iSixSigma

Use Earned Value Management for Process Improvement

Whenever there is an issue in a process, attempts are made to identify the process step that is causing the problem, identify the root cause and come up with a corrective or preventive action. The time taken to identify the “right” process step is directly proportional to the number of process steps involved and it becomes vital to identify the root cause as quickly as possible in order to take action. This article explains how the process steps can be identified using earned value management (EVM) without losing time by deep diving into the complete process.

Variance in quality will have a direct impact on either cost or, schedule, or both; cost variance and schedule variance can be used as a trigger to identify process improvement areas using the concept of EVM. Earned value management is a project management technique for measuring project performance and progress and it has the capacity to combine cost, scope and schedule. Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for that work; it is the budget associated with the authorized work that has been completed. Planned value (PV) is the authorized budget assigned to scheduled work.

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Consider a process with four steps. Each step takes exactly 15 minutes (cycle time is 60 minutes) and the costs associated (e.g., resources and effort) with each step is $25 (planned value). As and when a process step is completed, $25 is added to the earned value. The budget at completion (BAC), therefore, is $100.

Four-step Process

Four-step Process

Four-step Process

Possible scenarios reveal the value of EVM.

Scenario 1

If the process begins at 10 a.m., then by 10:30 a.m. Step 2 is complete and $50 has been spent.

Cost variance = earned value ($50) – actual cost ($50) = $0
S
chedule variance = earned value ($50) – planned value ($50) = $0

This is an ideal scenario with zero variance, which means the process is performing as planned both on the cost and schedule perspectives.

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Scenario 2

The process begins at 10 a.m. and by 10:30 a.m. only the first step has been completed. Twenty-five dollars has been spent. The earned value is $25 as 25 percent of the total effort has been earned through Step 1. Ideally by 10:30 a.m. Step 2 should have been completed, meaning the planned value is $50.

Cost variance = $25 – $25 = $0
Schedule variance = $25 – $50 = -$25

The schedule variance is negative which means the process is lagging by $25 worth of work. The possible primary causes could be motion, wait time, defect or transportation.

Scenario 3

Work starts at 10 a.m. and by 10:30 a.m. the process is at Step 2. The actual cost, however, has been $60 and as Step 2 has been completed, the earned value is $50.

Cost variance = $50 – $60 = -$10
Schedule variance = $50 – $50 = $0

The process consumed $10 worth of resources more than were required to deliver the product or service. The possible causes are overproduction or a defect in Steps 1 or 2.

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Scenario 4

Step 1 begins at 10 a.m. and Step 3 is finished at 11 a.m.; $100 was spent.

Cost variance = $75 – $100 = -$25
Schedule variance = $75 – $100 = -$25

Here there are both cost and schedule variances, which signify more cost has been consumed than should have been and that there is a lag of $25 worth of deliverables on a schedule standpoint. The possible causes could be any of the seven kinds of waste.

This method helps in identifying the wastes in a process without getting into a detailed value stream map, especially when there is not much time or resources but there is a clear process understanding. The table below reveals possible causes of cost and schedule variance problems.

 Possible Causes of Cost and Schedule Variance Problems
Cost VarianceSchedule Variance
Primary Wastes
  • Overproduction
  • Defect
  • Motion
  • Defect
  • Wait time
  • Transportation
Secondary Wastes
  • Inventory
  • Transportation
  • Rework
  • Rework
  • Inventory
  • Overproduction
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Consider the cost and standard variance from the provided scenarios. For example, in Scenario 2 there is a schedule variance of -$25 at Step 2. If there is a negative cost variance at Step 1, it is an indicator that there may be a defect at Step 1 with some rework being done at Step 2; this would explain the schedule variance.

By missing the planned cost and schedule, how does the budget look once the product or service is delivered? Use the estimate at completion (EAC) with the budgeted rate to determine the forecast.

EAC = AC + (BAC – EV)

The EAC method accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs and predicts that all future ETC work will be accomplished at the budgeted rate.

  • If applied to Scenario 4:
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EAC = $100 + ($100 – $75) = $125
Twenty-five dollars more than the budgeted amount will be spent while $25 of waste has been produced.

  • If applied to Scenario 2:

EAC = $25 + ($100 – $25) = $100
In spite of a delay in the schedule, delivery will happen per the estimated budget.

Tips for Implementing EVM

  • The first process step with a schedule or cost variance should be examined for the root cause.
  • The process step with the greatest schedule variance could be the bottleneck. Crashing (or applying a pull) will help reduce the schedule variance. It will also help reduce the wait time between the subsequent process steps.
  • The process step with the greatest cost variance could have high inventory; its predecessor might be overprocessing.
  • If a process has both schedule and cost variances, then there is a possibility of more defects followed by rework.

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Comments 6

  1. Derek

    It was looking at Earned Value Management that brought me to Lean Six Sigma and Lean Construction. AT which I am still at an early stage. It has helped address some issues on construction projects when progress has fallen behind, and allowed us try and focus our attention to where the lack of productivity or waste is occurring without watching every activity across a large site.

    My only issue with this method is, even now, many construction project people do not seem to fully understand how to do EVM reporting. The risk then becomes that the base plan and subsequent reporting is floored and your efforts can be miss-directed. In addition EVM only identifies waste based on the plan. It doesn’t ensure that the plan is sound or effective.

    In the absence of process mapping and time on a fast moving project EVM can help identify probable causes of waste that can be quickly addressed, but it needs honesty by all parties it what can be a difficult situation when honesty about progress doesn’t come naturally on many construction projects.

    I would be more inclined to use EVM along with say a tool like Last Planner to try and get to the bottom of waste on site and move the project schedule forward with the minimum of waste and an effective plan from the outset.

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  2. Carl Berardinelli

    Nice article, thank you.

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  3. Shinny

    Well explained Sunil !

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