Define Project Value

Deliverable 3D

Define Module Roadmap

Define1D – Define VOC, VOB, and CTQ’s2D – Define Project Boundaries3D – Quantify Project Value4D – Develop Project Mgmt. Plan

Measure5M – Document Process6M – Prioritize List of X’s7M – Create Data Collection Plan8M – Validate Measurement System9M – Establish Baseline Process Cap.

Analyze 10A – Determine Critical X’s

Improve12I – Prioritized List of Solutions13I – Pilot Best Solution

Control14C – Create Control System15C – Finalize Project Documentation

Green11G – Identify Root Cause Relationships

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).

• VOC Worksheet

• Affinity Diagram• Stratification

tools (Pareto and other basic graphs)

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.

• Project charter

• SIPOC

• Included / Excluded

• Elevator Speech

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.

• Project Benefit Document

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.

• ARMI• Project

plan

• Faces of resistance

• Stakeholder analysis

• Influence strategy

3D – Quantify Project Value

# Deliverable Deliverable Concept & TasksPrimary 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.

• Project Benefit Document

Steps to Complete Deliverable:1. 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.

• 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.

• Where there are no dollar values to be saved by this project, list the intangible benefits brought by the project.

Objectives – Quantify Project Value

Upon completing this module, students should be able to:• Define COPQ• Define the types of project value• Define the difference between Hard Savings/Revenue and

Soft Savings/Revenue• List when & where project benefits are documented during

a project

COPQ Concept

• 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)o e.g. Vehicle repair beyond routine, preventative maintenance

• Any process improvement strategy includes an attack on the Costs of Poor Quality

• For an average company, the COPQ can be as high as 25% of sales revenue

• In almost every company where the COPQ is unknown, the COPQ exceeds the profit margin

COPQ vs. Defect Frequency

Number of Defects to be Corrected

The Expenses We See

Expediting Excess Inventory Lost LoyaltyLonger Cycle Times Costs to Customer

OvertimeRework Maintenance

Productivity

“Hidden Factory” COPQ

• Beyond the direct costs associated with finding and fixing defects, the COPQ also includes:o The hidden costs of failing to meet customer

expectations the first timeo The hidden opportunity for increased efficiencyo The hidden potential for higher profitso The hidden loss in market shareo The hidden increase in production cycle timeo The hidden labor associated with ordering

replacement materialo The hidden costs associated with disposing of defects

Determining the Financial Implications of a Project

Quantifying Project Value

• Hard savings/revenue = Cost reduction or avoidance for which a Manager/Director/Vice President/Chief will make a budget change request to recognize the improvemento e.g. Reduce fuel oil consumption or lower demurrage costs that

will not be incurred in the future• Soft savings/revenue = COPQ that can benefit JEA in the

future if exercised or a new, future cost that is avoidedo 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

o e.g. A new tax or noncompliance fee that is avoided• Non-financial benefit = Projects that support non-financial goals

(Circle of Excellence)

Hard Savings Categories

• 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.

• 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.

• Capital Reduction – is like expense reduction except that it applies to capital budget expenditures instead of O&M.

Soft Savings Categories

• 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.

• Expense Avoidance – is used when a process change makes an anticipated future O&M expense unnecessary.

• Capital Avoidance – is like expense avoidance except that it applies to anticipated capital budget expenditures not O&M.

• 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.

• 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.

Non-Financial Benefits

• Some projects support JEA strategic programs or directives without having a tangible cost benefito Internal Employee Satisfaction – projects directed to improve

employee morale/satisfaction with their jobso Other strategic corporate objectives/initiatives

Potential Analysis: Examples

Type of Improvement

Reduce errors inprocessing

Increase MW produced at Northside Unit 1

Cut product defects by 25%

Benefit of thatImprovement

Less time spent fixingerrors; able to speedup flow of work

Decreased fuel costs

Reduce scrap, lesstime needed torework, lower inventory levels

Quantified Estimate ofImpact

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

COPQ Calculation Example – Sludge Hauling

Initial COPQ Savings Based on 2001 Actuals:• Jan to Sep gal hauled………24,786,000gal @ $0.0138/gal = $342,047• Oct to Dec gal hauled………..8,659,000gal @ $0.0135/gal = $116,897• Jan to Dec total gal hauled…33,445,000gal• Jan to Dec total cost…………………………………………..$458,944• 50% cost savings would be…………………………………..$229,472

End of Project COPQ Savings Calculations:• Jan to Dec 2001(baseline) average gal hauled/day………..91,630gal/day• Jan 2002 average gal hauled/day…………………….72,258gal/day x $.0135/gal = $975• Current (Feb 2002) average gal hauled/day………...44,000gal/day x $.0135/gal = $594• Jan 2002 actual gals and cost……………..……….......2,240,000gal x $.0135 = $30,240• Jan 2002 cost (using average daily cost)…………………….$975 x 31days = $30,225• Annualized 2002 remainder cost @ 44,000gal/day……......$594 x 334days = $198,396• Total annualized 2002………………………………….…………………….. …....$228,621• Projected total Savings over calendar year 2002….....$458,944 - $228,621 = $230,323

Project Benefit Documentation

• Deliverable 3D is a summation of the benefits by the project

• Calculate cost savings using a format suitable to your project (typically an Excel spreadsheet) using the project baseline data

• Briefly summarize the benefits in the project charter• In the final project presentation show the line by line

calculation of these benefits to complete deliverable 3Do Template: 15 Deliv template.ppt

• In deliverable 15, update the project benefits based on post improvement performance data.

When to Report Financial Information

• Limited resources necessitate project prioritization o 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

o Measure: Quantify COPQ to be as accurate as the data currently available will allow

o Improve: Identify costs of improvement (weigh cost vs. benefit)

o Control: Quantify COPQ (net of gain vs. cost of improvements) and document for official tracking

Project Worksheet #3: Potential Impact

• Instructions: Estimate the benefits your project will have. Be prepared to discuss your results with the class.

15 Min

Learning Check – Quantify Project Value

Upon completing this module, students should be able to:• Define COPQ• Define the types of project value• Define the difference between Hard Savings and Soft

Savings• List when & where project benefits are documented

during a project