Good morning and thank you Mike for your kind introduction and invitation to address your conference. It's always a pleasure to soak in the warmth of the Southwest as a brief respite from a Midwest winter. Our recent stretch of sub–zero weather in Moline reminds me of a story the American writer and humorist Mark Twain once told of an old man he met in Iowa who had moved up from Arkansas. Twain asked the man whether he had experienced much cold during the preceding winter, and the old man exclaimed, "Cold! If the thermometer had been an inch longer, we'd all have frozen to death!"

I must confess that despite the opportunity to spend a sunny weekend in Phoenix, I had some initial doubts about accepting ASQ's request to talk about Six Sigma at John Deere. You see, I'm a relatively recent convert to the wonders of Six Sigma and John Deere has not always been a poster child for this methodology, which I'll explain further in a minute. Yet now that we've embarked on our Six Sigma journey, there's no question in my mind that it's proving to be an extremely valuable tool in our growth and operational improvement strategy. Hopefully, John Deere's somewhat unconventional approach to Six Sigma can spark a few constructive takeaways for you this morning.

First, an explanation as to why our view of Six Sigma may differ from yours. Deere & Company has been around for 170 years and owes much of its success to a culture that promoted, and even rewarded autonomy. Given the limited communication tools during our early expansion period in the late 1800s and early 1900s, independently operated units were the best way to manage a growing business. As long as everyone acted within a larger framework and produced positive results in an honest and quality–driven way, we weren't as concerned with how they were doing it.

Of course today, we function in a totally different environment – 24/7 communication, customers and operations on six continents, and an extremely competitive global marketplace that demands speed, efficiency and quality. We're recognizing the value of common processes, tools and approaches ...and we're finding that legendary Deere culture of independence and autonomy is changing – changing because we want to be around at least another 170 years!

Deere Strategy/SVA
When our chairman and CEO Bob Lane took over the top job in 2000, John Deere had a lot of good things going for it – quality products, a rich heritage, fiercely dedicated customers, a top–notch dealer network, a highly visible brand and an enviable market share. But something was missing – and that was a consistently GREAT business.

Just as the ASQ motto "encourages all to make good great," Bob and the senior leadership introduced an initiative to "build a business as great as our products." After struggling too long with too many assets, too much capital and too much cost, we set out to improve our operating performance and grow the business.

For the past six–plus years we've diligently followed a three–point strategy of exceptional operating performance, disciplined growth and aligned, high performance teamwork. We gauge our progress through a financial metric we call SVA, or Shareholder Value Added, which is essentially, the difference between operating profit and pretax cost of capital.

Our aim is to build and grow a business that is lean and nimble enough to be profitable throughout the business cycle. Specifically, we're looking for a 20 percent operating return on operating assets at normal volumes, resulting in sustained SVA...or consistent economic profit...year–in and year–out. Even under the weakest conditions, our goal is to earn our cost of capital, creating positive SVA. In other words, every year we aspire at a minimum, to generate returns equal to or above our average cost of capital.

That's a very tall order – especially for a company with such cyclical businesses. But we're making good progress. SVA topped $1 billion in 2004, twice our previous best. In 2005 SVA was $938 million and last year, it reached $948 million. Three consecutive years of record level SVA.

So when John Deere defines growth, we're talking about growing SVA seven percent a year. That is, continuing to increase the return rate on our cost of capital, which is much more difficult than top line growth. This is where Six Sigma reveals its true value, in making sure we don't have money – as I like to say – "leaking out the bottom of the bucket."

In the bigger picture, Six Sigma is the systematic way we are improving quality in our business, in our processes and in our products. By rigorously applying Six Sigma principles throughout the business, we're ensuring the quality and resources will be there to fuel our growth and sustain John Deere's prosperity for years to come. I'd like to focus today on how Six Sigma has evolved at Deere, review some examples and show how the methodology is becoming a very necessary component of our growth initiatives.

Six Sigma History
You could say that Deere has been on a quality journey for 170 years when John Deere himself first stated "I will not put my name on a product that does not have in it, the best that is in me."

Some more recent milestones were in 1990 when we received initial certification to the ISO 9000 Quality standard. Today, most of our locations are ISO 9000 registered. In 1992, we formalized a product development process, and the remainder of the 90's was spent understanding and deploying TQM, as defined in the Malcolm Baldrige National Quality Award.

Since then, Deere units in the U.S., Canada and Mexico have won various state and national awards, and I'm proud to announce that next week, John Deere Credit will receive the first ever gold level award from the Iowa Recognition for Performance Excellence, that state's Baldrige assessment and award process.

After a Baldrige assessment identified a gap in process management in the company in 1997, we launched an initiative we called BPE, or business process excellence, which would become a precursor to Six Sigma. For the next four years we focused intently on process.

In 2001, we felt BPE was sufficiently embedded in the organization and phased out the formalized program. That's when we began to more fully recognize the value Six Sigma could bring to John Deere.

It's no coincidence, in my opinion, that we began introducing Six Sigma to process management about the same time we embarked on this goal to build a business as great as our products. Process improvement was a good start, but we needed to do more – we needed different tools and different skill sets if we were to be able to reach this lofty aspiration of sustained SVA.

As an aside, in retrospect, I now realize that coming up with that 20 percent OROA figure actually was an exercise in Six Sigma. We did statistical analysis to determine what kind of return on capital over time was required to become a top tier company, we analyzed our cost of capital and our cost of risk among other things, and came up with a figure of 20 percent we needed to equal or exceed on a continuing basis.

I suppose had we taken a more structured Six Sigma approach, we could have reached a conclusion in three months instead of six months, but we were still somewhat inexperienced in the methodology at the time.

So here we are, early into our efforts to build a great business through creating continuous positive SVA. As I mentioned, we're off to a good start, but we figure it will take several more years to determine whether John Deere can indeed sustain an exceptional operating performance through the trough as well as the peak periods, while growing SVA.

Let me share with you a few examples of how Six Sigma is providing John Deere the necessary tools to improve our processes and ultimately contribute to our ability to build and grow a great business.

In our Ag division, which I oversee, we launched more than 80 Six Sigma projects last year. Large or small, they all contributed to improving Deere's business performance. I'd like to tell you about a few projects that demonstrate how we use Six Sigma from both an operational excellence and business management approach.

In Pune, India, where we produce small tractors, plus transmissions and engines, we were having problems with a gap found between the tractor hood and cowl, which is part of the main frame. Extra time was needed during the assembly process to adjust the hoods and in some cases, the tractors had to be reworked offline. FPY, or first pass yield rates were unacceptable and the tractors were delayed in getting to the warehouse.

Six Sigma filters such as whether the project aligned with the company's strategy, whether it would improve an existing process and could be completed within 4–6 months justified the project. The goal was to identify and eliminate the major cause of the problem by analyzing various possible contributors resulting in improved first pass yield rates.

A team was formed and began working through the problem–solving methodology of DMAIC, or define, measure, analyze, improve and control. While there were minor cost savings associated with this project, the real bonus was the redeployment of man hours to other work. As a yellow belt project, this was a great frontline success story.

In our Ottumwa, Iowa plant, where we make hay balers, paint defects were the number one contributor to our poor linearity performance which ultimately prevented us from shipping on time. Paint Process first pass yield was 70 percent and the factory had been unsuccessful in identifying a root cause and driving permanent corrective action for the defects.

A cross–functional Six Sigma team was formed with a goal to achieve and sustain 90 percent Paint Process first pass yield, or a 66 percent decrease in defects. The CTQ, or Critical to Quality analysis identified 56 factors affecting paint quality. Those factors were divided into four categories for analysis, and an improved defect data collection system was created for improved monitoring of the paint system performance by shift. Specific actions were taken in each of the four defect categories to improve the Paint Process first pass yield rates.

Though falling just short of goal, process first pass yield improved to an 87 percent sustainable level...a 17 percent improvement. This included a 50 percent reduction in paint rework and contributed to an overall 50 percent improvement in Product first pass yield. In addition, on–time shipping performance improved to 97 percent from the previous 75 percent.

In Monterrey, Mexico, where we have a facility that manufactures agricultural components and implements, a series of continuous improvement projects on the shop floor last year resulted in more than $321,000 in annual savings to the company. Six Sigma methodology was utilized in each of these projects.

One case focused on a component that was the number one rejected part in the factory due to improper machining. Historical data to start the project showed a CPK, or process capability ratio of 1, representing 66,257 parts per million.

After measuring the process, the Monterrey team found that the CPK was now 0.05. Once critical variables were identified and new parameters established, the new process showed a CPK of 1.38, resulting in 2660 percent improvement.

Another case involved optimizing that factory's paint system to reduce paint consumption. Through design experimentation, parameters and values for the process were established. Through hypothesis testing of the new parameters vs. the old ones, the project team proved that paint consumption was decreased by 17 percent without affecting the quality of the product. Final results showed that paint consumption was indeed reduced by 17 percent, surpassing the original goal, and saving $82,000 annually.

In Waterloo, Iowa, at our flagship tractor manufacturing plant, we had a significant quality improvement opportunity on our hands in 2005. R & A, or returns and allowances totaled nearly $70 million that year. This was especially troubling because quality has been synonymous with Deere since the day John Deere demonstrated his self–scouring steel plow in an Illinois farm field. Ironically, in this case, we were meeting our quality promise by fixing products after the sale. That's a very expensive and risky way to do business!

The Waterloo project focused on identifying and eliminating the root causes of problems in the tractor hydraulic system. Using Six Sigma methodologies, a goal was established to reduce the number of hydraulic system warranty claims on two tractor platforms by 50 percent during a six month period.

Using the problem solving methodology of define, measure, analyze, improve and control, Waterloo achieved their goal, as well as identifying several other promising opportunities. The team is currently applying the same robust approach on the hydraulic systems of the two remaining tractor platforms. Their goal is another 50 percent reduction by the end of this fiscal year.

From a business management approach, Six Sigma methodology has been used in the Ag Division's strategy planning process, something we call Ambition Planning. We've used the structure and rigor of Six Sigma to evaluate and plan our division's business objectives, connecting desired outcomes with high level path planning and flowing it through to the projects that will produce these outcomes. We've monitored progress against goals, and adjusted the course as we go.

It all sounds so logical and pretty obvious, but that's what impresses me about Six Sigma. In many ways we are simply taking all the elements we have always had, but we're tying them together in a much more integrated and results–focused way.

Finally, a current example of using Six Sigma methodology to improve business management relates to excess parts inventory in our ag manufacturing facilities. We determined that more than $100 million of finished goods inventory of non–current service parts were being stored in our factories, when the majority of those parts should be housed instead at our Parts warehouses.

With inventory stored at the factories, the Parts Division has no way of knowing what is where, hampering their efforts to effectively manage stock and occasionally, leading to some disgruntled customers.

In support of the Ag Division's goal of achieving three and a half asset turns by 2011, the project team is working to reduce the amount of inventory stored at the factories to appropriate levels. The team also plans to establish processes that prevent unneeded parts from being stored at factories in the future. The initial goal is to reduce the amount of non–current service parts inventory stored at the factories by 50 percent over three years when compared to the baseline established last month, while at the same time, improving the customer experience.

DPS – Deere Production System
John Deere is well prepared to further integrate Six Sigma because of the success of our version of lean manufacturing, something we call the Deere Production System – or DPS. DPS is the enterprise manufacturing strategy that incorporates the most effective elements of modern manufacturing philosophies into a systematic, common approach.

John Deere had been addressing lean manufacturing since the mid–1990s, business by business, but it wasn't producing the exceptional, sustainable performance we desired. In 2002, we began in earnest to create an enterprise–wide solution and developed the Deere Production System by leveraging best practices from all our equipment divisions: agricultural equipment, construction and forestry equipment, commercial and consumer equipment and John Deere Power Systems.

We needed a strategy that accounted for our unique business requirements and characteristics. First, we build highly engineered, very complex products. For example, one of our large combine harvesters has nearly 18–thousand parts, and a big row–crop tractor has 10–thousand parts.

Secondly, our volumes vary widely...from a few hundred in the case of specialty product lines like cotton harvesters, to hundreds of thousands, in the case of our L100 lawn tractors.

Other factors that needed to be considered were the cyclical and seasonal swings of our business. Planters and combines, for instance, have a four–month use and demand period, and in our lawn care business, two–thirds of our sales occur in a 17–week period. Finally, as Deere continues to grow globally in terms of operations, supply bases, and customers, our lean strategy had to be able to function on a worldwide basis.

In five short years, DPS has proven to be a significant addition to driving and sustaining real business results, through lean principles and best practices captured in a common language, common tools, common systems and common training. DPS has become, and will continue to be, a competitive advantage for John Deere.

DPS is nothing more than integrating Six Sigma–type rigor in everything we do. Of course, those of you who live and breathe Six Sigma will recognize that our DPS lean manufacturing approach is simply applying the methodology to our order fulfillment processes.

Our production employees are very engaged in our DPS journey through a formal continuous improvement process. We have hundreds of CI teams generating thousands of projects annually on safety, quality, efficiency and delivery. We're actively integrating DMAIC and Six Sigma tools into our CI process to improve our focus and our problem–solving capabilities.

DPQS – Deere Product Quality System
As process quality tools, Six Sigma and DPS both are integral to a major enterprise initiative we are just rolling out focused on improving our product quality. It's called DPQS, or Deere Product Quality System. DPQS builds on the Deere Production System guiding principles and was designed using a Six Sigma approach.

The DPQS development team used a Critical to Quality flowdown to ensure that the strategy would drive reduction in failures and warranty. This would occur by eradicating the root causes of quality problems in product design, the supply chain, manufacturing and customer support.

From the Six Sigma Critical to Quality flowdown, the team built a Quality Improvement roadmap. The roadmap is built with common processes, common tools, and common metrics, anchored in Deere business processes and sustained by rigorous certification.

Our goal is to have all product lines DPQS–certified by 2011. In addition, we aim to have the product lines at their "zero claim" and FPM, or failures per machine targets. And the brass ring is an estimated $150 to $200 million annual SVA improvement.

Six Sigma Deere Approach
So you can see that Six Sigma permeates a lot of things we do at Deere, but at what level? You've probably heard Six Sigma referred to as a "breakthrough strategy." In Dr. Joseph Juran's book Managerial Breakthrough, he distinguishes between control, which is an absence of change, and breakthrough, which is change. John Deere is probably somewhere in between.

First, serious change usually means top–down advocacy and at Deere, we've often found that when a change mandate is given, in the long run, it's less effective than if people first convince themselves of the value, then implement change. We take more of the "sneeze" approach, an attitude that was explored in an article in ASQ's Quality Progress magazine about a year and a half ago.

The article states that while Six Sigma is designed to solve linear problems, when it comes to implementation, the methodology often fails because an organization's culture is most definitely not linear. A better way to ensure Six Sigma is successful, according to the article, is to rely on informal leaders who, in a sense, will "infect" the population by sneezing the idea to others, eventually creating an epidemic that converts a culture.

We've found success by not getting wrapped up in the Six Sigma nomenclature and instead, showing employees how using Six Sigma can actually be liberating in providing a structure and discipline to solve problems.

While Deere will always utilize Six Sigma from a tactical, project–oriented approach, as you heard in the examples I highlighted, we're looking more these days at applying Six Sigma methodology in strategic, business management initiatives. If we are to meet our aspirations of sustainable business results, seven percent SVA growth, and aligned teamwork, we need Six Sigma to bring discipline to our management and strategic planning processes. That way, we make good decisions based on a variety of fact–based inputs.

In terms of geographical growth, Six Sigma is also important in leveraging common processes across multiple cultures and is a more effective way to bring newer parts of the organization on line faster. We can't have a tractor factory in Mannheim, Germany doing its own thing to grow its business and a factory in Brazil producing the same tractor doing something entirely different and hope that we can efficiently manage our operations.

Six Sigma brings us a common problem–solving framework that overcomes language barriers, and diverse ways of thinking. In a marketplace where we need to continually find ways to take cost out of the system through common processes, Six Sigma is a powerful tool.

I opened my comments this morning by talking about Deere's historic, autonomous culture. As an organization still early in the Six Sigma journey, we're hoping to move from rewarding unit–based ideas to rewarding unit–originated ideas that can be deployed across the enterprise for the common good.

Once Six Sigma becomes truly integrated throughout the enterprise, there's no doubt in my mind that John Deere will achieve lasting success in running and growing a business as great as its products.