“Cash is king,” as they say. When it comes to Six Sigma projects, hard savings are about just that — cold, hard cash.
Overview: What are hard savings?
Hard savings refer to project benefits that have a direct impact on the organization’s bottom line. These projects either support revenue growth (more sales) or cost savings (reduced business spend).
3 benefits of hard savings
Making and/or saving money is good for business. There are many benefits to working on Six Sigma projects that have hard savings.
1. They improve profit
Creating higher margin products, reducing overtime, smaller material costs…these are all examples of hard savings, and these changes all improve profit.
2. They demonstrate the value of Six Sigma
When projects show hard savings, and thus improved profit for the organization, it reinforces the value of the Six Sigma process. This methodology gets literal results that can be seen by improving the organization’s bottom line.
3. They serve as an additional metric
Why are hard savings important to understand?
Businesses need to be profitable in order to survive. It is important to understand hard savings so that we understand what levers can be pulled to keep the company making money.
Project activity supporting revenue growth or cost savings will have a direct impact on the organization’s operating income. Examples of projects in these areas include reducing scrap, increasing sales volume and/or price, and reducing freight costs.
Improving working capital will also improve the organization’s bottom line. Examples of projects in this area include reducing inventory levels or accounts receivable cycle time.
An industry example of hard savings
Imagine you are the plant manager at a manufacturing site that produces athletic gear. There are a lot of materials that go into these products — fabrics, screen print ink, elastic bands, etc. All of these materials have a cost, and you need to spend money to make money.
You notice that a particular manufacturing line tends to produce more defective products. This means you have to spend even more money on extra materials to make additional good products. You pull together a Six Sigma project team with the goal to improve first-time yield.
The team takes a closer look at the line in question and comes up with some ideas to reduce the number of defective products made (improve first-time yield).
After six months, the improvements made by the team are working! Taking a look at the numbers, improving the first-time yield has significantly reduced materials costs — you don’t need to buy as much material because you aren’t wasting it on making defective products.
This is an example of hard savings — reducing material costs has a direct impact opn the bottom line and improves profit for your organization.
3 best practices when thinking about hard savings
Since hard savings result in financial improvement, there are a few things to keep in mind when considering their calculation and ultimate impact.
1. Be accurate
Resist the urge to be overly aggressive when calculating hard savings associated with a project. There is the tendency to inflate hard savings when reporting out on a project, but this can negatively impact the credibility of both the project leader and the overall Lean Six Sigma program.
2. Standardize calculations
There are projects that can be run repeatedly across an organization (ex. changeover reduction is a need for multiple lines, multiple manufacturing sites, etc.). Having a standard way of calculating hard savings associated with these repeat project types will save a lot of arguments and headaches in the long run.
3. Don’t neglect soft savings
Since hard savings have a measurable impact on a company’s bottom line, Six Sigma practitioners may try to force a hard savings calculation to demonstrate project value. Don’t neglect soft savings, as these can sometimes pay off more than hard savings (for example, improved employee satisfaction).
Frequently Asked Questions (FAQ) about hard savings
What is the difference between hard savings and soft savings?
Hard savings have a clear and direct impact on a company’s bottom line — they improve profitability. Soft savings also benefit the organization, but they do not have this direct impact and are often harder to calculate.
How do you calculate hard savings?
The answer to this depends on the type of hard savings associated with your project. Below are some examples of ways to calculate different types of savings:
Material cost savings = (Old Cost – New Cost) x quantity used
Example: ($0.80 per pound – $0.50 per pound) x 100,000 lbs = $30,000 saved
Working Capital savings = amount of inventory reduced x carrying costs
Example: inventory reduced by $5 million x 15% carrying cost = $750,000 saved
It is a good idea to work with your finance department to determine how to calculate savings for your particular situation and make sure you are doing so correctly.
Cash is king, so let the money sing
Hard savings have a direct impact on a company’s bottom line and improve profitability. In a world where cash is king, it’s important to understand what levers you can pull as a Six Sigma practitioner to help your organization make/save that money.