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financial calculations

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  • #30965

    Nicoletti
    Participant

    My company is just beginning it’s journey into six sigma. Most people in my company are proposing COPQ as the measure of success. I am looking for insight on the “right” metrics to be measured financially. I know that COPQ is a critical component, but I’m sure there are others… I am ready to start the development of a tracking tool to roll up all the finances and I want to make sure I have captured more than COPQ..Thanks in advance for any suggestions.

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    #81367

    John Beaudon
    Participant

    The good thing you have going here is that it sounds like you are starting with a clean slate and thus can set up your tracking with unlimited creative potential.  Note: COPQ is strictliy Cost of Poor Quality.  Every company can look at every process they perform and find a COPQ.  In theory, you could even sum the individual process COPQ’s and come up with an overall COPQ for the company.  In reallity, this is very impractical, and thus comes in COPQ Savings.
    COPQ savings is the difference between the original COPQ of a process and the new COPQ after a process is improved.  This savings can be tracked on a per-project basis and totaled over time.  Note that the COPQ savings will usually have 2 components:  Hard Savings (Items that hit your balance sheets and income statement) and Soft Savings (where you saved someone time, improved customer satisfaction, etc.)  Soft saving may be converted to Hard savings by reducing head count, etc. and thus most financial people really focus on the hard savings, because this kind of thing hits budgets.
    Note that if you only track COPQ savings, you tend to ignore a lot of projects that focus on the customer.  Customer CTQ’s (Critical to Quality) factors are the real drivers of any business.  Revenue growth from keeping old customers and adding new is a hard thing to measure on a per project basis and usually ends up with just a footnote like “Customer satisfaction should improve due to reduced turn-around time…” or something like that.  Other issues occur like if you were to reduce inventory by $1 million dollars.  Did you save the $1 million, or simply the carrying cost associated with it since you may be consuming or selling the inventory in either case, but is just a matter of when it is used and purchased?
    Our first couple of years were spent on the $ value of the projects.  The $ value is what management wants to tout to share holders and ensures that the investment in training Greenbelts, Blackbelts, and Champions is getting some type of payback.  Next yearly evaluations of employees will start to contain $ value goals for projects, etc. Like any goal you hit, it gets raised every year.  Unfortunately, projects will save a lot of money the first couple of years you do them because of the low hanging fruit, but as your business gets better, the $ savings/project can get smaller and smaller.  Currently, we want to be measure more on linking projects to specific business goals of upper management, and will move away from emphasising the COPQ Savings.  Business goals also contain more customer focus than the $ alone.
    Something 6-Sigma leaves out of a lot of projects are Net Present Value calculations.  Many businesses need to insure specific returns on money and time invested in projects and should prioritize them based on this kind of information, but this is really just complicating the issue.
    Continue to get feedback on this issue and choose a plan or combination of ideas that works best for your environment.

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    #81377

    Ronald
    Participant

    John-
    You bring up some great points.  At my company, we have struggled the past year trying to determine a metric for capturing inventory reductions, elimination of planned capital, the cost of capital against a project, old & new revenue growth, etc. 
    Thus most of our beginning projects have been cost reduction based on material, increase productivity, etc.  If the financial side of the projects is properly understood, a lot more velocity could be spent performing the improvements instead of justifying them.

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