Cost Out! Cost Out!
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Transcript of Cost Out! Cost Out!
PwC*connectedthinking
March 8th, 2006March 8th, 2006Toronto, CanadaToronto, Canada
Cost Out! Cost Out! A Lean Six Sigma Approach to Drive Out Costs*A Lean Six Sigma Approach to Drive Out Costs*
PwC*connectedthinking
March 8th, 2006Page 2
PricewaterhouseCoopers LLP
Lean Six Sigma – Key Messages for Today
A different perspective is required to see new Cost Out opportunities
A structured, rigorous approach is required to realize savings
Lean Six Sigma is a broad methodology and toolset
Lean Six Sigma can be applied to any process, in any industry
Agenda
Introduction
Case Studies – Lean Six Sigma in Action
Cost Out! A Lean Six Sigma Approach
Summary
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PricewaterhouseCoopers LLP
Introduction
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PricewaterhouseCoopers LLP
Scenario:You are the owner of a very successful Pizza restaurant. You areleaving for a two month business trip and have asked the managerof your restaurant to e-mail you a report every Monday morning that includes five pieces of data about your restaurant that are mostimportant to you. List five:•••••
Lean Six Sigma – An Exercise
Introduction
March 8th, 2006Page 6
PricewaterhouseCoopers LLP
Scenario: Now assume you are a customer looking to go out for pizza with your family. You have several choices of pizza restaurants. They are all about the same distance from home. How do you decide which restaurant to go to? List five:•••••
Lean Six Sigma – An Exercise
Introduction
March 8th, 2006Page 7
PricewaterhouseCoopers LLP
Owner’s List:RevenueCostsCustomer SatisfactionEmployee AttendanceSupplier Issues
Customer’s List:PriceWaiting TimeAdequate ParkingFriendliness of StaffTaste of the Pizza
Lean Six Sigma – An Exercise
Introduction
1. Define value from the customers perspective2. Balance customer needs with the business constraints3. Identify and prioritize improvement opportunities 4. Drive improvements and realize cost savings
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PricewaterhouseCoopers LLP
Lean Six Sigma Core Concepts
Introduction
Significant costs can be removed from the organization by focusing on these core concepts.
1. Measure your process
2. Eliminate Waste
3. Eliminate Non value added activities
4. Reduce Variability
5. Eliminate Defects
6. Repeat
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PricewaterhouseCoopers LLP
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 10
PricewaterhouseCoopers LLP
ROI for Lean Six Sigma
Case Studies – Lean Six Sigma in Action
GE Annual Report 2004 - Lean Six Sigma• Leveraged Lean manufacturing’s tools for reducing cycle time with the problem-
solving capability of Six Sigma• In the last two years;
- Transportation improved inventory turns from seven to nine- Advanced Materials improved receivables by six turns- $2.7 billion of improvements in working capital in 2003–04 - Commercial Finance focus on margin expansion, risk management and lower cost
0
0.5
1
1.5
2
2.5
1996 1997 1998 1999
Invested ($B) Savings ($B)
0
10
20
30
40
50
60
2000 2001 2002 2003 2004
Invested ($M) Savings ($M)
General Electric Maple Leaf Foods Canada
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PricewaterhouseCoopers LLP
The Impact of Lean Six SigmaCrown Corporation/Service Provider
Paying customers are suppliers• Moving it faster doesn’t improve cash flow
Mid 90s • Big batches from one process to next • Wait, then processed as fast as possible
Adopted concept of Flow, Voice of the customer
BenefitsDespite declining volumes (due to email):
• 10 years of consecutive profitability • Reduced footprint• Reduced material handling. • Reduced on-floor inventories• Reducing lead time, improving quality • Increased capacity• Improved labor relations
Operation Balance ChartTakt time of 24 secEach bar represents one operatorbuilt by stack up of work elements
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 12
PricewaterhouseCoopers LLP
The Impact of Lean Six Sigma
Early '90s, facing a deregulated commercial airline industry that had begun to focus on profitability
Needed to reduce costs and improve quality
Today, Aerospace leader in profitability
Washington 737 FactoryLine moves products from one assembly team to the next at the steady pace of two inches per minute
Benefits• Shortest final-assembly time of any large
commercial jet • Assembly time (11 days) - 61 percent reduction• WIP inventory - 55 percent reduction• Stored inventory - 59 percent reduction• Allow for interior configuration and systems
decisions closer to delivery
2000: 26 Planes
2005: 5 Planes
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 13
PricewaterhouseCoopers LLP
Major Canadian Bank
Background • Major Canadian bank has a branch network of more than 1200 branches across the country
• The bank has high sales volume of personal and small business loans • The loan process takes more than 14 days to complete with error rate higher
than 63%
Role • Review the end to end process • Radically rethink and redesign the process to bring about significant cost
savings and significant quality improvements
Key issues • Expensive operation• High error rate• Too many hand-offs and redundancies
Outcome • Error rate reduced from 63% to 20%• Overall lead time went from 14 days to 5 days• Cost was reduced by $2.5M
Radical process redesign generated significant improvements in Cost, Lead Time and Quality.
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 14
PricewaterhouseCoopers LLP
International Manufacturing Company
Background • Major Plastics manufacturing company• 9% of all invoices needed to be corrected • Increasing customers complaints about receiving multiple invoices• Invoice errors impacting the ability of the business to predict average selling
price (ASP) and forecast costs
Role • Determine the root causes for invoice inaccuracies • Improve the process to avoid invoice errors for the future
Key issues • Multiple broken processes• Complex processes involving many different functions and systems• Cross Functional teaming required
Outcome • Increased cash flow by $10M• Reduced costs by $8M• Reduced variability in pricing estimates by 80%
Modifications to billing process created significant benefits inCosts, Cash Flow, and Accuracy of Pricing Estimates.
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 15
PricewaterhouseCoopers LLP
Major Transportation Company
Background • Major transportation company needed to:- Increase customer satisfaction- Acquire more market share - Increase efficiency in their finance functions
Role • Identify inefficiencies in finance function• Improve customer service
Key issues • Redundant Processes• Increasing costs • Poor customer satisfaction
Outcome • Eliminated non-value added steps in finance function• Potential to reduce staff by 20 FTE’s• Reduced product/services costs by over $1.2M
Back office focus … increased resource efficiency andgenerated cost out by targeting high dollar contracts.
Case Studies – Lean Six Sigma in Action
March 8th, 2006Page 16
PricewaterhouseCoopers LLP
International Manufacturing Company
Background • Major Glass manufacturing company• Inventory cost is more than 50% of the cost of operation• 70% of a fabrication plant space is used for inventory • Plans to purchase more space to accommodate an expansion in the operation
Role • Improve the current process to avoid the anticipated expansion requirements
Key issues • Large inventory • Lack of space• High product scrap rate• Low product turnover due to inadequate product quality
Outcome • Map the end to end plant operation for each product family• Developed a Just-In-Time pull system• Reduced On hand Inventory by 70%• Increased available space by more than 50%• Increased Inventory turnover by 50%
Created a Pull-System to reduce WIP, drive inventory turns and eliminate the need for an additional warehouse.
Case Studies – Lean Six Sigma in Action
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PricewaterhouseCoopers LLP
Cost Out!A Lean Six Sigma Approach
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Lean Six Sigma – Roadmap to Cost Out!
1. Have a clear vision. Provide a standard that must be achieved. Listen to your customers, your shareholders, your business.
2. Link your vision to your business strategy, and your business strategy to tactical execution.
3. Select projects/initiatives that will advance your strategy the most. Use data to decide.
4. Involve your people. Get data. Use the right tools to solve the right problems. Fix broken processes.
5. Repeat the process.
Cost out is part of overall strategy. Use data, not intuition, to direct your efforts.
Cost Out! – A Lean Six Sigma Approach
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PricewaterhouseCoopers LLP
Tran
sact
ion
Vol
ume
Perc
ent
C15Count
24.0 16.7 4.3 3.5 2.0Cum % 49.4 73.4 90.1 94.4
922
98.0 100.0
447 312 81 66 38Percent 49.4
OtherEDCBA
2000
1500
1000
500
0
100
80
60
40
20
0
Pareto Chart of Transaction Volume by Product Type
Percent of Selling Price that has been Lost
Freq
uenc
y
100806040200
250
200
150
100
50
0
Mean 43.61StDev 25.82N 799
Example of Lost Selling Price AnalysisNormal
ListPrice
Net
pri
ce
400003000020000100000
25000
20000
15000
10000
5000
0
Scatterplot of PwC_avg_net_price vs ListPrice
3. Select projects/initiatives that will advance your strategy the most. Use data to decide.
3a. Measure Performance• Develop KPIs that link to strategy• Measure constantly • Hold people accountable
3b. Respond to Breakdowns• Focus on KPIs that are failing• Analyze data to identify broken processes• Pinpoint problems
Identify ‘Big Hitters’ and focus efforts on reducing process variation and eliminating the ‘Hidden Factory’.
Cost Out! – A Lean Six Sigma Approach
Lean Six Sigma – Roadmap to Cost Out!
March 8th, 2006Page 20
PricewaterhouseCoopers LLP
4. Involve your people. Get data. Use the right tools to solve the right problems. Drive out variation and non value added work.
CREATE FIX STREAMLINE• Create effective and
efficient processes where none exist
• Design error free products and services
Goal
Six Sigma
• Improve existing processes
• Reduce process variability
• Eliminate root causes of errors
Six Sigma
• Improve existing processes
• Eliminate non-value added activities
• Eliminate waste
LeanTools
CYCLE TIME
Before
After
Cost Out! – A Lean Six Sigma Approach
Empower your people to solve problems. Focus on the data,eliminate root causes and mistake proof the solutions.
Lean Six Sigma – Roadmap to Cost Out!
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PricewaterhouseCoopers LLP
• The higher the sigma, the fewer the defects, the better the performance.
• 6 σ represents a near flawless process (3.4 defects per million opportunities).
• Most organizations operate at 3 σ to 4 σ
Sigma a Greek letter that represents the statistical measurement of the variability or spread of data.
Six Sigma measures how well a process or product meets customers requirements.
σ Defects per Million
Opportunities123456
697,672308,77066,8106,2092323
Lean Six Sigma Core Concept: Measure your process
Cost Out! – A Lean Six Sigma Approach
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PricewaterhouseCoopers LLP
Unsafe drinking water for almost 15 minutes each day
99.99966% Good (6.0 σ)99% Good (3.8 σ)
20,000 lost articles of mail per hour
Lean Six Sigma – Practical Meaning
Seven articles lost per hour
5,000 incorrect surgical operations per week
Two short or long landings at most major airports each day
200,000 wrong drug prescriptions each year
One unsafe minute every seven months
1.7 incorrect operations per week
One short or long landing every five years
68 wrong prescriptions per year
Source: American Society for Quality
Cost Out! – A Lean Six Sigma Approach
March 8th, 2006Page 23
PricewaterhouseCoopers LLP
Lean Six Sigma Core Concept: Focus on Variation
Companies tend to measure and track averages
Time
Customers feel the effect of variation, not averages.Variation = Opportunity.
Average (Typical Business Goal)
Customer requirement
Why? “Defects” cost money
Cost Out! – A Lean Six Sigma Approach
March 8th, 2006Page 24
PricewaterhouseCoopers LLP
Market
Inputs Business Processes
SuppliersCritical
Customer Requirements
ProcessOutputs
Defects
Process variation creates Defects. Defects cost you money and frustrate your customers. Follow the defects and fix the root cause.
Output variation is caused by both variation in process inputs and by variation in the process itself
Variation in the process output causes defects
Lean Six Sigma Core Concept:Focus on Variation
Cost Out! – A Lean Six Sigma Approach
March 8th, 2006Page 25
PricewaterhouseCoopers LLP
Lean Six Sigma Core Concept:Rolled Yield
Process A
ProcessB
ProcessC
SupplierInputs
Outputs to Customer
Efficiency of Process Step
93% Good 93% Good 93% Good81% Good (2.4 Sigma)
99% Good 99% Good 99% Good 97% Good (3.4 Sigma)
99.99966% Good
99.9999% Good (5.8 Sigma)
99.99966% Good
99.99966% Good)
Waste and Rework are anchors that limit the capacity of the organization and increase costs!
3.0 Sigma
3.8 Sigma
6.0 Sigma
Sigma ScoreFor Process Steps
Overall Yield
Example: Business Process with 3 key steps
What is the probability of accomplishing the task error free?
Cost Out! – A Lean Six Sigma Approach
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PricewaterhouseCoopers LLP
Lean Six Sigma Core Concept:Example: Identify and Eliminate the “Hidden Factory”
The ‘Hidden Factory’ is any non value added process step.
Cost Out! – A Lean Six Sigma Approach
What Management thinks it is
What it really is
What it should be
What it could be
Current Situation Lean Six Sigma Efforts
PricewaterhouseCoopers LLP
Observe that 2 things are always happening in any process…
Focus on reducing the amount of Non Value Added work.The customer will not pay for inefficiencies.
Lean Six Sigma Core Concept:Focus on Waste
Things that customers will pay for…Work or Value
Things that customers do not want to pay for…
Time
Value Added Work
After
Before
Non Value Added Work
Time
Cost Out! – A Lean Six Sigma Approach
March 8th, 2006Page 28
PricewaterhouseCoopers LLP
• Improve customer satisfaction
• Better understand and meetchanging customerrequirements
• Create new customeropportunities
• Define key metrics
• Improve market positionrelative to competitors
• Increase productivity
• Improve capacity and output
• Increase product reliability
• Reduce exposure to risk
• Minimize inventory
• Improve efficiency of supply chain
• Improve delivery and qualityperformance
Cost Out! – A Lean Six Sigma Approach
Cost Out Other Improvements
Lean Six Sigma Targets
Different problems require different solutions.
March 8th, 2006Page 29
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Summary
March 8th, 2006Page 30
PricewaterhouseCoopers LLP
Lean Six Sigma – Some Final Thoughts
Vision + Leadership + People + Tools = Results
Adopting a different perspective allows you to see new opportunities.
Identifying variability and waste in your process is critical to taking cost out.
Tools do not solve problems. People do.
Lean Six Sigma is a means to an end.
Summary
PwC*connectedthinking
© 2006 PricewaterhouseCoopers LLP, Canada. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership, or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP.
Scott Crowley416 814 [email protected]
Thank you.
www.pwc.com/ca/leansixsigma
Paul Snowdon416 814 [email protected]
Joe Rafuse416 941 [email protected]