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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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 3/24
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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 4/24
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)
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 5/24
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 6/24
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 7/24
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 8/24
Project Calculations
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 9/24
Project Calculations
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 10/24
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…
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 11/24
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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 12/24
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 13/24
Project Calculations
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 14/24
Technological Competence
highContinuousImprovement
mediumInvestment
ProcessImprovement
Delivery Performancelow
highmediumlow
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 15/24
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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 16/24
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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 17/24
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
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 18/24
Appendix:Appendix:Example about strategic Example about strategic Decisions and Cost
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 19/24
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%.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 20/24
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%
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 21/24
In the mean time our volume went down over 30%.
Example: Production of Chocolate
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 22/24
p g
Example: Production of Chocolate
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.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 23/24
Example: Production of Chocolate
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%.
Knorr-Bremse Group 08 Mgm. Financial Integration 08, D. Szemkus/H. Winkler Page 24/24
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