The projected financial savings must be analyzed by the Project Manager in conjunction and validation from a Controller or a financial 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.
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 means there is a direct flow to the Profit and Loss statement (P&L).
Soft Savings do not have a direct impact on the P&L.
Some projects may have a problem
statement that involves improving working capital or cash flow. Almost
every Six Sigma project has some impact on working capital.
Some areas to be aware of the could help your project deliver a bigger reward is to improve these areas that impact working capital.
One simple calculation to determine the impact from a change in payment terms is shown below:
Annual Spend / 365 * # of days increased (or shortened).
If Supplier A was at N45 (net 45 days) and the annual spend is $15,000,000 and your team negotiates N60 terms then the calculation is as follows:
$15,000,000 / 365 * +15 days = $616,438 annually
An additional $616,438 of cash (working capital) is available to put towards debt or fund other investments that wasn't before.
If that money is put towards paying down debt, then the hard savings may be estimated by taking the savings * your company's WACC.
Assume the WACC is 10% for your company then the hard savings can be estimated at $61,438.
The is a very simplistic estimate and each company will have specific guidelines and exceptions. This information is intended to spawn ideas for your team to deliver more results and value.
Keep in mind sometimes payment terms may be negotiated lower thus negatively impacting cash flow in favor of a piece price reduction that is more than overall favorable.
financial reporting is necessary to show the impact on the P&L of a
respective business unit, facility, and entire company.
Each company will need to define the rules and guidelines for accountability, accuracy, and consistency.
The plan should include:
times many departments are accountable for generating savings and Six
Sigma is certainly one of them (others may be Supply Chain and Human
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.
If the savings grow over time then and uniform distribution of the full savings rate per month * 12 should be given credit.
Calculating the Future Value of money is an
important concept to project a future amount based on inputs of
expected interest rate, number of time periods, beginning amount, and
payments for the period. (assumed constant over each period).
The following is simple example done in Excel with the following assumptions:
The answer is $109,198. The ability to run scenarios with money that is freed up from a project is useful to help make investment decisions.
This obviously has a very practical use in personal lives as well. The above example is similar to a savings plan for a child's college tuition.
The picture below shows how to enter into Excel.
Jul 17, 16 12:12 AM
Proper data classification is necessary to select correct statistical tools
Jun 22, 16 07:13 PM
Description of the 7-Wastes, also called Muda
Feb 03, 16 10:43 PM
Determing the process capability indices, Pp, Ppk, Cp, Cpk, Cpm
Six Sigma Modules
The following presentations are available to download.
Green Belt Program (1,000+ Slides)
Cause & Effect Matrix
Central Limit Theorem
1-Way Anova Test
Correlation and Regression