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Project Metrics & Value

Concepts & Application


Authorized Lean Six Sigma Instructors

Each Lean Six Sigma training module focuses on specific


concepts and tools.
If you are completing this training module as part of a
Lean Six Sigma training program (Yellow Belt, Green Belt,
etc.), you will be working with an authorized LSS
instructor. You will be able to ask any questions about
the working examples, review module exams or
homework assignments and prepare for the final exams.
By working with an authorized instructor, you will gain a
fuller understanding of the material and potential
applications.

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Previous/Additional Training Recommended

To review core concepts and tools used in this module,


the following training modules are recommended:
 QAT-0095, Lean Concepts & Implementation

After completing this training module, the following


modules are recommended for further study:
 QAT-0091, Project Value Worksheet (Examples)

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Learning Objectives

The learning objectives for this training module include:


 Primary Metrics

 Project Value Definition

 Value Calculation Concepts

 Consequential Metrics

 Project Value Types

 Project Value Examples

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Primary Metrics

Our goal is to show improvement.


We compare the before project and after project
performance.
Primary metrics are associated with the areas we have
targeted for performance improvement. These are often
the metrics which determined the project selection and
priority.
Not all primary metrics will result in dollar value.

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Project Value Definition

We define project value as:


Project Value = Expected Cost – Actual Cost

Expected cost is based on before project conditions and


the actual cost is based on after project conditions.
We calculate and report project value as an annual
figure. After project conditions are often used to project
an annual figure since we do not typically wait for an
entire year after the project to calculate value. Final
project value can be validated after 12 months of data
have been collected.

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Project Value – Calculation Concepts

Suppose a plant has opened a scrap reduction project.

What is the “obvious” project metric?


Annual Scrap Cost

Any other potential project metrics?


First Pass Yield (FPY) or DPPM
MRB Processing Time
On Time Delivery

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Project Value – Calculation Concepts

Before After
Annual Scrap Cost $100,000 $100,000

Was this project successful?


What should we report for project value?
Any other information you might want to know?

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Project Value – Calculation Concepts

Most project metrics are also influenced by some kind of


“volume driver”. This information is required to properly
predict the after project expectations.
What other things might affect annual scrap cost?
Production Volume – Revenue/COGS
Customer/Model Mix Change
Accounting Methods
We want to be sure to consider potential changes to
volume driver metrics (if any) before assuming our
project was responsible for any improvement.
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Project Value – Calculation Concepts

Before After
Annual Scrap Cost $100,000 $100,000
Annual Revenue $10,000,000 $20,000,000
Scrap Rate (%) 1.00% 0.50%

Was this project successful?


What should we report for project value?
Any other information you might want to know?

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Project Value – Calculation Concepts

Before After
Annual Scrap Cost $100,000 $100,000
Annual Revenue $10,000,000 $20,000,000
Scrap Rate (%) 1.00% 0.50%

Expected Annual Cost = $200,000


Actual Annual Cost = $100,000
Project Value = $100,000

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Project Value – Consequential Metrics

In some cases, improvements in one performance metric


have been made at the expense of other performance
metrics. When this happens, the project value can be
overstated.
Consequential metrics reflect the areas of performance
we suspect may be adversely influenced by our actions.
In the scrap reduction project example, what are some
possible consequential project metrics?
Rework Cost
Scrap Recovery Cost

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Project Value – Consequential Metrics

After a project, we expect to see that our project metrics


have changed (improved). Project value is typically
calculated using these metrics with appropriate volume
driver metrics.
After a project, we expect to show consequential metrics
have not changed. In the scrap reduction project, we
want to make it clear we considered and documented a
stable rate of rework (before and after the project).

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Project Value – Value Types

Not all project metrics will have a dollar value


calculated. This does not mean they are not a good
measure of project success. There may well be dollar
benefits but we cannot easily quantify them.
When we do report dollar value, it will be one of two
types:
Hard Value
Soft Value
The difference is easy to understand and critical for
proper project value reporting.

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Project Value – Hard Value

Hard project value is a direct contribution to the


company bottom line.
Simply speaking, hard project value requires we show less
money going out or more money coming in.
What are some examples of hard project value?
Scrap Cost Reduction
Material Cost Reduction
Freight Cost Reduction
New Business

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Project Value – Soft Value

Soft project value is defined as benefits which do not


make a direct contribution to the bottom line. Soft value
should always be conservatively estimated.
What are some examples of soft project value?
Labor Hour Reduction (Incremental)
Transportation Time Reduction
Transaction Time Reduction
Floor Space Reduction (No New Business)
If we give a cost reduction to the customer, we report
this as soft value.
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Project Value – Other Value

Other project value is defined as benefits where we do


not calculate a dollar figure.
Other project value will often affect project metrics
where we can calculate a dollar value.
What are some examples of other project value?
On Time Delivery Improvement
Lead Time Reduction
Yield Improvement
Customer Satisfaction (Scorecard) Improvement

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Project Value – Capital Investment

In some cases, a project will involve spending money to


buy equipment. In these cases, we need to “adjust” our
reported project value to account for the fact that up
front investment was required.
The basic rule is to take the cost of the equipment
(investment) and then divide by the life span of the
equipment and then subtract this from any hard value
reported.
If we purchased a $50,000 machine with a life span of 5
years, then we would subtract $10,000 from the
calculated hard value.

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Project Value – Rework Reduction Example

Metric Before After


Rework $15,000 $7,200
Cost Month Month

Preliminary project value is estimated as:

$7,800/Month x 12 Months = $93,600/Year

Is this figure correct? Do you have any questions?

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Project Value – Rework Reduction Example

Metric Before After


Revenue (Qtr) $4,500,000 $3,600,000
Rework Cost 1.0% 0.6%
(% Revenue)

Estimate the annual project value using revenue as


the volume driver.

0.4% x $3,600,000 x 4 = $57,600

Is this hard or soft value? Any remaining questions?

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Project Value – Rework Reduction Example

Metric Before After


Rework $ Rate 0.9% 0.6%
(External)
Rework $ Rate 0.1% 0.0%
(Internal)

Estimate the annualized hard project value.


0.3% x $3,600,000 x 4 = $43,200

Estimate the annualized soft project value.


0.1% x $3,600,000 x 4 = $14,400

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Project Value – Rework Reduction Example

Are there any consequential metrics we need to review as


part of our project presentation?
Scrap Cost
Labor Cost
On Time Delivery
MRB Backlog

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Project Value – Partial Allocation

It is not always possible to absolutely demonstrate the


changes in the performance metrics are only the result of
our project changes. However, if there is demonstrated
improvement we want to make a strong case the project
probably had something to do with it. A partial allocation
of benefit is often a good approach.

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Project Value – Initial Estimates

A preliminary estimate of project value should be


outlined when projects are formally opened (at the start
of the project). We want to look for all elements of
project value including both hard and soft contributions.
This should be reviewed and refined (as needed) using
input from Finance. We need to agree on how we will
use the data (after the project) as well as identify
appropriate consequential metrics.
A preliminary estimate of project value is based on
assumed values for the direct project metrics.

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Value Calculation Exercise #1

Metric Before Project After Project


Revenue $4,000,000 $4,000,000
Freight Cost $200,000 $150,000
Expediting Time 200 Hours 50 Hours

Before and after periods are each 3 months. Compute


the annual project value (assume the following three
quarters revenue will be similar to the after project and
$20/hour labor rate).

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Value Calculation Exercise #1 Solution

Metric Before Project After Project


Revenue $4,000,000 $4,000,000
Freight Cost $200,000 $150,000
Freight Cost Rate 5.00% 3.75%
Expediting Time (Hrs) 200 50
Labor Rate 0.0050% 0.0013%

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Value Calculation Exercise #1 Solution

Hard Value
Expected Actual Annual Value
Freight Cost $800,000 $600,000 $200,000

5% x $4,000,000 x 4 3.75% x $4,000,000 x 4 $200,000

Soft Value
Expected Actual Annual Value
Labor Time $16,000 $4,000 $12,000

.005% x $4,000,000 x 4 x $20 $12,000

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Value Calculation Exercise #2

Metric Before Project After Project


Revenue $5,000,000 $4,000,000
Headcount 28 People 20 People
Floor Space 10,000 sq-ft 8,000 sq-ft

Before and after periods are each 3 months. Compute


the annual project value (assume the following three
quarters revenue will be similar to the after project
quarter, an average annual headcount cost of $50,000
and an annual facility cost of $10 per sq-ft).

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Value Calculation Exercise #2

This example raises some additional questions.


Would headcount and/or floor space be expected
to be proportional to the revenue?
An exact answer will depend on the specific project
situation. If we have a good reason not to expect the
proportional reduction, then we want to report the value
based on the (raw) change. If we do expect a
proportional reduction, then we compute the value based
on the revenue as a volume driver.
The calculations presented here are based on the
expectation of a proportional reduction.
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Value Calculation Exercise #2 Solution

Metric Before Project After Project


Revenue $5,000,000 $4,000,000
Headcount 28 20
Headcount Rate 0.00056% 0.00050%
Floor Space 10,000 8,000
Floor Space Rate 0.2000% 0.2000%

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Value Calculation Exercise #2 Solution

Hard Value
Expected Actual Annual Value
Headcount $1,100,000 $1,000,000 $100,000

22 x $50,000 20 x $50,000 $100,000

Soft Value
Expected Actual Annual Value
Floor Space $80,000 $80,000 $0

$0

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Value Calculation Exercise #3

Metric Before Project After Project


Revenue $4,800,000 $4,000,000
Scrap $240,000 $120,000
Labor Cost $1,200,000 $900,000
Floor Space 12,000 sq-ft 9,000 sq-ft
OTD 96.5% 99.2%

Before and after periods are each 3 months. Compute


the annual project value (assume the following three
quarters revenue will be similar to the after project
quarter and an annual facility cost of $10 per sq-ft).
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Value Calculation Exercise #3 Solution

Metric Before Project After Project


Revenue $4,800,000 $4,000,000
Scrap $240,000 $120,000
Scrap Rate 5.0% 3.0%
Labor Cost $1,200,000 $900,000
Labor Rate 25.0% 22.5%
Floor Space 12,000 9,000
Floor Space Rate 0.250% 0.225%
OTD 96.50% 99.20%

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Value Calculation Exercise #3 Solution

Hard Value
Expected Actual Annual Value
Scrap Cost $800,000 $480,000 $320,000
Labor Cost $4,000,000 $3,600,000 $400,000

$720,000

Soft Value
Expected Actual Annual Value
Floor Space Cost $100,000 $90,000 $10,000

$10,000

Other Value
Improved OTD

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Project Value Summary
Summary

Project value is calculated using rules established with


Finance based on comparing the before project and after
project performance (metrics). We calculate and report
project value as an annual figure.
Volume driver metrics (if any) are used to properly
compare before and after project conditions.
Project value is classified as Hard (bottom line
contribution), Soft, or Other (no dollar value claimed).
A standard Project Value Worksheet (QAF-0038-C) includes
the most common project metrics which drive project
value calculation.
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Project Value Summary
Summary

Each project has an assigned reviewer who will check the


project value calculations before closing the project.
Not all project value calculations are standard or simple.
If a project involves methods of project value calculation
which are not common, the plant should work closely
with the assigned project reviewer to determine
appropriate calculation methods as early in the project as
possible.
Project reviewers have identified additional sources of
project value not initially reported by the project team.

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