Making $ense of LSS $avings
Manny Veloso
With Our Learn-and-Do Approach, We Build Practitioners Who Think and Act Like Owners
Learn how we build practitioners with our hands-on coaching approach. Check out the CICS advantage today!
Visit the CICS LSS learning kits webstore to browse the coaching services we offer. See why our products, like Magic Ball or Red Bead and Blue Bead Experiment Kits are "Designed by Trainers for Trainers."
Start Here
Measuring the Benefits of Improvements
After the improvements have been made and the actual benefits determined, very often the project sponsor wants to know the value of the improvement. Many practitioners prefer to use percentage of improvement because it's easy to measure and verify. "We were completing 10 orders per day before the project and now we can complete 12 orders per day with the same number of people. That's a 20% increase!"
The Problem with Percentages
While they're easy to calculate, I've noticed that when results are based on percentages, the news gets a golf clap from the executives who aren't sure of the real benefit of "A 10% reduction in scrap costs for the year." After all, they need to report bottom line dollars to shareholders and the board.
When it comes to cost savings, there are 4 commonly accepted categories:
Examples include:
Since these savings represent an invoice not received or check not written, the dollars drop directly to the bottom line.
Many Six Sigma projects target hard dollar savings
2. Soft Dollar Savings: These indirect savings don’t show up on financial statements. Employee time, or labor hours, are saved here. This includes exempt and non-exempt employee time.
Examples include:
Soft dollar savings are a priority these days in tight labor markets
3. Cost Avoidance: Equipment or facilities not required as a result of projects that increase productivity or efficiency. Actions taken to prevent costs that would have been incurred in the future.?
Examples include:
Many Lean projects target this category with higher productivity
4. Customer Retention: Acquiring new customers can be 5 times more expensive than keeping existing ones. If a customer threatens to leave over issues related to order fulfillment or quality, then actions taken to keep the customer fall into this category. Retained sales that would have been otherwise lost is reported here to show the potential loss to the business had the customer walked away.
Examples include improving these areas of your offering to satisfy customer requirements using SQDC:
SQDC covers key areas of every business
Calculating Time Savings Using Burdened Labor Rate
When calculating savings associated with time reductions, such as those from labor efficiency improvements, it’s important to use the burdened labor rate rather than just the wage rate. The burdened labor rate includes all associated costs of doing business such as benefits, insurance, taxes, and any overhead required to run the area.?
Imagine cutting just one hour of cleanup time per day in an area, for instance. That one hour of time each day is worth over $20K for a company with a burdened labor rate of $100 per the example below.
Steps to Calculate:
Example Project Benefit
Suppose a Lean project reduces the setup time for a machine, and the improvement saves 200 hours monthly for the machine center's employees. If the burdened labor rate is $100 per hour, the direct benefit (hard dollar savings) would be 200 hours * $100/hour = $20,000 per month, $240K per year.
At the same time, a reduction in the time to schedule the machine saves a planner 5 hours a week (soft dollar savings) for a savings of 250 hours per year * planner labor rate (ask for the rate).
What could your planners do with an extra 5 hours per week of time? Can they work "on" the business, not just "in" the business?
By implementing a preventive maintenance schedule (cost avoidance), the company avoids potential future costs of $100,000 annually due to unplanned machine downtimes and emergency repairs, based on actual operating performance.
Because of the increased service levels due to these improvements, the customer placed additional orders (customer retention) on a blanket PO to reduce transaction costs (soft dollar savings).
Another Example: Implementing a LSS project to reduce chemical usage for cleaning the chemical reactor.
What's really cool about all this is that when we make improvements, a savings in one category can have a measurable impact on the other, as this example shows. Subscribe to our newsletter "Lean Where You Least Expect It" to stay informed.
Learn how we build practitioners with our hands-on coaching approach. Check out the CICS advantage today!
Visit the CICS LSS learning kits webstore to browse the coaching services we offer. See why our products, like Magic Ball or Red Bead and Blue Bead Experiment Kits are "Designed by Trainers for Trainers."
Deputy Regional Director, Mid-Atlantic Region ASQ and Chair, Philadelphia ASQ Section 505
10 个月Your newsletters are always so informative. The point about using hard dollars is well taken. Money is just about the only language top management speaks, and to get them to understand the value of a LSS program you have to speak it with them.
Management Consultant
10 个月I like the burden rate example - because it discusses the “opportunity cost” / loss of a worker not working on more value added work. Perhaps the ROI to the redeployed work could be added as an additional benefit ? Also, we need to find a way to measure soft benefits. We talk so much about more meaning and well being at work. If the process is mundane to the workers - improving it could also improve their morale and meaning …what could be more meaningful than eliminating non value added work? Maybe reduced turnover ? Improved job satisfaction? Just some thoughts. Thanks for putting this together - I enjoy your newsletters.