1. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. SSA Financial Product Project Valuation and Prioritization Module

2. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 1 Project Selection Process Balanced Scorecard Business Strategy 1.Growth 2.Market Lead. 3.Productivity Y=f(x) Scoping Project ID, Scoping & Chartering Business Alignment & Baseline Prioritization Project Charters P&L BlS Financial Statements Project Approval Steering Committee Review/Approval Valuation Alignment Benefits Valuation Valuation andPrioritization Throughout Project Selection Process Valuation and Prioritization Throughout Project Selection Process Balanced Scorecard Balanced Scorecard BaselineControl Value & Record Improvement In Operational Metrics Prioritization Based On Standard Criteria 1 Ensures Six Sigma Program is aligned with Company priorities, such as Cost Savings, Revenue Growth, Cash Flow, Customer Satisfaction, etc. 1 Do we want to replace balanced scorecard

3. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 2 Project Valuation and Prioritization Module Content Connecting Defects to Dollars Benefit Types / Measurement Benefit Calculation Hurdles Project Prioritization

4. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 3 Connecting Defects to Dollars Sigma Lean will help you find and eliminate defects. Y By eliminating defects the company’s bottom line will improve. Defects Dollars

5. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 4 Establish a link between the project Defects and the Dollar impact -As defects are eliminated, benefit in dollars will be realized on the P&L -Ensure that the “baseline” used in the project charter (problem statement, objective, etc.) is appropriate to the defect and metric -Ensure that data is readily available or establish a measurement system as a part of the project Connecting Defects to Dollars

6. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 5DefectDollars 3rd 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 FTE reduction or overtime cost elimination Leased computer equipment not recovered at end of lease Lease buy-out cost of un-recovered PCs & Laptops Employee accidents (slips, trips & falls)Cost of associated accidents in lost productivity/overtime to cover shift, lower insurance costs Sales Rep. Effectiveness (close rate) below 12% Increased sales Connecting Defects to Dollars

7. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 6 Benefit Types Hard -Measurable Operating Income Impact Margin from Sales Volume Increases Sales Price Increases Net Project Benefits – Expense Savings less project implementation Costs Soft -Impact to Operating Income not easily measured Customer Satisfaction Employee Satisfaction

8. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 7 Benefits Classification Matrix Raw Material Cost Reduction Direct Labor Cost Reduction Dire. Overhead Cost Reduction Revenue Enhancement Warranty Cost Reduction Scrap Cost Reduction Functional Projects IT, Finance, HR, etc. Cash Flow Improvement Inv. Reduction A/P Improvement A/R Improvement Etc. FTE Reduction Capacity Reduction Actual Staff Reduction Shed Capacity Yes Soft No WACC applied To Cash Flow Realized, Actual Period/Period Hard Realized, Actual Period/Period Realized, Actual Period/Period No Yes No Price Volume Adj. for Other Projects & Mkt. changes Projects Delivering Actual, Realized Benefits Period Over Period Categorized As Hard Benefits Note: Benefits should be net of incremental cost Yes

9. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 8 Benefit Measurement – Hard Dollar Savings Specific Identification -Benefits are specifically identified for each unit, aggregated for reporting period (usually monthly) -Example: Each week a report is produced that lists each piece of equipment (including serial number, original price, and Six Sigma benefit) for which the company no longer incurs a sales tax liability Fixed Monthly Contribution -Financial benefits are constant for this type of project as long as the process remains in control -Example: Staffing reduction resulting from NVA elimination in a call center process Rate times Defect Reduction -Financial benefits are calculated by multiplying a benefit rate per defect times the number of defects prevented by the improvements resulting from the Six Sigma project -Example: Scrap reduction in a manufacturing process Estimation -When no scientific methodology is available, you may be able to estimate the benefits to the satisfaction of all stakeholders -Example: Percentage of sales volume increase attributable to a revenue enhancement project

10. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 9 Specific Identification Example Sales Force Effectiveness Project Sales force records and specifically identifies sales closed as a result of new process – cross-validated with customer survey data Identify and record each sale attributable to new process.

11. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 10 Fixed Monthly Contribution Example Manufacturing Productivity Project Can eliminate 2 FTEs at the fixed monthly contribution of salary plus benefits Additionally, can eliminate lease of one piece of manufacturing equipment at a fixed monthly contribution equal to the monthly lease expense Implement Improvement that Eliminates a Monthly Expense Going Forward

12. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 11 Rate times Defect Reduction Example Scrap Reduction Project On 10,000 units of raw material per week, increased yield from 92% to 98%, eliminating 6% or 600 units of raw material scrap Calculate savings based on cost of the raw material per unit plus any cost of scrap disposal per unit Measure Defect Reduction, Calculate Savings based on $ per Defect

13. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 12 Estimation Example Customer Retention Project Project is one of three initiatives that are being using to increase customer satisfaction / retention Calculate savings based on improved retention rate. Estimate impact of retention in dollars and further estimate % of the impact from this specific project. Estimation is the least preferred valuation method

14. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 13 Benefits Determination MethodBenefits DeterminationComments 1. Accounting MethodDirect contribution to Operating Income* (OI) Preferred method, accurate & simple. E.g. Increase sales of 1,000 units over the next year at the current price of $8,000 will result in an increase to revenue of $8M. At the current OI contribution rate of 15% this will translate to an OI contribution of $1.2M 2. Present Value/WACCCash inflows less Cash outflows over time with time-value of money consideration. Also consider use of Weighted Average Cost Of Capital (WACC) Various versions. See controller for appropriate/required calculation and interest/ WACC assumptions. 3. Utility ValueRely on market, expert and/or competitive price & value to estimate potential value to company Use this input to calculate ROI and/or prepare business case 4. Replacement ValueDetermine the maximum amount you would pay (value) an outside firm to complete the project successfully Should be prepared to actually pay for this service Should approach project valuation with the same rigor, thoroughness and accountability as any “investment” decision. * Your Company may use EBIT, Net Income or other measure instead of Operating Income

15. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 14 Benefits Determination - Accounting Method Project: Chemical manufacturer has peak demands for a certain product that exceed production capacity. Because this is a commodity product customers turn to competition for required product. A Six Sigma project is initiated to improve manufacturing throughput and ultimately peak capacity by 15% to accommodate customer demand. Lost sales are estimated at 18,000 tons at an average discounted unit price of $0.32/pound, lost revenue is estimated at $11.5M. Measurement: Specific Identification. For the project proposal (Define Phase) the estimate will be based on the increased number of units the plant is expected to sell, based on the current sales forecast and the increased plant capacity (15%). After the project is completed (Control Phase) the measurement will be the actual sales units (pounds) that were booked in excess of the previous plant capacity. Benefits Determination: ↑ Units X Price X OI% = Benefits Increase in units sold (initially forecast, actual after project closes) as a result of Six Sigma project TIMES the average discounted unit price for the product TIMES the OI contribution % for this product = the project Benefits. In this example, the expected increase in units is 18,000 tons which equals 36M pounds. The average discounted unit price is $0.32/pound. The OI contribution % for this product line is 8%. Therefore the expected benefits are calculated as follows: 36,000,000 X $0.32 X 8% = $922K annual OI ROI Calculation: Cost to complete project (investment) = $75K Net Project Benefits ($922K – $75K) / Investment ($75K) = 1,129% ROI in first 12 months. NOTE: May be appropriate to use longer period for ROI calculation based on your company practices Benefit will be realized through increased sales volume

16. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 15 Benefits Determination - Present Value Method Project: Healthcare provider has “high” outstanding accounts receivables as compared to industry peers. DSO is currently calculated to be 118 days and Accounts Receivable balance averages $120M. Initial analysis of customer “disputes” that DSO could be improved by several days by improving the invoice accuracy from one of the several billing systems in the company. This project will focus on that area and is expected to result in a DSO reduction of 5 days which will reduce the rolling A/R balance by $5M. A system modification is required to accomplish this task. The total cost of the project including the system modification is estimated at $80K Measurement: Specific Identification. Tracking of Customer Disputes resulting from invoice accuracy, dollars associated with those disputes and time to resolve disputed invoices. Benefits Determination: ↓A/R Balance X WACC The reduction in Accounts Receivable Balance will result in a one- time cash flow benefit. The company uses a standard 8% WACC when calculating the OI impact from cash flow projects. $5M X 8% = $400K OI ROI Calculation: Cost to complete project (investment) = $80K Net Project Benefits ($400-80 / Investment ($80K) = 400% ROI Benefit will be realized through reduced Accounts Receivable balance.

17. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 16 Benefits Determination: (↑Units X Price) + (Total Units X 2%) X 5% = Margin improvement During project proposal phase an estimated 4% increase in units and a 2% increase in unit price is used to estimate increase in revenue. Benefits Determination - Utility Value Method Project: A computer manufacturing company initiates a Design For Six Sigma project to design and establish a new product launch process to accelerate, optimize timing & effectiveness of product launches. Market data indicates that a 3-day delay in the launch of a new model results in a 3%-5% loss in total units sold over the product lifecycle. Furthermore, historical, competitor &market data validates that first to market results in a 2% price premium over the life of the product. This project should be completed in time for the new model launch for the upcoming holiday season. Projected sales are 100,000 units at an average units price of $1,800/unit. EBIT % for these products is 5%. Measurement: Estimation: Unit price will be raised by 2% on units launched through the new process, actual units sold would be compared to forecast and historical units volumes from like-product launches. The difference in units would be attributed to the Six Sigma project. ROI Calculation: Cost to complete project (investment) = $150K Net Project Benefits ($547K - $150K / Investment ($150K) = 265% ROI 4% more units, 2% increased unit price Will drive $547K EBIT improvement.

18. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 17 Benefits Determination: Business experts have determined that they would pay an outside organization no more than $150,000 for a designed and implemented “customer welcome process” Benefits are determined to be the “Replacement Value” of $150K Benefits Determination - Replacement Value Method Project: One of the three strategic goals for a popular retail chain is Customer Satisfaction. A Six Sigma project has been approved to establish customer welcome procedures to make customers more comfortable entering stores and giving them a chance to ask questions and receive direction upon first entering the store. The company feels strongly that the completion of this project will improve Customer Satisfaction, but can not put a dollar value on the successful completion of this project. Measurement: Estimation: Improvement in Customer Satisfaction will be measured through customer surveys and use of outside rating agencies. ROI Calculation: Cost to complete project (investment) = $50K Net Project Benefits ($150K - $50K / Investment ($50K) = 200% ROI Benefits are valued at $150K based on “replacement value.”

19. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 18 Quality engineering and administration Inspection/test (materials, equipment, labor) Expediting Scrap Rework Rejects Warranty claims Maintenance and service 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 Many Costs of Poor Quality Not Readily Seen Retrofits Downtime Service recalls Redesign Brand reputation Lost Sales Poor product availability

20. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 19 Benefit Calculation Hurdles Timing of benefits when Accounting reserves are impacted Timing of benefits when Manufacturing costs are recorded at Standard Cost Benefits from reducing accident rates, claims against the company, etc. for which the company is insured Productivity improvements that don’t translate proportionally to headcount reductions Understanding fixed versus variable expenses Other impacts simultaneously to the same Cost Center and Account

21. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 20 Project Prioritization Questions to ask -What KPI is the project aligned to? -What is the anticipated financial statement impact? What department/cost center is impacted? What financial statement line item is impacted? Is the Process Owner on-board to adjust the forecast/budget accordingly? Is there a large investment required to achieve the benefits? -Is the solution pre-determined? -Does the project have clear boundaries? -Is the problem to be addressed clearly understood? -Is the defect well-defined and measurable? -Are the right people available to serve as team members? -Is the project focused on an ongoing process that will continue to be used ? -Are there other initiatives in the area that will impede project progress?

22. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 21 Project Prioritization Matrix Example

23. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 22 Summary Identify business opportunity (must establish project value proposition) Decide on appropriate measurement for project Determine project valuation method (dollars to defects) Baseline performance, value current performance Improve process, value improvement Treat projects as funding requests, develop business case.

24. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 23 If You Could Remember Only Four Things 1.Did, or will the project improvements directly result in financial benefits (dollars to defects)? 2.Whose BUDGET will this project impact? 3.Which line item(s) (accounts) will this project impact? 4.How much benefit ($$$) will this project deliver and when? Establish A Clear Connection Between Defects & P&L Impact

25. Project Closeout - Benefits Validation Items To Review  Comments (attach extra pages as necessary) 1. Original Project Estimates (Define Phase) 2. Project Report-Out (BB Presents) 3. Control Phase & Control Plan 4. Baseline period & calculation reviewed & validated (indicate baseline DPMO and baseline period) 5. Demonstration of improved process performance (attach Control Chart, indicate Improved DPMO and Improvement %) 6. Demonstration of improved Financial Performance 7. Financial benefits (forecast & actuals) updated* 8. Indicate Benefits Calculation Type:  Specific Identification  Fixed Monthly Contribution  Rate times Defect reduction 8. Sample monthly benefits calculation attached Estimated net annualized benefits $(000): ________________Benefits realized to-date from Proj. Imp. (accumulated benefits) $(000): ___________ Benefits first realized (MM/YY): _____ / _____Expected useful life of improvement (if less than 24 months): ________________ Where are benefits realized? (Business Unit, Department Name/Number, Cost Ctr., etc.): __________________________________________________ Where on the P&L will the benefits be observed (which accounts/line items)? : __________________________________________________________ Project Number: _____________ Black Belt Name: ________________________________________ Project Title: ____________________________________________________________________________ SignatureDate Financial Analyst Finance Champion SSA Finance * Updated in the Six Sigma Project Tracking system, reported to the Finance Champion for consolidation/reporting.

26. Copyright © 2006 Six Sigma Academy International, LLC All rights reserved; for use only in compliance with SSA license. Presentation NamePg 25 The following are trademarks and service marks of Six Sigma Academy International, LLC: Breakthrough Lean ®, Breakthrough Strategy ®, Breakthrough Value Services ®, Breakthrough Change Strategy SM, Breakthrough Design SM, Breakthrough Diagnosis SM, Breakthrough Execution SM, Breakthrough Sigma Lean SM, Breakthrough Six Sigma SM, Breakthrough Software Design SM, FASTART SM, Six Sigma Gold Belt TM, SOLVING YOUR BUSINESS PROBLEMS FOR THE LAST TIME SM. Six Sigma is a federally registered trademark of Motorola, Inc. MINITAB is a federally registered trademark of Minitab, Inc. SigmaFlow is a federally registered trademark of Compass Partners, Inc. VarTran is a federally registered trademark of Taylor Enterprises. Six Sigma Academy International, LLC 15210 North Scottsdale Road, Suite 250 Scottsdale, Arizona 85254 Tel. (480) 515-9501 Fax (480) 515-9507 www.6-sigma.com