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.
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 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.
EXAMPLE:
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.
Six Sigma
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:
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.
If the savings grow over time then and uniform distribution of the full savings rate per month * 12 should be given credit.
Cost Accounting places a strong emphasis on reducing costs, (aka cutting expenses) and this is often leads to decisions that reduce headcount, trimming of employee benefits and a myriad of squeezes that are not the goal of Six Sigma or Lean Manufacturing and actually give these programs a bad reputation.
Lean Manufacturing focuses on the Theory of Constraints, or removing bottlenecks to increase throughput and thus increases Sales (revenue) or make available capacity to take on more sales and growth. Then the company can devote that cost-cutting energy and devote it to growing the "top line" which is sales.
Cutting expenses is limited at some point. A company can only trim so much and often they cross a tipping point where the risk and losses long term exceed any short term gain. The most damaging correlation a company can be perceived to have is one where improvements from Lean Manufacturing or Six Sigma programs results in headcount reduction (or even overtime reduction). If the employees, or stakeholders, perceive that these programs reduce their personal or family quality of life in any way, then the program is not likely to succeed...very simple.
The top line growth is seen as being unlimited and is where the competitive advantages can reside. So the most commonly ask question by company leaders is how to grow the top line which includes increasing throughput with minimal investment or increase in operating expenses.
Three key words:
In Throughput Accounting, there are a few basic formulas used:
Net Profit = Throughput − Operating Expenses
Productivity = Throughput / Operating Expenses
Investment Turns = Throughput / Investment
Return on Investment = Net Profit / Investment
You can see how they are all tied together which an emphasis that increases in throughput drive the most potential for the company.
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.
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