Project Benefits Toolkit

1. Project Benefits Toolkit YOUR COMPANY

2. Each Project Unique • DISCLAIMER • The following pages will give you ideas on what benefits may be associated with common types of projects • Benefits listed are only suggestions . . . • - your project may not include these benefits or it may include additional benefits • Your business should define which Specific benefits it will recognize based upon your accounting practices

3. When to Calculate Benefits Define Measure Analyze Improve Control High Confidence Estimate: Commitment to Deliver Project Benefits Becomes an Input to Business Financial Plan Post Project: Measure actual delivered benefits Initial Estimates: Rough Estimates based upon best Current knowledge of project Used to prioritize Projects Increasing Confidence in the Estimate

4. Assumptions In reality, the assumptions behind the calculations are the most critical in determining a comfortable dollar benefit for a project. Once these assumptions are established, the benefits calculations are relatively straight forward; but it is critical to state what they are in order to re-evaluate benefits and / or confirm the true impact later in the project life cycle. Be careful of . . . • Assuming that all defect types will be reduced at the same rate. • Assuming that the numerical average is representative of the typical item, outliers can have an impact. • Assuming that all Incremental Capacity can be sold. If Incremental Production is not needed to meet the production plan, then sales function must be integrated to determine the sales potential of the excess capacity. • Assuming that a sample over a relatively short period of time can be extrapolated over the entire year. • Assuming a scrap percentage without data to verify or generalizing one scrap rate across all types of returns. • Assuming that there is a linear relationship between defect reduction and cost reduction. Always be clear in stating the assumptions behind calculations and review as better information becomes available. Use your functional finance representatives as well as commercial and manufacturing representatives to help refine / verify assumptions and benefits.

5. Fixed Standards To facilitate benefit calculations, it is often desirable to have fixed standards for various activities associated with defect management. Examples: Standard Administrative Cost of Customer Return $400 Standard Admin. Cost of Billing / Documentation Issue $200 Standard Cost to Rework a Returned or Defective Part $300 * Costs include routine, repetitive personnel / actions to resolve these issues: Pricing Specialists, Quality Managers, Account Managers, Receiving / Warehousing and Cash Application specialists.

6. General Guidelines • Direct Benefits • Direct Tie to Year Over Year Improvement to the Income Statement • Are Calculable to a $ Value • Explicit Direct Savings, Incremental Revenue • Indirect Benefits • May Not Be Able to Be Converted to $ Benefit • No Direct Tie to Year Over Year Income Statement Improvement • Cost Avoidance, Non-saleable Incremental Revenue, Improving Customer Satisfaction, Task Elimination Many Projects Will Have More Than One Type of Benefit

7. Examples of Process Improvement Benefits / Costs Other Benefits Direct Savings • Scrap / Rework Write-Off Reduction • Overtime Reduction • Concessions Reduction • Additional Accounts Payable Discounts • Scrap Disposal Cost Reduction • Transportation Cost Reduction • Warehouse Cost Reduction (If space purchased on a per part or square foot basis) • Expedited Freight Cost Reduction • Rework Cost Reduction / Elimination • Reallocated Resources ( Task elimination) • Prevention of Sales Erosion Due to Improvement of Poor Product Quality or Service • Warehouse Cost Reduction (If not purchased on a per Part or square foot basis) • Funds Flow Improvement From Reduced Inventory and Past Due Receivable Balance Cost Avoidance • Plant and Equipment Avoided Costs Due to Incremental Capacity Generated • Headcount (C&B) Avoided Costs Due to Defect Resolution Incremental Revenue • Sales Revenue from Incremental Capacity Which Can Be Sold (Produced) Incremental Costs • Increase in Price Due to Product or Service Improvement • Increase in Sales Due to Improved Product Quality or Increased Service • Increase in Sales and/or Price Due to Improved Lead Generation or Quotation Process • Additional Systems Software or Hardware (Expensed or Capitalized) • Additional Maintenance • Additional Plant and Equipment • Costly / Repetitive / Expansive Design of Experiments (DoE) • Consulting or Other Outside Services

8. Direct Savings

9. Direct Savings - Scrap and Loss Project reduces the number of parts scraped or reworked and therefore reduces the write-down losses or cost to rework a unit or part. Any recovered costs should be used to offset the losses. In addition, the cost of disposal should be included. Calculation: (Scrap Parts x $ Write-Down per Part) - (Any Separate Recovered Cost per Part x Parts) (Rework Parts x $ Rework per Part) - (Any Separate Recovered Cost per Part x Parts) Scrap Parts x Average Disposal Cost Typical Associated Benefits May Be: - Transportation Costs on Returned Material (Direct Savings) - Warehousing Cost of Scrap/Rework Inventory (Direct Savings or Other Benefits depending upon how your business unit buys warehouse space)

10. Direct Savings - Warehouse Costs Warehousing Cost of Scrap / Rework Inventory Project reduces scrap or rework and therefore reduces the associated inventory costs. Only Direct Savings if your business unit buys warehouse space on a per Part or per square foot (or other per weight / space basis) and the warehousing costs for the business unit will be reduced upon reduction of scrap or rework inventory, otherwise consider these savings to be Other Benefits. Calculation: Average Scrap or Rework Parts Inventory Reduction x Average Warehousing Cost per Part Typical Associated Benefits May Be: - Transportation Costs on Returned Material (Direct Savings) - Scrap Disposal Costs (Direct Savings) - Material Scrap / Rework Loss ( Direct Savings)

11. Direct Savings - Transportation Costs Transportation Costs Project reduces the dollars we pay to return material to the plant or warehouse. Includes return material claims where we were paying freight, such as concessions or quality issues. Doesn’t include returns on which customer pays freight. Project increases service level and enables us to eliminate premium expedited freight costs. Does not include normal freight costs. Calculation: Average Freight Cost per Part x Parts Annual Parts expedited x (Premium Freight Cost per Part - Normal Freight Cost per Part) Typical Associated Benefits May Be: - Reduced Scrap/Rework (Direct Savings) - Disposal Costs of Scrap (Direct Savings) - Administrative Costs of Claims/Credit/Debit Transactions (Other Benefits)

12. Direct Savings - Accounts Payable Additional Cash Discounts On Accounts Payable Process Improvements allow us to take advantage of discount opportunities that we previously missed due to defects. Includes only discounts that we had the opportunity and intent to utilize, but we were prevented from doing so due to the defective process. * Savings must be tied to a project with intention to improve payables. Cannot claim benefits associated with improved payables not specifically related to project. Calculation: Annualized eligible discounts which we will utilize in year following completion of project. Typical Associated Benefit May Be: - Other Manpower Costs Associated with Defect Resolution (Other Benefits)

13. Direct Savings - Comp and Benefits Compensation and Benefits Project results in process efficiencies which enable us to reduce temporary labor, overtime hours worked or actual reduction in headcount. Doesn’t include headcount resource reallocation (see Other Benefits), net result must be actual reduction in direct staff, overtime hours reduction, or elimination of temporary labor. * Savings associated with headcount elimination must be certain - and related compensation and benefit expenses eliminated from budgets, plans, etc. Calculation: Temporary Labor Reduction: Estimated Hours x contract rate with vendor Headcount Reduction: Estimated Resource Annual Salary plus 30% Benefit Rate Overtime Reduction: (Estimated Hours of OT eliminated * OT Rate) plus 30% Benefit Rate

14. Direct Savings - Concessions Price Concessions Reduction Project will clarify customer’s expectation of price and concessions will be reduced. Could include: Credits, Free Material, or Price discounts as the result of quality or service issues. Doesn’t include Return Material (RM) concessions (see specific RM calculations). Calculation: Annual Estimated Price Concessions Credits that will be eliminated Typical Associated Benefits May Be: - Administrative Costs of Claims / Credit / Debit Transactions (Other Benefits)

15. Direct Savings - Other Other Operating Expenses Project savings such as, but not limited: - Maintenance - Leased or Contract Services - Utilities - Supplies - Packaging - Gauge R&R on Supplier Shipments (Did you get what you ordered?) * Be sure to include basis for all assumptions and clearly defined calculations behind benefit $$

16. Incremental Revenue

17. Incremental Revenue - Saleable Incremental Capacity Saleable Incremental Capacity Project creates incremental capacity from scrap reduction or increased throughput and there is consensus among MBB, Commercial or Product Manager, Functional Finance and Capacity Planners that Parts will be produced either due to the need for the Parts in the original production plan or because incremental capacity will allow sales in excess of the original plan because that product was “at capacity” prior to the improvement. If not at capacity, incremental pounds are considered excess capacity and can be entered into QPID as capacity Parts without associated revenue. This category doesn’t include incremental sales which are not associated with incremental capacity. Revenue from these activities should be included in the “Other Incremental Revenue” category. Calculation: Annual Capacity to be sold x Average Selling Price [ASP] x Contribution Margin Percent Typical Associated Benefits May Be: - Cost Avoidance from Capacity Creation (Cost Avoidance) - Material Scrap / Rework Loss (Direct Savings)

18. Incremental Revenue - Sales Incremental Sales Volume Due To Improvements In Product or Service Level Project enables commercial to penetrate market beyond initial plan due to improved product quality or service levels. There should be consensus among MBB, Commercial or Product Manager and Functional Finance that units will be produced because improvements enable sales in excess of original plan. Doesn’t include sales associated with incremental capacity. Calculation: Annual Estimated Additional Units x Average Selling Price x Contribution Margin Percent

19. Incremental Revenue - Price Increased Average Selling Price On Corrected Billing Process improvements reduce billing defects that had resulted in net under-pricing of products. Doesn’t include revenue from under-pricing which is reported by customers (and subsequently debited by us). Calculation: Annual under-pricing which has gone unreported by customers LESS overpricing which has gone unreported by customers. Typical Associated Benefits May Be: - Administrative Costs of Claims / Credit / Debit Transactions (Other Benefits)

20. Incremental Revenue - Lead Generation Incremental Sales Revenue From Improved Quoting/Lead Generation Process Improved speed and accuracy of quoting or lead generation process increases competitiveness and is expected to result in incremental units sold and/or increased average selling price [ASP] where we had been under-quoting price. There should be consensus with MBB and Commercial or Product Manager on the expected revenue. Calculations: For Additional Sales Volume: Annual additional Units x Average Selling Price x Contribution Margin Percent For Increased Average Selling Price: [{Under-quoted Parts x (Old ASP - New ASP)} - {Over-quoted Parts x (Old ASP - New ASP)}] x Contribution Margin Percent

21. Other Benefits

22. Other Benefits - Claims C&B Administrative Costs Of Claims / Credit / Debit Transactions Project will reduce the number of claims or non-invoice credits or debits. This allows us to reallocate the manpower spent on those activities to do more proactive, productive activities. Doesn’t include headcount reduction (see Direct Savings) or manpower costs from Sourcing, Accounts Payable, routine Color Lab, etc… Does include manpower of Credit Specialist, Account Managers, Quality Action, Warehouse (on RM), Receiving (on RM) and Systems processing. Calculations: For Return product Transactions: Number of Claims Reduction x Standard Cost / Transaction* For Non-Return product Transactions: Number of Claims Reduction x Standard Cost / Transaction* * Standard cost per transaction should be determined for uniformity.

23. Other Benefits - Manpower Other Manpower Costs Associated With Defect Resolution Savings in manpower costs other than those specified for Claims / Credit transactions (see Administrative Costs for Claims / Credit / Debit Transactions). Includes manpower resources that routinely spend time to resolve or manage defect implications, such as traditional Quality Assurance, Sourcing, Accounts Payable, etc… Doesn’t include Lean Six Sigma resources. Calculation: Annual Number of Hours Saved x (Hourly Rate + Benefit Rate)

24. Other Benefits - Warehousing Warehousing Cost of Scrap / Rework Inventory Project reduces scrap or rework and therefore reduces the associated inventory costs. If your business pays for warehousing by the Part or by the sq foot, consider these savings to be Direct Savings otherwise they belong here in Other Benefits. Calculation: Average Scrap or Rework Parts Inventory Reduction x Average Warehousing Cost per Part If uncertain of average warehousing cost per Part, or how your business pays for warehousing, see functional finance for assistance. Typical Associated Benefits May Be: - Transportation Costs of Returned Product (Direct Savings) - Scrap Disposal Costs (Direct Savings) - Product Scrap/rework Loss (Direct Savings)

25. Other Benefits - Revenue Retain Sales Volume Previously In Jeopardy Due To Extremely Poor Service Or Quality Project enables commercial to retain market share where there was consensus with the commercial organization that poor product quality or poor service levels put market position in jeopardy. There should be consensus among MBB, Commercial or Product Manager and Functional Finance that Parts will be produced. Sales in this category are not incremental, they are retained, thereby preventing market erosion. This category doesn’t include incremental sales due to capacity generation or improved quality or service. Calculation: Annual Estimated Retained Sales Units x ( Average Selling Price) x (% Margin)

26. Other Benefits - Funds Flow Funds Flow Improvement from a Reduction in Inventory (Scrap, Rework, Finished Goods) and Past Due Receivable Balance Inventory Balance - Project reduces inventory balance and frees up cash that can be used for other activities. Past Due Receivable Balance - Project reduces the past due receivable balance and frees up cash that can be used for other activities. Alternatively, the cost of Capital can be applied to an inventory reduction Calculation: $ Amount Inventory or Receivable Balance Is Reduced Due To Project Average Annualized Dollar Value Reduction In Inventory Or Receivable Balance Improved Funds flow x Cost of Capital Typical Associated Benefits May Be: - Transportation Costs of Returned Product (Direct Savings) - Disposal Costs of Scrap (Direct Savings) - Product Losses on Scrap/Rework (Direct Savings) - Warehousing Costs of Scrap / Rework / FG Inventory (Direct Savings or Other Benefits depending on how your business buys warehouse space) - Administrative Costs of Claims / Credit / Debit Transactions (Other Benefits)

27. Other Benefits Benefits That Are Not Easily Quantified, But Are Important Project benefits that are not easily or accurately quantifiable in $ or #s, but are still important, such as: • Increased Customer Satisfaction (due to, but not limited to, service levels, claims resolution, or product quality) • Improved Employee Satisfaction (reduced frustration from previously inefficient or ineffective processes) • Reduced cost of quality due to increased efficiency, decreased cycle time of issue resolution NOTE: Eventually it may be possible to for a particular business unit to develop transfer functions between certain indicators of customer or employee satisfaction (surveys scores, for example) with subsequent behavior (customer or employee retention rates). If this is established , and agreed to by business leadership, statistically validated improvements in these indicators as driven by lean six sigma projects can be used to estimate benefits for future behavior.

28. Cost Avoidance

29. Cost Avoidance - Capital Plant & Equipment (P & E) Cost Avoidance Project results in incremental capacity which will help the business grow without additional P&E investment. Includes capacity created by Elimination of Scrap production, Increase of yields or Increases in throughput. It also includes all capacity Parts whether they are produced or not. Calculation: Standard P&E Investment per Parts (TBD) x Capacity Parts Created See Functional Finance for assistance in Standard P&E Investment per Part for major product groups. For other product groups, functional or quality finance can also help determine reasonable estimate of P&E cost per Part. Typical Associated Benefits May Be: - Product Scrap / Rework Loss (Direct Savings) - Incremental Revenue from Incremental Capacity

30. Cost Avoidance - Headcount Headcount Cost Avoidance Project results in process efficiencies which help the business grow without additional headcount. Doesn’t include headcount reduction from prior levels (see Direct Savings). Doesn’t include general assumptions of headcount increases, should be preplanned and then no longer necessary due to project. Calculation: Estimated Resource Annual Salary plus 30% Benefit Rate

31. Incremental Costs to Execute

32. Incremental Costs Incremental Costs To Execute Project Project Benefits Should Be Offset by Significant Incremental Expenditures Required to Deliver the Benefits Only includes unusual, project-specific costs which are not already in the budget. It includes those costs whether they are expensed or capitalized. Some examples: - Computer Hardware or Software - Incremental Maintenance - DOEs Exceeding $1,000 - Consulting Services - Other Outside Services - New Plant Equipment - New Tools For Capitalized Assets: Include only the annualized depreciation expense and any implementation costs (i.e., installation, maintenance, engineering set-up fees), not the cash outlay, for the purchase of the plant and equipment. See your Functional Finance representative for assistance in determining first year depreciation.

33. Examples of Benefit Calculations

34. Calculation Examples - Mfg. Cost Reduction Conversion Cost Reduction • Currently because of capacity constraints we need to toll produce (outsource) about 2,000,000 Mousetraps from now thru 12/31. A Black Belt has eliminated a bottleneck which will cut this number by 50% • Tolling cost per mousetrap is $0.75 • We can manufacture mousetraps internally for $0.50 per part[Represents Conversion Cost only - Bill of Material unchanged] Calculation: Parts Produced in-house = 1,000,000 * Cost Savings per Part = $ 0.25 (Tooling Cost - Manufacturing Cost) Benefits $’s = $ 250,000

35. Calculation Examples - Freight Expedited Freight • Because of the scheduling and order system, a number of orders are produced late and need to be expedited to the customer. • During the previous year, we spent $20,000 on expedited freight for these issues. • Our initial investigation reveals that we can reduce the costs by half, at a minimum. Calculation: Expedited Freight Cost = $ 20,000 50% Reduction in Cost = .50 Benefit $’s = $ 10,000

36. Calculation Examples - Capacity Incremental Capacity • A Black Belt has identified and eliminated a bottle-neck in a process generating an additional 300,000 Parts • ASP of the product = $2.00 / Part with a 30% CM • There is only a true demand for 200,000 Parts and that is all the Industry Mgr commits to • A new, larger pump will be installed and cost $100,000 to install Calculation: Additional Parts in Demand= 200,000 ASP of Product = $ 2.00 CM% on Product = 30% Benefits $’s = $ 120,000 Less Cost to Implement = 10,000 ( 10 yr. Depreciation) Net Benefit of Project = $ 110,000

37. Calculation Examples - Yield Improvement Yield Improvements • Last year, Line 5 produced 50,000 parts, including 10,000 rejects. Of this, 4,000 were reworked and sold as good goods and 6,000 were scraped. In addition the rework process consumes line time that would be otherwise used to make product. • The cost to manufacture a part is $10.00, Sale price is $15.00. Cost to rework is $2.00. Landfill cost is 50 cents. • Marketing says they could sell all 50000 units if they could get them. • After completing the project the BB eliminated 100% of the defects. Calculation: Scrap Costs (6000 Units + $10 Cost to MFG + $0.5 Landfill Cost) = $63,000 Rework Cost ( 4000 Units X $2.00) $8,000 Post Project Capacity 50000 + 4000 Rework Space 54,000 Prior Capacity 50000-6000 Scrapped 44,000 Total Incremental Capacity 10,000 Saleable Capacity 50,000-44,000 = 6000 * ($15-$10) $30,000 Total Direct Benefit $101,000 Indirect Benefit an Additional 4000 Units of Capacity

38. Calculation Examples Out-of-Spec Material (See Direct Savings, p. 12) • 5,000 Parts of out-of-spec material are going to be eliminated based on the following data from 1996: • 1. Scrap 1,500 Parts • 2. Sold 1,000 Parts to Resin Recovery • 2. 2,500 Parts reworked into good material • 4. Standard cost of RTV7000 = $1.50/PartConversion Costs to Rework = Additional $0.10/PartResin Recovery will buy material that cannot be reworked for $1.00/PartResin Recovery will charge a flat $100 fee to truck material away Calculation: Rework Rework Parts = 2,500 Conv Rate = $ 0.10 Benefit $ = $ 250 Sell Via Resin Recovery Parts Sold to RR = 1,000 Std Cost/Part = $ 1.50 Sell Price to RR = $ 1.00 Parts * (Std-ASP) = $ 500 Less: Transportation Cost $ 100 Net Benefit = $ 400 Scrap Parts Scrapped = 1,500 Std Cost/Part = $ 1.50 Benefit $ = $ 2,250 Total Project Benefit = $ 2,900

39. Benefit Category Index Listed below are typical benefit categories for the type of projects shown in the following table. This list is not intended to illustrate all possible benefits for a project of that type. Use your functional and quality finance representatives as well as commercial and manufacturing representatives to help determine/refine/verify assumptions and benefits. Typical Benefit(s) for Type of Project Direct Savings Other Benefits Cost Avoidance Incremental Costs Inc Rev Type of Project Yield Improvement 4 4 4 4 Inventory Accuracy 4 4 4 Packaging 4 4 4 4 Scheduling 4 4 4 4 Out-of-Spec Material 4 4 4 4 Conversion Cost Reductions 4 4

40. Scrap or Rework Reduction Projects Cost Reductions to Consider : - Transportation Costs for Returned Materials (see Direct Savings) - Disposal Costs of Scrap (see Direct Savings) - Material Write-Down / Write-Off Loss less any Recovered Costs (see Direct Savings) - Warehouse Cost per part for Scrap/Rework Inventory (Savings type depends on how your business buys Warehouse space. If on a per part or per Square Foot basis, it is Direct Savings, otherwise it is Other Benefits). - Incremental Capacity Associated with Scrap production

41. Incremental Capacity Projects Revenue and Cost Avoidance Benefits to think about: • CHANGING SCRAP parts TO GOOD parts: • Parts that will be produced: • Scrap or Rework Reduction - See Project Page detailing Cost Reductions to think about for Scrap/Rework Reductions • Incremental Revenue (Incremental Revenue from Capacity) • Cost Avoidance on Plant & Equipment (Cost Avoidance) • Parts that will not be produced (excess capacity): • Scrap or Rework Reduction - See Project Page detailing Cost Reductions to think about for Scrap/Rework Reductions • Cost Avoidance on Plant & Equipment (Cost Avoidance) • CREATING NEW CAPACITY FROM EXISTING PLANT & EQUIPMENT: • Parts that will be produced: • Incremental Revenue (Incremental Revenue from Capacity) • Cost Avoidance on Plant & Equipment (Cost Avoidance) • Parts that will not be produced (excess capacity): • Cost Avoidance on Plant & Equipment (Cost Avoidance)

42. Return Material / Quality Issue Resolution Projects Cost Reductions to think about: ALL TYPES OF RETURN MATERIAL: Scrap or Rework - See Project Page Detailing Cost Reductions to think about for Scrap/Rework Reductions Administrative Costs of Claims (Other Benefits) Transportation Cost of Returning Material (Direct Savings) In addition, for specific types of returns: CONCESSION RETURNS: Enforcement of Restocking Charge on Returns that become NORMAL under RM Policy (Direct Savings) QUALITY RETURNS: Elimination of Additional Credits for Customer Downtime, Machine Cleaning, etc. (Direct Savings)