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Six Sigma – Financial Overview

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Roles and ResponsibilitiesRoles and Responsibilitiesof the Finance Support Teamof the Finance Support Team

• Define Savings/Benefits

• Provide Financial Support– Project Selection and Review

– Project Evaluation

– Track Savings/Benefits

• Validate/Audit Financial Results

• Management Reporting

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Finance TeamFinance Team

Being Developed

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Roles and ResponsibilitiesRoles and ResponsibilitiesBlack Belt vs. Financial Analyst Black Belt vs. Financial Analyst

Black Belt– Data Collection

– Original Analysis

– Cost Analysis

Financial Analyst– Provide Budget Information by Cost Center

– Cost/Benefit Analysis

– Review / Validation

– Budget Adjustment

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Project Process MapProject Process Map

Project Consideration Close

Project

Finance Sign-Off

Project Assignment

Project Champion

Enters High Level Estimate of Cost Savings

Measure & Analyze

• Establish Budget and Savings.

• Enter Data into Tracking Model

• Finance Sign-Off by Project Team Financial Analyst.

• Sign-Off by Functional Deployment Champion - Finance

Improve & Control

• Sign-Off by Project Team Financial Analyst

• Sign-Off by Director-Level Deployment Champion - Finance.

• Sign-Off by Functional Deployment Champion - Finance.

• Appropriate Budgets Adjusted.

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Finance Sign-OffFinance Sign-Off

1. Before an Opportunity becomes a Project– High-level “sanity check”– The Project Champion should have already entered numbers and attached the

model spreadsheet– The spreadsheet should contain values, in thousands of dollars, on the Input

and Output tabs only– Questions to ask:

– Are there hard savings?– Are the savings categorized correctly? (ie hard versus soft)– Are there any other possible sources of savings?– Is there an opportunity to save $250,000 or more?

2. Before the Process Improvement Takes Place– The Black Belt should have already entered numbers and attached another

copy of the model spreadsheet– The spreadsheet should contain values, in thousands of dollars, on the Input

and Output tabs as well as the detailed business unit tab– Questions to ask:

– How do these estimates compare with the previous estimates?– Are the correct cost centers numbers used?– If there are multiple cost centers, is the Multiple Cost Center tab completed?– Do these savings look realistic for the proposed improvement?– Are there any errors in the data entry?– How do the savings estimates compare with current budget numbers?

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Finance Sign-OffFinance Sign-Off

3. After the “Cooling-Off” Period– Detailed audit of savings– The spreadsheet should contain values, in thousands of dollars, on the

Input and Output tabs as well as the detailed business unit tab.

– Questions to ask:– Did the process improvement take place?– Does the process improvement result in the reported level of savings?– Are the correct cost centers numbers used?– If there are multiple cost centers, is the Multiple Cost Center tab completed?

4. Verify Financial results– Time required to validate financial benefits

5. Budget Adjustment– Adjust budgets to realize financial benefits

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Savings DefinitionSavings Definition

• “Hard” Savings– Measurable, controllable and contribute to earnings– Sources

• Reduction of non-fuel operating expenses• Lower carrying cost related to Capital Expenditure reduction• Margin improvements directly attributable to Six Sigma projects

• “Soft” Savings– Difficult to measure or not tied directly to earnings– Examples

• Customer satisfaction• Safety or regulatory compliance• Cash impact of reduced Capital Expenditure

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Savings DefinitionSavings Definition - Examples- Examples

Hard Savings • Decrease time to post payments received (increase interest income)• Decrease Uncollectables (Increase Revenue)• Decrease in Office Supply Expense• Decrease in Overtime Paid• Decrease in Postage Expense• Decrease in Travel Expense• Decrease in Late Payment Fees• Decrease in Rent/Lease Expense• Decrease in Utilities Expense• Decrease in Repair Costs

Soft Savings • Capital Expenditure saved net of

interest, depreciation, property tax• Increase in Customer Service• Increase in Customer Satisfaction• Increase in customer/employee Safety• Aid in Regulatory Compliance

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Sample Income StatementSample Income Statement

Cost Center 12345 ($ Thousands)

Revenue $11,000 $11,000Expenses:

O&M $ 6,000 $ 6,000Depreciation $ 1,000 - $ 50 $ 950Interest Expense $ 1,000 - $ 70 $ 930 Other Taxes $ 300 - $ 45 $ 255 Other Expenses $ 500 $ 500

Pretax Income $ 2,200 $165 $ 2,365

Result: $165 Thousand Hard Savings $835 Thousand Soft Savings

SAVINGS

$1 Million Capital Saved

* Assumes 20 year depreciation, 7% interest rate, 4.45% Property Tax rate.

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Sample Income StatementSample Income Statement

Cost Center 12345 ($ Thousands)

Revenue $11,000 $11,000Expenses:

O&M $ 6,000 - $1,000 $ 5,000Depreciation $ 1,000 $ 1,000Interest Expense $ 1,000 $ 1,000 Other Taxes $ 300 $ 300 Other Expenses $ 500 $ 500

Pretax Income $ 2,200 $1,000 $ 3,200

Result: $1 Million Hard Savings $0 Soft Savings

$1 Million O&M Reductions

SAVINGS

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Tracking SavingsTracking Savings

• Savings implemented during current fiscal year• Tracking

• Elements tracked by project:– Hard Savings - Cost Center & Expense Account

– Soft Savings - by category

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Validation/Audit of SavingsValidation/Audit of Savings

• Focus of validation will be on hard savings and capital saved. Preference is for ATOI versus cash.

• The 2001-2005 Budget/Plan is the baseline against which quantifiable savings will be measured.

• After project is completed, validated and approved, annual operating budget will be adjusted accordingly.

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1. The purpose of involving Finance in the up-front process is to ensure that the financial targets set for the initiative are supported by the project selection process. This is when initial financial targets for each project are established - both cost and revenue.

2. If the project includes a Lean component, the financial benefits should be validated after the Completion of the lean event.

3. At the completion of the Measure Phase, the BB, Champion and finance representative can validate the financial impact and determine if the project should continue.

4. Upon completion of the Improve Phase, the full scope of the cost savings and revenue generation is determined. Many clients will “book savings” at this point.

5. The final audit of a successful project is at the completion + 3 month point. This is validation that the project met the goals of the project and the revenue/cost were sustainable.

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Sample List of Sample List of DeliverablesDeliverables

Action Items for Functional Champion - Finance Updated 12/19/02Task Sub Tasks Point Person Date Due Dependencies

Create a Model to be used to calculate SavingsMust be done prior to BB and Financial Resource Training

Define Hard Savings Needed for the Executive SummitDefine Soft Savings Needed for the Executive Summit

Establish Finance Support Resources Must be done prior to TrainingDefine Expectations Must be done prior to DeploymentIdentify Resource Contacts DoneCommunicate Expectations

Define Savings Validation ProcessMust be done prior to the end of the 1st w eek of BB training

Identify Points w ithin each project w here sign off is requiredDefine the logistics of how the sign off w ill occur.

Educate the Black Belts on the Financial ProcessesMust be done before the end of the1st w eek of BB training

Define the financial process w hich Black Belts w ill need to understand.Develop the PresentationTrain the Black Belts

Develop an Educational Presentation for the Financial Support Resource Team

Must be done before the end of the 1st w eek of BB training

Define the financial models and how to use them.Develop the PresentationPresent the Training

Ensure Project Savings are monitored.Must be done before the 1st w eek of BB training

Clarify w hat needs to be tracked.Verify Project Tracking Softw are has appropriate f ields.

Establish Communication Among Functional Champion - Deployment Champions, CEO

This does not need to be on the project plan.

Identify how these groups w ill communicateDefine the communication tools

Develop a Reporting Template that summarizes Financial Progress

Define w hat should be included in the templateDevelop the template

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Financial IntegrationWith Six SigmaSample Internal Communication

Document

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Project Savings/Review Package

• Purpose of Project Savings• Project Selection Process• Financial Impact

• Benefit Categories• Financial Integration• Detailed Worksheets

• Six Sigma savings worksheet

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Purpose of Six SigmaFinancial Integration

Purpose: Present a method of measuring and integrating process improvement benefits with the financial statements.

Problem: Business units continue to have difficulty integrating the expected cost savings from improvement projects, Six Sigma or non-Six Sigma, with the financial statements.

Challenge: Develop a way of measuring improvement projects costs and benefits (and the timing of these) which will better allow managers to:

(1) more clearly define the expected benefits; and (2) understand the impact of those expected benefits on the business units financial

statements.

Result: Development of a brief methodology and a measurement system which can be used to plan expectations and measure results by:

(1) more clearly defining expected benefits in dollar amounts and timing; (2) indicating the expected impact on the business units financial statements by month; and(3) allowing feedback by comparing results to expectations at

(a) the project step level (actionable items) (b) by project (net sustainable results)(c) for the entire pool of projects monthly.

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Project Selection ProcessCompanyFinancial

Commitment

Goal Deployment

ProjectsChartered

Aligned withOrg. Goals?

Is there financial benefit?

Find projectaligned withsite goals

Customer Sat benefit?

Employee Satbenefit?

yes yes

no no

no

Why work the project? See your mgr &

6 sigma champion.

no

Regulatory issue?

HS&Ebenefit?

no

no

Calculate Savings

Write upCharter

Signoff of savings worksheet & charter by mgr & six sigma

champion

yes

yes

yes

yes

Why work the project?

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Timing?

Cost?

Cash Flow?

Revenue?

Six Sigma Project Expectations Require Financial Translation

revenue equals unit volume of output multiplied by actual unit prices obtained from customers

the cost of resources (material, labor, etc.) input to obtain an established quantity of good output

is there a one time, non operating expense impact, such as a decrease in inventory levels, which frees up cash and, if so, what is the timing?

in which of the next calendar months do each of the impacts occur?

Training, worksheets and integration with financial commitments will facilitate “Financial Translation”

Does the Six Sigma Project directly result in a change in the following:

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Six Sigma Financial Benefit Categories

Elimination or reduction of a cost currently incurred in the process

Taking a current action to eliminate/reduce a cost which will otherwise be incurred in the futureTwo subcategories:- In the Annual Operating Plan (AOP) - Not in the AOP

Elimination or reduction of a non value added process activity which currently incurs costQuestions to consider:1. Is this actually a cost takeout (then see above)?2. Is the “saved resource” re-invested in value added activities?3. Is the “saved resource” converted to other NVA activities?

Reduction in “base line” level of an asset or increase in a liability (example: a one time permanent significant decrease in inventory frees up the cash previously invested in this amount of inventory)

In a market with backlog demand, removal of a constraint to growth can increase revenue

Operating Income OI / Cost Takeout

Cost Avoidance

Reduction of NVA (Non-Value Added)

Operating Income (OI) / Volume

One Time Cash Flow Impact

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OI/Cost Takeout Category Impact on purchased raw material?

What inputs from my process are raw materials purchased from external suppliers?

What is the current scrap factor? What is the volume? What do the raw materials cost? What percent of the total value is purchased? If purchased materials are a small percent of the

total value, where should I work? If purchased materials are a large percent of the

total value, where should I work? What raw material purchases can be decreased or

eliminated as a result of my project? How will my project reduce the actual dollars spent

on purchased materials? What is the timing associated with the dollars

saved? Are material problems driven by the supplier’s

quality problems? Are we incurring a cost due to a supplier’s quality

problems? Can we measure the cost caused by the

supplier? Can we use ABM to measure the cost? Can we recover the cost from the supplier? Do the supplier’s processes need to be

addressed?

Impact on Payroll Expense?

As a result of my project, can we reduce the headcount in my process?

What is the current headcount? How does the current headcount compare to the

planned headcount? What headcount is built into the plan? What headcount is built into the forecast?

Has headcount changed recently? Are there unfilled job openings? How will headcount reduction be achieved?

By attrition? By eliminating unfilled, budgeted openings? By involuntary reduction? What is the timing?

What is the level of cross-training in the area? How will headcount reduction affect other metrics?

Employee satisfaction? What is the impact on the customer? Will overall output levels (throughput) remain the

same? Is there a risk of losing “tribal knowledge”?

Other Out-of-pocket expenses Who do we pay? What goods or services are we paying for?

Financial Benefit Categories

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Are these out-of-pocket expenses triggered by my

process? Do defects in my process cause even higher out-of-

pocket expenses? Will my project reduce other out-of-pocket expenses?

Cost Avoidance Category What future costs could be avoided as a result of my

project? Planned increase in headcount? Planned capital equipment purchases?

Were these future costs built into the financial plan ? If they were planned, what expenditures were planned by

quarter? If the future costs were not planned, when were they first

identified? Are these costs are truly unavoidable without implementing

a process improvement?

NVA Reduction Category Which activities in my process are non-value-added? Do the process operators understand and agree on NVA

definitions? How much time is spent on these NVA activities? Can I reliably measure or estimate the time spent on NVA

activities? Do I have a process for learning more about NVA

activities? What is the root cause that drives NVA activities in my

process? Does my project reduce or eliminate the driver of NVA? If NVA is reduced by 40 hours per week, can headcount be

reduced? If so, is this really cost takeout? How much NVA time can be freed up as a result of my

project? How do I measure it? Can I estimate the NVA cost before and after my project? Can ABM (Activity Based Management) be used to help

estimate NVA? .

Financial Benefit Categories

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One Time Cash Flow Category Where are the potential one time cash benefits? Does my project have any impact on inventory levels?

Can my project permanently reduce inventory levels? How much inventory do we have now? How much inventory will we have after my project is

complete? How does the current level compare to past inventory

levels? What is the trend? What is driving the trend and can my project have a

positive impact? What are the root causes that drive inventory levels? Can I reduce or eliminate the root causes?

What equipment or other assets could be freed up and soldas a results of my project?

OI/Volume Category What is the capacity of the process?

What output levels have historically been produced? How do the historical output levels vary with time and

why? What is the maximum capacity of the current process? What are the utilization levels based on historical

output.

How could current capacity be increased? What scrap, yield, and rework factors exist in the

current process? Do scrap, yield, and rework problems limit the

maximum output? How much capacity could be added if scrap, yield,

and rework were reduced? Is the entire process balanced with respect to the

capacity of each sub-process? Will adding capacity on one sub-process result in an

increased output for the overall process? What is the demand?

Who is the customer that creates the demand for theoutputs of this process?

What is the current demand level? What is the trend? What is driving the trend and how long will it continue? What is the backlog? What incremental volume could realistically be gained

if capacity were increased? If demand exceeds capacity, what does this mean to my

project? Will my project expand capacity? When will the new capacity be available? How many additional units can be sold per period? What is the average price per unit? What is the additional sales revenue that may be

realized as a result of my project? If capacity exceeds demand, will there be any benefits from

increasing capacity?

Financial Benefit Categories

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Six SigmaExpected

Result

CostAvoidance

?

ReduceNVA

?

CashFlow

?

CostTakeout

?

OI/CostTakeout

CostAvoidance

ReduceNVA

CashFlow

OI/Volume

InAOP

?

InForecast

?

SvdResource

to VA?

NoBenefit

Yes Yes

Yes

NonFinancialBenefit

Net NVAReduction

Est. NetSavings

Yes

No

No

No

No

NoNo

No

Yes

Yes

Yes

Est. NetSavings

Revenue Cost CashFlow

Savings Compared to Prior PeriodActual Reporting

(Quarterly)

Yes

No

Six Sigma Opportunities &Financial Statement Impact

ProjectOpportunities Non

Financial

Six Sigma SavingsNot Visible in

Financial Statements

Financial(Cost

Avoidance)

Constraint?

No

YesBacklog

?Growth

?No

Yes

Savings Compared to Plan/Forecast

Cost

No Six Sigmaor Fin Stmt

BenefitFinancial

(NVAReduction)

Est. NetSavings

Est. NetCash Flow

Est. NetIncrease

(include additional cost)

Totals $$ $$$$ $$ $$ $$-- --

Reporting to Corporate: NVAto VA

CostAvoidance

OperatingInc Impact

CashFlow

Six SigmaExpected

Result

CostAvoidance

?

ReduceNVA

?

CashFlow

?

CostTakeout

?

OI/CostTakeout

CostAvoidance

ReduceNVA

CashFlow

OI/Volume

InAOP

?

InForecast

?

SvdResource

to VA?

NoBenefit

NoBenefit

Yes Yes

Yes

NonFinancialBenefit

NonFinancialBenefit

Net NVAReduction

Est. NetSavings

Yes

No

No

No

No

NoNo

No

Yes

Yes

Yes

Est. NetSavings

Revenue Cost CashFlow

Savings Compared to Prior PeriodActual Reporting

(Quarterly)

Yes

No

Six Sigma Opportunities &Financial Statement Impact

ProjectOpportunities Non

Financial

Six Sigma SavingsNot Visible in

Financial Statements

Financial(Cost

Avoidance)

Constraint?

No

YesBacklog

?Growth

?No

Yes

Savings Compared to Plan/Forecast

Cost

No Six Sigmaor Fin Stmt

BenefitFinancial

(NVAReduction)

Est. NetSavingsEst. NetSavings

Est. NetCash Flow

Est. NetIncrease

(include additional cost)

Totals $$ $$$$ $$ $$ $$-- --

Reporting to Corporate: NVAto VA

CostAvoidance

OperatingInc Impact

CashFlow

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Six Sigma Scorecard

Detailed Project Tracking -Indicates I've received input on that project

Indicates I've received input that it's under investigationIndicates no input 2000 Savings Information

Jan-00

SIX SIGMA PROJECTS Start Date

End Date Savings End Date

SavingsType

Owner Prod Line

Status - (Complete, On Hold, Current or Dropped)

Plan Actual Plan Actual Plan Actual Plan

Billing Process May-00 Dec-00 May-01 OI-CS Smith Fans Current 0 0 0 0

Workscope Reduction Jan-99 Aug-99 Sep-00 CA Jones Fans Complete 0.167 1.727 0.167 1.256 0.167 1.57 0.167

Eliminate misuse of PAA time Mar-00 Jul-00 Jul-01 CF Mgr 1 Site Current 0 0 0 0 0 0 0

Product Defect Reduction Sep-99 CA Mgr 2 Comp Dropped 0 0 0.005 0.005

Eliminate Needless Shiiping of Product Aug-99 Nov-99 Smith Comp On Hold

GB Project - Credit Hold May-99 Nov-99 Oct-00 CF Jones Comp Complete 0.095 0.09522 0.095 0.095 0.095 0.089 0.095

Grand Total 0.262 1.82222 0.262 1.351 0.267 1.659 0.267

OTHER NOTES:* Dropped projects remain on the list for 1 month for visibility and then are recorded on a dropped project list* Completed projects remain on list until the savings we can claim are exhausted. Savings end date is the field that tracks those dates* Please only fill in the green shaded areas for savings -- all other savings fields are calculated from those.

Feb-00 Mar-00 Apr-00

PHOENIX PROJ ECT SCORECARD

0

2Add any new six sigma productivityprojects that are:- launching in your product area- being worked by any Six Sigmaactivities within your product area.Indicate ownership in column F -- whoever is listed as owner will beon distribution to update this sheet.

Indicate project start & end dates. Indicate when you estimate savings will start for the project. Rule of thumb is to claim 12 mths of savings for a project.

Enter savings projected (or realized) inmonthly buckets starting hereOnly fill in green shaded areas

Indicate Project ownership, product it impacts & status of project (current, complete, on hold or dropped) - please note those that are no longer working!

Select savings type:1. Operating income, Volume (OI-V), 2. Operating income, cost savings (OI-CS)3. Cost Avoidance (CA)4. NVA to VA (NVA)5. Cash Flow (CF)