After you set the targeted level of improvement, you can then determine the financial benefit of doing the Six Sigma project and decide whether the project is worth your time. The Six Sigma effort is often aimed at cost reductions by eliminating waste (scrap, inefficiencies, excess materials, rework, and so on) that are increasing costs but not adding value.
You’ve done well if you’ve gotten to this point. You’ve identified what needs to be improved, you know which processes are involved in creating your problem, and you’ve determined your current level of performance. You also may have a good estimate of how much this problem is costing you.
As a general rule, you want all your Six Sigma projects to produce a financial benefit, either directly or indirectly, through cost reductions, revenue growth, balance sheet improvements, or accomplishing strategic goals.
Look for a savings category for each Six Sigma project: hard, soft, or potential:
Hard savings reduce expenses and result in a financial improvement.
Soft savings are financial benefits that may occur as a result of a Six Sigma project but aren’t accountable as a direct result of the project. Soft savings are calculated by using a rational assessment of the expected benefits and a probability analysis of their likelihood.
For example, because of a Six Sigma project, your customers may become more satisfied and place more orders. Because many factors affect order rates, you can’t necessarily calculate a change caused by the project. But you just know the project helped. Because these changes aren’t traceable directly to the project, they’re considered soft savings.
Potential savings are a form of hard savings but require some action or decision to be realized. An example is a project that optimizes the design of an existing product. Until the redesign is implemented, the savings are only potential.
Generally speaking, cost improvements come from reductions in labor, inventory, material, cost of money, scrap, excess equipment, space, and so on.
Cost avoidance isn’t an appropriate metric for determining Six Sigma savings. If a process has been improved, you can’t make a projection into the future about what may have happened if the project hadn’t been done. The vast majority of Six Sigma projects are straightforward reductions of costs, resulting in hard savings.
A good way to estimate the potential value of a project is to imagine how much you could save if the problem was completely eliminated.
Be careful not to make generalizations about the average value of a Black Belt, Green Belt, or Yellow Belt project. Projects have a broad distribution of returns. Small projects can escalate, while high-value projects may never reach their potential.