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Project savings/ BB bonuses

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  • #28245

    A.H.
    Participant

    If I have project savings in the first year of 100,000 dollars, can I count that savings for the following years or is it a one time only savings? Seems to me that amount would be counted for all years thereafter since it is to the bottom line.What is the guideline for BB bonuses, is there a percentage given based on project savings?

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    #70046

    AnnonymousBB
    Participant

    Dear A.H. – Whether you can count it in subsequent years depends on the nature of the savings.  Generally, the Finance /Accounting department has some time horizon which they estimate up to, and it can depend on obscure things in your company’s tax policies. 
    In my (very large, manufacturing) organization, it’s 5 years.  We are asked to estimate cash flows (and changes to cash flows) due to our projects for up to 5 years forward from project inititation.  Projects that save or require investment  have one-time cash flow impact per item.  Projects which save material cost or labor are counted by period (month, quarter or year depending on who’s asking) up to the time horizon OR up to the point where the affected product undergoes a major change.  Then, the lower cost is rolled into the base from which the updated product is measured.  The same “roll it into the base and quit claimimg credit” happens when the time horizon expires.  
    I hope this helps.
    As to giving BB’s bonuses based on savings – I offered to work for only 1% of what I could save the company annually – figured the same way for me as for the 6 Sigma management sytem.  No salary, and if they insisted not even benefits. I was turned down cold.  It would have been about a 10X raise so far this year. Remember if you do it that the bonus should be big enough to be meaningful (10-50% of total compensation) and also consider your need for secondary metrics (BB’s should be mentoring and training too – but this does not produce direct savings.  No one should get a big bonus who doesn’t get good marks as a trainer/mentor too.) 
     

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    #70076

    Adam L Bowden
    Participant

    Hi,Project savings – some companies use 2 years and some just 1 year. If you are going to use multiple years you might want to apply a “discount factor” for the value of money today.BB – Bonusses – some offer bonusses and some companies consider that you should consider the job and its potential and intangible career progression itself a bonus.Adam

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    #70080

    Smithsigma
    Member

    Let me quote you, “As to giving BB’s bonuses based on savings – I offered to work for only 1% of what I could save the company annually – figured the same way for me as for the 6 Sigma management system.  No salary, and if they insisted not even benefits. I was turned down cold.  It would have been about a 10X raise so far this year.”
    Now let’s do the math…If you were making only $20,000 a year right now (and surely you make more than that), that would mean you WOULD BE making $200,000 per year under your scenario.  Also, since that’s 1% of what you saved the company, then you claim you have saved the company $20 million.
    Give us all a break, man. 
     

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    #70093

    Annonymous BB
    Participant

    Dear Smith Sigma –
    I did do the math, and I meant what I said.  When one is working fairly far up front, doing DFSS (and DFM) on high-volume manufactured products, and can count “cost avoidance” both on facilities investment, and the in-product content – well, yeah – we cut more than $100 million out of our capital, material, and direct expense budgets on future products due to the work of teams I facilitated.
    I could not possibly achieve these kind of results as a “lone wolf / gunslinger / samurai” type BB.  It takes a good, cross-functional team. Nor could I do it without the leverage of early cost/quality forecast, thorough analysis and directed change while the product and the plant are still only on paper (or on-screen).  And if we made one-offs (custom-engineered products) instead of hundreds of thousands of units per year, the results would be similarily less in magnitude. 
    The major reason the powers-that-be didn’t want to consider paying me (or anyone else) based on this type of savings is that they depend on half or more of this savings happening “anyway” because of the iterative nature of product development. If my organization actually “did what they said”  in terms of institutionalizing up-front analysis, design re-use and “simultaneous engineering”  – there wouldn’t be this kind of savings opportunity.  Nor would we be able to get the kind of improvements we’re seeing Six Sigma provide in our current product lines – where BB’s are saving $1-5 million apiece per year – when we can get the darn projects implemented through the fear, uncertainty and doubt being sown by our upper-middle management.

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    #70095

    melvin
    Participant

    “Cost avoidance” is the “funniest” money there is.  While I’m confident you have had success as a Black Belt (Samurai or not), forgive me for being skeptical of any savings based on “cost avoidance”.
    If we could ever create an accounting (Black Belt project savings) measurement system with a gage R&R of less than 85%, we could perhaps go to a “performance-based” compensation system.  Right now, there is so much disparity between savings declaration guidelines from company to company, it is impossible for me to fathom what you are saying as being real  – or just a $100,000,000 illusion.

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    #70096

    Smithsigma
    Member

    Based on the way you are calculating your savings, I can see how you can come up with figures like $100 million dollars in a year’s time.  So, while I don’t agree with your methodology completely (i.e. including cost avoidance???), you have made a case with regards to what the savings consists of.
    However, since you didn’t do this on your own (as the “lonewolf” BB would do) and you instead worked with teams, wouldn’t it be more appropriate to say that the entire team should receive compensation based on the savings you’re claiming.  In simple terms, maybe you get 10% of that 1% you refered to, and let the team have the other 90%.
    Just a thought.

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    #70097

    melvin
    Participant

    Also……
    Anybody making a $100,000 per year and asking for $1,000,000 per year would know that “Anonymous” is spelled with one “n”.
     

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    #70098

    anonymous BB
    Participant

    I agree.  I ended up pursuing and obtaining an MBA after a few years in engineering, because I wanted to know what the accountants knew, and how to get my projects past their “hurdles”.  Cost avaoidance is not “real” savings, and you can argue for years about the validity of one set of  “what counts” rules for vs. another. Never the less, it is also comparatively much easier to implement and has enormous leverage and organizational benefit.  
    The highly “subjective” nature of the rules for allocating costs (especially overhead and sunk capital costs) and cost savings is the major reason I’d argue against any organization giving BB’s bonuses based on savings.  The temptation to exaggerate savings claims to make the BB or the whole 6 Sigma program look good is too great – especially wher the 6 Sigma program director and/or the Accounting director are given executive bonuses under similar rules.

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    #70099

    anonymous BB
    Participant

    I definately agree that if bonuses are to be awarded based on savings, the whole team should recieve a bonus (possibly even the same mout of bonus or the same proportion of their base salary.)
    Becasue of the slipperiness of rules for calculating savings (and cost avoidance savings are among the most slippery…), I believe that teams and BB’s should NOT be given bonuses based on savings.  I also think that BB’s should NOT be singled out because of their status as BB’s for monetary awards of any kind .  Policies of that sort destroy teamwork and cooperation more effectively than anything else but forced-ranking of employees. 

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    #70100

    AnnonymousBB
    Participant

    Ahhh – not one ‘n’ only.  Besides, the way I spell my nom-de-forum is intentionally unique.

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    #70156

    Mike Carnell
    Participant

    The length of time is really irrelevant as long as it is the same for everyone. It should be the call of your financial group.
    As far as a bonus that is dependent on the agreement you made when you hired on. Did you negotiate a bonus structure based on savings? If not who paid for your training? I have seen a company have their BB sign an agreement to pay back $65,000 if they left within 1 year of graduation. If the bonus wasn’t part of your agreement then you either renegotiate or you live up to what you agreed to do.
    I really hate to jump into the middle of the percent of Savings argument but I have offered to do deployments for a percent of savings since 1996. I have seen a lot a self agrandizing talk from “C one thing or anothers” about what they do or don’t believe about Jack Welches numbers. Never have seen any of them pick up the phone and tell him to his face. The bottom line I have made the offer (never for 1%) but I have only used a 1 year window and I have never had anyone accept the offer. I have also had an offer of 200% ROI and never had to repay anything. If it isn’t what Annonymous claims he will do himself but what is achieved through the deployment, a $20,000,000 savings isn’t unreasonable. We did more than that at Allied Automotive in year one (over twice but we were a group of 3 consultants). I have seen a customer give us credit for savings of $100,000,000 on a project – the consultant working the job thought it was incorrect but the company believed it. There is a public service type company in progress right now with about $75,000,000 from 6 BB’s. These are exceptions to the rule but it only takes one to make the risk viable. 
    Is the real issue here that Annonymous believes enough in themselves to make the offer while others sit on the sideline and only wish they had the guts to make the offer. Bottom line is “that isn’t what this guys question was.”
     

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    #70191

    Payne
    Participant

    As Adam said above, Some companies project only in the current and next fiscal year.   Some project further though.
    For instance, Bombardier projects out to 5 years with a 3% + adjustment per year.   There are “One time hitters” too.
    As for bonuses, many of the “founding father” companies have discontinued their BB bonus structure.   (They wonder why retention is such an issue).
     

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    #70198

    Smithsigma
    Member

    I agree with you that the original question had nothing to do with the remarks I made.  But that’s why it’s called a discussion forum, right?  Discussions lead to other discussions that may not be related to the original discussion…
    I have seen too many people make claims for savings that they achieved that they really had very little to do with.  Meanwhile, the poor person actually spending all their time working within the process (and doing most of the “work” on the project) gets no credit for the successes realized. 
    Sure, MBBs and BBs are a must to make the six sigma system of process improvement happen, but it’s the team (management and plant employees) that implement the changes, and the control system that keeps the savings real.
     

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