Andres H. Slack – Chapter Twenty

Andres H. Slack

CHAPTER TWENTY:

Overview

This chapter is intended for business leaders, managers, Six Sigma sponsors and project leaders who are interested in learning how to maximize the impact of their LSS projects, both before and during rollout. The current global economic situation dictates that companies spend their money wisely; wasted money spent on projects that do not actually impact the bottom line are no longer acceptable.

Financial Impact Analysis (FIA) provides a tool for executives and managers to estimate financial impact of proposed improvement projects before resources are dedicated. After rollout, FIA monitors the improvement process to track actual savings and revenue impact against targeted data. Financial Impact Analysis is a flexible tool that works well with other Lean Six Sigma metrics and provides a direct link between the project and the bottom line. This is a key consideration when soliciting buy-in for the project.>

This chapter will help you to:

  • Learn why and how Financial Impact Analysis is necessary to choosing and monitoring project improvement efforts
  • Understand the prerequisites for performing FIA
  • Understand the benefits of using FIA
  • Learn step-by-step how to perform a Financial Impact Analysis on your LSS projects

Importance of Conducting Financial Impact Analysis

A Brief History

Six Sigma has firmly established itself as a highly successful process improvement methodology that appears to be here to stay for the long term. In contrast to transient business improvement initiatives, sometimes derisively referred to as “flavors of the month” (e.g., quality circles, TQM, BPI, Zero Defects, and process reengineering), Six Sigma continues an unabated growth that began with its quiet birth at Motorola in the 1980’s and its loudly trumpeted thrust into the world stage by General Electric’s high profile launch in 1995. Other companies, such as Allied Signal, actually rolled out Six Sigma before GE, but their implementation was eclipsed by the sheer scale, massive investment ($450 million the first two years), and legendary status of GE’s CEO, Jack Welch.

As Six Sigma has matured and as it gains a more varied practitioner base with wide-ranging areas of expertise, it has been influenced by other organizational performance improvement approaches. A notable change to Six Sigma has been the increasingly common inclusion of “Lean” (and, more recently, performance improvement approaches such as “Systems Thinking” and “Theory of Constraints”) into its iconic DMAIC methodology. Lean was made famous by the Toyota Production System and is dedicated to improving efficiency and speed by eliminating nonvalue- added activities. This fusion of Lean and Six Sigma, which focuses on reducing process variation and eliminating defects, led to the coining of the term “Lean Six Sigma,” or LSS.

Six Sigma has made several important contributions to the evolution of business improvement methodologies. These contributions include the introduction of a program architecture founded on strong senior leadership and buttressed by a core of “Champions,” “Master Black Belts,” and “Black Belts” who implement the program. Six Sigma also refined Deming’s well-known PDCA (Plan, Do, Check, Act)
methodology for problem solving into DMAIC (Define, Measure, Analyze, Improve, Control), with improved project management features such as formalized project reviews (tollgates) at the end of each phase. Six Sigma’s DMAIC platform, with its methodical application of process
improvement tools, proved very adaptable to the future inclusion into Six Sigma of other improvement approaches such as Lean, TOC, and Systems Thinking.

The Benefits of FIA

Perhaps the best known contribution of Six Sigma is the introduction of formal financial impact analysis as an integral part of the execution of each project. Only projects that can show financial benefit are considered for selection. It is this financial justification for each project that is widely credited with the broad acceptance and staying power of Six Sigma in American industry. This is because financial impact analysis is written in the language American managers understand and embrace. This “show me the money” feature of Six Sigma had been missing from prior business improvement methodologies (which had more of a “build it and they will come” philosophy), and this seemingly innocuous mutation of the Six Sigma DNA made all the difference when it came to the survival of Six Sigma among competing business improvement methodologies of this (the American) business ecosystem.

The emphasis on “American” in explaining the importance of financial impact analysis is not casual. In contrast to the USA, it is interesting to note how Japan readily adopted and socialized into their business culture Deming’s variation-reduction statistical approach without the need for financial justification of each project. For one thing, in Japan – unlike in the USA – engineers are heavily represented in management ranks, so Japanese administrators understood at both the intellectual and gut levels the enormous promise of variation reduction and thus did not need “financials” to induce them to follow that course of action. Moreover, there is much greater emphasis on long-term business performance in Japan rather than the American short-term emphasis on quarterly financial results. This makes it easier in Japan for managers to make investments that have a long-term payoff horizon. For these reasons, the idiosyncrasies of American business culture make financial impact analysis at the individual project level a powerful facilitator for the adoption and retention of LSS.

Financial impact analysis plays an important support role in practices that have been identified as critical for successful Six Sigma programs. To use GE as an example, let’s look at the role of financial impact analysis in three success factors that accounted for the spectacular triumph of Six Sigma in GE:

  1. Top management’s total commitment through highly visible, vocal and ongoing support (as a GE employee at the time of the Six Sigma roll-out, this author can attest to top management’s commitment; this author was one of the hundreds of thousands of GE employees who witnessed Jack Welch – in person or on video – personally explain the importance and urgency of the initiative when it was rolled out in 1995).
  2. Include participation in Six Sigma in all managers’ performance evaluations. This is particularly significant in a company with a policy of “parting ways” with the managers performing in the bottom 10%.
  3. Commit adequate organizational resources by deploying fulltime black belts (trained Six Sigma professionals) to lead improvement projects. This can require a massive investment on the part of an organization (GE spent $450 million in the first two years of the deployment).

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