Page 37 - The Six Sigma Project Planner

Refining the Dollar Opportunity Estimates
Preliminary estimates of benefits were made previously during the initial
planning. However, the data obtained by the team will allow the initial estimates
to be made more precisely at this time.
Whenever possible, “characteristics” should be expressed in the language of
management: dollars. One needn’t strive for to-the-penny accuracy; a rough
figure is usually sufficient. It is recommended that the finance and accounting
department develop dollar estimates; however, in any case it is important that
the estimates at least be accepted (in writing) by the accounting and finance
department as reasonable. This number can be used to compute a return on
investment (ROI) for the project.

As a general rule, dollar estimates are made conservatively. That is, they do not
consider the dollar value of intangibles such as improved employee morale or
customer satisfaction. The approach is usually to consider the cost of the current
process and to compare it with the cost of operating the improved process. A
recommended approach is to calculate the cost of a single error or problem,
estimate the total number of errors or problems, and multiply to arrive at the
dollar size of the opportunity. This is compared with the project’s cost and time
to determine the ROI.

Example #1: Cost of Incomplete or Inaccurate Customer Data
The Six Sigma project involved improving the quality of data in a customer
database at a call center. Whenever a customer phones in, the representative
looks for the customer’s record in the database and verifies the information it
contains. Based on a sample, it is estimated that about 11% of the records in the
database are incorrect and require attention by the representative. Considering
only direct costs (labor), the estimated opportunity is calculated as follows:

Figure 5. Example of Cost-Benefit Opportunity Calculations

Number of calls/year 1,300,000.
Average time to correct database 30 seconds (0.5 minutes)
Cost per minute $1.75.
Size of opportunity $1.75 x 0.5 x 1,300,000 x 0.11 = $125,125.
Estimated cost of project $25,000. No additional operating expense is
expected.
Estimated improvement Reduce errors by 90%, to 1.1% incorrect
records.
Savings $125,125.00 – $12,512.50 =
$112,612.50.
Time to complete 4 months.
First-year ROI 3 x ($112,612.50 / $25,000) x 100 =
1351%.

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