77565239 13-cost-benefit-analysis

08/09/02
Groups on Lknw08Data (K:) Corporate Admin Green Belt Week 2 13 Cost Benefit Analysis 080902 Cost Benefit Analysis Page 1
Business
Results
 Q * A
E
Section 13
COST BENEFIT
ANALYSIS

08/09/02
Business
Results
 Q * A
E
Close &
Handoff
Define
1a
Select
Process to
Improve
1b
Select
Sponsor &
Team
Members
3a
Document or
Map the
Process
4a
Collect Data
Hard/Soft
4b
Display Data
& Analyze
Variation
Measure &
Analyze Control
7a
Plan Implementation
7b
PILOT
8a
Evaluate & Establish
Measures
10a
Celebrate
Improvements &
Recognize Team
10b
Continuously Improve
5c
Perform
Root Cause
Analysis
5d
Generate
Possible
Solutions
6a
Evaluate
Alternatives
6c
Select a
Solution
2
Identify
Customers
& Require-
ments
1c
Start Up the
Project Team &
Write Problem
Statement
Improve
9
Transfer Knowledge
&
Align Practices
3b
Tollgate
5a
Calculate
Process
Sigma
DMAIC Process Map
8b
Monitor for
Consistency
6b
Tollgate
8c
Tollgate
11
Tollgate
5b
Tollgate

08/09/02
Business
Results
 Q * A
E
• 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
In conducting a cost benefit analysis, the team
should:
Cost Benefit Analysis

08/09/02
Business
Results
 Q * A
E
• Communicates in financial terms why it makes
business sense to implement your solution
• Concentrate on direct costs
– Project implementation cost
– Systems costs
– Material cost
• Benefits may include
– Reduction in defects
– Cost reduction
– Cost avoidance
– Quality improvements
Typically, benefits outweigh costs.

08/09/02
Business
Results
 Q * A
E
Direct Costs
• Material Scrap Costs
• Direct Labor Costs
• Cost of Capital
• Cost of Equipment
Indirect Costs
• Management Review Time
• Time to Resolve Problems
Cost Examples

08/09/02
Business
Results
 Q * A
E
 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.
Cost Savings Rules
for Six Sigma

08/09/02
Business
Results
 Q * A
E
Costs Benefits
What Are Your
Considerations?

08/09/02
Business
Results
 Q * A
E
• 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
Cost Benefit Approach

08/09/02
Business
Results
 Q * A
E
Project Solution: Do Labs In House at XYZ Hospital
Purchase Glass bottles
in Lab < $1000
Save $250,000 paid to
outside lab to do assays
Utilize expertise of lab staff
Fully utilize lab equipment
Sample Analysis
Costs Benefits

08/09/02
Business
Results
 Q * A
E
Breed’s CAR Form
BREED TECHNOLOGIES, INC.
APPROPRIATION REQUEST
($ 000) Project #:
PROJECT CATEGORY: (select one)
REPORTING DIV: 1
LOCATION: 2 ADDITIONAL CAPACITY
DEPT # : 3 COST SAVING X
CCN #: 4 HEALTH, SAFETY & ENVIRONMENT
LOCAL ACCT #: 5 RESEARCH & DEVELOPMENT
6 MAINTENANCE
SPENDING TIMING: 7
Current FY Q1 8 MISCELLANEOUS
Current FY Q2 FINANCIAL RETURN 0.14
Current FY Q3 12.0 NET PRESENT VALUE (NPV) $ 226.6
Current FY Q4 INTERNAL RATE OF RETURN (IRR)
FUTURE YEARS DISCOUNTED PAYBACK (YEARS)
TOTAL CAPITAL 12.0 OK
FOR FINANCE USE ONLY
AMT BUDGETED 400.0 CURRENT YEAR CAPITAL BUDGET
BUDGET #: LKL PL-01--006 MINUS PRIOR APPROVED CAR's.
PIF # (if applicable) = UNCOMMITTED CAPITAL BUDGET
Total Capex Required MINUS THIS CAR
Prior AR's ($) = REMAINING FY CAPITAL BUDGET
12
Airbags
Lakeland
5000
210
SYSTEMS & IS
NEW CAPACITY
PROJECT TITLE:
TPS / Safety
0
2159.1%
0.1

08/09/02
Business
Results
 Q * A
E
Breed’s CAR
Form (Continued)
INVESTMENT DETAIL
PROJECT TITLE:
Item # Description of Item Qty Unit Cost Total Cost
PERMANENT CAPITAL INVESTMENT (000s)
1 Shield Gas Manifolds 2 3.5 7.0
2 Pressure Regulator & Flow Meter Combo. 18 0.3 5.0
3 -
4 -
5 -
TPS / Safety
0
-
Sales Tax -
Freight -
Less: Trade-In or Salvage (old equip) -
Total Permanent Capital Investment 12.0
$
NONCAPITAL INITIAL EXPENSE Account # Qty Unit Cost Total Cost
1 -
2 -
3 -
4 -
5 -
6 -
7 -
8 -
Total Supporting Expenses -
$

08/09/02
Business
Results
 Q * A
E
Breed’s 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)
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
ANNUAL INCREMENTAL CASH FLOWS:
Year 1 272.0 Year 6 - Year 11 -
Year 2 - Year 7 - Year 12 -
PLANNED STARTING DATE: 3/1/02
PLANNED COMPLETION DATE: 3/2/02

08/09/02
Business
Results
 Q * A
E
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
TIME: 30 minutes
OBJECTIVE: Prepare a Cost Benefit Analysis
on one project
Activity:

77565239 13-cost-benefit-analysis

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