2018

3.4 PER MILLION

Proactive Benefits Calculations

Speak the language of money, but don’t omit the benefits of quality

by Mike Carnell

In the late 1990s, Six Sigma was hot. Everybody wanted to be a consultant, and everybody claimed to have been the consultant that General Electric (GE) used to attain its amazing results. But let’s not ponder who really did the consulting work at GE. What really caught everyone’s attention were the claims about the financial benefits GE realized after its initial Six Sigma deployment.

There was a large group of organizations that wanted to do Six Sigma and "be like Jack" (Welch), but there was also another group that liked to discredit those financial claims. Typically, these individuals conjured up figures or formulas to discredit the GE numbers.

In 1996, I spent a great deal of time working for GE, so these misguided analyses didn’t sit well with me. Because we were typically hearing these disparaging comments during consulting sales calls, I didn’t say much.

But have you ever had one of those days where you were tired of having your buttons pushed? I had one when I was listening to an executive debating the GE numbers. Finally, I suggested to him that he should purchase some GE stock so he could attend a shareholders’ meeting where he could stand up and debate with Welch why GE’s numbers were incorrect.

As you can imagine, the outcome of this conversation was predictable: We never heard back from this executive or his organization again. Not the outcome we were looking for, but there may be a little Joel Goodsen—the daring and direct lead character of the 1983 movie "Risky Business"—in all of us after all.

Speaking the right language

Compared to my poor choice of words with that executive, Joseph M. Juran had it so right: "The language of business is money," Juran is credited with saying throughout the 1980s. As someone who has stood in front of executive teams struggling to explain what a Sigma value means while watching their eyes glaze over in confusion, I have learned to switch the discussion to money: return on investment or economic value added. Suddenly, everybody in the room perks up and starts wiggling in their seats like excited 5-year-olds, a phenomenon that has repeatedly confirmed to me that money is indeed the language of business.

After the Six Sigma journey began at Motorola in the late 1980s, we were given Relevance Lost: The Rise and Fall of Management Accounting,1 a book that detailed the history of accounting, and more importantly, the shortcomings of accounting. Then, during the Allied Signal Six Sigma deployment in 1995, my organization spent a great deal of time on activity-based costing and building cost models (Figure 1). GE, of course, paid close attention to quantifying financial benefits in an effort to dislodge the old notion that there is a point at which it becomes uneconomical to improve quality.

Figure 1

In today’s global economy, not recognizing the competitive advantage of quality improvement is not only flawed thinking, but it’s also completely delusional. Financial benefits from more than a cost perspective must be addressed first, and not only because they are the language of business.

Since those early years of Six Sigma, we have become more sophisticated in terms of teaching the benefits of quality. We have learned that the benefits are not always about cost. We have seen that when yields improve, we reduce scrap and rework, which results in improved cost and an increase in the speed of the process. That increase has a monetary value attached to it.

Safe working conditions

Organizations spend a great deal of time and effort aligning their goals and initiatives with improvement projects. Safety is close to a common global initiative. Many Six Sigma projects support these initiatives to ensure safety of the workforce. There are monetary benefits to addressing safety issues, but that is not the primary driver. My organization has now worked in the mining industry for more than a decade—an industry that is inherently more dangerous (including the possibility of fatalities) than a lot of other manufacturing or transactional businesses.

There are many reasons why there is a moral obligation to provide a safe working environment for our workforce, which most people can easily recognize. Doing a financial calculation based on a fatality is something that just feels wrong: It isn’t our motivating factor. For those who struggle with that moral obligation, there is the financial motivating aspect to consider as well. Depending on the mining laws of certain countries, fatalities may result in the suspension of the operators’ mining licenses, which basically puts them out of business. If you are a person who needs a financial driver to motivate you, that repercussion should more than do it.

Systems-level thinking

Through the years, one of our best practices to proactively address financial benefits has been to generate a document called a "benefits capture" during the planning stage of a deployment. This document is a collaborative effort between the operations departments (which execute the projects) and the financial and accounting functions. We find that it takes this thorough understanding of costs to value projects. It also requires systems-level thinking, which typically comes from the financial side of the organization.

This holistic level of understanding says: "Yes, we have improved my process," "Yes, we are building more products," and "Yes, that does increase the cost of that process." But it is because of that comprehensive systems-level thinking that we are able to understand that even though total cost has gone up, the unit cost has dropped, and, consequently, we have added more value.

Getting back to the mining example, we once worked with a particular precious metal client on projects to increase a process output by about 30%. From a cost perspective, to augment that process increased the client’s cost in the range of six figures per month because it involved precious metals production. From a purely financial perspective, cost had increased considerably.

However, it was more complex than that. We also determined that the next process that followed created a bottleneck. To realize the required 30% process output increase, we had to recalculate the increase based on what the subsequent process could handle until we broke that bottleneck. After that happened, we were able to recognize the original 30% increase goal.

From a purely theoretical perspective, these financial impacts can be easily calculated. In practice, the dynamics of the system can and do have a profound impact on how these numbers stay within the realm of reality.

A strategy of being prepared to deal with complex process situations must be in place in the planning stages of a deployment. This preparation can have a significant impact on project selection as well as benefits calculations.


Reference

  1. H. Thomas Johnson and Robert S. Kaplan, Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business Review Press, 1991.

Mike Carnell is president and CEO of CS International in New Braunfels, TX. He earned a bachelor’s degree in business administration from Arizona State University in Tempe. Carnell is a member of ASQ.


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