javier garcia - verdugo sanchez - six sigma training - w3 financial integration

The Financial Integrationgof Six Sigma Projectsg j

€€Week 3

Knorr-Bremse Group

About this Module

An important part of the project work beside the improvements

of the metrics, is the involved financial benefit. Calculation and

definition are often difficult. This module will give some g

guidelines how to handle this subject. With examples we will

explain the “magic” costexplain the magic cost.

Content

Financial categories of improvement• Financial categories of improvement

• Transparency of the cost distributionTransparency of the cost distribution

Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 2/24

P j t b fit t kiSix Sigma Project Results

Project benefit tracking

Project results will be tracked usually over a time period of 12 monthj y(or 4 quarters). The project finalization and the start of the benefit tracking should be around the same point of time. At the end of the project, we should be sure, that an improvement of the metrics will be achieved. Development projects are in some cases exceptions, because their improvement potentials can be realized at later stagebecause their improvement potentials can be realized at later stage.

Financial contribution of the Project

This will be calculated with the agreement or better directly by the finance department. In order to use comparable numbers, all project p p , p jbenefits shall be determined as earnings before taxes. We compare against the previous year or the corresponding time period. We do not compare against the actual plan or forecast. Advanced companies have the planned benefits in the actual plan already i l d d


included.

Categories for Six Sigma Project Results

Cost Reduction

Elimination and reduction of costs present in the actual process.p p

Cost avoidance

Eli i ti d d ti f t hi h ld f i thElimination and reduction of costs, which would occur for sure in the future without Six Sigma project work.

Q ti i thi l tiQuestions in this relation:

1. What is the amount of the future costs in accordance to

the plan?

2. Were the future costs in the forecast included?

3. Are the future costs identified?

GrowthGrowth

Enabling of growth in the areas of high workload and with backlog, due to the elimination of bottle necks in production


due to the elimination of bottle necks in production.

Categories for Six Sigma Project Results

Efficiency

Elimination and reduction of non value added activities which causeElimination and reduction of non value added activities, which cause costs currently

Questions in this relation:Questions in this relation:

1. Is the cost reduction prompt and traceable?

2. Is the saved resource converted in to a value added step?

Cash Flow

Reduction of capital assets or accounts payable

( Example: a one time permanent reduction of stocks increases the( Example: a one-time, permanent reduction of stocks increases the cash flow)


Summary Calculation Categories

Cost Reduction

Difference of operating income in relation to the comparable time frame before improvement. Example: Increased production volume due to increased capacity,

d d f t i l d dReduction reduced use of raw material or reduced manpower.

Eff ti d ti f it l t t bl E l O ti dCash Flow

Effective reduction of capital assets or accounts payable. Example: On-time and effective reduction of inventory which releases cash flow.

Cost Avoidance

Costs, which will not arise due to process improvement activities. Example: Process reengineering or outsourcing which improves the cost situation or save of investments for new equipment, e.g. test benches.

Efficiency

Sum of costs caused by non value added activities (e.g. rework, rejects, waiting times, transport, work on complaints), which are not any more necessary in the f t C b t d i t l dd d ti iti ( f t iEfficiency future. Can be converted in to value added activities (manufacturing, development, customer visits).

A ti iti hi h b i d l E l D l t fGrowth

Activities which causes new business and new sales. Example: Development of new products and/or services for a existing or new market areas.


Calculation Categories @ KB1) C t R d ti T i l f thi t b t i l t d ti1) Cost Reduction: Typical for this category can be raw material cost reduction, material consumption rate reduction, scrap and re-work elimination, lowering shipping and insurance costs, warranty costs or reducing administration expense (decrease material, operational or transactional costs).

2) Cost Avoidance: Costs, which will not arise due to process improvement activities. )Example: Process reengineering or outsourcing which improves the cost situation OR save of investments for new equipment, e.g. test benches, work bench or even a production line.production line.

3) Cash Flow Improvement due to reduction of inventory or cash receivable.

4) Potentials:

a Growth: Activities which cause new/additional sales Example: Development of newa. Growth: Activities which cause new/additional sales. Example: Development of new products and/or services for an existing or new market.

b Ri k A id l f l t b i tb. Risks: Avoid loss of sales or even customers, e.g. by increase customer satisfaction or reduce customer claims or increase of product quality.


c. Any other “soft savings”.

Project Calculations

Volume Projects

The project benefit out of volume project results fromThe project benefit out of volume project results from

the sales increase, caused due to a capacity

increase, multiplied with the profit margin. The profit

margin per quantity unit is the difference of the

selling and variable costs per quantity unit. Additional

fix costs have to be subtract from the project benefitfix costs have to be subtract from the project benefit,

if present.



Cost Reduction Projects

At this type of projects we look for the costs whichAt this type of projects we look for the costs which

we will reduce due to the project. This could be for

example the reduction of raw material usage at the

same yield level. We can also think about the

reduction of the number of repairs, which of course

reduce the repair cost Here we will compare thereduce the repair cost. Here we will compare the

actual cost reduction with the period of the previous

year.



Cost Avoidance Projects

At this type of projects the cost will not arise or ifAt this type of projects the cost will not arise or if,

than in a reduced amount. An example is an

investment which avoids significant higher

investments. Reorganizations in administrative areas

for example can avoid already planned new

employments The benefit of such projects is theemployments. The benefit of such projects is the

difference (fictive saving) compared to the cost

situation which would show up without this project.


Required Data

Volume Projects

Part number of the effected partsPart number of the effected parts

- old capacity for these parts (before Six Sigma)

- new capacity for these parts (after Six Sigma)

The capacity can be noted in tones or manufacturing

capacity per yearcapacity per year…


Required Data

Cost Reduction Projects

Cost reduction in the productionCost reduction in the production- Part number - Copy of the old calculation (before Six Sigma) py ( g )- Copy of the new calculation (after Six Sigma)

Cost reduction in other areasCost reduction in other areas - Type of cost, which have been saved (Personal cost,

etc )etc.) - If available: cost center where it have been saved - Type of saving, for example, the reduction of yp g, p ,

two employees or the reduction of consumables


Required Data

Cost Avoidance Projects

- Cost / expenses which arise with the project- Cost / expenses, which arise with the project - Cost / expenses, which would arise without the

project (e g higher investments write-offs)project (e.g. higher investments, write-offs)

The duration of the reporting is 1 year (4 quarters)The duration of the reporting is 1 year (4 quarters) for unchanged running projects. Project start is the point, when the first savings areProject start is the point, when the first savings are realized.



The project benefit shall be calculated by controlling. To p j y g

calculate the benefits the data on the pages before are

the required minimum of informationthe required minimum of information.

The project results will be calculated and reported

monthly or quarterly. If the needed data for the y q y

calculation are not a available on a working day x, the

results for this month or this quarter can not beresults for this month or this quarter can not be

calculated. With complete information usually one

notification is necessary only.


Technological Competence

highContinuousImprovement

mediumInvestment

ProcessImprovement

Delivery Performancelow

highmediumlow


Technological Competence – Outputs

Foundation for strategic decisions:

1) Internal growth (volume increase)

2) Cost reduction

3a) Technological improvements (Investments etc.)

3b) Quality improvements focused on the application3b) Quality improvements focused on the application

4) Outsourcing) g

The realization of these decision can always conducted with Six Sigma


g

Technological Competence – Inputs

Inputs Delivery Performance Inputs Product Quality

• Production technology • Product performanceProduction technology

• Production cost

• Available raw material

Product performance

• Specification and yield

• Customer complaints• Available raw material

• Capacity utilization

P k i

• Customer complaints

• Reaction time on customer needs

• Packaging

• Work safety

• Process knowledge intern

• Process knowledge extern

• Analytical possibilities


Technological Competence Volume and Cost

corresponding Plan Income by Productgroup

Quality %

90

100

Quality % and

80

Quality % and

Performance %

evaluated with

60

70evaluated with

C & E Matrix

50

60

50 60 70 80 90 100

Performance %

50 60 70 80 90 100


Appendix:Appendix:Example about strategic Example about strategic Decisions and Cost


Example: Production of Chocolate

A business unit, located in Belgium, is manufacturing high quality chocolate

and is selling the products to supermarkets and to a network of independent g p p p

retailer. The Product BCB (Best Chocolate Belgium) is well liked and known.

The company is very profitable and

has a market share of about 35%.


Example: Production of Chocolate End of last year the cost increased dramatically caused by a shortage and

price increase of cacao. At this time, another international active company,

Cookie Corporation, decided to add a new branch to their portfolio with

chocolate. Cookie invested a lot in production and marketing. Due to the

company size they can buy cacao for significant better conditions than we

can do. Therefore, they are able to underbid our prices everywhere to , y p y

increase their market share.

In the mean time our volume went down over 30%


In the mean time our volume went down over 30%.


Drastic actions for all areas did help to reduce the costs. However,

till l i l d If t bl t i l twe still loosing volume and money. If we are not able to implement

effective corrections we have to shut down our business.

Previous Year This Year

Selling Volume 4,959 t per month 3,800 t per monthSelling Volume 4,959 t per month 3,800 t per month

Average price 3.52 Euro per kg 3.20 Euro per kg

Cost: variable 2.14 Euro per kg 2.85 Euro per kg

Cost: fix 20 Mill Euro 16 Mill Euro

Sales per year 208 Mill Euro 146 Mill Euro

Profit 37 Mill Euro (0.4) Mill Euro

The leadership team together with an external consultant

Profit 37 Mill Euro (0.4) Mill Euro

developed alternatives to improve the situation. Nevertheless, a

decision is still pending.


p g


Option 1 – Volume increase – Concentration on the wholesale trade

Step 1• Reduction of the product variety

Th t d th i bl t ( t i l) b 5%• That reduces the variable cost (raw material) by 5%.• Increase of the lot sizes increases the capacity by factor 2.• Reduction of the indirect fix costs (stores, manufacturing etc.) by 5 Mill Euro

Step 2Step 2• With all these actions the selling price can be reduced by 10%. • This is effective and results in double selling volume.

Step 3• New ways to the customer

Si l d t ith hi h l• Simpler products with high volume• Sales can be intern organized due to the use of the internet.• Further 1.5 Mill Euro can be saved.



Option 2 - Profit increase – Concentration on the retailer

Step 1• Price increase by 15%• The selling volume degreases by 15% (Mainly in the wholesale)• The half of the production assets are unused.

Step 2• Improvement of efficiency and productivity.• Saving of 1 Mill Euro indirect fix costsSaving of 1 Mill Euro indirect fix costs.• Reduction of variable cost by 10%.

Step 3Step 3• Focus on the customer – more sales personal.• That means additional cost of 2 Mill Euro.

10% f th l t l b t b k• 10% of the lost volume can be get back.• Further increase of the selling price by 5%.


javier garcia - verdugo sanchez - six sigma training - w3 financial integration

Engineering