ROI calc

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    Hello folks, general newby here to six sigma and related analysis techniques….
    Basically I have a process that must be improved, but doesn’t require a hardware, software or external training investment.
    There is no capital cost and the salary cost for team members would be paid either way as they have fulltime responsibilities outside of the project.
    By making certain process changes, I fully expect to reduce rework costs by X dollars.
    The Benefit is a significant reduction in rework costs related to labour.
    What financial metric would most appropriately reflect the benefit of moving this project forward?
    Thanks in advance,



    You’ll have several opportunities to make changes and improvements in your process.
    I recommend a few things:
    1.  Value-Stream Map – the current process. This includes a time study of each of the activities being performed and the lag time between each activity; identify who performs each, and an objective determination the “value / non-value” of each of those activities to the customer. Remember to rate the value of the activity NOT the employee performing the activity.
    2.  Loaded Labor Rate (divided to hrly / min) of each employee that is engaged in each step / activity.
    3.  Material Costs for the defects.
    Your measurements can be: reduction of material costs, improved cycle-time, reduction of labor costs.  Not sure if your company does any kind of Customer Satisfaction Indexing, this processimprovement will impact that satisfaction scoring.


    Michael Mead

    I think you are trying to find some investment to get a return on…right? It seems your time, and the team members is all you have, so use it. You should get a high net present value.  But that is why Ben Franklin said, ” An ounce of prevention is worth a pound of cure.”


    boggled BB

    What about the use of hours per 1000, against the standard calculation for project start up. If currently the standard is not been met (Due to time taken in completeing rework) then there is a chance of profit loss against the original price calculation. This might help when you can sell the project as $$$ loss per product. Then use the improved process to show saving per product. Every fat cat can be bought over by P&L :-)



    Rob,Since your marginal cost for the improvement project is basically zero $, I would use marginal analysis and the average cost/unit metric (before and after project) to estimate the average cost reduction per unit at current production levels. However finding the total dollar impact of the unit cost reduction quickly exceeds the role of most quality professionals and is best relegated to the CFO and upper mgt. Estimating the total dollar savings requires a “cost-volume-profit” analysis to determine the optimal application of this unit cost reduction (ie: increased capacity allocation to produce more units, a price reduction or promotion investment to sell more units, a profit gain from the improved contribution margin at current production levels, or a combination of these). These strategies all have their own pluses and minuses, new marginal costs, and uncertainties.A solid estimate of cost/unit reduction should be sufficient to justify doing the project IMHO.

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