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About this lesson

Businesses require a rationale before allocating resources to a project. This principle applies to Lean Six Sigma projects. The business case explains the business impact of the defect or problem situation the project will be attempting to resolve. In most cases, this defect or problem must be translated into a fiscal impact in order to prioritize the problem with respect to other problems that could also have a Lean Six Sigma project assigned.

Quick reference

Business Case

The Lean Six Sigma methodology encourages the creation of a business case to describe the opportunity associated with the project and to manage stakeholder expectations.

When to use

The business case is initiated during the Define phase but often is not finalized until the Measure or Improve phase when the full project costs of implementation can be estimated.

Instructions

When initiating a Lean Six Sigma project, an important aspect from IASSC’s perspective is the calculation of business benefits used in the business case.  In my experience, the business case for Lean Six Sigma projects is commonly done at a portfolio level for the entire program and not for individual projects.  However, when the business case is required for a project, the team must gather estimates for the project cost and the project benefit. 

The business benefit can often be determined during the Define phase based on the magnitude of the problem being addressed. The costs often cannot be determined until the nature of the investigation is determined in the Measure phase or possibly not until a solution has been developed in the Improve phase. A typical method for estimating the benefit is to estimate a “per unit” savings or additional sales.  This could be an estimate such as saving 25% of effort on every widget.  The units could be an item in production, a savings per week, or a reduction in the hourly operating costs of equipment. Once the rate has been estimated, that rate is multiplied by the number of projected units – such as full year if the rate was a savings per week.  The value obtained from this calculation is used as the benefit.  Be sure if there are new costs in addition to savings that you take the net effect as your benefit rate.

Some benefits are sustainable or recurring. In that case, you need to also determine the time period over which the benefits will be calculated. This may require an estimate of sales or customer service interactions. Some benefits may be a one-time impact such as the sale of an obsolete piece of equipment.  

Hints & tips

  • Don’t overly agonize over the project benefits when doing a business case.  They are just estimates and I have never had a case where someone came back to audit the business case estimates.
  • If estimating benefits from a quality yield improvement, don’t assume that you will get to 100% yield, but you can assume that you will significantly reduce the defects.
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  • 00:04 Hi, this is Ray Sheen.
  • 00:06 Let's take a few minutes and talk about the business case for
  • 00:09 a Lean Six Sigma project.
  • 00:12 First, some background about business cases.
  • 00:14 Companies use a business case to make a business decision about resource
  • 00:19 allocation to start working on a Lean Six Sigma project.
  • 00:23 In my experience, Lean Six Sigma is often approved as a project portfolio level.
  • 00:29 That means that the resources are allocated to work on a group of
  • 00:33 Lean Six Sigma projects.
  • 00:35 At the time of a project kickoff, the problem is not yet known.
  • 00:39 So it's impossible to accurately estimate what the cost and
  • 00:42 schedule will be to fix the problem.
  • 00:45 The problem won't even be clarified until the end of the measure phase.
  • 00:49 A business case is an analysis of the project impact at a business level.
  • 00:54 This means that all the costs in the business due to the project, or
  • 00:57 the portfolio of projects, are estimated.
  • 01:00 And all of the benefits that will accrue to the business are estimated.
  • 01:04 One other thing is, the business case will normally include an impact of any risks
  • 01:09 that are identified at this time.
  • 01:11 Most of the project costs in a Lean Six Sigma project will be costs associated
  • 01:15 with the people doing the work of the project.
  • 01:17 Although there may be some costs for material, or travel to suppliers,
  • 01:22 equipment, if it needs to be updated or modified as part of the solution.
  • 01:26 And possibly some training costs, if the solution requires retraining of operators.
  • 01:32 The benefits are most commonly cost savings,
  • 01:35 but sometimes benefits will be sales growth.
  • 01:38 In some cases, there will be some reserves set aside to address things like
  • 01:43 regulatory filings or business disruptions that might occur as part of the solution.
  • 01:49 One other thing that I find important is to be ready to explain the risks
  • 01:55 in the business if the project or portfolio projects is not done.
  • 01:59 One of the most difficult things for many people to estimate are benefits.
  • 02:05 For Lean Six Sigma projects,
  • 02:07 the benefit is usually based on fixing something that is in a process.
  • 02:11 That means that the benefit is a rate, such as a dollar savings per part, or
  • 02:16 a dollars saved per month.
  • 02:18 But now the question becomes, how many parts should we count, 1, 100,
  • 02:23 1,000, all products?
  • 02:25 Or how many months?
  • 02:26 One month, one year, one decade?
  • 02:28 To calculate the actual savings, you'll not only need to estimate the rate, but
  • 02:33 you'll need to estimate the duration or
  • 02:35 the total quantity that that rate will be applied to.
  • 02:39 Most organizations establish some ground rules that they use for
  • 02:43 Lean Six Sigma projects.
  • 02:45 I know when I worked at GE, we used 1 year for Lean Six Sigma projects,
  • 02:49 either 12 months or 1 year's worth of production parts.
  • 02:54 But ultimately, that was a judgment call by the business leadership and finance.
  • 02:58 One other point, when a change is put into effect, it may save a lot of money in
  • 03:02 one area, but it may actually increase the amount of spending in another area.
  • 03:07 Make sure you are looking at the total net effect.
  • 03:10 If there are offsets, these need to be included in the analysis.
  • 03:15 Let's dig into this benefits analysis a little bit deeper,
  • 03:18 and talk about the nature of the business benefits and how they're captured.
  • 03:23 I find it easier to separate the benefit streams into two categories.
  • 03:27 The first I refer to as sustainable benefits.
  • 03:30 These are ones that keep on going.
  • 03:32 They become part of the new normal.
  • 03:35 So if we reduce the operating costs, like scrap or rework, that isn't for
  • 03:39 just one piece or one month, that will go on as long as we stay in production.
  • 03:44 Keep in mind, the solution may also increase some operating costs.
  • 03:48 There may be new equipment that must be maintained and
  • 03:51 calibrated on a regular basis.
  • 03:53 And on the revenue side,
  • 03:54 if the change increases the attractiveness of the product to the customers,
  • 03:58 we'll sell more this month, and we'll keep selling more in the future.
  • 04:02 I contrast these costs and savings with one-off costs and benefits.
  • 04:06 These are the things that happen once at the time of the project.
  • 04:10 Once that is over, they won't happen again.
  • 04:13 The most obvious of these is the project costs themselves.
  • 04:16 Once the project is over, the project spending ends.
  • 04:19 There may also be implementation costs,
  • 04:22 such as reworking all the inventory in stock or qualifying a new vendor.
  • 04:26 Once these are done, the process now runs without further costs in these areas.
  • 04:32 At the end of the day, all the costs and
  • 04:34 all the benefits are summed up in the business case document.
  • 04:38 These costs are normally time-phased, such as, how much did we save on products this
  • 04:42 year, and how much next year, and how much the year after?
  • 04:46 Or how much do we have to spend on the project this year?
  • 04:49 And how much do we have to spend on maintenance and calibration next year and
  • 04:54 the year after?
  • 04:55 All of these numbers will be used when calculating the return on investment,
  • 04:59 which is something we'll cover in a later lesson.
  • 05:03 Once you've captured all the costs and benefits for your project or
  • 05:08 portfolio of projects, you can present them to management for
  • 05:13 approval of your Lean Six Sigma project.

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