Calculating Lean Six Sigma Project Savings
There are famous battles in our history. The Battle at Waterloo, Custer’s Last Stand, and the Battle of the Bulge. But none is so fiercely fought as the battle of whether or not a Lean Six Sigma project delivered real value or just “soft” savings!
The Lean Six Sigma Black Belts argue, “All savings are bottom line savings. Without them you would have spent more money.”
The fierce financial warriors fight back, “We didn’t lay anyone off. Our payroll costs are the same. How can you say there are savings?”
And so the battle rages. Well at KPI Fire we are all about helping companies save money and win their battles so here is! The official guide to calculating Top Line Value, Hard Savings and Soft Savings for Lean Six Sigma projects.
“The fastest and most effective way to get buy-in and create a culture of continuous improvement is to show real business results.”
The Official Guide to Lean Six Sigma Project Value
There are 3 categories of project value, Top Line or Revenue, Hard Savings, and Soft Savings.
Hard savings are real dollars that show up on financial statements. There are only 2 ways to save money:
- Fire someone (yep we said it)
We believe as Lean Gurus that you never, ever want to fire someone as the result of a process improvement. You want to grow your company and you need those amazing resources that you’ve invested years coaching, mentoring and training (you have done that right?). These people are your growth engine.
DO NOT FIRE ANYONE. It will kill any efforts to continuously improve in the future. In fact, you should implement a NO LAYOFF POLICY, a guarantee that everyone will keep their job at least with regards to improving processes. It’s amazing how well people perform when that stress is removed.
- Reduce material costs
- Reduce defects which lowers the actual cost of goods you have to bring in to produce your widgets. You can see this number go down on the balance sheet.
- Reduce the amount of supplies needed to run your Emergency Department. This number will also show up in your financials.
Wow did that hard savings list seem short? Well it is! Many Lean Six Sigma projects help companies do just one thing, generate soft savings or cost avoidance. These numbers do not show up on financial statements… well most of the time.
- Do more with the same resources… AKA Efficiency, AKA Cost Avoidance
- So you increased throughput by 30%? Soft savings.
- Then you reduced inspection by 50%. Soft savings.
- Then you made your employees 10% happier. Soft savings
You can now produce more widgets, see more patients, and get more done with the same resources. This is cost avoidance if your business is growing because you can now handle increased demand without adding labor costs. This CAN lower your COGS (cost of goods sold) if demand for your product or service is slowing and you experience natural employee attrition which you do not backfill.
Many companies count soft savings as hard savings because they would have hired 3 new people and now they don’t have to. They would have purchase another machine and now they won’t. Hard or soft… it is still real money in my book. The bottom line here is employees will have more time to do Value Added activities rather than work on waste.
TOP LINE VALUE
This is the third category and an often sought after prize. Can we work on a project that actually generates income? YES! New product development and using data to determine which market segment to attack next are good examples. There are many strategic projects where a solid PDCA or DMAIC will work just fine in producing a fast ROI (sorry, got a bit acronym crazy there).
6 Steps to Calculating and Communicating Project Value
Now that we understand the 3 categories of savings let’s go through the 6 steps of calculating and communicating these savings.
- Start with the improvements you’ve made or plan to make.
- We did a process flow optimization for our nursing staff
- We worked on yield issues in the factory
- Quantify each improvement.
- We reduced 300ft of walking each day for the nursing staff.
- We improved the yield of this product from 85% to 93%, an 8% increase.
- Translate the project value into a KPI someone at the leadership level actually cares about (read: DOLLAR$).
- 300ft each day is 10 minutes for 12 nurses is 120 minutes per day or 2 hours at $45/hour = $90/day
- 8% yield at $23 per unit = $1.84 saved per unit
- Annualize the savings. Most lean projects count savings for a period of 12 months. At this point the new process is considered the Standard and savings no longer apply.
- $90 per day X 250 days per year = $22,500 labor saved per year or ¼ of an employee
- 8% yield at $23 per unit for 358,000 units per year = $658,720 per year
- Make your KPIs visible to management
- Report out using a combination of data and a Gemba Walk (going to the place where the process improvements were made) to showcase the amazing work you are doing. This will help management understand and support additional process improvement efforts.
- Make your KPIs visible to your team
- Showcase the savings and other improvement metrics to your team. Throw a team party. Verbally recognize them in front of management and their peers. Studies show this is often the most effective form of motivation.
Show Me The Money!
The math can get tricky. Start by establishing standards for your company. To help you we created a simple spreadsheet based on the acronym for the 8 Wastes, “DOWNTIME.” You can download the spreadsheet here.
Do you have a great way to track project savings? Share your knowledge in the comments section of this post and make the Lean world a better place.