This document discusses conducting a cost benefit analysis for process improvement projects. It provides guidance on including direct and indirect costs, benefits that may include cost reductions and quality improvements, and establishing a payback period. Examples of direct costs like material and labor costs and indirect costs like management review time are given. Rules for cost savings include that they must reach the bottom line and be sustainable. The document provides a template for a cost benefit analysis, including estimating costs for a proposed solution and the expected benefits.

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Section 13
COST BENEFIT
ANALYSIS

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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

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• 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

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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
• Benefits may include
– Reduction in defects
– Cost reduction
– Cost avoidance
– Quality improvements
Typically, benefits outweigh costs.
Cost Benefit Analysis

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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

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 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

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Costs Benefits
What Are Your
Considerations?

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• 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

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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

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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

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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 -
$

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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 -
Year 3 - Year 8 - Year 13 -
Year 4 - Year 9 - Year 14 -
Year 5 - Year 10 - Year 15 -
PLANNED STARTING DATE: 3/1/02
PLANNED COMPLETION DATE: 3/2/02

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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:
Cost Benefit Analysis