Chartering Module

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Defining Value …

Canvas $ 5.75Oils $ 8.50Frame $75.00Nail $ .05String $ .02

Value = $89.32

Like $15 MillionMan

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Chartering Module Content

• Roles and Responsibilities• Charter Flow• Charter Components• Good and Bad Charter Example• Intro to Benefits Calculator• Charter Troubleshooting• Examples, Examples, Examples• Charter Exercises

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Chartering Roles and Responsibilities

ChampionChampionMBBMBB

Black BeltBlack BeltProcess Owner

Process Owner

Steering Committee

Steering Committee

• Identifies areas of opportunity within span of control

• Works with Champion to write charter

• Used as needed on a limited basis supports Champion in charter writing (data collection & analysis)

• Handed finalized charter

• Directs Company project focus• Approves final charters

• Supports Champion with the technical aspects of the charter

• Helps validate assumptions

• Writes charters based upon business needs• Works with Process Owners and MBB to

identify projects

Financial Analyst

Financial Analyst

• Works with Champion on financial metrics

• Validates first pass financial benefits of projects

Finance Champion

Finance Champion

• Works with Financial Analysts to ensure consistency of approach

6Sigma Exec Team

6Sigma Exec Team

• Manages Project Pipeline• Encourages Champions to fulfill

deployment goals

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Charter Flow• Champion• MBB• Process Owners• Business Leaders• Finance

Development of Project Ideas

Focus on Best Charter Opportunities

Steering Committee Approval

Write the Formal Charter Handoff to Blackbelt

• Charter ideas developed from assessment activities with process owners, business leaders and finance

• Filter the list of possibilities based upon agreed project guidelines:

• Financials• Business Priorities• Data• Speed …

• Champion pulls together required elements to write charter

• Involves MBB, Process Owners and Financial Analysts where needed

• Steering committee reviews charters for proper business focus and completeness

• Cancels or sends back for rework charters which are inadequate

• Charters handed to Blackbelts based upon agreed criteria

• Project officially kicks off into the Define Phase

• Champion• MBB• Process Owners• Financial Analysts

• Champion• MBB• 6Sigma Exec Team

• Champion• Steering

Committee• 6Sigma Exec Team

• Champion• MBB• BB• Process Owners

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Charter Components• Charter Template• Charter Header Information• Problem Statement• Metric• Defect Definition• Project Objective• Project Benefits Calculation• Amendments

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Charter Template

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Charter Header Information

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Problem Statement

Purpose and Function of the Problem Statement:

• To provide Black Belts with a well defined issue upon which to apply the DMAIC method

• To quantify current performance relative to customer expectations

• To identify the financial impact of current performance

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Problem Statement

Characteristics Of A Good Problem Statement

• It should be a concise but complete description of the issue

• It should focus on a specific problem aligned to high-level business objectives

• It should be as detailed as possible including quantifiable performance characteristics

• It should not include any presumed causes or pre-determined solutions

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Example – Needs Improvement

What Changes Need to Be Made?• No baseline period indicated• No baseline data, only speculation of uncharged fees• No calculation of baseline financial impact of the

problem

Problem Statement:Commercial Loans perform too many audit confirmation requests. For those audit confirmations processed, we think that only 25 to 30% were charged the fees of $15 (Southeast) or $35 (Northeast). This represents a loss in income to the bank.

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Example - GoodProblem Statement:For the one year period of August 2004 through August 2005, Commercial Loans performed 10,365 audit confirmation requests. For those audit confirmations processed, only 25% or 2537 were charged the fees of $15 Southeast or $35 Northeast, totalling $38,045. This represents a loss in income of approximately $187,830.

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Metric

• The Project Metric should be• Measurable• Indicate a source for the measurement data• Same units as Baseline and Objective

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Example – Needs Improvement

What Changes Need to Be Made?

• Metric is not normalized such that volume changes will impact project benefit

• How often will measurement take place?

Project Metric "Y":Charged fees

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Example - GoodProject Metric "Y":% of audit confirmation fees charged (not waived) measured on a daily basis

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Defect Definition

The Defect Definition should be

• Specific to the issues described in the Problem Statement and Objective

• Consistent with the metric

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Example – Needs Improvement

What Changes Need to Be Made?• What if, on a given day, 98% of the audit

confirmation fees are charged? Is the day a “defect”?

Defect Definition:Less than 100% of fees charged

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Example - GoodDefect Definition:Any fee that is not charged

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Project Objective

Objectives should

• Agree with validated measurements of performance

• Be based on clear project boundaries

• Be attainable by the scheduled project completion date

• Be consistent with VOC (Voice Of the Customer) requirements

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Project Objective• The objective should be based on accurate baseline data versus entitlement. • When no entitlement can be determined, an average Six Sigma project will yield a 70% improvement in process performance; • in those cases, it is typically appropriate to set the Project Objective for a 70% reduction in defects.

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Example – Needs Improvement

• What Changes Need to Be Made?• The Objective statement should not assume a solution• The Objective should begin by stating from [baseline data] to

[objective] • The anticipated completion date should be indicated

Project Objective:Implement tracking software to increase the percentage of collected fees to 100%

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Example - GoodProject Objective:Increase the percentage of fees charged from 25% to 100% by 12/31/05

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Project Benefits

Project Benefits are generally characterized as

• Margin improvements that can be directly attributed to the Six Sigma project

• A reduction of operating expenses

• Operating Income contribution resulting from revenue enhancement projects

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Project BenefitsThe Project Benefits should

• Cite a minimum of $250,000 in hard dollar savings (Black Belts)

• Cite a minimum of $40,000 in hard dollar savings (Green Belts)

• Be achievable in 4 to 6 months

• Have P&L Impact

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Example – Needs Improvement

• What Changes Need to Be Made?• Given baseline data and a stated objective, the specific calculation of

anticipated benefits should be on the face of the charter or attached

Project Benefits:Cost Savings $15 for each Southeast audit confirmation not charged and $35 for each Northeast audit confirmation not charged.

We estimate the savings to be at least $100K.

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Example - GoodProject Benefits:Cost Savings 187,830$ total of 10,365 items processed: 6802 Southeast; 3502 Northeast; 51 other state not known;

Southeast = 6802 X $15=$102,030 Northeast = 3502 X $35=$122,570 other (avg of $)= 51 X $25= $1,275Total potential fees: $102,030 + $122,570 + $1,275= $225,875Items charged Aug 2004-July 2005: $38,045Total not charged: $225,875- $38,045= $187,830 Note that this will be higher during 2006 because of the recent acquisition. Benefits will be based on actual fees collected @ 75%.

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AmendmentsA Project Amendment is typicallyrequired

• When project benefits decline by 15 to 20%

• When the anticipated project close date slips by more than 30 days

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Introduction to Benefits Calculator

• Through the Define and Measure Phase the Blackbelt establishes the Baseline performance of their project metric and works with the Financial Analyst to determine its associated financial impact on a period basis

Baseline Forecast Actuals• During the Analyze phase

the Blackbelt validates the final financial project assumptions and with the help of finance, forecasts benefits for their project

• Actual benefits for the project are tracked according to deployment guidelines by the process owner or directed individual.

• Actuals compare the historical baseline performance of the project metric to current performance and calculates project benefits

Converts The Improved Metric’s Performance Into Financial Benefits

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Baseline - Benefits Calculator

What Today’s Performance Is Costing Us

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Forecasting - Benefits Calculator

What Improved Performance May be Worth

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Actuals - Benefits Calculator

What Are The Actual Quantifiable Benefits From The Project

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Charter Troubleshooting

Process Owner Buy-in Has the Process Owner agreed to the Charter, proposed benefits and has resources

available to go forward with the project?

Problem Statement Does the Problem Statement contain a date range of baseline data, a baseline and

source of data and the timeframe it was gathered? Is there a “Pain” sentence as the last sentence in the Problem Statement?

Objective Does the Objective state an “increase” or “decrease” from the baseline to the goal (%

improvement) by a specific project target end date? Do the Problem Statement, Primary Metric and Objective support one another?

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Charter Troubleshooting - Continued

Metrics Is the Primary Metric documented and normalized for volume (i.e. if volume increases or

decreases will the way the metric is used still make sense?) Is there a Secondary Metric that ensures no undesired results occur due to a change in the

Primary Metric? If not, is there a good reason there is no secondary metric? Do metrics contain units (i.e. % defective, cycle time in mins, daily, weekly, monthly, etc.)? Does the Defect Definition tie to the Primary metric and will it aid in establishing the Primary

Metric chart?

Finance Is the financial value supported by computations? What assumptions are in the financial value? What business line will benefit from the savings? Does the business line manager agree to any resultant budget adjustment?

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Name:

Belt ( x ) Black ( ) Green Billy Bob Smith

Finance Champion

SME 5

Team Makeup

Align to Process Owner

Anita Dollar

Phone: e-mail:Role:

Project Champion CFO

Not yet determinedProcess Owner

Bad Debt AccountantSME 1

Finance Analyst

SME 3

SME 4

SME 2

• Be sure that the team members have been identified. A project should not be approved without Process Owner buy-in.

More Charter ExamplesNeeds Improvements

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Problem Statement:

Project Objective:

Primary Metric, "Y"

Defect Definition

Annualized Financial Benefit

Scope of Project

% contribution (incoming raw hide size (sq ft) to crust hide size (sq ft)).

The method and calculation for the financial benefit will be developed during this project.

The project will include both GH and WT facilities and extend from the receipt of the raw hides to the point they are shipped to the finishing plant.

Utilizing the Sq ft/ Lb soaked metric has shown a low correlation to actual hide size. This is the method currently used to predict the impact of incoming raw hide size on crust hide size.

Improve the understanding of incoming raw hides on crust hide size and to verify this impact. The baseline is the % contribution to total crust hide size as measured over a 6 period basis.

The impact of incoming Raw hides on Crust Hide size (sq ft) is not well understood or verifiable. The contribution of incoming hide size (sq ft) has been estimated at 55.2% over the past 6 periods with a range from 21% to 84%. • No baseline data

available. Is this the best use of the belt resource.

• This is a recurring issue that often results in cancelled or lengthy project cycle times

More Charter ExamplesNeeds Improvements

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• The entire charter is focused on the financial impact (cost) of the problem. The problem should be stated in terms of what drives the need for Outside Sorting.

• The Project Objective does not indicate when the project will be completed.

•When the Problem Statement has been properly stated, the metric and defect definition should align to the driver.

•The financial benefit of this project would be $488K (67% of $729K) and the charter writer would likely have caught this mistake if the calculation was on the face of the charter. This is NOT cost avoidance but a reduction in expense from one period to the next (P&L impact).

Problem Statement:

Project Objective:

Primary Metric, "Y"

Defect Definition

Annualized Financial Benefit

Scope of Project

Scope for the project is XYZ Plant

Cost incurred due to Outside Sorting during 2005 was $728,523

Baseline: 2005 Sorting Cost was $ 728,523

Reduce Sorting Cost by 67% to $240 K

Cost Avoidance $ 240 K

Oustside Sort Cost

More Charter ExamplesNeeds Improvements

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• No baseline data.

• Overall poorly written charter in which the defect, metric, and objective are not aligned.

• No financial benefits determined.

• Based on the Project Objective, isn’t the defect definition “any box that must be opened after taping”.

• Without knowing specifics of the business, scope seems too large.

Problem Statement:

Project Objective:

Primary Metric, "Y"

Defect Definition

Annualized Financial Benefit

Scope of Project

All incoming materials to outgoing finished goods.

Productivity, PPM's, inventory reduction.

to be determined

Identify bottle necks of product flow.

Reduce waste and lead time of product flow. All parts in a box to be packed one time and the work order to be closed at the packing station. Once a box is taped it should only be opened again for Dock Audits.

Product does not flow at the same rate and speed through the different process in the plant so all parts come together in the minimal amount of total takt time.

More Charter ExamplesNeeds Improvements

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More Charter ExamplesNeeds Improvements

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More Charter ExamplesNeeds Improvements

Problem Statement:

Project Objective:

Project Benefits:

Project Metric "Y":

Defect Definition:

In FY 2004, the Cash Vault contained an average of $22 M. This cash is not only a non-earning asset, the company incurs a 5% cost annually to borrow and carry these reserves.

To reduce average amount of cash held in the Cash Vault from $22M to 6.6M (70% improvement) by 11/9/05, ensuring compliance to all regulatory statutes.

By eliminating $15.4 from the daily vault balance, approximately $770K (0.05 X $15.4MIL) would be saved annually.

Cash held in the Pittsburgh vault in excess of 6.6 million.

$ in vault cash per day. • Well written charter but Metric is not normalized based on cash flow.

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More Charter ExamplesGood

Problem Statement:

Project Objective:

Project Benefits:

Project Metric "Y":

Defect Definition:

From April 1st, 2005 through May 31st, 2005 the Cash Vault contained an average Day End Balance of $20M. This balance was staged in the vault to support an average daily net cashflow of $1.5M. This cash is not only a non-earning asset, the company incurs a 5% cost annually to borrow and carry these reserves. The average Days Cash on Hand was 13.3.

To reduce days on hand in the Cash Vault from 13.3 to 5.3, a 60% improvement, by 12/09/05, ensuring compliance to all regulatory statutes.

Days Cash on Hand = End of Day balance / Daily Cash Flow

Daily Project Savings = Cost of Money x (1- New Days on Hand/Baseline Days on Hand) x Baseline Avg Daily Ending BalanceDaily Project Savings Goal: $1,472 = (.05/360) x ( .53 ) x $20,000,000 Annualized: $537K

D1: Cash held in the cash vault that is not necessary to fulfill retail needs D2: Running out of money in the vault.

• Note that this is the same as the previous “needs improvement” charter.

• Baseline period has been updated with more recent data, project goal was changed from 70% improvement to 60% improvement and metric has been normalized.

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More Charter ExamplesGood

Problem Statement:

Project Objective:

Project Benefits:

Project Metric "Y":

Defect Definition:

In 2004 a total of 66,050 exception statements were processed out of 2,084,935 total statements (3.1%). A team of six people process the exceptions An exception is any statement that has an exception code applied to it; such as incorrect bill amount, payment split etc.

A 70% improvement in daily exception statement ratio from from 31,700 errors per million to 9,510 errors per million by 9/1/05

A 70% improvement in exception statement ratio would result in a reduction of staff from 6 grade 5 employees at an average salary and benefit of $34K to 2 employees with a savings of $224. ($56K total comp *4 FTE = $224K)

Any exception statement

Daily exception statement ratio = (exception statements/total statements)x million

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More Charter ExamplesGood

Problem Statement:

Project Objective:

Project Benefits:

Project Metric "Y":

Defect Definition:

As of April 1, 2005, there are an average 106K of savings and 160K checking accounts with current balance of $500 or less at month end that had shown no customer activity for more than 3 months. 213K (80%) of these accounts have a monthly statement printed, resulting in more than $106K spend per month.

Reduce the monthly percentage of low-dollar/low-activity accounts having a printed statement by 70% (from 80% to 24%), by 9/30/2005.

Each statement costs $0.5 to print, handle, and mail. Annual cost of printed monthly statements for low-activity/low-dollar accounts is $1,278K (213K * .5 * 12) in cost. Achievement of the 70% project objective will save $894K.

Monthly statement printed for a low activity account, defined as an account with current balance of $500 or less and no activity for more than 3 months

Percentage of low activity/low-dollar accounts having a monthly statement printed. (# of low activity account statements printed/total number of low activity accounts)

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More Charter ExamplesGood

Problem Statement:

Project Objective:

Project Benefits:

Project Metric "Y":

Defect Definition:

During June-August 04, the Account Services Department performed 20,000 account maintenance requests. Despite the completion of the multiple quality controls performed, 8500 critical customer errors were identified which potentially could cause mis-posted customer financial transactions. This represents an error rate of 4.25% vs the department goal of 1.50%. 20 employees work on this process full time with an average OT of 4 hours per week each.

Reduce the number of critical errors impacting customer account maintenance from 4.25% to 1.5% (65% improvement) by 7/30/05.

The current average salary plus 15% benefits is $40K for the 20 level 7 employees. The current annual cost for these employees including overtime is $904K. ($40,000 * 20 employees) + ($40,000 / 1.15 / 2080 *1.5 *4 *20 * 52). A 65% improvement will result in savings of at least $590K. Since we will reduce overtime first, the savings should be slightly greater.

Any daily incidence of a critical ZBA error

Primary Y - % of Critical Errors as a proportion of dailymaintainance requests (Error Rate)Secondary Y- Maintenance transactions completed daily per hour (Productivity)

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Charter Exercise• Within the Packaging Department at Lava Lamps R Us, there are multiple packaging

lines each performing two types of packaging set-up changeovers. “A” packaging set-up changeovers are performed when the team is packaging the same lamp branded for a new wholesaler. “B” changeovers are performed before the team begins to package a different lamp.

• The current times to perform both changeovers are above industry averages.• With the tremendous growth in our U.S. market share and the expansion into several

new markets abroad, we are capacity constrained. Our union agreement does not allow us to hire weekend staff. Since we are not meeting customer demand, all employees are required to work Saturday and Sunday to get product packaged for shipment.

• A 6-Sigma project was just completed that optimized the number of changeovers. Your project is to reduce the set-up time for both changeover types. Your goal is based on research done to benchmark changeover times for both processes. If your project is successful, all changeovers can be performed during normal business hours and you will achieve Management’s goal of no overtime.

• There is no opportunity to reduce staff (union again!) and the company does not recognize cost avoidance savings.

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Charter Exercise• Below is data gathered for this project. Working with

your team, write a project charter for this project with the goal as stated for the respective changeover types.

• If you make any assumptions to calculate financial benefits, document each assumption on the face of the charter or an attached benefit calculation sheet.

12 Month Period Ended 12/31/05"A" "B"

Packaging Changeovers 6,212 2,795 % on Monday - Friday 80% 70%% on Saturday 12% 30%% on Sunday 8% 0%Average changeover time in hours 1.80 4.20 Project improvement goal 50% 70%Hourly Rate 18.65$ 18.65$ Benefit Rate 20% 20%Saturday Premium Time and a half Time and a halfSunday Premium Double Time Double Time

Lava Lamps R Us