iSixSigma

Cost

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  • #31928

    Swaggerty
    Participant

    I’m currently debating with one of our managers the difference between Cost savings and Cost avoidance. We have a project that I’m saying will save $50,000 and he says we are avoiding the $50,000. If we change nothing we will spend the money. If we make the changes will not spend the money. This is a transportation project and we are going to make the changes. Have any of you had this same problem?

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    #84641

    Mikel
    Member

    Yes, I have had the same problem.
    It is very frustrating when resources that are supposed to be driving change sit around and debate the name of a good business decision.

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    #84655

    Savage
    Participant

    This is a very real debate for many companies.  In our organization, we distinguish cost savings and cost avoidance as two separate categories.  Cost savings are dollars that directly affect the bottom line.  These are dollars that are current being spent and will continue to be spent if improvements are not made.  Cost avoidance dollars are dollars that are budgeted but not allocated or spent.
    For example:  If we have a process that needs to be redesigned.  The current process takes 3 head count.  After redesigning the process the process only requires 2 head count.  The reduction of the 1 head count is a cost savings.  What if, for the same process previous to redesign, we budgeted 1 additional head count to keep up with production schedules.  After we redesign the process we do not need that head count.  That additional head count would be cost avoidance.  Our Six Sigma process avoided additional costs of an additional head count.
    This is a significant subject when differentiating hard and soft savings.  Typically cost savings are hard dollars and cost avoidance dollar are soft.  There may be time where the middle ground is gray.

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    #84679

    BobJim
    Participant

    This is one of those subjects that really bugs me too. The implication is that cost “savings” are somehow more important that cost “avoidance.” Horse hockey! $50,000 not out the door is $50,000 not out the door! It does not matter to me whether it was budgeted or not. Think about it this way, in your personal finances you have a household budget and you budget $200 per month for electricity ($2,400 per year). If you take steps to make sure lights are turned off and the thermostat is adjusted more moderately so that you reduce your monthly electric bill to $150 ($1,800 per year) is that cost savings or cost avoidance? It doesn’t matter because you have $600 more in your bank account than you counted on!
    My company too, puts a premium on “savings” but gives you no credit for “avoidance.” The Smart Alec in me asked once, “If cost avoidance isn’t so important then why not just divert the funds that I avoided spending into my paycheck? You already had it budgeted anyway!” I got blank stares from the finance people.
    Sorry for the rant, but this is a sore subject for me. Money not spent is a good thing, no matter what you call it!
     

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    #85075

    Satyendra Singh
    Member

    In your case ‘cost saving’ and ‘cost avoidance’ are same since if you don’t change the process you are going to actually spend $50000 – so it is absolutely a saving.
    In certain cases where ‘notional losses’ are shown against some benchmark which you are showing as negative variance but actually not spending from your pocket – improvement in these cases are called ‘cost avoidance’.

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    #85086

    Tierradentro
    Participant

    My company debates the difference  between hard and soft (avoidance) savings.  Due to the fact that most Six Sigma Practitioners are measured  somewhere down the line by real savings, this is usually a very spirited debate.
    One thing is for sure, avoidance or soft savings must be treated as equally important as hard savings or there is nothing to motivate us to address issues before they become problematic.  DFSS and other pre-launch disciplines will not  properly measured and recognized.  We might as well wait until the projects will deliver hard savings before addressing the issues.
     

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    #85090

    Scott Lewis
    Member

    George,
    I’m afraid I agree with your boss.  Money that you are spending now that you will stop spending is savings.  Money that you anticipate spending in the future that you no longer anticipate spending is avoidance. 
    I would disagree with JimBob’s somewhat when he says that they are both equivalent.  I would place a premium on savings over avoidance for three reasons.  The first reason is the time value of money.  Savings is money you are spending now.  Avoidance is money you anticipate spending later.  The second reason is the normal difficulty of predicting anything.  Although you anticipate spending X dollars on Y date.  Will you really end up spending that much at that time?   This is especially true with planned hiring.  It’s a common cost avoidance tactic to delay, defer, or eliminate budgeted hiring when money gets tight.  The final reason is the capacity for abuse.  It is a lot easier to fudge anticipated spending than current spending in order to find “savings” that just aren’t there and never will be.
    That being said, to completely disregard cost avoidance is equally wrong-headed.  Some cost avoidance items can be predicted with a high degree of certainty for both timing and amounts, and can be easily documented.  An example would be maintenance contracts on equipment that will be sold off because it is no longer needed.
    Hope this is useful.
    Scott

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    #85132

    Matt M
    Participant

    This is a real problem for our company, because we seperate the two categories (“official” or “hard” savings and “deferred” or “soft”).
    We can only officially use the hard savings for certification projects, but we’ve started to include deferred savings to show the REAL savings a project will provide.  It’s all up to your management, are they going to listen to accountants who don’t view the “hidden factory” or the BB?

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    #85137

    Mikel
    Member

    You are correct. It is all up to the management. Are they going to lead (define areas of opportunity) or hope for the best.

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    #85454

    reinaldo
    Participant

    Cost Avoidance allows you to accurately measure and compare each year’s utility performance against an average of previous years, or baseline year.
    From changes in the current year, you can calculate each of the adjustments to be added to your baseline year to make it equally comparable to your current year.
    The difference between your adjusted baseline year and your current year is your cost avoidance.Items used for adjustment, may be: * Square footage
    * Number of students
    * New equipment
    * Upgrades in equipment
    * Changes in weather
    * Hours of operation
    * Utility rate changesSo you can calculate your saving from the implemented saving plans.

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