Return On Investment and Lean Six Sigma Projects
Advice from Joe De Feo, President and Executive Coach
“All improvement happens project by project and in no other way,” said Dr. Juran. This quote, and the evidence that backs it up, is the driver behind most quality improvement, Lean, and Six Sigma programs today. To drive out waste and improve performance, use Lean and Six Sigma multi-functional project teams to ensure results happen. Just talking about improvement or placing banners on the walls of the offices to improve, will not lead to the levels of improvement required to remain competitive. Using a project by project approach will enable real ROI – return on investment – to happen.
Samsung Electronics Corporation (SEC) completed 3,290 quality improvement “Six Sigma” projects between 2000 and 2001. These projects contributed to a 50% reduction in defects of electronic equipment over the same period. There is no thought of improvement in quality, cost, and productivity without projects at Samsung. These impressive numbers have certainly played a major role in Samsung’s recent growth. By 2001, SEC had earned net income of $2.2 billion on total revenues of $24.4 billion. Market capitalization stood at $43.6 billion. According to SEC’s 2001 annual report, SEC is now one of the top 10 electronic and electrical equipment manufacturing companies in the world, with the best operating profit ratios and superior fiscal soundness.
Sentara Healthcare uses Lean Six Sigma Projects as one performance tool to improve quality, increase patient satisfaction and reduce costs. “The goal of our clinical project was to reduce the length of time a patient is on a ventilator, thereby avoiding potential complications associated with prolonged mechanical ventilation,” says Sarah Darwin, director of nursing and leader of the General Intensive Care Unit Six Sigma team. “The results were a reduced average ventilator length of stay of 25 percent and reduction of defects per million opportunities by 12 percent for annualized savings of $450,000.”
i-Six Sigma and our own research has shown that the ROI of structured improvement teams have is 10:1 or greater. Why? Because the investment into a project is usually the time it takes to diagnose process problems and make changes, which is small in comparison to the gain as a result of the change. A typical Black Belt project will gain $350,000 to $500,000 per project over a six month project implementation. A Green Belt project will gain about one-half that.
Why then do some organizations not want to deploy improvement projects, or if they do, do not get these results? The answer often lies in one of two areas. First, the organization selected the wrong projects from the start. Second, the organization did not begin by quantifying the financial loss due to a poor quality process which selected the projects. If you want financial results and greater ROI, there are a few steps you can take.
Let us take a quick look at what to do first if you are trying to understand how the costs of quality can drive a financial target. If, for example, your organization sets a target to save $5 million, there is a simple methodology to determine how many improvement projects it will take to reach that goal. The organization can then manage the improvement initiative more effectively if it puts some thought behind how much activity it can afford. The answer will help it know how many project leaders or Black Belts are needed to manage the improvements and how much training will be required.
The project methodology requires the following six steps:
- Identify what your desired cost reduction goal should be. In this case we will use $5 million over the next two years or $2.5 million per year.
- Identify the average return for each improvement project. For this example $250,000 is used. Now calculate how many projects are needed to meet the goal for each year. For this example, we would need 10 projects per year at $250,000 ROI.
- Next management should discuss how many projects can actually be completed in each year based on available resources. This will then define the number of leaders or subject matter experts required to lead the projects. If your organization had two full-time leaders available to support two projects every six months and each project can be completed in four to six months, then we can complete eight projects in one year. You now have a choice to make. Should your organization add a leader to get to 10 projects? Should you try to find larger projects with greater ROI? Can you complete the projects faster, thereby completing more projects in one year? These are the questions that should be asked when looking for results. The answers will then lead to the next step. How many people do we need to work on 10 projects per year?
- Estimate how many employees will be involved on a part-time basis to work with the Black Belts to meet their targets. Our experience indicates that four team members per project at 15 – 20% of their time for the time of the project is typical. If this works for you, then you will need about 20 employees involved at some level each year to complete the projects.
- Now look for projects that can return $250,000 per year. Identify the specific costs related to poor performance for each project and select projects from this list that are already causing your organization to incur at least $250,000 per deficiency. If you have not identified a list of projects, use a small team to identify the costs and create a Pareto Analysis prior to launching any projects to make sure the potential is there.
- Use these steps and debate each variable (the ROI per project, the length of each project, the number of part-time or full-time staff to lead, the number of employees to participate, and the time required to complete the projects) with the executive team to ensure the ROI needed happens.
Visit the Juran e-LifeLine to download a simple resource calculator free from Juran to make this task an easier one.
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