Define Project Value Deliverable 3D
Define Module Roadmap Define 1D – Define VOC, VOB, and CTQ’s 2D – Define Project Boundaries 3D – Quantify Project Value 4D...
Deliverables – Define # Deliverable Deliverable Concept & Tasks Primary Tool(s) Secondary Tool(s) 1D Define VOC, VOB and C...
3D – Quantify Project Value # Deliverable Deliverable Concept & Tasks Primary Tool(s) Secondary Tool(s) 3D Quantify Projec...
Objectives – Quantify Project Value <ul><li>Upon completing this module, students should be able to: </li></ul><ul><ul><li...
COPQ Concept <ul><ul><li>Definition: The cost of poor quality (COPQ) is the extra cost that occurs when a process does not...
COPQ vs. Defect Frequency Number of Defects to be Corrected
The Expenses We See Expediting Excess Inventory Lost Loyalty Longer Cycle Times Costs to Customer Overtime Rework Maintena...
“ Hidden Factory” COPQ <ul><ul><li>Beyond the direct costs associated with finding and fixing defects, the COPQ also inclu...
Determining the Financial  Implications of a Project
Quantifying Project Value <ul><ul><li>Hard savings/revenue = Cost reduction or avoidance for which a Manager/Director/Vice...
Hard Savings Categories <ul><ul><li>Expense Reduction – is used for routine recurring O&M expenses that will be reduced in...
Soft Savings Categories <ul><ul><li>Increased Capacity – is used when process changes result in additional benefits from e...
Non-Financial Benefits <ul><ul><li>Some projects support JEA strategic programs or directives without having a tangible co...
Potential Analysis: Examples Type of  Improvement  Reduce errors in processing  Increase MW produced at Northside Unit 1 C...
COPQ Calculation Example – Sludge Hauling <ul><li>Initial COPQ Savings Based on 2001 Actuals: </li></ul><ul><ul><li>Jan to...
Project Benefit Documentation <ul><ul><li>Deliverable 3D is a summation of the benefits by the project </li></ul></ul><ul>...
When to Report Financial Information <ul><ul><li>Limited resources necessitate project prioritization  </li></ul></ul><ul>...
Project Worksheet #3:  Potential Impact <ul><ul><li>Instructions: Estimate the benefits your project will have. Be prepare...
Learning Check – Quantify Project Value <ul><li>Upon completing this module, students should be able to: </li></ul><ul><ul...
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D08 Quantify Project Value

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D08 Quantify Project Value

  1. 1. Define Project Value Deliverable 3D
  2. 2. Define Module Roadmap Define 1D – Define VOC, VOB, and CTQ’s 2D – Define Project Boundaries 3D – Quantify Project Value 4D – Develop Project Mgmt. Plan Measure 5M – Document Process 6M – Prioritize List of X’s 7M – Create Data Collection Plan 8M – Validate Measurement System 9M – Establish Baseline Process Cap. Analyze 10A – Determine Critical X’s Improve 12I – Prioritized List of Solutions 13I – Pilot Best Solution Control 14C – Create Control System 15C – Finalize Project Documentation Green 11G – Identify Root Cause Relationships
  3. 3. Deliverables – Define # Deliverable Deliverable Concept & Tasks Primary Tool(s) Secondary Tool(s) 1D Define VOC, VOB and CTQs A project is started because a customer (internal or external) needs some problem to be solved. Deliverable 1D obtains customer input to understand the problem(s) that the customer is experiencing so that a project can be started. In addition to defining the problem, we also need to understand how the customer defines product acceptability (specifications). <ul><ul><li>VOC Worksheet </li></ul></ul><ul><ul><li>Affinity Diagram </li></ul></ul><ul><ul><li>Stratification tools (Pareto and other basic graphs) </li></ul></ul>2D Define Project Boundaries Once we understand the defect that needs to be improved (project Y), define the project boundaries and components of the project. This includes a well written problem statement, identifying what process produces the defective item, how much improvement we will make, when it will be done, etc. This information is summarized in the project charter. Portions of deliverables 3D and 4D will also be on the charter. <ul><ul><li>Project charter </li></ul></ul><ul><ul><li>SIPOC </li></ul></ul><ul><ul><li>Included / Excluded </li></ul></ul><ul><ul><li>Elevator Speech </li></ul></ul>3D Quantify Project Value Determine the benefit to the customer and to JEA for improving the process. Internal customer benefits are typically hard or soft $ savings, productivity improvements, and employee satisfaction. External customer benefits are typically customer satisfaction. Deliverable 3D documents these benefits. <ul><ul><li>Project Benefit Document </li></ul></ul>4D Develop Project Management Plan To effectively manage a project, the GB/BB needs to identify team members, effectively interface with the project stakeholders, plus develop and manage to a project plan (milestones and timelines). This plan should be developed and shared with all stakeholders. <ul><ul><li>ARMI </li></ul></ul><ul><ul><li>Project plan </li></ul></ul><ul><ul><li>Faces of resistance </li></ul></ul><ul><ul><li>Stakeholder analysis </li></ul></ul><ul><ul><li>Influence strategy </li></ul></ul>
  4. 4. 3D – Quantify Project Value # Deliverable Deliverable Concept & Tasks Primary Tool(s) Secondary Tool(s) 3D Quantify Project Value Determine the benefit to the customer and to JEA for improving the process. Internal customer benefits are typically hard or soft $ savings, productivity improvements, and employee satisfaction. External customer benefits are typically customer satisfaction. Deliverable 3D documents these benefits. <ul><ul><li>Project Benefit Document </li></ul></ul><ul><li>Steps to Complete Deliverable: </li></ul><ul><ul><li>Using the project baseline (historical) data, calculate the cost of poor quality (both hard and soft dollars) due to the presence of the defect. There is no standard COPQ template. Calculate savings using an Excel (or other) template that meets your needs. </li></ul></ul><ul><ul><li>If there is no historical data available for the project, COPQ can not be calculated based on actual data. In this case, estimate the savings based on experience, but update the estimated value using the data gathered after deliverable 8M. </li></ul></ul><ul><ul><li>Where there are no dollar values to be saved by this project, list the intangible benefits brought by the project. </li></ul></ul>
  5. 5. Objectives – Quantify Project Value <ul><li>Upon completing this module, students should be able to: </li></ul><ul><ul><li>Define COPQ </li></ul></ul><ul><ul><li>Define the types of project value </li></ul></ul><ul><ul><li>Define the difference between Hard Savings/Revenue and Soft Savings/Revenue </li></ul></ul><ul><ul><li>List when & where project benefits are documented during a project </li></ul></ul>
  6. 6. COPQ Concept <ul><ul><li>Definition: The cost of poor quality (COPQ) is the extra cost that occurs when a process does not perform at perfection (i.e.: when defects exist) </li></ul></ul><ul><ul><ul><li>e.g. Vehicle repair beyond routine, preventative maintenance </li></ul></ul></ul><ul><ul><li>Any process improvement strategy includes an attack on the Costs of Poor Quality </li></ul></ul><ul><ul><li>For an average company, the COPQ can be as high as 25% of sales revenue </li></ul></ul><ul><ul><li>In almost every company where the COPQ is unknown, the COPQ exceeds the profit margin </li></ul></ul>
  7. 7. COPQ vs. Defect Frequency Number of Defects to be Corrected
  8. 8. The Expenses We See Expediting Excess Inventory Lost Loyalty Longer Cycle Times Costs to Customer Overtime Rework Maintenance Productivity
  9. 9. “ Hidden Factory” COPQ <ul><ul><li>Beyond the direct costs associated with finding and fixing defects, the COPQ also includes: </li></ul></ul><ul><ul><ul><li>The hidden costs of failing to meet customer expectations the first time </li></ul></ul></ul><ul><ul><ul><li>The hidden opportunity for increased efficiency </li></ul></ul></ul><ul><ul><ul><li>The hidden potential for higher profits </li></ul></ul></ul><ul><ul><ul><li>The hidden loss in market share </li></ul></ul></ul><ul><ul><ul><li>The hidden increase in production cycle time </li></ul></ul></ul><ul><ul><ul><li>The hidden labor associated with ordering replacement material </li></ul></ul></ul><ul><ul><ul><li>The hidden costs associated with disposing of defects </li></ul></ul></ul>
  10. 10. Determining the Financial Implications of a Project
  11. 11. Quantifying Project Value <ul><ul><li>Hard savings/revenue = Cost reduction or avoidance for which a Manager/Director/Vice President/Chief will make a budget change request to recognize the improvement </li></ul></ul><ul><ul><ul><li>e.g. Reduce fuel oil consumption or lower demurrage costs that will not be incurred in the future </li></ul></ul></ul><ul><ul><li>Soft savings/revenue = COPQ that can benefit JEA in the future if exercised or a new, future cost that is avoided </li></ul></ul><ul><ul><ul><li>e.g. The soft savings of increasing individual fleet vehicle utilization by 10% will convert to hard savings when vehicles are removed from the fleet </li></ul></ul></ul><ul><ul><ul><li>e.g. A new tax or noncompliance fee that is avoided </li></ul></ul></ul><ul><ul><li>Non-financial benefit = Projects that support non-financial goals (Circle of Excellence) </li></ul></ul>
  12. 12. Hard Savings Categories <ul><ul><li>Expense Reduction – is used for routine recurring O&M expenses that will be reduced in both current and future years, as a result of a process change. </li></ul></ul><ul><ul><li>Revenue Growth – is used when a process change results in an increase in cash flow from existing revenue sources or from a new revenue source. Revenues do not include liquidation of assets that were not purchased for resale. Selling excess spare parts inventory or vehicles, for example, is not a source of revenue. </li></ul></ul><ul><ul><li>Capital Reduction – is like expense reduction except that it applies to capital budget expenditures instead of O&M. </li></ul></ul>
  13. 13. Soft Savings Categories <ul><ul><li>Increased Capacity – is used when process changes result in additional benefits from existing facilities. The amount to estimate depends on how the additional capacity will be used. </li></ul></ul><ul><ul><li>Expense Avoidance – is used when a process change makes an anticipated future O&M expense unnecessary. </li></ul></ul><ul><ul><li>Capital Avoidance – is like expense avoidance except that it applies to anticipated capital budget expenditures not O&M. </li></ul></ul><ul><ul><li>Inventory Reduction – is a “soft” dollar classification based on the presumption that the “carrying cost” of inventory is 14.7% (as claimed in an old Stone & Webster study). The 14.7% is almost entirely attributable to salaries and benefits. A permanent reduction in inventory balances is assumed to yield a savings of 14.7% of the amount of the reduction. </li></ul></ul><ul><ul><li>Cycle Time/ Productivity – is used to identify COPQ estimates for process changes that reduce time and effort spent on tasks without a corresponding reduction in work force. </li></ul></ul>
  14. 14. Non-Financial Benefits <ul><ul><li>Some projects support JEA strategic programs or directives without having a tangible cost benefit </li></ul></ul><ul><ul><ul><li>Internal Employee Satisfaction – projects directed to improve employee morale/satisfaction with their jobs </li></ul></ul></ul><ul><ul><ul><li>Other strategic corporate objectives/initiatives </li></ul></ul></ul>
  15. 15. Potential Analysis: Examples Type of Improvement Reduce errors in processing Increase MW produced at Northside Unit 1 Cut product defects by 25% Benefit of that Improvement Less time spent fixing errors; able to speed up flow of work Decreased fuel costs Reduce scrap, less time needed to rework, lower inventory levels Quantified Estimate of Impact Yearly decrease in processing time * (salary & benefits) = COPQ savings Cost of next cheapest fuel source per MW * yearly MW increase = COPQ savings Cut material costs by 25%; increase capacity by 17% = annual COPQ savings
  16. 16. COPQ Calculation Example – Sludge Hauling <ul><li>Initial COPQ Savings Based on 2001 Actuals: </li></ul><ul><ul><li>Jan to Sep gal hauled………24,786,000gal @ $0.0138/gal = $342,047 </li></ul></ul><ul><ul><li>Oct to Dec gal hauled………..8,659,000gal @ $0.0135/gal = $116,897 </li></ul></ul><ul><ul><li>Jan to Dec total gal hauled…33,445,000gal </li></ul></ul><ul><ul><li>Jan to Dec total cost…………………………………………..$458,944 </li></ul></ul><ul><ul><li>50% cost savings would be…………………………………..$229,472 </li></ul></ul><ul><li>End of Project COPQ Savings Calculations: </li></ul><ul><ul><li>Jan to Dec 2001(baseline) average gal hauled/day………..91,630gal/day </li></ul></ul><ul><ul><li>Jan 2002 average gal hauled/day…………………….72,258gal/day x $.0135/gal = $975 </li></ul></ul><ul><ul><li>Current (Feb 2002) average gal hauled/day………...44,000gal/day x $.0135/gal = $594 </li></ul></ul><ul><ul><li>Jan 2002 actual gals and cost……………..……….......2,240,000gal x $.0135 = $30,240 </li></ul></ul><ul><ul><li>Jan 2002 cost (using average daily cost)…………………….$975 x 31days = $30,225 </li></ul></ul><ul><ul><li>Annualized 2002 remainder cost @ 44,000gal/day……......$594 x 334days = $198,396 </li></ul></ul><ul><ul><li>Total annualized 2002………………………………….…………………….. …....$228,621 </li></ul></ul><ul><ul><li>Projected total Savings over calendar year 2002….....$458,944 - $228,621 = $230,323 </li></ul></ul>
  17. 17. Project Benefit Documentation <ul><ul><li>Deliverable 3D is a summation of the benefits by the project </li></ul></ul><ul><ul><li>Calculate cost savings using a format suitable to your project (typically an Excel spreadsheet) using the project baseline data </li></ul></ul><ul><ul><li>Briefly summarize the benefits in the project charter </li></ul></ul><ul><ul><li>In the final project presentation show the line by line calculation of these benefits to complete deliverable 3D </li></ul></ul><ul><ul><ul><li>Template: 15 Deliv template.ppt </li></ul></ul></ul><ul><ul><li>In deliverable 15, update the project benefits based on post improvement performance data. </li></ul></ul>
  18. 18. When to Report Financial Information <ul><ul><li>Limited resources necessitate project prioritization </li></ul></ul><ul><ul><ul><li>Due Diligence: At this point, exact financial estimates are not necessary, but the values do need to be quantified well enough to correctly place the project in the priority list </li></ul></ul></ul><ul><ul><ul><li>Measure: Quantify COPQ to be as accurate as the data currently available will allow </li></ul></ul></ul><ul><ul><ul><li>Improve: Identify costs of improvement (weigh cost vs. benefit) </li></ul></ul></ul><ul><ul><ul><li>Control: Quantify COPQ (net of gain vs. cost of improvements) and document for official tracking </li></ul></ul></ul>
  19. 19. Project Worksheet #3: Potential Impact <ul><ul><li>Instructions: Estimate the benefits your project will have. Be prepared to discuss your results with the class. </li></ul></ul>15 Min
  20. 20. Learning Check – Quantify Project Value <ul><li>Upon completing this module, students should be able to: </li></ul><ul><ul><li>Define COPQ </li></ul></ul><ul><ul><li>Define the types of project value </li></ul></ul><ul><ul><li>Define the difference between Hard Savings and Soft Savings </li></ul></ul><ul><ul><li>List when & where project benefits are documented during a project </li></ul></ul>
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