Financial Impact Analysis of Lean Six Sigma Projects

The analysis of Lean Six Sigma (LSS) projects from a financial perspective does some very important things.  First, Financial Impact Analysis (FIA) is a tool that allows executives and managers to examine the financial impacts of proposed projects prior to dedicating valuable resources, helping to make valid justifications and decisions for those projects.  Second, FIA monitors and reports ongoing improvement processes in tracking true, actual, savings and revenue impacts to specific areas.

Further, particularly during lean times, FIA can support the ongoing efforts of an overall LSS presence, and its associated cost, by virtue of exposing benefits and net savings as delivered. In doing this, FIA establishes baselines (references) for costs and revenues prior to any specific course of improvement.  These provide a beginning reference against which the cost of any improved process is compared.  The difference between the two represents the financial impact of the project.  The same is done for revenues:  That initial baseline, or reference, revenue value is recorded and then compared to actual revenues after improvements have been implemented.  Again, this represents a financial impact, but the important thing is it is a known and measurable impact, yielding the LSS influence (and justification) to projects.

Further, LSS serves a diverse body of project stakeholders.  FIA is able to capture impacts and make delivery by tracking the multitude of contributions across the organization.  As an example, for the organization’s finance function, LSS follows the cost accounting model, but then brings a standardized format to all projects.  It then provides an auditable and verifiable model for delivering financial impacts.

For senior leadership, FIA provides assurance that analysis is measured in real dollars, in documenting actual returns on investments for initiatives.  For process owners, there is the exposure of the process’ tether to the company’s bottom line.

There are further benefits, all contributing to known impacts for LSS projects prior to rollout, helping to ensure that highest-impact and most cost-effective projects are undertaken.  The involvement of financial subject matter experts (SME) yields accurate analysis and results in readily understood reports for stakeholders in the improvement process.  It’s possible to track expected project performance against the actual, with effective monitoring of improvement efforts.  For all, FIA provides easy and convenient access to accurate high-level summaries of financial benefits.

Finally, Financial Impact Analysis is a flexible tool that integrates with other Lean Six Sigma metrics in providing a direct link between the project and the organization’s bottom line.

About the Author: Andres Slack is a certified LSS Master Black Belt with an MBA from the University of Michigan and a bachelor’s degree in electrical engineering from Florida International University. He currently works as a Lean Six Sigma consultant and has extensive experience in logistics, manufacturing, and the financial industries.

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