13 Cost Benefit Analysis

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Section 13 COST BENEFIT ANALYSIS

08/09/02
Groups on Lknw08\Data (K:) \ Corporate Admin \ Green Belt \ Week 2 \ 13 Cost Benefit Analysis 080902
Cost Benefit Analysis
Page 1
DMAIC Process Map

Define Measure & Analyze Improve
1a Select Process to Improve 3a Document or Map the Process
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Control
5b Tollgate
6c Select a Solution
9 Transfer Knowledge & Align Practices
1b Select Sponsor & Team Members
3b Tollgate
5c Perform Root Cause Analysis
7a Plan Implementation
10a Celebrate Improvements & Recognize Team
4a Collect Data Hard/Soft 1c Start Up the Project Team & Write Problem Statement 4b Display Data & Analyze Variation 2 Identify Customers & Requirements
5d Generate Possible Solutions
7b PILOT
10b Continuously Improve
6a Evaluate Alternatives
8a Evaluate & Establish Measures 11 Tollgate 8b Monitor for Consistency
6b Tollgate 5a Calculate Process Sigma 8c Tollgate
Close & Handoff

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In conducting a cost benefit analysis, the team should: Include all costs direct and indirect Use data to calculate expected cost and expected benefit Consider cost-benefit over varying time scales Establish a pay back period
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Communicates in financial terms why it makes business sense to implement your solution Concentrate on direct costs
Project implementation cost Systems costs Material cost
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Benefits may include

Reduction in defects Cost reduction Cost avoidance Quality improvements
Typically, benefits outweigh costs.

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Cost Examples
Direct Costs Material Scrap Costs Direct Labor Costs Cost of Capital Cost of Equipment Indirect Costs Management Review Time Time to Resolve Problems
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Cost Savings Rules for Six Sigma

Cost savings MUST reach the bottom line. Cost transfers to other departments or areas of Breed are NOT savings. Costs cannot be deferred. Savings MUST be sustainable. Savings must be REAL, and be quantifiable and measurable. Savings ideas MUST be implemented in less than 2 years from end of implementation.
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What Are Your Considerations?

Costs Benefits
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Cost Benefit Approach

Start with As-Is process analyzed in quantifying the opportunity Cost out the Should Be process improvement As-Is minus Should Be represents the cost saving associated with the proposed solution Determine cost of implementing the proposed solution
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Sample Analysis
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Project Solution: Do Labs In House at XYZ Hospital Costs

Purchase Glass bottles in Lab < $1000
Benefits
Save $250,000 paid to outside lab to do assays Utilize expertise of lab staff Fully utilize lab equipment
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Breeds CAR Form

BREED TECHNOLOGIES, INC. APPROPRIATION REQUEST
($ 000) PROJECT TITLE: REPORTING DIV: LOCATION: DEPT # : CCN #: LOCAL ACCT #: SPENDING TIMING: Current FY Q1 Current FY Q2 Current FY Q3 Current FY Q4 FUTURE YEARS TOTAL CAPITAL AMT BUDGETED BUDGET #: PIF # (if applicable) Total Capex Required Prior AR's ($)
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Project #:
TPS / Safety PROJECT CATEGORY: (select one) 1 NEW CAPACITY ADDITIONAL CAPACITY 2 3 COST SAVING X HEALTH, SAFETY & ENVIRONMENT 4 5 RESEARCH & DEVELOPMENT 6 MAINTENANCE 7 SYSTEMS & IS 8 MISCELLANEOUS FINANCIAL RETURN 0.14 NET PRESENT VALUE (NPV) $ 226.6 INTERNAL RATE OF RETURN (IRR) 2159.1% DISCOUNTED PAYBACK (YEARS) 0.1 FOR FINANCE USE ONLY CURRENT YEAR CAPITAL BUDGET MINUS PRIOR APPROVED CAR's. = UNCOMMITTED CAPITAL BUDGET MINUS THIS CAR = REMAINING FY CAPITAL BUDGET
Airbags Lakeland 5000 210
12.0
12.0 400.0 LKL PL-01--006 12 0
OK
0 0 0 0 0
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Breeds CAR Form (Continued)

INVESTMENT DETAIL
PROJECT TITLE: TPS / Safety 0 Item # Description of Item PERMANENT CAPITAL INVESTMENT (000s) 1 Shield Gas Manifolds 2 Pressure Regulator & Flow Meter Combo. 3 4 5 Sales Tax Freight Less: Trade-In or Salvage (old equip) Total Permanent Capital Investment
NONCAPITAL INITIAL EXPENSE
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Qty 2 18
Unit Cost 3.5 0.3
Total Cost 7.0 5.0 12.0
$ Qty Unit Cost
Account #
1 2 3 4 5 6 7 8
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Total Supporting Expenses
Total Cost $ Page 11
Breeds CAR Form (Continued)

PROJECT JUSTIFICATION
PROJECT TITLE: TPS / Safety LOCATION: Lakeland PRODUCT LINE: HSI Inflator CURRENT CAPABILITY: Current Annual Expense for Shield Gas is $187K Current Scrap cost on TIG welder is $30- 45K per month ($360 to $540K per year)
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PROPOSED CAPABILITY: Expected Annual Expense for Shield Gas should be $47K per year A PLC change will reduce the shield gas expense to $94K per year. The regulators will allow us to further reduce the shield gas expense from $94 to $47K per year Expected Scrap Cost on TIG welder should be $7.5 - $11K per month ($90 to 135K per year) - 75% decrease
SOURCE OF SAVINGS: Reduced gas expense: $47K per year Reduced Scrap on TIG welder: $225K per year
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ANNUAL INCREMENTAL CASH FLOWS: 272.0 Year 1 Year 6 Year 2 Year 7 Year 3 Year 8 Year 4 Year 9 Year 5 Year 10 PLANNED STARTING DATE: PLANNED COMPLETION DATE:
3/1/02 3/2/02
Year 11 Year 12 Year 13 Year 14 Year 15
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Activity: Cost Benefit Analysis

OBJECTIVE: Prepare a Cost Benefit Analysis on one project AGENDA:
Assign team roles and prepare an agenda. Select one persons project to do a cost benefit analysis on the potential solution. Define the costs of implementing the solution estimate the dollar value. Categorize the costs as indirect or direct Define the benefits of the potential solution. Report out on the key elements of your cost benefit analysis
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TIME:
30 minutes
08/09/02
Page 13

13 Cost Benefit Analysis

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13 Cost Benefit Analysis

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Eh Q * A

Section 13 COST BENEFIT ANALYSIS

Cost Benefit Analysis

DMAIC Process Map

9 Transfer Knowledge & Align Practices

1b Select Sponsor & Team Members

5c Perform Root Cause Analysis

10a Celebrate Improvements & Recognize Team

5d Generate Possible Solutions

10b Continuously Improve

8a Evaluate & Establish Measures 11 Tollgate 8b Monitor for Consistency

6b Tollgate 5a Calculate Process Sigma 8c Tollgate

Close & Handoff

Cost Benefit Analysis

Cost Benefit Analysis

Cost Benefit Analysis

Cost Benefit Analysis

Benefits may include

Typically, benefits outweigh costs.

Cost Benefit Analysis

Cost Benefit Analysis

Cost Savings Rules for Six Sigma

Cost Benefit Analysis

What Are Your Considerations?

Cost Benefit Analysis

Cost Benefit Approach

Cost Benefit Analysis

Project Solution: Do Labs In House at XYZ Hospital Costs

Cost Benefit Analysis

Breeds CAR Form

Airbags Lakeland 5000 210

12.0 400.0 LKL PL-01--006 12 0

Cost Benefit Analysis

Breeds CAR Form (Continued)

Unit Cost 3.5 0.3

Total Cost 7.0 5.0 12.0

$ Qty Unit Cost

Total Supporting Expenses

Total Cost $ Page 11

Cost Benefit Analysis

Breeds CAR Form (Continued)

Year 11 Year 12 Year 13 Year 14 Year 15

Cost Benefit Analysis

Activity: Cost Benefit Analysis

Cost Benefit Analysis

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