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Transcript of The scientific approach to operations performance improvement SIGMA S o l u t i o n s SIX Copyright...
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
1
How Lean Six Sigma is used as a strategic business tool to increase shareholder value
LEAN SIX SIGMALEAN SIX SIGMA
FORFOR
INVESTORSINVESTORS
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
2
PROBLEM
Every company is in competition for
Customers (for revenue growth)
Shareholders (to drive share price)
QUESTION
How does one reveal the potential for economic profit, revenue growth and hence value creation from different components of your business in a unified, methodical and consistent way?
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
3
THE VALUE MOUNTAIN
Revenue Growth
EP% =
ROIC
- COC
Mar
ket
to B
oo
k V
alu
e
8
3
2
1
4
5
6
7
0
0-3% 3-9% 9-13% 13-25%(2
)-2%
2-6
% 6
-10%
>10
%
Competitor C
YOU ?
Competitor B
Competitor A
High ROIC = high
Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition
Low ROIC = low
Revenue Growth (X-axis)
Market to Book Value (Y-axis) - the stock market premium that will be paid for net assets (book value)
Economic Profit (Z-axis) - the difference between return on invested capital (ROIC %) and the cost of capital (COC%)
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
4
THE VALUE MOUNTAIN cont’d
ROIC =Profit After Tax
Invested Capital
Invested capital is the total assets of the organization minus the current liabilities
Revenue Growth
EP% =
ROIC
- COC
Mar
ket
to B
oo
k V
alu
e
8
3
2
1
4
5
6
7
0
0-3% 3-9% 9-13% 13-25%(2
)-2%
2-6
% 6
-10%
>10
%
Competitor C
YOU ?
Competitor B
Competitor A
High ROIC = high
Based on data 1994 to 1998, Tom Copeland’s Valuation ex. 5.2, 2000 Edition
Low ROIC = low
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
5
MAKING ROIC THE PRIORITY
ROIC is probably the strongest driver of high multiples of book value
Revenue growth is also a strong driver of higher market value
As ROIC% increases, the trading multiple typically increases
However if Economic Profit (EP%) = 0, then the ROIC% = Cost of Capital•i.e. Company likely to trade at around book value
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
6
WHAT ABOUT REVENUE GROWTH?
Growth plans are often affected by uncontrollable external market forces• Rising energy costs• Increasing interest rates• Changing fashions (tastes)• Unpredictable politics• Global economic instability
And Growth without Economic Profit creates no long lasting value (e.g. many dot coms)
PROBLEM
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
7
THE CONNECTION
Internal inefficiencies are easier to identify, measure and control
ROIC therefore is a HUGE value lever that’s easier to reach up to
However, performance improvement results MUST be tracked to the bottom line in support of strategic objectives
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
8
EXECUTING CORPORATE STRATEGY
Identify the platforms for shareholder value creation at both corporate and business unit levels
Identify value streams within the business units that suggest the greatest potential for improving shareholder value
Identify and prioritize projects that will maximize value
THE LEAN SIX SIGMA APPROACH
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
9
CORPORATE ANALYSIS
Strategic Issue YouCompetitor
ACompetitor
BCompetitor
CAvg
Std Dev
CEO Goal
Share Price A
Economic Profit %
Growth Rate
Market to Book
Owner Earnings/Profit
Comparing value with other companies will often indicate where the corporate opportunities are
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
10
BUSINESS UNIT ANALYSIS – part 1
Net Assets
Economic Profit as a % of Invested Capital (spread)
A
B
C
D
0%
5%
10%
-5%
E
-10%
EP% shows where Value is being created
Creating Value
Destroying Value
302010 40 50
A comparison of each business unit will show where Value is being created or destroyed
“…some companies get a conglomerate discount, but there are others like GE who got a conglomerate premium. And guess what? It all depends on performance, and if we could get our performance up, we felt we’d be able to earn those types of premiums..…that’s how we started Value Based Six Sigma.”
- Lou Giuliano (CEO, ITT Industries), May 2000
Invested Capital
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
11
BUSINESS UNIT ANALYSIS – part 2
AC
B
DE
Disadvantaged Parity Advantaged
EVA Breakeven
Economically
Profitable
COMPETITIVE POSITION
MA
RK
ET
PR
OF
ITA
BIL
ITY
Unprofitable
Profitable
Measurement of both business unit profitability and competitiveness shows relative position
The larger the circle, the greater the revenue
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
12
BUSINESS UNIT ANALYSIS – part 3
Identify specific projects within a targeted value stream
Prioritize projects based on the likely benefit
Expose Lean Six Sigma opportunities through quality and time based complexities
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
13
WHY LEAN SIX SIGMA?
Lean Six Sigma incorporates the principle of Lean’s simplified flow and speed to increase business process velocity
Lean Six Sigma incorporates Six Sigma’s approach to eliminating errors, variation and instability
The combination of Lean & Six Sigma attacks the “hidden factory” of complexity in your business
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
14
MOVING THE VALUE LEVER
Lower material costs
LEAN Reduced waste
Lower inventories
Fewer assets
Methodology Improvement Benefit Location
SIX SIGMA Reduced variance
Reduced DSO
Lower cost of labor
Lower R&D costs
Balance
Sheet
Income
Statement
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
15
Price
Volume
Labor
Material
Fixed Cost
Labor
Sales & Manufacturing
Non Labor
SG & A
Revenue
R&D
Cost of Goods Sold
SG & A
Operating Profit
Net Op Profit After Tax
Income Tax
Cash
Inventory
Receivables
Fixed Assets
Payables
Other Assets
Current Debt
Other Current Liabilities
Total Assets
Current Liabilities
Capital Charge
Economic Profit
CashInvested Capital
Economic profit is the income generated relative to all resources required including capital costs from the balance sheet
-
--
- =
Fewer Assets + Reduced Costs = Increased EP
ECONOMIC PROFIT
Balance Sheet
Income Statement
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
16
WHAT IS LEAN SIX SIGMA?
WHAT DOES LEAN MEAN?
Lean is the elimination of all forms of non value added work from the customers perspective (waste) in business transactions and processes
WHAT DOES SIX SIGMA MEAN?
Six Sigma is a statistical based methodology used to eliminate defects (errors or variations) in business transactions and processes
Lean Six Sigma is the combination of two powerful operations improvement management philosophies that came out of the manufacturing sector in the 1980’s. In recent years it has been developed and successfully deployed in the service sector to include banking, retail, healthcare, staffing and financial services.
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
17
WHAT IS WASTE?
Non value-added work is called waste
Waste is caused by inefficiencies
Inefficiencies incur costs
Any activity which absorbs resources BUT adds no value to the service or product from the customer’s perspective
CUSTOMERS ARE UNWILLING TO PAY FOR WASTE
CUSTOMERS ARE UNWILLING TO PAY FOR WASTE
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
18
WHAT ARE DEFECTS?
Defects are variations in transactions & processes that reduce the quality of products & services
Defects require rework, consume resources, create instability, generate delays & cause scrap
Defects are frequently & mistakenly accepted as an unavoidable part of doing business
CUSTOMERS ARE UNWILLING TO PAY FOR DEFECTS
CUSTOMERS ARE UNWILLING TO PAY FOR DEFECTS
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
19
THE COST OF WASTE & DEFECTS
Delays in transactions & processes
Lower quality products & services
Consumption of scarce resources
Customer dissatisfaction
WASTE & DEFECTS REDUCE EBITDA
WASTE & DEFECTS REDUCE EBITDA
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
20
REWARDS FOR IMPROVEMENT
Reduced costs
Increased margins
Lower inventories
INCREASED EBITDA
INCREASED EBITDA
Reduced DSO
Better cash flow
Less debt
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
21
REWARDS FOR IMPROVEMENT cont’d
COMPETITIVE ADVANTAGE
COMPETITIVE ADVANTAGE
Faster transactions & processes
Higher quality products & services
Satisfied customers
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
22
ABOUT US
Six Sigma Solutions LLC is owned & managed by certified Lean Six Sigma experts.
We design, develop & execute operations improvement plans using Lean Six Sigma tools & methodologies to minimize waste (non value-added work) & defects (variations) in business transactions & processes.
Our clients benefit from:
Reduced costs
Better quality products & services
Satisfied customers
The scientific approach to operations performance improvement
SIGMAS o l u t i o n s
SIX
Copyright © 2006 Six Sigma Solutions LLC
23
CONTACT US
PARTNERS
Carl E. Watson Jr. BSc, Master Lean, Six Sigma Master Black Belt
Cell: 256-337-9811
OFFICE
PO Box 3375
Huntsville
AL 35810
http://www.sixsigmasolutionsllc.com