Six Sigma Tool Navigator: The Master Guide for Teams

2017-07-07 02:10:07

AKA

N/A

Classification

Evaluating/Selecting (ES)

Tool description

The cost-benefit analysis provides the team with the ability to estimate the costs associated with potential benefits of implementing a proposed solution or process-improvement opportunity. This analysis is especially useful when several options need to be evaluated for financial impact; the final selection should return the greatest overall benefit for incurred cost.

Typical application

To compare among several options and select the option that offers the greatest return for the cost of implementation.

To prepare a financial cost-benefit analysis for decision makers.

To provide a cost-data rationale for proposing the implementation of a solution.

To verify the cost effectiveness of a solution.

Problem-solving phase

→	Select and define problem or opportunity
	Identify and analyze causes or potential change
→	Develop and plan possible solutions or change
→	Implement and evaluate solution or change
	Measure and report solution or change results
	Recognize and reward team efforts

Typically used by

	Research/statistics
	Creativity/innovation
	Engineering
	Project management
	Manufacturing
2	Marketing/sales
3	Administration/documentation
	Servicing/support
	Customer/quality metrics
1	Change management

links to other tools

before

Information Needs Analysis

Data Collection Strategy

Activity Cost Matrix

Consensus Decision Making

Resource Requirements Matrix

after

Cost of Quality

Starbursting

What-If Analysis

Different Point of View

Presentation

Notes and key points

When calculating costs, use actual labor and material rates. Remember, your conclusions are only as good as the data they are based on!

Costs-benefit ratio = Benefits Costs

Step-by-step procedure

STEP 1 The team first identifies the various costs involved for the activities to be completed within the options to be evaluated.

STEP 2 Costing data are collected from some qualified source. These data cover labor rates, material costs, transportation, expenses, fees, and other charges. See example Provide Statistical Process Control (SPC) Training.

STEP 3 The team next discusses the various options, selects those that show the greatest potential, and performs the calculations of total costs.

STEP 4 Options are costed out and compared using a benefits/cost ratio as shown in the example.

STEP 5 A final decision is made and the cost-benefit analysis data are saved for the development of a proposal or action plan.

Example of tool application

Provide Statistical Process Control (SPC) Training

Option A: Engage external trainer to conduct (6) 2-day SPC workshops for 100 employees		Option B: Prepare internal trainer to conduct the 2-day SPC workshops for 100 employees
$2,250	Airfare (3 roundstrips, conduct 2 classes per trip)	$ 750	Airfare for company trainer to be cross-trained
1,560	Expenses (12 days $130 per day)	700	Expenses (5 days workshop and reserch)
2,500	Materials ($25 per student)	3,000	Train-the-trainer charge
9,500	Tuition ($95 per student)	10,000	Master copy and repro rights
350	Shipping materials	1,080	Internal trainers's prep time ($45 per hr 24 hrs)
120	Local reproduction	4,320	conduct (6) 2-day classes (labor $360 per day)
		1,200	repro of 100 training binders
$16,280		$21,050
Benefit Estimate: Reduction of an estimated 25 hours of rework per week. Savings ($) = 25 hrs 50 wks $30/hr = $37,500 per year
Notes: Tuition discounted to $95 per employee Benefits/Cost ratio = 2.30 Based on the higher benefit/cost ratio, this is the better option.		Notes: Labor rates fully loaded Benefits/Cost ratio = 1.78