iSixSigma

Involve Finance in Project Selection, Not Just Validation

Most companies using Six Sigma have grown used to including financial staff at the back-end of project completion to validate the project results. But the most savvy organizations are learning to get their finance department involved up front, helping to pick what projects to work on in the first place.

Here is what can happen when the finance department gets involved early:

Jim was the chief financial officer at a food manufacturing plant, who had become excited about the application of Six Sigma when a Black Belt helped him tackle Sarbannes-Oxley compliance. At a project selection meeting Jim was attending, the plant management committee decided to develop a charter on product write-offs. Jim, who had access to the actual data, decided to pull together a quick statistical process control (SPC) chart (Figure 1) and share it with the committee.

Figure 1: I-MR Chart of Write-offs

Figure 1: I-MR Chart of Write-offs

As the committee members looked over the data, they could see a pattern in the SPC chart. The company was writing off between $400,000 and $600,000 every quarter, or about $2 million annually. As a “finance guy,” Jim had been used to looking at aggregate data simply because it was the high-level figures that were most important to company management. But one of the tricks he had learned from his previous project was the need to stratify data and look for where problems occur most often or with the biggest impact. So he next pulled in the “bucketed” data to stratify the write-off data, which resulted in a Pareto chart (Figure 2). 

Figure 2: Pareto Chart of Write-offs

Figure 2: Pareto Chart of Write-offs

The committee quickly wrote a well-scoped project charter focused on the two specialty product lines with the largest write-offs. It was prioritized as a key project for the company. They asked Jim and the company’s Master Black Belt to talk to the specialty lines manager to see what they could learn and to launch a project if the resources were available (or put it “next in line” when a Black Belt became available). 

On the Manufacturing Floor

As Jim and the Master Black Belt approached the line manager’s office, she offered this tip. “Since we’re going into someone else’s domain, we can’t be confrontational or act like we’re blaming him for these huge write-offs,” she said. “For one thing, we don’t really know what the problem is. For another, if we’re going to solve this problem, we’ll need his support. So we need to go in with open minds and just ask for his help in understanding what’s going on here.”

Jim started the meeting with Barry, the specialty lines manager, by explaining the management committee’s reasons for being interested in write-offs. Then he showed Barry the two charts he had created. 

“As you can see,” said Jim, “nearly 40 percent of our write-offs during the past two years came from specialty flavorant products and another 30 percent from specialty concentrates. The control chart shows a very distinct pattern every three months.” 

Barry wasn’t surprised by the cyclical pattern, but the fact that most of the write-offs came from specialty flavorants and concentrates was news to him. “I’d always thought the write-off line in the budgets was kind of like the company taking out the trash once a quarter,” he commented. “I’ve never seen the figures broken out like this.” 

“I don’t know much about these products,” said Jim, “or why the data would show that cyclical pattern. Do the two product lines share something in common that might explain this pattern? Or might there be different things going on here?” 

Looking for a Pattern

“Flavorants and concentrates are the two products we run in big batches, just once a quarter,” Barry said. “They both have a shelf life of about 90 days. The products must be passing their expiration dates before they’re sold – that would explain the big write-offs three months after each production run.” 

The Master Black Belt immediately asked: “Do you know why we run the flavorants and concentrates that way? And why we run such big batches?” 

“I’m just doing what production scheduling tells us to do,” answered Barry. “I presume the requests come down from sales.” 

“I’d really like to solve this problem,” said Jim. “Would you mind working with us to get together a team to dig into this problem and see if we can reduce those write-offs? Can you make time for your people to work on the project?” 

Barry agreed to the request, and the three spent a few minutes writing out a problem definition statement and selecting a team. 

Three Months Later…

With a team focused on the problem and guided by an expert Master Black Belt, it did not take long to ferret out the root cause of this problem. The specialty products were made in large batch mixers. If the level in the mixers was not kept high enough, then the products did not meet specifications due to poor mixing. That is why the batch sizes were too large, which led to too much material running out of shelf life and having to be written off. 

The team found a nice solution which was to use some mothballed developmental mixers. The batch sizing was reduced to a more appropriate size, and the amount of write-offs for these product lines was cut by 85 percent. A Pareto chart of write-offs after this project (Figure 3) showed the reduction for the specialty products. 

Figure 3: Pareto Chart of Project Results

Figure 3: Pareto Chart of Project Results

Financial Input on Project Selection

Jim’s project changed the way project selection occurred in his company. From then on, financial staff members were regularly called on to stratify financial data and feed it into the project selection process. 

Feeding financial data into project selection can reap big rewards. The easiest place to begin is to simply attack whatever the biggest “buckets” are in a company’s budget. For Jim, that started with write-offs. Other typical categories include direct costs, utilities, materials, overtime, returns and warranties. Then it is just a matter of plotting key data on control charts and looking for statistically significant variances (not just variances from budget as is typically used in financial reporting). When that is done, all that is needed is to implement regular DMAIC processes to follow up on the area targeted by the financial analysis.

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