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*


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



Introduction



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



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:•••••


Introduction



Owner’s List:RevenueCostsCustomer SatisfactionEmployee AttendanceSupplier Issues

Customer’s List:PriceWaiting TimeAdequate ParkingFriendliness of StaffTaste of the Pizza


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



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






ROI for Lean Six Sigma


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

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2.5

1996 1997 1998 1999

Invested ($B) Savings ($B)

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2000 2001 2002 2003 2004

Invested ($M) Savings ($M)

General Electric Maple Leaf Foods Canada



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




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




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.




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.




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.




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.




Cost Out!A Lean Six Sigma Approach



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



Tran

sact

ion

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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

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Pareto Chart of Transaction Volume by Product Type

Percent of Selling Price that has been Lost

Freq

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Mean 43.61StDev 25.82N 799

Example of Lost Selling Price AnalysisNormal

ListPrice

Net

pri

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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’.





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


Empower your people to solve problems. Focus on the data,eliminate root causes and mistake proof the solutions.




• 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




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




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




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




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?




Lean Six Sigma Core Concept:Example: Identify and Eliminate the “Hidden Factory”

The ‘Hidden Factory’ is any non value added process step.


What Management thinks it is

What it really is

What it should be

What it could be

Current Situation Lean Six Sigma Efforts


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




• 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 Other Improvements

Lean Six Sigma Targets

Different problems require different solutions.



Summary



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


© 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]

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Cost Out! Cost Out!