Transforming Business Through Smarter Process April 23, 2008 Finance Policies and Processes

1 Finance Roles and Responsibilities Six Sigma Project Benefit Policies - What Counts? - What Doesn’t Count? - How to Calculate Certain Project Benefits - Company Financial Standards Six Sigma Financial Processes - Project Closure - Benefit Recording and Auditing Results - SSA Payment Benefits Measurement and Monitoring -Data Base Requirements -Project-related Decisions Deployment Reporting Project financial documentation -Charter -Amendment -Closure Financial Guidebook Financial Analyst Training Finance Policies and Processes Module Content

2 Roles and Responsibilities Finance Finance serves as the financial advisor to the Six Sigma teams Finance supports Black Belts, Green Belts, Champions, and Process Owners in their efforts to identify, prioritize and select initiatives that will provide maximum value for Company Finance must establish an ongoing communication process with Black Belts, Green Belts, Champions, and Process Owners to ensure that any significant changes in the status and or assumptions of Six Sigma projects is promptly reported to management and reflected in the latest plans and forecasts.

3 Roles and Responsibilities Role Of Finance Champion The Finance Champion is a member of the Client Deployment Team and is responsible for overall coordination of the program from a financial perspective -Establish Six Sigma Policies and Document in Financial Handbook -Establish Financial Processes and Document in Financial Handbook -Develop and Deliver Financial Analyst Training -Monitor Project Financials and Anticipated Close Dates -Prepare Deployment Forecast for Closed, Active and Future Projects -Report Consolidated Benefits for Closed Projects -Audit Project Benefit templates as necessary This individual also works with the Six Sigma Belts and with the Financial Analysts at a project level to -Estimate Benefits Prior to Project Approval -Understand and report any significant changes in benefits or anticipated end dates throughout the project cycle -Approve project for closure after MBB and Process Owner

4 During charter development and as project progresses through DMAIC stages -Assist Belts in accessing and interpreting source financial data (G/L, Budgets, etc.) -Assist Belts in summarizing project benefits and cost -Approve charter and forward to the Finance Champion -Review project benefit estimates and anticipated close date with the Finance Champion as necessary During the Control phase -Work with Belts to verify and validate project results -Approve closing documentation and forward to the Finance Champion -Review with the Finance Champion as necessary After project completion -Provide support to Process Owner or the Belt to monitor and validate ongoing benefits Roles and Responsibilities Role Of Financial Analysts

DMAIC Process Map – Finance Define Measure Black Belt /Master Black Belt Finance Steering Committee Review assumptions and high level estimates, Consider up-stream/down- stream effects Categorize as hard/soft benefits Review measurement methodologies Identify appropriate sources and uses of financial data to measure, estimate and validate as project progresses Analyze Improve Control Review Approve or re-direct Draft Charter High Level Problem statement, process definition, potential financial benefits and cost Engaged by Black Belt as needed to update measurements, financials, completion dates Update Charter as necessary while progressing through project phases. Engage Finance, Project Owner as needed. Request Steering Committee Approval if Method of measuring benefits OR significant change to benefits forecast is required. Validate actual benefits with Black Belt/Master Black Belt Update forecast if necessary Sign-off Project Implements Control Plan Validates benefits with Finance Presents to Steering Committee for Sign-Off Review Approve or re-direct Charter Originator Project Selection Draft Charter Process Owner Sustain Long Term Project Benefits Utilize Ops reviews Finance Champion Approves as Steering Committee Member

6 It is the responsibility of the Finance Champion to establish and document the policies to be followed when determining the net financial benefit of the individual Six Sigma projects. Company’s generally place value on “Hard Benefits” (P&L impact) and Cost Avoidance. “Soft Benefits” are often noted on the Project Charter but are generally not quantified. Project implementation costs are netted against project savings to determine net project benefits. The Belts salary, benefits, travel, etc. to complete the project are not deducted to determine net project benefits, nor is any fee paid to SSA. Six Sigma Project Benefit Policies What Counts?

7 Hard Benefits - Hard benefits flow to Operating Income (OI) and the impact can be traced to specific Financial Statement line items. - Hard benefits result from such things as a reduction in headcount, labor rate reductions, reductions in material usage or cost, or an identifiable increase in revenue. Examples of Hard Benefits - The elimination of a position in department XYZ previously dedicated to correcting errors in a particular process once the defects have been eliminated or reduced. - An improvement in customer retention rate within the XYZ area resulting from the implementation of a simpler process, which allows more competitive rates to be offered to this specific customer segment driving an identifiable increase in revenue. - A reduction in the amount paid to a vendor supplying Company with transportation services resulting from a decrease in the number of collection and delivery runs. Six Sigma Project Benefit Policies What Counts?

8 Examples of Hard Benefits - A reduction in the number of manual reconciliations performed in department XYZ, requiring fewer temporary employees. - A productivity improvement in the process that allows for fewer overtime hours within the department. - Process Improvements of 70% in the XYZ Department result in the need for 6.2 fewer FTE. There are no part time employees and no overtime. The project benefit is calculated based on the salary and benefit savings of the 6 redeployed or severed Six Sigma Project Benefit Policies What Counts?

9 Cost Avoidance - Generally related to being able to process increased volume with no additional staff. The Process Owner/Belt must be able to demonstrate support of current monthly volume, source of the additional volume, and that controls are in place for the current staff/materials/etc to support the increased volume Example of Cost Avoidance - Currently, 10 FTE in the Customer Service Department handle a monthly call volume of 50,000 (5,000 items per person). Due to a lower Customer Satisfaction ranking, there has been a large increase in calls. Monthly volumes are expected to increase to 65,000 and 3 additional FTE will be needed. An Six Sigma project will streamline processes within the department such that the current 10 FTE can process the increased monthly volume therefore avoiding the hiring of the FTE. The cost avoidance is calculated as follows: Actual Monthly Volume/5000 = Number of FTE Needed Prior to Project Less Actual Number of FTE in Current Month = FTE Savings Times Average Salary + Benefits = OI Impact Averted There is generally incremental savings based on office space, supplies, recruitment and training costs. Six Sigma Project Benefit Policies What Counts?

10 Project Implementation Costs - Any external cost associated with implementing the project solution in the Improvement phase. Examples of Project Implementation Costs - Purchase of software - Purchase of hardware - All COGS when project has produced incremental volume Six Sigma Project Benefit Policies What Counts?

11 Soft Benefits - A soft benefit cannot be traced to an improvement in Operating Income. Although every effort should be made to relate an improved project metric to a P&L improvement, some companies are unable to do so. Examples of Soft Benefits - A productivity improvement that results in less than a Full time Equivalent (FTE) such that no headcount can be eliminated, unless there are part-time employees or overtime that could be eliminated. - Increased Customer Satisfaction, unless there is a way to relate a point of Customer Satisfaction to higher revenue, fewer returns, fewer calls to Customer Service, etc. - Increase Employee Satisfaction unless there is a way to relate this to employee retention and thus less recruitment/training costs. Six Sigma Project Benefit Policies What Doesn’t Count?

12 Resource Costs Associated with Completing Project - Costs incurred within the Six Sigma department and other internal costs associated with the project work. Examples of Resources Costs Associated with Completing Project - Time that Belt spends working on the project - Time that team members spend working on the project - Cost of internally developed software implemented during the Improve phase - Costs of tracking benefits post project closure Six Sigma Project Benefit Policies What Doesn’t Count?

13 One-time (non-recurring) Benefits - Recognize project benefits in period that they are realized. Capital Expenditure - Savings associated with avoidance of capital expenditures should be considered as part of the benefits generated from a project if it is a reduction against the current run rate or a budgeted event. The savings is depreciation plus the WACC of the cash expenditure avoided. Customer Satisfaction - If possible, work with Sales/Marketing to determine the value of a point in Customer Satisfaction to increased revenue. The benefit is then the Operating Income from the volume increase (equal to the increased revenue less COGS) as well as from any price increase (equal to the increased revenue). Employee Satisfaction - If possible, work with Human Resources to determine how Employee Satisfaction impacts Employee retention. The benefit is the reduced recruitment and training costs. Growth in Market Share -It is generally hard to pinpoint exactly what portion of a market share increase is project-related. Work with the Sales manager to determine other internal and external influences and come an agreement re: the % impact of each influence, included the project. Safety - There is a benefit to improve safety – fewer days of absence from the job, lower accident insurance cost when enough improvement data has been gathered, etc. Estimate the future value and “pull it forward” using a NPV calculation. Six Sigma Project Benefit Policies How to Calculate Certain Project Benefits

14 Weighted Average Cost of Capital (WACC) Employee Benefit Rate Duration of Benefits Tracking Other Company Specific Standards Six Sigma Project Benefit Policies Company Financial Standards

15 A comprehensive database is a critical component to a successful Six Sigma deployment. The attached file shares Best Practices based on SSA’s deployment experience. Benefits Measurement and Monitoring Database Requirements

16 How many weeks of stability / improvement are required before a project closes? When a project closes, are retroactive benefits included in project benefits? When a project is piloted, are pilot benefits included in project benefits? When is a project amendment required? Benefits Measurement and Monitoring Project-related Decisions

17 Will be company-specific, generally directed by the Deployment Leader, the Finance Champion and the Steering Committee Reporting is closely related to the database requirements Examples of suggested reporting - Financial ~ Monthly project benefits on closed projects ~ Forecast of project benefits on closed and active projects at project level ~ Monthly variance of actual versus forecast at project level ~ Average project value - Non-financial ~ Average Project cycle time ~ Project cycle time versus baseline expectation ~ Number of projects chartered, assigned, active, cancelled, closed ~ Belt productivity Benefits/Deployment Reporting

18 Responsibility of the Finance Champion Audience is Belts, Financial Analysts, Project Champions, Process Owners Includes all financial decisions related to the Six Sigma Deployment, included those covered within this document Should include example templates for required documentation Should include an introduction to the database Should include Six Sigma Finance contact information Financial Guidebook

19 Covers all financial decisions related to the Six Sigma Deployment Will include some project charter and project financial examples Will include a workshop regarding financial calculations on ongoing projects Are there example templates for required documentation that should be included? Financial Analyst Training April 24, 2008

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