1. Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Six Sigma Financial Management

2. Pg 1 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Module Objectives By the end of this module, the participant will be able to: Explain the Cost Of Poor Quality (COPQ) and its impact on the business Explain the importance of Finance in Six Sigma Explain the role of the Financial Analyst and how to work with the Financial Analyst during the project Explain the need for two different metrics -Defects to measure project progress for the Black Belt, the Team, and Operations Management -Money to measure accrued benefits for the Black Belt, Finance, and Upper Management

3. Six Sigma Financial Management Pg 2 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Different Functions In An Organization Speak Different Languages Upper management – Language of money Champions, Black Belts, Master Black Belts, and middle management must be BILINGUAL Others – Language of defects, parts, transactions, etc. Black Belts run their projects with DPMO and Z Metrics, but The BENEFITS need to be measured in $$$.

4. Six Sigma Financial Management Pg 3 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Project Benefits – To Financial Statements Project Type Usually Impacts Financial Statements OI Impact Increased sales force effectiveness (selling more units) Revenue: Volume Margin % (typically 20% - 60%) Elimination of NVA in manufacturing cell COGS: Labor100% Scrap reductionCOGS: Material 100% Reduced warranty expenseCOGS: Material & Labor 100% Improving a “back office” process SG&A: Salaries & Benefits 100% Inventory reductionCash FlowWACC% (typically 8%)

5. Six Sigma Financial Management Pg 4 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved The Goal: Breakthrough Performance Time Defects and Unnecessary Steps Six Sigma Breakthrough Current State Future State Improvement Period Most projects will not target a Six Sigma performance level – ROI decision.

6. Six Sigma Financial Management Pg 5 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Connecting Dollars To Defects… Sigma Lean will help you find and eliminate defects. Y By eliminating defects the company’s bottom line will improve. Defects Dollars

7. Six Sigma Financial Management Pg 6 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Dollars To Defects DefectDollars Non-value added activity in call center resulting in elimination of 4 FTEs from call center operations. Salary & benefits savings associated with reduced staffing levels. 3 rd Party Logistics processing times in excess of 1.2 days Increased sales (customers not canceling orders because of delays) Reduced expedited shipping costs Non-Value-Added activity in manufacturing process Overtime cost Leased computer equipment not recovered at end of lease Lease buy-out cost of unrecovered PCs and Laptops Direct mail advertising sent to invalid address (not-deliverable) Printing, handling & postage Sales Rep. Effectiveness (close rate) below 12% Increased sales

8. Six Sigma Financial Management Pg 7 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Hard And Soft Savings Or Direct And Indirect Benefits Hard Benefits -Directly and immediately contributes to bottom line savings -Measurable benefits associated with customer satisfaction -Typically, improvements to operating margin -Savings compared to current operating levels, not an annual operating plan -Defined as P&L impact Soft Benefits -Does not directly and immediately contribute to bottom line savings -Indirectly support business objectives -Are difficult to measure -Frequently cost avoidance These are simply typical guidelines, use YOUR company’s rules.

9. Six Sigma Financial Management Pg 8 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Quality engineering and administration Inspection/test (materials, equipment, labor) Expediting Scrap Rework Rejects Warranty claims Maintenance and service Cost to customer Excess inventory Additional labor hours Longer Cycle Times Quality audits Vendor control Lost customer loyalty Improvement program costs Process control Opportunity cost if sales greater than capacity Classical Cost Of Poor Quality Categories Most Losses Not Readily Seen Retrofits Downtime Service recalls Redesign Brand reputation Lost Sales Poor product availability

10. Six Sigma Financial Management Pg 9 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Cost Of Poor Quality (COPQ) Categories Internal Failure Costs – Costs associated with defects found prior to customer receipt of product or service -Scrap, rework, reinspection, retest, etc. External Failure Costs – Costs associated with defects found after customer receipt of product or service -Warranty claims, returned products, concession costs, etc. Appraisal Costs – Costs incurred to determine conformance to quality requirements -Incoming inspection and test, final inspection, and test, etc. Prevention Costs – Costs incurred to keep failure and appraisal costs to a minimum -Process planning, new product review, training, DFSS, etc.

11. Six Sigma Financial Management Pg 10 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Cost Of Poor Quality (COPQ) Current Could be Why? Let’s Discuss

12. Six Sigma Financial Management Pg 11 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Defect Rate Cost of Control Point of Diminishing Economic Returns from Quality Investments FailuresCost Quality Improvement Traditional Perspective Of Quality Cost

13. Six Sigma Financial Management Pg 12 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Driving Down The Cost Of Quality Failures Cost Defect Rate Cost of Control 3s 4s 5s 6s If we can make the “cost of control” smaller, we can drive to 6s.

14. Six Sigma Financial Management Pg 13 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Magnitude Of The Cost Of Poor Quality “Most companies will find that the cost of quality, when properly evaluated, falls somewhere between 15 and 25 percent of total sales – not the 3 to 7 percent they estimate it to be. Their estimates are in error because their accounting system cannot trap most of the true costs associated with poor quality.” Six Sigma, by Mikel Harry and Richard Schroeder, Doubleday, 2000

15. Six Sigma Financial Management Pg 14 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Let’s Put Things In Perspective Non Competitive Industry Average World Class % of Sales >40% 25 - 40% 15 - 25% 5 - 15% <1% Sigma Level Defect Free Defects Per Million 2345623456 65% 93% 99.4% 99.976% 99.9997% 308,537 66,807 6,210 233 3.4 COPQ Key Six Sigma Statistics Company Status

16. Six Sigma Financial Management Pg 15 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved COPQ Exercise On time delivery Damage-free shipments Fill rate Cycle Time Billing accuracy Shipping accuracy Pricing Materials Inventory Direct labor Indirect labor Did you think of these possibilities? Overhead Freight/Transportation Product warranty Product liability insurance Engineering Administrative Rework Market opportunity Capacity Indirect operating expenses Customer concessions/penalties

17. Six Sigma Financial Management Pg 16 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved The Role Of Finance We have just explored two concepts Two languages -Project success is measured in defect reduction -Project benefits are measured in $$$ COPQ: There are many hidden costs to poor quality What Next? How do we properly capture these costs as our Six Sigma improvements need to be correctly reflected in our bottom line -We need to enlist finance as an independent assessor of each project’s financial benefit to our company -We need to understand the “financial” rules applied to Six Sigma projects by our company

18. Six Sigma Financial Management Pg 17 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Process Owner Time vs. Level Of Responsibility/Drive Time Level of Drive Black Belts Process Owner/Team Project Hand-off MeasureAnalyzeImproveControl / Sustain Define Proven to be the best scenario by far.

19. Six Sigma Financial Management Pg 18 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved A person who, with their team, solves a difficult business problem for the last time Full time dedication working on Sigma Lean projects Lead teams through the completion of projects Progressing projects to completion Communicating progress, issues, and barriers Learning, teaching, and mentoring Communicates the vision of Sigma Lean Proven performers who solve 8-12 difficult business problems. Black Belt Roles And Responsibilities

20. Six Sigma Financial Management Pg 19 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Support project from a Financial perspective: -Project Benefit estimate calculations are accurate, complete – including COPQ considerations -All project savings calculations were done using your company’s financial standards, using Project Charter financial template -The data, assumptions, and calculations are appropriate -Sign-off on project assumptions/valuations at each phase -Verify and validate financial benefits at Control phase/project close-out Work with the Black Belt team(s) to increase their understanding of financial benefits Financial Analysts Roles And Responsibilities Realistic projections and consistent calculations.

21. Six Sigma Financial Management Pg 20 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Working With Your Financial Analyst As part of weekly project reviews, Project Champions ensure all of the above activities have occurred. Initial Project Chartering Phase -Project Champion drafts charter with initial project cost/benefit analysis -Financial Analyst assists by reviewing and qualifying benefits, suggests additional potential sources of benefits, data sources, etc. -Financial Analyst’s approval required before Project Champion submits Project Charter to the Steering Committee for review/approval During DMAIC process -Black Belt engages Financial Analyst as a Team member to assist with updates to project cost/benefits, validating changes, financial guidance -Financial Analyst review/approval required at the end of each project phase Project Close-out -Black Belt reviews project (report-out) with Financial Analyst, demonstrates business process improvement, resultant financial improvement -Financial Analyst validates financial improvement and signs-off on savings, or requests additional information, schedules follow-up review as required -Financial Analyst sign-off required before project is submitted to Finance Champion (and Steering Committee) for close-out

22. Six Sigma Financial Management Pg 21 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved If You Could Only Remember 4 Things Did or will the project improvements directly result in the financial benefits? Whose BUDGET will this project impact? Which line item(s) (accounts) will this project impact? How much benefit ($$$) will this project deliver and when? If you can’t at least answer those questions, you do NOT have a viable project, STOP!

23. Six Sigma Financial Management Pg 22 Copyright © 2001-2004 Six Sigma Academy International LLC All Rights Reserved Summary Understand that there are many hidden costs Get Finance on board early Learn and follow your company’s accounting rules for Six Sigma projects Remember that while project progress is measured in defects (DPMO/Z), the dollars measure the accrued benefit Defects 