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Six Sigma Financial Savings

Projected financial savings must be analyzed by the Project Manager in conjunction and support of a Controller or Finance representative.

A project does not have to contribute to ROI or directly increase revenue to qualify as a Six Sigma project. Many forms of soft savings related projects include customer scorecard improvements, loyalty, satisfaction, risk avoidance, and cost avoidance.

Some of the guidelines below may fall under both categories of hard and soft savings in different percentages. Each company may categorize them slightly different. It is important to understand and adhere to your company reporting guidelines.

Before a project begins, a preliminary estimate of the hard and soft savings must be determined and agreed upon by the BB/GB, financial representative and the MBB or representative of Upper Management.

The GB/BB should possess a firm understanding of financial relationships, variances, and projected impact of their project. The reported savings may be audited therefore tracking accuracy is critical.

It is equally important to analyze the financial savings and costs by financial reporting period. For example, if the team spends $5,000/month on devices, research, and programming which in turn saves $20,000 in the same month, the net savings is $15,000 in that month.

HARD Savings – direct flow to the Profit and Loss statement (P&L)

Moving from one operation to less expensive operation.

Permanently remove labor, wages, benefits, etc.

Sell a building, or end lease/rent real estate.

Eliminate direct material costs or reduce to lower cost level.

Reduction in insurance premiums.

Reduce indirect materials cost or eliminate the use.

Reduced inventory levels of product or material, or reduce cost of carrying the same level, often at the WACC.

Sold equipment directly related to project efforts (must exceed Net Book Value in some cases to be counted as savings. Some will consider these sunk costs so any sale is savings).

Overtime reduction.

Eliminated sorting by instituting poka-yoke to prevent defects.

Utility or natural resource reduction or elimination.

Scrap dollars reduced or eliminated.

New product revenue.

SOFT Savings

Intangible savings.

Improving 5S score of an area.

Reduce RPN on PFMEA for particular failure mode Improved customer/employee satisfaction.

Reduced insurance plan due to reduced hazards, exposure, or frequency.

Shift work task of employees but overall hours worked are not reduced.

Improve service level (unless it can be documented that it directly related to new sales or profit).

Improved ergonomics or environmental, health, and safety conformance (may be hard savings if it directly avoids a fine that has been accrued for).

Reduced walking distance of an operator unless direct savings can be tied to this.

Alleviated floor space or machinery but it is not sold or used to produce new income.

Avoiding the purchase of additional planned equipment or material.

Future manpower need reductions.

Improves morale of workforce or customers.

Reduce projected warranty costs.

Typical Organizational Financial Reporting Rules

Six Sigma financial reporting and measurability are necessary to show the impact on the P&L of a respective business unit, facility, and entire company.

EVERY company will need to define the rules and guidelines for accountability, accuracy, and consistency.

The plan should include:

Standard definitions and rules

Roles and responsibilities for all parties involved

Hard savings versus Soft savings

Quick method to report savings, validate, and upload (if necessary)

Costs to be included in overall project impact,

Reporting times and reporting calendar

Exchange rate rules

Clarify conflicts in savings

Often times many departments are accountable for generating savings and Six Sigma is certainly one of them (others may be Supply Chain and Human Resources).

Since teams are meant to be cross functional, there will be instances where teams have members of two or more of these departments and all are looking to report savings. There should be a policy with examples to guide the savings distribution process.

Their should be a database with all projects and their status relative to their FINANCIAL contribution: For example, a project may be closed but the company allows savings to be reported for 12 months since the first month of savings.

1) COMPLETED - closed and savings validated and defined
2) ACTIVE - still contributing financial impact
3) PIPELINE / PROPOSED - estimated financials, project yet to be assigned

FINANCE responsibilities

Quantify the savings being generated by the project.

Determine how to handle Balance Sheet reductions, typically these are not hard savings.

Determine if savings are hard savings or soft savings.

Ensure that the realization of the savings can be tracked.

Ensure that the CFO(s) (or Upper Management) agree with the savings being reported.

Ensure that the reported savings can be audited.

Ensure that the hard savings are reflected in future budget/forecasts.

See an example Project Contract template

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