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Calculating the Cost and Savings of Six Sigma Quality
B One of the most distinct differences between Six Sigma and other quality management systems is the link to business finances. Financial benefits of potential process improvement projects are quantified and used to help select and prioritize process improvement projects. Financial benefits are re-evaluated during the analyze phase to ensure that the cost of improvements suggested will be supported by the benefit of the project. And finally, the financial benefits are verified once the project enters the control (for DMAIC) and verify (for DMADV) phases. The rigor associated with linking Six Sigma projects to business financials helps connect everyone within the business -- not just the quality department and related personnel. The entire organization, including the CEO, CFO, line managers, employees, and shareholders, looks to Six Sigma to increase cost savings, productivity, and incremental revenue. It also helps differentiate substantial process improvements from insignificant 'fluff' projects that have little long-term benefit for the business. Below are a few posts from fellow quality professionals discussing how best to link quality to finances. If you have a question or would like to make an additional comment, just press the 'Post A Reply' button. "During the Define and Measure phase, we highlight what the project is supposed to do and how it is supposed to do it. Most of the time, maybe due to human natural tendencies, the improve phase is already running at the back of everyone's minds. "To forecast financial savings, we try to follow suit that "Under each category like tangible benefits, we try to break it further down to cost of sales, tax savings and all the financial jargon along with it. The cost of project implementation will be labour cost and all other liabilities that arises from doing the project. And with that, we try to give the most accurate forecast as we can during the D and M phase. "As the project goes along, there may be some changes and we update this forecast to be even more accurate and revise the financial plan for approval." Posted by: Dominic Lai "In so far as savings in DMAIC projects are concerned the way calculations are done is by computing the Costs saved by raising the Quality Level from x Sigma level to the Target y level." Posted by: Praneet "At the stage of selecting the project you should be able to estimate what the saving will be to the end improvement that you are trying to fix. There will clearly be elements of cost incurred during the project phase which will be quantified when the project is signed off by the finance department once the project is completed. But it is more the long term savings that will be achieved by fixing a defect that you trying to estimate...the costs incurred in getting there is another matter." Posted by: Anonymous "Bit of a conundrum this one. At the DEFINE stage of a project, we should have a defined issue/problem we wish to improve/overcome. eg. Reduce Variability of a Product. "As the Six Sigma team move through the ANALYZE and IMPROVE Stages of the Process they will identify various process improvement scenarios, and determine which has the best net benefit impact to the company. "After implementing this improvement, we can calculate the 'actual' net benefit realized. "HOWEVER......until the ANALYSE/IMPROVE stages we would not have know what improvement was necessary, let alone what categories of costs were going to be affected! Yet we hope to forecast the financial benefits at the beginning! "Hmmm.....am I missing something? OK, we might be able to identify some cost savings such as Reduction in Waste if we have less 'out-of-spec' material. But we won't know if, for example we would need to upgrade a machine, or review working practices, or change a raw material. So how might we know what costs/savings would be incurred?" Posted by: Don "An approach I often see is by splitting the finances into five categories: Cash Flow, Removal of Non Value Add, Cost Avoidance, Growth and Cost Savings. "The latter two impact the bottom-line immediately, whilst the others may not. Hence, it may be best to initially target those projects that have greatest impact in the Growth and Cost Savings categories, thereby showing an immediate saving to the bottom-line." Posted by: Don Previous Page > Linking Quality to Finances Reproduction Without Permission Is Strictly Prohibited – Copyright Requests Publish an Article: Do you have a Six Sigma tip, learning or case study? Share it with the largest community of Six Sigma professionals, and be recognized by your peers. It's a great way to promote your expertise and/or build your resume. Read more about submitting an article. "The Bottom Line" Links
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