularly in the investment banking. De Koning, Does & Bisgaard (2008a, p.7) argue that In the meantime, banks are experiencing more demanding clientele, competition of the new low-cost market players and low customer loyalty. In short, banks must deliver high level tailored customer service in various channels whilst increasing operational efficiency to cut costs. To handle these two main operational issues, numerous UK banks are looking for operational brilliance projects instigated by the Lean thinking methodology (Maleyeff 2006, p.679). However, many have been skepticism whether the Lean methodology and principles, which emerged from manufacturing world, would apply to the banking sector industries. Since banks are process-rigorous with intricate flows of the information across the departments, Lean provides a massive potential for the operational progress by doing way with process wastes. Slack, Chambers & Johnston (2007) believe that Rework owing to faults in the processes, redundant confirmation points, physical spreading of the information, procedure loopbacks, information storage and provision of services the customers does not need waste of time. By doing away with these wastes additional time can be used on process stages which create value for their customers. Derived from the lean approach, most UK banks have begun lean programs to boost their operations performance (Kumar & Antony 2008, p.1159). One $60 billion, UK based bank recognized how well Lean thinking is used in the financial services. With over 8,000 employees, consisting of 1,600 employees in the bank’s back office, the institution developed models so as to estimate the employee’s efficiency (Kumar & Antony 2008, p.1156). To put this lean thinking into consideration, the models had earlier shown considerable waste in the back office of the banks. Kumar & Antony (2008, p.1161) claim that evaluation of just one area of the back office revealed a 10% disparity between payroll records and real productivity by the department. The research found out that in one bank in the United Kingdom, employees were being paid for 40 hours but only worked for 36 hours (Kumar & Antony 2008, p.1163). Furthermore, there were other areas within the back office of that bank which had no information on where employees were spending their time. Ways of reducing barriers of implementation lean thinking and Six sigma in banking sector Some of the ways to reduce barriers of implementation lean thinking and Six sigma in banking sector including creating a disciplined employees, building outsourcing lean thinking and Six sigma services, creating a customer centered approach and creating a clear communication channel. The UK banks now create a disciplined employees management strategy by the use Lean since it’s important in improving the value it has been offering to the customers via cost reductions and better customer service (Wiele, Iwaarden & Power 2010, p.1054). Communication is one of the most critical steps in the change management. the communication channel is for articulating the objectives. The UK banks require having common objective and set of anticipations of value which the lean initiative can deliver. Wiele, Iwaarden & Power (2010, p.1056) state that coaching and teaching Lean techniques to staff is a required investment to maintain the Lean culture. The idea of “internal client” has also to be incorporated for non-client-facing departments. This strategy ensures a customer-centered attitude at all levels of the bank. Managers using lean approach have to employ a lot of time on the banking hall to see and examine improvement concepts (Byrne, Lubowe & Blitz 2007, p.). Most banks in the UK which implement lean and Six sigma outsourced former car engineers to leverage experience in the Lean production approaches in the operations areas of the banks (Brewer & Eighme 2005, p.27). The Production Management Engineering (PME) team composing of bank executives and engineers who were bought onboard began their work with Activity-Based Costing (ABC) and to figure out the inefficiencies that were reported by early models. ABC establishes exactly what each widget costs to include in the bank's situation, what each activity in a procedure costs with regards full-time employee hours or payroll sterling pounds (Brewer & Eighme 2005, p.28). In order to collect the data crucial to Activity-Based Costing, the UK bank implements an all-inclusive labor force management solution comprising of new processes and software. This includes touch-screen kiosks in which staff checks in and out on a daily basis to gather employee’s performance and then process data. Before the integration of the kiosk, employees clocked in and out however the system had no centralized accounting to record what the employees did in the office (Brewer & Eighme 2005, p.31). By integrating this to the bank production systems, the effect reflected an exact capacity of employees’ productivity and efficiency of the overall process. Together with payroll system data, it offered an insight into the costing, personal and departmental production and capacity and performance (Augusto, Cauchick, de Carvalho 2014, p.64). Activity-Based Costing has become the key to the success which ensued. With what most of UK banks currently call the "single source of truth," projecting modules to establish the demands for labor, programmed scheduling algorithms to regulate fit, analytics to enhance visibility, dashboard reporting and the PME can now recognize changes which resulted to considerable perfections in efficiency (Bertels 2008). The introduction of scheduling systems, part of employees management solution, regulate workload fit through closely coupling individual employee profiles with the completed work, eliminating major waste. The schedules guide the staff to particular activities each time they have checked in, even recommending proper break times. Achanga et al. (2006, p.461)claim that Most UK banks are now able to instantly recover the 10% variance between actual work and payroll and eventually optimized employees’ efficiency in their operation by 30 percent on average. In other areas where more staff was required, the bank management had the instruments with which to validate their increases. Experts claim that more than simply cut costs, the UK bank employed Lean principles so as to hire the right individuals, at the right times and to provide positive results (Antony et al. 2007,p 299). Consequently, customer value satisfaction increases too. For the banks, Lean thinking just worked. Augusto, Cauchick, de Carvalho (2014, p.65) contend that by converting Lean principles and methodologies from initial manufacturing lexicon to a back office, the banks can build a powerful system to recognize waste where it is present and to compute the cost of conducting business. The three crucial element of a Lean production initiative are an initiative office which can train and position Lean practices within the bank, the consistent and consolidate activity data, and an automatic scheduling solution which leverages the given data. ABC is s significant first step with no "single source of truth," enhancements cannot be created with any confidence as to the result (Augusto, Cauchick, de Carvalho 2014, p.66). Eventually, Lean production results to a win-win situation, having the consumer getting a high-quality product, the bank employees gaining from the high performance and objective assessments and bank in general performing better and proving service at a low cost. The concentration of Lean thinking depends on building a client-based organization (Byrne, Lubowe, & Blitz,2007, p.8). Most UK banks have often struggled to provide excellent customer service because of processes which are not tailored to the need of the customers. Furthermore, it is mainly a negative discernment of the banking sector which affects customer satisfaction. Heckl, Moormann & Rosemann (2010, p.445) postulates that Lean programs are growing fast in banking, industry yet their initiatives are still much concentrated on realizing operational excellence. A concentration on the intellectual facets of Lean thinking would make sure, that the whole organization is coordinating in enhancing customer service, but more significantly, all staff will be encouraged to deliver constantly quality customer service (Nonthaleerak & Hendry 2006, p.106) Lean is mainly perceived and implemented as a methodology in improving operations whilst the cultural facets of Lean are frequently forgotten. Thus very few banks can be in fact referred to as “Lean Enterprises” (Maleyeff 2006, p.681). The spirit of Lean culture is that all employees, on all levels, attempting to enhance his operational environment and techniques on routine basis. Frequently, a project group will guide the lean initiative and will formulate a planned strategy to increase performance to a set target. Six sigma The emergence of Six sigma as a standard of measurement date back to Frederick Gauss, who invented the idea of a normal distribution or a normal curve. Walter Shewhart formulated three sigma to b used as a production variation measurement (Chakravorty 2009, p.3). According to Schroeder et al. (2008, p.537) this was sufficient for the most manufacturing units until early 1980s when Motorola Company introduced the Six sigma. Motorola transformed the scope and application of the quality systems. In this era, the basic components of six sigma cannot be considered new. Failure mode effect evaluation, Statistical processes control, gage reproducibility and repeatability research, and other methodologies and tools have been used for quite some time (Antony et al 2007, p.297). Six sigma provides a framework which connects these essential quality methodologies with higher-level support from the management (Achanga, Shehab, Roy, Nelder 2006, p.465). In fact, Motorola introduce Six Sigma in 1986 and was originally implemented by companies within the manufacturing industry as well as prominent cases like the Six Sigma adoption at General Electric in the 1990s (Chakravorty, 2009,,p.4). From then, it has spread greatly towards 21st century and now used in service sector including banking industry. However, there are some disparities which are taken into consideration when this approach is moved to the banking sector. Several categorization schemes for this tool exists which is mostly based on define, analyze, measure, improve and control (DMAIC) method. DMAIC is normally employed for the existing processes in the banking sector. This methodology not only uses six sigma tools, but also integrates other concepts like financial analysis and the project scheduling development (Chakravorty 2009, p.5). In consequence of the global financial crisis of 2008, most financial institutions made major crisis cutbacks so as to maintain afloat in those unstable times (Heckl, Moormann, J & Rosemann 2010, p.451). Few years later, the same financial institutions realize they required a more broad and strategic plans to handle the business certainty which merged after the crisis. Competitive pressure prompts UK banks to permanently enhance their business process. Heckl, D Moormann & Rosemann (2010, p.457) claim recent instability (subprime crisis, unreliable fluctuations at the stock exchanges and trading scandals among others), new prerequisites set by the regulatory bodies and ever increasing customer needs are not the reason to remain to costly, error-prone and opaque practices. Instead, the banking sector is ever more committed to the concept of straight by means of processing based on standardized, automated and efficient processes. Even though numerous banks and insurers still depend on a large coverage on the legacy IT systems, the concept of process-oriented management together with the emerging technologies like service-based architectures, business intelligence and workflow management systems (Nonthaleerak, P & Hendry 2006, p.112). This reality has left organizations undergoing tough challenges, like the declining profit margins, increased competition and great consumer awareness. Categorically out of the comfort zones, the UK banks have been under pressure to formulate and uphold all-inclusive organizational practices entailing extensive adjustments to the manner in which they provide services. Based on an updated study carried out amongst managers of UK banks and some financial institutions, 43% of participants consider that bank managers ought to devote the their two years to programs for enhancing operational effectiveness, cutting costs and examining their organizational and operative models (Kumar & Antony 2008, p.1161). Large American banks like HSBC, Barclays, Standard Chartered, Barclays, and Co-operative Bank are recognized for their comprehensive use of Six Sigma (Kumar, M & Antony, 2008, p.1156). Scores of processes in the banking industry can be conducted in a standardized manner, particularly in the area of processing customer-based outputs such as credit cards or payment transactions, processes applying self service apparatus like the ATMs, loan financial sectors as insurance industry for application handling, claims processing and contract issuing. Lean Six Sigma Recent research on Six Sigma has emphasized on the connection between lean production and Six Sigma (Byrne, Lubowe & Blitz 2007, p.2) Lean methodologies and Six Sigma have both developed over time as part of the ongoing transformation of quality, breakthrough performance and excellence. The researchers made a conclusion that Six Sigma and lean complement one another and embody a great framework for reduce waste and disparity when applied together. The concept of Lean Six Sigma” is a vital improvement method which increases shareholder value and enhances customer satisfaction, quality, cost, invested capital and process speed by decreasing variation and eradicating waste in the banks (Byrne, Lubowe & Blitz, 2007, p.7). Motorola developed the word Six Sigma since it in place to increase the standards for progress and Lean came as results of Toyota Production System. The Lean Six Sigma (LSS) is one tool that is implemented by banks to assist boost operational effectiveness and efficiency (Nonthaleerak & Hendry, 2006, p.121), by incorporating the strengths of Six Sigma and lean thinking. Since lean approach does not have the tools to decrease variation and offer statistical regulation and Six Sigma does not try to create a connection between speed and quality, the use of Lean Six Sigma presents practical solutions which can result to positive efficiency and outstanding quality in the banking sector (De Koning, Does & Bisgaard,2008a, p.12). To stay efficient, agile and competitive banks in services requires, gradually more constant investing in innovation. The advantages of this methodology comprise of the capital investment, improvements in the service quality and client satisfaction. According to Brewer & Eighme (2005, p.28) it is regarded an efficient and accurate methodology to sustain the growth of integrated quality management system in Banks so as to execute virtually free of faults and waste of time. Banking Services offered to customers like loaning, mortgage, foreign exchange and any other are by nature frequently time bound with regards to time value of money and the benefits the customer would get (Brewer & Eighme 2005, p.31. In banking institutions, lean emerges as a methodology of reducing waste with reference to time and to enable the processes to be more efficient. It needs the process assessment from the customer's perspective, so as to reduce the inefficiency and waste. De Koning, Does & Bisgaard (2008a, p.9) recommended an outline for the incorporation of lean and Six Sigma, comprising of the project organization structure derived from Six Sigma (Green Belts (GB), Black Belts (BB) and the champions) and in comprehensive training initiatives and to define, measure, analyze, improve and control (DMAIC) methodology, with lean evaluation tools and models of improvement entrenched and concepts or classifications of both Six Sigma and lean combined. Normally banks consist of several department including human resource, loan and lending, foreign exchange, auditing etc. all these department need coordination so as to avoid complaints from customers. Lean Six sigma ensures that customer focus business is instilled in the organization culture (Davison & Al-Shaghana 2007, p.251). Barclay Bank, one the biggest banks in the UK has adopted lean six sigma within the company so as to improve loan process and also to consolidate its assets (Augusto, Cauchick, Carvalho 2014, p.72). Before, the loan managers who worked directly with customers expressed their dissatisfaction with how credit approval officers have frequently failed to inform them regarding loan status. De Koning, Does & Bisgaard (2008a, p.3) postulate that because of poor channel of communication and setbacks, the loan managers found difficulty in winning new business. The Barclay Bank used Lean Six sigma to establish where, how long and why loans were trapped at approval process, in addition to the rationale behind dismissals. The comparison of the systems at various branches, the management could observe which one was working and what variations emerge in improvements (De Koning, Does & Bisgaard 2008a, p.6). For instance, one branch had advanced its loan sanctions by putting an experienced credit officer on the banking floor to coordinate with the loan managers. The experts believe that partnering has helped clients get a great sense of timing and approval. Implementation at different companies As mentioned earlier both HSBC and Barclay Bank implement Lean Six sigma to increase efficiency of their operations. HSBC Holdings is a multinational financial services and banking company with the headquarters in London, UK (HSBC 2014). According to HSBC website (2014) the bank has since grown and operates in 85 countries while having nearly 7,200 offices across South America and North America, Asia, African and Europe. Currently the bank has approximately 90 million customers who depend on its services. To unite its operation across the world the bank need lean Six sigma. It its operations HSBC has also acquired different banks such as Demirbank in 2001 and a polish bank, Polski Kredyt Bank SA in 2003 among others (HSBC 2014). All these banks operate on a different policy and system; hence there was need to restructure to bring these banks under HSBC. For instance, as part of their high profile acquisition of those two banks, HSBC needed to interlink all ATM switches to make sure that clients could benefit from applying the former ATM networks. The interconnectivity offers a seamless banking provision to both existing Demirbank and Kredyt Bank customers would have move to HSBC due to acquisition. Due to the acquisition and incorporation of Lean Six sigma, the top management of HSBC had acknowledged that there were numerous efficiencies that it could be drawn from its operations. It also recognized LSS as the tool to apply in achieving the needed level and went ahead to outsource for the Black Belt service to support adoption of continuous upgrading program (HSBC, 2014). On the other hand, Barclays is a multinational financial and baking services company also with headquarters in London, UK (Barclays 2014). Barclays has operations in wholesale, retail and investment banking including wealth management, credit cards and mortgage lending. The company has operations in more than 50 nations and about 49 million customers across these countries (Barclays 2014). To control its operations and assets across the world, Barclays needs lean management in place. Lean Six Sigma operates better at Barclays Bank than past approaches since it combines the human and system process aspects of the business. Lean Six Sigma was adopted in 2005 by Barclays Bank considering the recommendation of the operations manager, who had learnt concerning its benefits from a forum. The company then formed a team to put into operation the lean management. A vital point employed to validate it was to show the benefits which banks can achieve with the Lean Six Sigma (Heckl, Moormann & Rosemann 2010, p.467). In the same year, the first team of black belt received their training from an external consulting firm. Currently, the operations at the banks is efficient; a situation which have improved the image of bank. Barclays is the seventh-biggest bank globally. Conclusions Lean thinking and Six Sigma approaches remain a major target to get competitive business. The literature review holds that Lean Six Sigma is required since individuals and organizations need a method for problem solving and improvement, if that methodology is correctly used, it can create an ideal approach than other operation approaches. The literature reviewed here adds a contribution to the theory of lean thinking and Six Sigma in banking services. It can be noted that the existing literature is mostly focusing on general lean and Six Sigma and project level that is also used in manufacturing industry while the clear boundary between manufacturing and banking sectors are not defined. Therefore, the gap exists of how the approaches work in these two different industries. As such, further research is recommended on Lean Six sigma. References Achanga, P., Shehab, E., Roy, R & Nelder, G 2006, Critical success factors for lean implementation within SMEs, Journal of Manufacturing Technology Management, Vol. 17, No.4, p.460-71. Antony, et al., 2007, Six sigma in service organizations: benefits, challenges and difficulties, common myths, empirical observations and success factors, International Journal of Quality & Reliability Management, Vol. 24 No. 3, p. 294-311. 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Davison, L & Al-Shaghana, K 2007, The link between Six Sigma and quality culture – an empirical study, Total Quality Management & Business Excellence, Vol. 18 No.3/4, p. 249-258. De Koning, H., Does, R & Bisgaard, S 2008a, Lean Six Sigma in financial services, International Journal of Six Sigma and Competitive Advantage, Vol. 4 No.1, p.1-17. Heckl, D., Moormann, J & Rosemann, M 2010, Uptake and success factors of Six Sigma in the financial services industry, Business Process Management Journal, Vol. 16, Iss: 3, p.436 – 472 HSBC 2014, HSBC official website, Viewed 20 May 2014, https://www.hsbc.com/ Kumar, M & Antony, J. 2008, Comparing the quality management practices in UK SMEs, Industrial Management & Data Systems, Vol. 108, No.9, p.1153-1166. Maleyeff, J 2006, Exploration of Internal Service Systems Using Lean Principles, Management Decision, Vol.44, No.5, pp. 674-689. 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