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Validating Financial Impact of Six Sigma/Lean Projec

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  • #43076

    Sean
    Member

    Question:
    How do you accurately account for actual financial benefit for the following example:
    Lets say the result of a project saves 5 line workers 30 minutes each a day.Β  The time saved is not enough to fire one of the employees.Β  There is no more demand to fill the excess capacity.Β  The 30 minutes per worker is used to allow them 30 more minutes for a break, so there is no actual financial benefit….correct?

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    #136339

    Dale
    Participant

    I’ve seen it listed as no save and as aΒ soft save.Β  The soft save thought is that as volume increases you can do it without incurring increased worker expense.Β  Are you sure there won’t be increased demand over the next 12 months?Β  If so, then I think no save is right.Β Are there other saves – inventory, quality, customer order fulfullment cycle time improvements, ?Β  If not, why did you do the project?

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    #136343

    Heebeegeebee BB
    Participant

    It’s Cost avoidance.
    However…
    If the contract is firm-fixed, the avoidance impacts net-operating profits due to increased margin.Β  Talk to your finance weenie about burdened rates/factors to calc $$$ impact.

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    #136344

    OLD
    Participant

    HBGBBB:
    Β 
    Please explainΒ…. What cost is avoided when the labor $Β’s paid remain the same? Are you saying that the DIFFERENCE between the original cost/units and the new rate (150 minutes less for the same number of units) is being avoided?
    Β Thank you! OLD

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    #136345

    Heebeegeebee BB
    Participant

    Billable hours are reduced, right?
    If ten people work on a unit and you redesign the process so that only 5 are needed, even if the labor rate isn’t reduced, you have cost avoidance.

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    #136347

    OLD
    Participant

    HBGBBB:
    Β 
    IΒ’ll be the first to admit IΒ’m not tracking with the logicΒ….. In this example, how are billable hours reduced?
    Β 
    Are you saying that the 150 minutes is now being charged to an Β“indirectΒ” account and not being charged to Β“directΒ” labor as in the original process?
    Β 
    If yes, then the overall labor $Β’s/day paid remain the same but the 150 minutes is avoided due to hitting another account?
    Β 
    Thinking from a TOC perspective, I am tending to agree with the poster that there is $0 savings and $0 cost avoidance.
    Β 
    Regards,
    Β OLD

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    #136351

    Adam L Bowden
    Participant

    Some things you might want to watch out for:
    – when your finance guys roll the numbers your cost per hour for each cell will increase due to overhead absorbtion due to freed up time.
    – if they now have 30 mins of breaks you probably want to get them 5s trained so they can maintain their own area (cos the’re probably less tired)
    Adam
    NB – the $ benefit might show up as a “soft save” now BUT there may be bottom line/hard $ benefits coming from giving them breaks such as productivity improvements, scrap reduction etc etc – This does depend upon there being proactive LEADERSHIP vs reactive MANAGEMENT in place – you’ll need to follow the recent threads on Culture which infer the benefits of Culture Change and SS.

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    #136359

    Heebeegeebee BB
    Participant

    Old,
    No.Β Β  I just closed a project that resulted in a 100% reduction of hours billed to a particular product for a particular activity (non value-added inspection process).Β Β  The people that were charging to this cost center are now freed up to work on value-added activities.Β Β  They now “lift and shift” their billing to other activities/cost centers.Β Β  The program that produces this part has realized 100% avoidance of cost, and since they are firm-fixed, the alleviation impacts margin via net operating profits.Β Β  In reality, the people charging were working an avg of 11 hours a day to keep up.Β Β  Now, They are back to a standard 8 hour shift and working on value-added in other cost centers.Β Β  This Company differentiates cost centers and recognizes the bottom line impact of avoidance.Β Β  Rather refreshing, actually.

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    #136362

    OLD
    Participant

    HBGBBB:
    Β 
    Thank you for taking the time to explain. Very enlightening and it IS a refreshing way to look at it!!!!Β  I think you have provided some ideas/options for the poster to consider.
    Β 
    Good Luck!
    Β OLD

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    #136729

    Sr.Venkatramani
    Member

    Hello all,
    Time saved is creating a opportunity for increasing the volume. If Volume is same then we have to think can we prepone the next day schedule so that cycle time of the products is reduced. Even that is not possible then involve the workforce in some Training activity, Kaizen activity, Motivational Activities which ultimately benefits the business firm. Nothing is possible then with reduced work load our employees turnover ratio will be reduced. So the indirect benefit is always assured for the firm – No second tought in it.”Some thing is better than nothing “

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    #136732

    Adam
    Participant

    You can shut down 30 minutes earlier and save on utility expenses. You also have a quicker cycle time which can become more predictable. What is your first time yield percentage for this process? How long did the process take before the improvement? Projects should be based on organizational goals and if there was no demand there for your product, finances and time should have been applied to marketing, being that your bottleneck is your customer demand, not necessarily the product. Also, event focus should not be on how many people you can fire. LEAN, not mean.
    Best of luck to you.

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    #136733

    Vinay
    Member

    There are several benefits:
    (a) Employees can have longer breaks, (b) In case there is an increase in demand or rework, and company does not need to pay overtime, (c) If an employee is on vacation or need some time off, other 4 employeesΒ can produce more to compensate for theΒ missing employee.
    Β 
    Β Β Β Β 

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    #136737

    Chaithanya
    Participant

    If I understand this right, there has been a reduction in the takt time of the process, there if we can take on additional workload. However if you do not foresee any demand or increase in the workload, a Kaizen project to eliminate NVA can help improve the process or try automating it. Post that, you can relocating the employee to processes where there is a requirement to meet the demand… you can calculate the financial impact by quanitfing the impact of not doing the lean …

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    #136779

    Scott
    Member

    Interesting how the answers went from accounting for cash flow impact to reinforcing continuous improvement. I will take all of the continuous improvement I can get, especially on the bottleneck (as one author points us to.) We might be a bit naive to think we actually can measure true cash flow for many improvements involved with so many other dynamics and variables hitting a business simultaneously. Enough improvements with good cost control will always win – even if the “Adjustments come in steps versus at each improvement.
    I am the MBB for Finance, in case you want to check any bias I might have.

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