How Does Lean Six Sigma Help In Cost Reduction?
Senior management will indicate where reductions will be made or provide targets to each function or business to reduce their cost base. Still, there is little consideration for the reductions’ impact on the rest of the end-to-end process.
Processes will not improve because we ask them to. Lean Six Sigma is a business improvement methodology that improves process cycle time, customer satisfaction, quality, and employee satisfaction. Majorly, Lean Six Sigma help in cost reduction.
So why merge the two methodologies?
Lean Six Sigma is a business improvement methodology that improves process cycle time, customer satisfaction, quality, and employee satisfaction, to name a few.
What Lean does is removes the non-value adding activities from business processes.
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Six Sigma cannot make processes more efficient and improve the speed of operation.
But Six Sigma removes customer-defined “defects” that tend to cause variation and, therefore, the cost. When both Lean and Six Sigma are combined, they take the complexity and cost out of your business.
Firstly, the organization needs to identify the type of cost, which could be:
Costs that do not change as production volume increases or decreases. (employee salary, rent, and utility)
A variable cost is a business expense that changes proportion to what a business produces or sells.
labor cost, electricity bill, shipping costs
Second, note which area the cost is generated and how it can be reduced or used effectively.
A review of most companies’ balance sheets reveals that there are still excessive inventory levels and needs an audit from a Six Sigma Cost Savings consultant.
Inventory levels still contain too many wrong items and too few correct items.
High inventory levels may result from waste resulting from poor execution and performance processes, poorly designed policies and procedures, and a lack of integrated planning and programming.
It is more efficient to streamline inventory supply processes in warehouses. Often pull systems can replace push systems for immediate and permanent reductions in stock levels.
People/Resources Cost Reduction
Companies have often requested productivity improvements without using the Lean Six Sigma methodology. Processes will not improve because we ask them to, and we cannot expect better performance from people stuck in invalid processes.
Businesses seek immediate returns using a proven and disciplined methodology. This book presents a useful productivity measure processes cycle efficiency (PCE). Analysis of low PCE can uncover the root causes of high cost and low performance and lead to effective mitigation approaches.
Time Cost Reduction
There is an opportunity for cost reduction through cycle-time reduction.
For example, US Naval Aviation was one of the first government organizations to implement process improvement across the enterprise. An example of the ability to reduce cycle time to drive cost reductions occurred at the International Naval Program Office.
Identifying and selecting the project based on priorities and applying Lean Six Sigma reduced the average response time to 11 days and the error rate to 8%. The overall cost of preparing the proposal has been reduced. (Source)
Cost Reduction Consulting Firms conduct an audit to help simplify the process and check the defect rate.
Why use Lean Six Sigma Cost Savings as opposed to the traditional methods:
Lean Six Sigma Cost Savings is fast and provides substantial results within weeks.
- It is efficient, offering exceptional cost savings with a relatively low investment.
- It is effective and provides a mechanism to identify, leverage, and replicate cost reduction best practices across the enterprise.
- Lean Six Sigma Cost Savings is practical and provides simple, analytical, and evidence-based methods to uncover the root causes of high costs; eliminate waste from processes, and turn plans into action.
Some of the Lean Six Sigma Cost Savings tools that could deploy for cost reduction:
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Eliminating Waste from Process
The greatest opportunities for cost reduction lie in eliminating waste from your processes, products, and services. To make that call, you first need to know what customers value and how much they value it. It’s the only way to ensure that your cost-cutting measures don’t inadvertently make your products or services less attractive to customers. Hence a thorough understanding of customer needs must underpin any project using the Lean Six Sigma Cost Savings technique.
Creating a Value Stream Map
The map will allow you to understand what activities are happening, in what order, and end-to-end performance levels. By investing in the right kind of data monitoring, you will also be able to assess process performance in terms of throughput, cycle time, setup time, and latency.
Process Cycle Efficiency
In its most basic form, the higher the PCE, the lower the operating costs. Or on the other hand, a low PCE number means that there is much more value-added time (NVA) in a process than value-added time. Knowing the PCE for any process tells you how much waste there is in the project.
PCE = 100 x (Value- Add Time) / PLT Process Cycle Efficiency where:
Value Added Time = is the amount of value-added time in the process.
PLT = Process Lead Time, the total time an item spends in a process.
Hiring the right Cost Reduction Consulting Services and taking the time to re-enable a Lean Six Sigma implementation can pay off in terms of adding value to the investment already made and generating significant savings, which is essential in these economic times.