The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 1 How Lean Six Sigma is used as a strategic business tool to increase shareholder value LEAN SIX SIGMA FORINVESTORS

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 2 PROBLEM Every company is in competition for  Customers (for revenue growth)  Shareholders (to drive share price) QUESTION How does one reveal the potential for economic profit, revenue growth and hence value creation from different components of your business in a unified, methodical and consistent way?

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 3 THE VALUE MOUNTAIN Revenue Growth EP% = ROIC - COC Market to Book Value %3-9%9-13%13-25% (2)-2% 2-6% 6-10% >10% Competitor C YOU ? Competitor B Competitor A High ROIC = high Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition Low ROIC = low  Revenue Growth (X-axis)  Market to Book Value (Y-axis) - the stock market premium that will be paid for net assets (book value)  Economic Profit (Z-axis) - the difference between return on invested capital (ROIC %) and the cost of capital (COC%)

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 4 THE VALUE MOUNTAIN cont’d  ROIC = Profit After Tax Invested Capital  Invested capital is the total assets of the organization minus the current liabilities Revenue Growth EP% = ROIC - COC Market to Book Value %3-9%9-13%13-25% (2)-2% 2-6% 6-10% >10% Competitor C YOU ? Competitor B Competitor A High ROIC = high Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition Low ROIC = low

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 5 MAKING ROIC THE PRIORITY  ROIC is probably the strongest driver of high multiples of book value  Revenue growth is also a strong driver of higher market value  As ROIC% increases, the trading multiple typically increases  However if Economic Profit (EP%) = 0, then the ROIC% = Cost of Capital i.e. Company likely to trade at around book value

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 6 WHAT ABOUT REVENUE GROWTH?  Growth plans are often affected by uncontrollable external market forces Rising energy costs Increasing interest rates Changing fashions (tastes) Unpredictable politics Global economic instability  And Growth without Economic Profit creates no long lasting value (e.g. many dot coms) PROBLEM

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 7 THE CONNECTION  Internal inefficiencies are easier to identify, measure and control  ROIC therefore is a HUGE value lever that’s easier to reach up to  However, performance improvement results MUST be tracked to the bottom line in support of strategic objectives

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 8 EXECUTING CORPORATE STRATEGY  Identify the platforms for shareholder value creation at both corporate and business unit levels  Identify value streams within the business units that suggest the greatest potential for improving shareholder value  Identify and prioritize projects that will maximize value THE LEAN SIX SIGMA APPROACH

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 9 CORPORATE ANALYSIS Strategic IssueYou Competitor A Competitor B Competitor C Avg Std Dev CEO Goal Share Price A Economic Profit % Growth Rate Market to Book Owner Earnings/Profit  Comparing value with other companies will often indicate where the corporate opportunities are

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 10 BUSINESS UNIT ANALYSIS – part 1 Net Assets Economic Profit as a % of Invested Capital (spread) A B C D 0% 5% 10% -5% E -10% EP% shows where Value is being created Creating Value Destroying Value  A comparison of each business unit will show where Value is being created or destroyed “…some companies get a conglomerate discount, but there are others like GE who got a conglomerate premium. And guess what? It all depends on performance, and if we could get our performance up, we felt we’d be able to earn those types of premiums..…that’s how we started Value Based Six Sigma.” - Lou Giuliano (CEO, ITT Industries), May 2000 Invested Capital

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 11 BUSINESS UNIT ANALYSIS – part 2 A C B D E Disadvantaged Parity Advantaged EVA Breakeven Economically Profitable COMPETITIVE POSITION MARKET PROFITABILITY Unprofitable Profitable  Measurement of both business unit profitability and competitiveness shows relative position  The larger the circle, the greater the revenue

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 12 BUSINESS UNIT ANALYSIS – part 3  Identify specific projects within a targeted value stream  Prioritize projects based on the likely benefit  Expose Lean Six Sigma opportunities through quality and time based complexities

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 13 WHY LEAN SIX SIGMA?  Lean Six Sigma incorporates the principle of Lean’s simplified flow and speed to increase business process velocity  Lean Six Sigma incorporates Six Sigma’s approach to eliminating errors, variation and instability  The combination of Lean & Six Sigma attacks the “hidden factory” of complexity in your business

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 14 MOVING THE VALUE LEVER Lower material costs LEAN Reduced waste Lower inventories Fewer assets Methodology Improvement Benefit Location SIX SIGMA Reduced variance Reduced DSO Lower cost of labor Lower R&D costs Balance Sheet Income Statement

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 15 Price Volume Labor Material Fixed Cost Labor Sales & Manufacturing Non Labor SG & A Revenue R&D Cost of Goods Sold SG & A Operating Profit Net Op Profit After Tax Income Tax Cash Inventory Receivables Fixed Assets Payables Other Assets Current Debt Other Current Liabilities Total Assets Current Liabilities Capital Charge Economic Profit Cash Invested Capital Economic profit is the income generated relative to all resources required including capital costs from the balance sheet = Fewer Assets + Reduced Costs = Increased EP ECONOMIC PROFIT Balance Sheet Income Statement

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 16 WHAT IS LEAN SIX SIGMA? WHAT DOES LEAN MEAN?  Lean is the elimination of all forms of non value added work from the customers perspective (waste) in business transactions and processes WHAT DOES SIX SIGMA MEAN?  Six Sigma is a statistical based methodology used to eliminate defects (errors or variations) in business transactions and processes Lean Six Sigma is the combination of two powerful operations improvement management philosophies that came out of the manufacturing sector in the 1980’s. In recent years it has been developed and successfully deployed in the service sector to include banking, retail, healthcare, staffing and financial services.

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 17 WHAT IS WASTE?  Non value-added work is called waste  Waste is caused by inefficiencies  Inefficiencies incur costs Any activity which absorbs resources BUT adds no value to the service or product from the customer’s perspective CUSTOMERS ARE UNWILLING TO PAY FOR WASTE

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 18 WHAT ARE DEFECTS?  Defects are variations in transactions & processes that reduce the quality of products & services  Defects require rework, consume resources, create instability, generate delays & cause scrap  Defects are frequently & mistakenly accepted as an unavoidable part of doing business CUSTOMERS ARE UNWILLING TO PAY FOR DEFECTS

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 19 THE COST OF WASTE & DEFECTS  Delays in transactions & processes  Lower quality products & services  Consumption of scarce resources  Customer dissatisfaction WASTE & DEFECTS REDUCE EBITDA

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 20 REWARDS FOR IMPROVEMENT  Reduced costs  Increased margins  Lower inventories INCREASED EBITDA  Reduced DSO  Better cash flow  Less debt

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 21 REWARDS FOR IMPROVEMENT cont’d COMPETITIVE ADVANTAGE  Faster transactions & processes  Higher quality products & services  Satisfied customers

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 22 ABOUT US Six Sigma Solutions LLC is owned & managed by certified Lean Six Sigma experts. We design, develop & execute operations improvement plans using Lean Six Sigma tools & methodologies to minimize waste (non value-added work) & defects (variations) in business transactions & processes. Our clients benefit from:  Reduced costs  Better quality products & services  Satisfied customers

The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright © 2006 Six Sigma Solutions LLC 23 CONTACT US PARTNERS Carl E. Watson Jr. BSc, Master Lean, Six Sigma Master Black Belt Cell: OFFICE PO Box 3375 Huntsville AL