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Might It Take Money to Save Money?

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Most of us know the saying, “It takes money to make money.” But what about, “It takes money to save money”? Lean Six Sigma is famously credited for driving increased productivity and improved efficiency or, in other words, “doing more work” for the same cost or “doing the same work” for less cost.

Quantifying these cost improvements may seem an easy task, but sometimes companies fail to make the benefits real to their bottom line by not making the up-front investments necessary to realize the true benefit. This not only hurts the financial statement, but it can also undermine the confidence in Lean Six Sigma programs for both management and employees.

“Hard dollar” savings, such as reduced scrap or lower raw material costs, are usually straightforward benefits, but labor savings is often a “soft dollar” savings with some potential issues associated. For example, if a Lean Six Sigma project makes Process A run more efficiently such that 10 employees can accomplish the production demands that used to require 12 employees, the project might claim a 16.6-percent increase in labor efficiency and a cost savings related to a reduction of two full-time equivalent employees. However, if all 12 employees are still on the payroll, did the company really save anything?

To have a real bottom-line cost savings, two employees either need to come off the payroll or they need to be redeployed to a position the company was prepared to hire. This is a very sensitive issue for Lean Six Sigma to be welcomed and become part of the company culture. If employees see Lean Six Sigma as mostly a job-cutting strategy, employees will feel threatened and won’t likely participate. If management only sees “soft” or theoretical cost savings, they too may fail to embrace the effort.

Typically, the Financial Department can help by establishing a continuous improvement/cost savings framework that promotes continuous improvement projects that can be married to employee attrition, transfers, redeployment and/or hiring plans. This requires the company to invest in education and training, to incorporate the framework to ensure that the right projects get worked on, and to create a culture that makes employees feel valued and safe — a core part of the continuous improvement process.

Lean Six Sigma projects that improve efficiency in areas or departments within the business can drive real cost savings for the company’s bottom line, but it may take some more investment up front before you truly feel it in the bottom line.

Join us for the MBA’s next three-day Six Sigma Green Belt workshop on March 11, April 15 and May 13. Visit www.mbausa.org to register!