Green Belt, Black Belt, Now the Six Sigma ‘Money Belt’

Activity-Based Costing

It is often useful to focus Six Sigma improvement projects on the most costly activities within a process. While it is easy to agree on that, it may not always be easy to agree what costs are appropriately attributable to an activity. Activity-based costing is typically a five-step process that to some extent parallels the Six Sigma roadmap.

• Step 1 – Analyze activities (create a process map)
• Step 2 – Gather costs (managerial accounting)
• Step 3 – Trace costs to activities
• Step 4 – Establish output measures
• Step 5 – Analyze costs

Time Value of Money

The Money Belt often employs a form of "discounted cash flow" to take into account the effects of inflation, changes in interest rates and opportunity costs. Tools commonly used include net present value (NPV) and internal rate of return (IRR). These tools require certain assumptions about interest rates and periodicity of the cash flows that must be applied consistently to achieve credible results.

Utility/Demand/Indifference Curves

The key idea of the curves, which are known by different names, is that not all customers respond in the same way to varying levels of cost, functionality or service delivered, response or cycle time, or any other set of critical-to-quality (CTQ) attributes of a particular product or process. Hence, any projection of benefits based on improvements to CTQ attributes can only be made in the context of a certain set of assumptions (hopefully data-based) about the utility a particular customer attaches to each attribute.

Some customers are price sensitive and assign little weight to other attributes, while others are very sensitive to cycle time and are willing to pay more to get fast results. Discovering these weights and their distribution within the target customer set can be critical to an accurate forecast of benefits of proposed improvements. Many Six Sigma Belts have little training or experience in this area.

Benefit Categories – Hard

• Top line (increased revenue):
  • Higher price for a product or service justified by a value increment in excess of the cost increment
  • Increased market share – e.g., improved cost of ownership, feature differentiation, product quality or usability, reduced time to market
  • New product or service; new market segments

The Money Belt may play a key role in evaluating secondary impact of revenue-focused projects – e.g., the impact of improvements in one product or service on sales/margins of other products or services.

• Bottom line (reduced cost):
  • Lower cost to produce the product or deliver the service
  • Lower warranty cost (cost of failure)
  • Reduced capital requirement – e.g., less equipment or facilities, reduced working capital

The Money Belt may play an important role in determining "true value" – e.g., if the facility requirements for a particular process are reduced, but no alternate use is applicable, what is the monetary value of the hypothesized savings?

Benefit Categories – Soft

• Improved reputation, competitive position, customer satisfaction
• Furtherance of company vision and mission
• Positioning the organization for the future
• Improved internal communication
• Reduced cycle time
• Process simplification
• Increased capacity
• Reduced risk

Policies vary widely as to the degree to which soft benefits are used to justify Six Sigma projects. If they are to be used, the Money Belt can help to define a consistent approach that minimizes the amount of "funny money," or undocumentable benefits, in circulation.

Conclusion: Make Sure the Numbers Are Solid

A disciplined and auditable approach to measurement of Six Sigma benefits is an important part of sustaining any deployment long-term. The best way to ensure that discipline is to specialize the role of Money Belt and to assign qualified financial analysis professionals who are thoroughly grounded in the appropriate body of knowledge.

When the CFO signs off on benefit claims, it becomes far more likely they will be accepted by the CEO, the board of directors and the stock market. For most companies, the real measure of ultimate success is a higher share price – which happens when the numbers are solid.

About the Author

Gary A. Gack is a founding partner of Six Sigma Advantage, Inc., based in Rockland, Massachusetts (USA). He has an MBA from the Wharton School, is an ASQ-certified software quality engineer and a Six Sigma Black Belt. During his 40-year career in the software and IT industry, he has managed a variety of large-scale software projects and has consulted with dozens of Fortune 1000 firms. He co-authored Six Sigma Advantage's Black Belt, Green Belt and foundation curriculum. Mr. Gack can be reached at ggack@6siga.com.