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Justifying lead time reduction projects

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  • #37460

    Whats in a Name
    Member

    I am new to six sgima and currently working on a lead time reduction project. In order to build the busness case we are looking to find a cost justification in terms of a dollar amount. How does one quantify a project financially- the only thing i can think of is increase in sales ( which I can only anticipate) and reduce in labor/unit.  I could account for WIP inventory in office- but how do i account for this? Is this between departments? or the total dollar amount in sales for that period?..I am a very confused about this. Any help would be great.
     
    Thank you

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    #110362

    Ropp
    Participant

    financial benifits at the define phase are an assumption and should be part of the project qualification process, agreed upon by the BCQ or Business Quality Council. Your project scope is very important and has a direct relationship with your problem statement ,CTQ and yes the finacial benifits. For a sucessful DMAIC project your company’s financial dept. should track and report the money. The finacial benifit is a guess but is reported out when the project is in the control phase. Be inventive look at your as-is process map add labour times per transaction, calculate the salary cost. If your to-be process reduces 2 workers report their salary removed anualized. This is the easiest of all. Reducing lead time could mean moving to a direct ship or drop ship environment reducing warehouse square footage costs and all that other stuff pertaining to material handling

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    #110586

    KWalker
    Participant

    If you’re actually removing hands-on time, then the easiest metric is labor savings, but you can’t realize that as actual $ for the company unless you can cut a head, or put off a hiring. If the hands-on time remains the same, but you’ve simplified to reduce your cycle time, then it may be you can show that fewer process steps lead to fewer errors, which cost $ to fix. There may well be a customer satisfaction metric that would apply if they feel the shorter turn-around as a benefit. You can’t really claim increased sales unless your long turn-around means you can’t process enough units to meet your sales, and you need shorter turn to keep up. Processing units faster if you can’t then sell them isn’t increased sales.

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    #110589

    Richard Peffley
    Member

    A reduction in lead time on the “bottleneck” of the process will translate into greater through put.  The potential increase in sales resulting from a reduction in cycle time is the major source of value for these projects.  The profit margin is much higher on incremental sales because all of your fixed costs are covered by existing business projections.  How much of the new capacity can be sold?

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    #110590

    Johnny Guilherme
    Participant

    You can justify WIP by counting the WIP (if possible) and then cost it out per costing given by your costing department. It might not be vary accurate, but maybe count at different times and then get some sort of average wip per work station or department. Once the leadtime is improved then you estimate the future “look” wip and cost this out. Then there must be some sort of savings between the old and new situation.
    Johnny Guilherme

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    #110599

    DaveG
    Participant

    If you are new to SS, why are you responsible for determining cost savings?  A sponsor should do that.  It sounds as if someone already decided on lead time reduction.  If so why is it necessary to justify the project?  Any argument against lead time reduction would be highly specialized.
    Do you have a clear model of your supply chain?
    Please disregard any mention of (1) labor calculations and (2) head count reduction.
    (1) Labor costs based on wage x task time are misleading because (a) it  doesn’t recognized bottlenecks and (b) most human activity is waste – so you are merely quantifying waste.  If you plan your processes correctly, you could actually increase time consumed by individual tasks and still raise your gross efficiency.
    (2) A highly ethical company consumes its “found” capacity with additional sales.

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    #110649

    pise
    Participant

    Not having a full picture of the chain it will be difficult to recommend specific solutions that will be of any benefit… I do a lot of consulting in the supply chain and network planning and lead time reduction is done for the following:
    1. Decreasing lead time allows POSTPONEMENT…  a concept that needs some thought
    The idea is postponing a decision (say order confirmation) allows more time for the ordering group/buyer/customer… what does it do?… more time allows us to be more certain (or a little more certain!) … more certainness will allow the order to be more perfect – in terms of the following:
    a. quantity
    b. specification
    c. getting it to the right location
    The benefits to business are enormous…
    1. getting it to the right location – reduces transport costs
    2. perfect order (right specification and/or quantity) means less obsolescence, meeting the demand better – customer satisfaction
    So cycle time reduction should be seen in terms of the ‘benefits to the business’ rather than from a cost saving perspective
    Take up the project only if it benefits the business, please do not build a case based on cost saving when it comes to an integrated extended enterprise process that is constrained by several other process that are outside your immediate organization
    You should have a look at the following concepts
    1. Logistics postponement
    2. Order penetration point
    Try GOOGLE search for information on the above
    It will assist your quest for building a case that delivers ‘value’ and is outward looking as opposed to cost – which is inward focussed
    Regards,
    Raj

     

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    #110697

    DaveG
    Participant

    Raj,
    Your answer is very interesting, but you should address it to the original poster – you can’t be sure they are following the whole thread.
    Dave

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    #110808

    pise
    Participant

    Not having a full picture of the chain it will be difficult to recommend specific solutions that will be of any benefit… I do a lot of consulting work in the supply chain space including network planning… lead time reduction is one of the factors considered and is done for the following:
    1. Decreasing lead time allows POSTPONEMENT…  a concept that needs some thought
    The idea is about flexibility (or ability) of postponing a decision (say order confirmation) allows more time for the ordering group/buyer/customer… what does it do?… more time allows us to be more certain (or a little more certain!) … more certainness will allow the order to be more perfect – in terms of the following:
    a. quantity
    b. specification
    c. getting it to the right location
    The benefits to business are enormous…
    1. getting it to the right location – reduces transport costs
    2. perfect order (right specification and/or quantity) means less obsolescence, meeting the demand better – customer satisfaction
    So cycle time reduction should be seen in terms of the ‘benefits to the business’ rather than from a cost saving perspective
    Take up the project only if it benefits the business, please do not build a case based on cost saving when it comes to an (integrated) extended enterprise process that is constrained by several other process that are outside your immediate organization
    You should have a look at the following concepts
    1. Logistics postponement
    2. Order penetration point
    Try GOOGLE search for information on the above
    It will assist your quest for building a case that delivers ‘value’ and is outward looking as opposed to cost – which is inward focussed
    Regards,
    Raj

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