Financial Integration With Six Sigma

Project Savings/Review Package Purpose of Project Savings Project Selection Process Financial Impact –Benefit Categories –Financial Integration –Detailed Worksheets Six sigma savings worksheet

Purpose of Six Sigma Financial Integration Purpose: Present a method of measuring and integrating process improvement benefits with the financial statements. Problem: Business units continue to have difficulty integrating the expected cost savings from improvement projects, Six Sigma or non-Six Sigma, with the financial statements. Challenge: Develop a way of measuring improvement projects costs and benefits (and the timing of these) which will better allow managers to: (1) more clearly define the expected benefits; and (2) understand the impact of those expected benefits on the business units financial statements. Result: Development of a brief methodology and a measurement system which can be used to plan expectations and measure results by: (1) more clearly defining expected benefits in dollar amounts and timing; (2) indicating the expected impact on the business units financial statements by month; and (3) allowing feedback by comparing results to expectations at (a) the project step level (actionable items) (b) by project (net sustainable results) (c) for the entire pool of projects monthly.

Project Selection Process Company Financial Commitment Goal Deployment Projects Chartered Aligned with Org. Goals? Is there financial benefit? Find project aligned with site goals Find project aligned with site goals Customer Sat benefit? Employee Sat benefit? yes no Why work the project? See your mgr & 6 sigma champion. Why work the project? See your mgr & 6 sigma champion. no Regulatory issue? HS&E benefit? no Calculate Savings Write up Charter Signoff of savings worksheet & charter by mgr & six sigma champion Signoff of savings worksheet & charter by mgr & six sigma champion yes Why work the project?

Timing? Cost? Cash Flow? Revenue? Six Sigma Project Expectations Require Financial Translation revenue equals unit volume of output multiplied by actual unit prices obtained from customers the cost of resources (material, labor, etc.) input to obtain an established quantity of good output is there a one time, non operating expense impact, such as a decrease in inventory levels, which frees up cash and, if so, what is the timing? in which of the next calendar months do each of the impacts occur? Training, worksheets and integration with financial commitments will facilitate “Financial Translation” Does the Six Sigma Project directly result in a change in the following:

Six Sigma Financial Benefit Categories Elimination or reduction of a cost currently incurred in the process Taking a current action to eliminate/reduce a cost which will otherwise be incurred in the future Two subcategories: - In the Annual Operating Plan (AOP) - Not in the AOP Elimination or reduction of a non value added process activity which currently incurs cost Questions to consider: 1. Is this actually a cost takeout (then see above)? 2. Is the “saved resource” re-invested in value added activities? 3. Is the “saved resource” converted to other NVA activities? Reduction in “base line” level of an asset or increase in a liability (example: a one time permanent significant decrease in inventory frees up the cash previously invested in this amount of inventory) In a market with backlog demand, removal of a constraint to growth can increase revenue Operating Income OI / Cost Takeout Cost Avoidance Reduction of NVA (Non-Value Added) Operating Income (OI) / Volume One Time Cash Flow Impact

Financial Benefit Categories

Six Sigma Expected Result Cost Avoidance ? Reduce NVA ? Cash Flow ? Cost Takeout ? OI/Cost Takeout Cost Avoidance Reduce NVA Cash Flow OI/Volume In AOP ? In Forecast ? Svd Resource to VA ? No Benefit Yes Non Financial Benefit Net NVA Reduction Est. Net Savings Yes No Yes Est. Net Savings RevenueCost Cash Flow Savings Compared to Prior Period Actual Reporting (Quarterly) Yes No Six Sigma Opportunities & Financial Statement Impact Project Opportunities Non Financial Six Sigma Savings Not Visible in Financial Statements Financial (Cost Avoidance) Constraint ? No Yes Backlog ? Growth ? No Yes Savings Compared to Plan/Forecast Cost No Six Sigma or Fin Stmt Benefit Financial (NVA Reduction) Est. Net Savings Est. Net Cash Flow Est. Net Increase (include additional cost) Totals$$ -- Reporting to Corporate: NVA to VA Cost Avoidance Operating Inc Impact Cash Flow

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