0. Six Sigma – Financial Overview

1. Roles and Responsibilities of the Finance Support Team
Define Savings/Benefits
Provide Financial Support
Project Selection and Review
Project Evaluation
Track Savings/Benefits
Validate/Audit Financial Results
Management Reporting

2. Finance Team Being Developed
An analyst from the appropriate functional area will be assigned to each project team.
The analyst will provide modeling support, budget information, and
savings guidance.
- For example if I’m a BB doing a project in Nuclear - LD Wade is who I need to talk to.
Being Developed

3. Roles and Responsibilities Black Belt vs. Financial Analyst
Data Collection
Original Analysis
Cost Analysis
Financial Analyst
Provide Budget Information by Cost Center
Cost/Benefit Analysis
Review / Validation
Budget Adjustment

4. Project Process Map Project Consideration Project Assignment
Measure & Analyze
Improve & Control
Close Project
Project Champion Enters High Level Estimate of Cost Savings
Finance Sign-Off
Establish Budget and Savings.
Enter Data into Tracking Model
Finance Sign-Off by Project Team Financial Analyst.
Sign-Off by Functional Deployment Champion - Finance
Sign-Off by Project Team Financial Analyst
Sign-Off by Director-Level Deployment Champion - Finance.
Sign-Off by Functional Deployment Champion - Finance.
Appropriate Budgets Adjusted.
Six Sigma changes our approach to work. It focuses on our customer / supplier relationships – internal and external. It’s a different use of metrics.

5. Finance Sign-Off Before an Opportunity becomes a Project
High-level “sanity check”
The Project Champion should have already entered numbers and attached the model spreadsheet
The spreadsheet should contain values, in thousands of dollars, on the Input and Output tabs only
Questions to ask:
Are there hard savings?
Are the savings categorized correctly? (ie hard versus soft)
Are there any other possible sources of savings?
Is there an opportunity to save $250,000 or more?
2. Before the Process Improvement Takes Place
The Black Belt should have already entered numbers and attached another copy of the model spreadsheet
The spreadsheet should contain values, in thousands of dollars, on the Input
and Output tabs as well as the detailed business unit tab
How do these estimates compare with the previous estimates?
Are the correct cost centers numbers used?
If there are multiple cost centers, is the Multiple Cost Center tab completed?
Do these savings look realistic for the proposed improvement?
Are there any errors in the data entry?
How do the savings estimates compare with current budget numbers?
1. Hard savings are measurable - doesn’t necessarily mean we’ve already got the data, but we could get if if we needed to. We can quantify them. They are things we can control. They contribute directly to earnings.
2. They include - reducing operating expenses (labor, materials, supplies), lower expenses due to Capital Expenditure reduction (depreciation, interest, property tax)
3. Soft savings - are less measurable or are not tied directly to earnings.
4. Includes - Customer satisfaction, safety or regulatory compliance, Capital Expenditure cash impact

6. Finance Sign-Off After the “Cooling-Off” Period
Detailed audit of savings
The spreadsheet should contain values, in thousands of dollars, on the Input
and Output tabs as well as the detailed business unit tab.
Questions to ask:
Did the process improvement take place?
Does the process improvement result in the reported level of savings?
Are the correct cost centers numbers used?
If there are multiple cost centers, is the Multiple Cost Center tab completed?
Verify Financial results
Time required to validate financial benefits
Budget Adjustment
Adjust budgets to realize financial benefits
1. Hard savings are measurable - doesn’t necessarily mean we’ve already got the data, but we could get if if we needed to. We can quantify them. They are things we can control. They contribute directly to earnings.
2. They include - reducing operating expenses (labor, materials, supplies), lower expenses due to Capital Expenditure reduction (depreciation, interest, property tax)
3. Soft savings - are less measurable or are not tied directly to earnings.
4. Includes - Customer satisfaction, safety or regulatory compliance, Capital Expenditure cash impact

7. Savings Definition “Hard” Savings
Measurable, controllable and contribute to earnings
Sources
Reduction of non-fuel operating expenses
Lower carrying cost related to Capital Expenditure reduction
Margin improvements directly attributable to Six
Sigma projects
“Soft” Savings
Difficult to measure or not tied directly to earnings
Examples
Customer satisfaction
Safety or regulatory compliance
Cash impact of reduced Capital Expenditure

8. Savings Definition - Examples
Hard Savings
Decrease time to post payments
received (increase interest income)
Decrease Uncollectables (Increase
Revenue)
Decrease in Office Supply Expense
Decrease in Overtime Paid
Decrease in Postage Expense
Decrease in Travel Expense
Decrease in Late Payment Fees
Decrease in Rent/Lease Expense
Decrease in Utilities Expense
Decrease in Repair Costs
Soft Savings
Capital Expenditure saved net of interest, depreciation, property tax
Increase in Customer Service
Increase in Customer Satisfaction
Increase in customer/employee
Safety
Aid in Regulatory Compliance
Six Sigma changes our approach to work. It focuses on our customer / supplier relationships – internal and external. It’s a different use of metrics.

9. $1 Million Capital Saved
Sample Income Statement
Cost Center ($ Thousands)
Revenue $11,000 $11,000
Expenses:
O&M $ 6, $ 6,000
Depreciation $ 1, $ $
Interest Expense $ 1, $ $
Other Taxes $ $ $
Other Expenses $ $ Pretax Income $ 2,200 $165 $ 2,365
Result: $165 Thousand Hard Savings
$835 Thousand Soft Savings
$1 Million Capital Saved
SAVINGS
* Assumes 20 year depreciation, 7% interest rate, 4.45% Property Tax rate.

10. $1 Million O&M Reductions
Sample Income Statement
Cost Center ($ Thousands)
Revenue $11,000 $11,000
Expenses:
O&M $ 6, $1, $ 5,000
Depreciation $ 1, $ 1,000
Interest Expense $ 1, $ 1,000
Other Taxes $ $
Other Expenses $ $ Pretax Income $ 2, $1,000 $ 3,200
Result: $1 Million Hard Savings
$0 Soft Savings
$1 Million O&M Reductions
SAVINGS
Assumes 40 year depreciation, 8% interest, and .5% tax rate

11. Tracking Savings Savings implemented during current fiscal year
Elements tracked by project:
Hard Savings - Cost Center & Expense Account
Soft Savings - by category
Six Sigma changes our approach to work. It focuses on our customer / supplier relationships – internal and external. It’s a different use of metrics.

12. Validation/Audit of Savings
Focus of validation will be on hard savings and capital saved. Preference is for ATOI versus cash.
The Budget/Plan is the baseline against which quantifiable savings will be measured.
After project is completed, validated and approved, annual operating budget will be adjusted accordingly.
Six Sigma changes our approach to work. It focuses on our customer / supplier relationships – internal and external. It’s a different use of metrics.

13. 1. The purpose of involving Finance in the up-front process is to ensure that the financial targets set for the initiative are supported by the project selection process. This is when initial financial targets for each project are established - both cost and revenue.
2. If the project includes a Lean component, the financial benefits should be validated after the Completion of the lean event.
3. At the completion of the Measure Phase, the BB, Champion and finance representative can validate the financial impact and determine if the project should continue.
4. Upon completion of the Improve Phase, the full scope of the cost savings and revenue generation is determined. Many clients will “book savings” at this point.
5. The final audit of a successful project is at the completion + 3 month point. This is validation that the project met the goals of the project and the revenue/cost were sustainable.

14. Sample List of Deliverables

15. Financial Integration Sample Internal Communication Document
With Six Sigma
Sample Internal Communication Document

16. Project Savings/Review Package
Purpose of Project Savings
Project Selection Process
Financial Impact
Benefit Categories
Financial Integration
Detailed Worksheets
Six Sigma savings worksheet

17. 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.

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

19. Six Sigma Project Expectations Require Financial Translation
Does the Six Sigma Project directly result in a change in the following:
Revenue?
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?
Cost?
Cash Flow?
Timing?
Training, worksheets and integration with financial commitments will facilitate “Financial Translation”

20. Six Sigma Financial Benefit Categories
Operating Income OI / Cost Takeout
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
Cost Avoidance
Reduction of NVA (Non-Value Added)
One Time Cash Flow Impact
Operating Income (OI) / Volume

21. Financial Benefit Categories

22. Financial Benefit Categories

23. Financial Benefit Categories

25. Six Sigma Scorecard