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Investing in Lean Six Sigma - is it worth it!

What are the costs, benefits and timescales?

One of the questions I often get asked is "what are the financials of investing in Lean Six Sigma?"

Like any investment, there is a cost and an expected benefit but how do they stack up against other forms of investment?

The bottom line is that return on investment for Lean Six Sigma is usually high and payback is relatively short, but how do we arrive at this conclusion?

Lean Six Sigma is a systematic method of making lasting improvements and transforming your business or organisation. However it should not be seen as a "get rich quick" strategy. Whilst quick wins are possible, to gain lasting benefits, investment must also be made in management, an infrastructure and cultural change to support the initiative.

So what are the typical costs and benefits and how long does it take before you see a return on your investment? In the following I make assumptions on salaries, overheads and timescales so please substitute your own figures if these are not representative of your own organisation. Costs and timescales can vary significantly and hence the figures provided are only indicative.

The Investment

Investment in training, like with many other products and services, you get what you pay for. There are cheap training courses on offer, however if you are serious about developing your skills to be able to drive significant improvement then seek out and pay the going rate for good quality training.

When selecting a company to provide training, select, ones that specialise in Lean Six Sigma, have been in business for several years, employ trainers who have 'been there and done it' and who will freely provide references for you to talk to openly about the quality of training they received.

The senior management in your company will need to be made aware of the issues involved with organising and running a Lean Six Sigma deployment. A two day 'Champions' training course over a two day period will be sufficient for this purpose and will cost between £700 and £1,000.

People who will support improvement initiatives as team members or are expected to make improvements in their own area of responsibility will require a good quality yellow belt or green belt foundation course. A five day course should be sufficient for this typically costing between £1,400 and £1,700 per delegate.

For people who will be expected to support larger projects and run projects of their own, a green belt course will typically be between 10 and 15 days spread over three or four months and cost around £3,500 to £4,500.

Black belts are usually full time exponents and lead significant projects. A black belt training course takes around 16 to 20 days spread over four months and typically costs between £5,500 and £6,500 per delegate.

Ensure that a certification process is included in the green and black belt package to qualify that the trainee has not only attended training but has also been tested on their knowledge and has proven that they can successfully run projects and achieved significant savings. This process makes the difference required in competence. Certification costs a few hundred pounds and a one or two additional days time.

Including certification and assuming a cost of £1,500 per week for salaries and related costs and expenses while undertaking training, this equates to around £2,000, £2,500, £6,500 and £10,000 to train a champion, yellow, green and black belt respectively.

A good balance of black belts to total employees in an organisation is about 0.5%-1%, 3%-5% for green belts and 15%-25% for yellow or foundation green belts. This will ensure that an organisation has enough capability to undertake projects and a critical mass to do so but is not so many that training is wasted because there is either not enough time to run projects or their aren't enough projects for them all.

Black belts normally work full time on improvement projects, whilst green belts typically will work on projects for 20% of their time and yellow or green belt foundation people around two to three hours per week, approximately 5% to 10% of their time. A black belt would be expected to undertake around four projects per year and green belts one or two smaller projects per year as well as supporting black belts. Yellow/green foundation belts would mainly support other projects.

From the above it is possible to work out roughly the likely cost of rolling out Lean Six Sigma across your organisation. So, as an example, if we take a nominal company of 100 employees, this would equate to 1 black belt, 5 green belts, 20 yellow/green foundation belts and 5 managers on a Champions course. You would not need to start at this level but could ramp up to this over time. One off training costs would be around £60,000 and including labour and overheads will be close to £100,000.

On the basis of running eight to ten projects per year, the time commitment equates to around 3.0 full time equivalents costing around £150,000 including overheads charged at 40%.

Also allowing for some project expenditure to pay for improvements of £60,000 across all projects. The total project costs are £210,000 per year.

Financial Benefits

In the above we have calculated the typical costs likely to be incurred for a Lean Six Sigma deployment per 100 employees. The costs will scale reasonably to larger or smaller organisations. So now what about the benefits?

Fortunately there is an abundance of substantive data to demonstrate project benefits. A recent benchmarking study, by the iSixSigma Magazine, of black belt project return-on-investment showed a median of £120,000 per project. This compares well to SigmaPro's own experience, which in addition to the median level of benefits, revealed a 1st quartile return of £65,000 and a 3rd quartile return of £180,000. Green belt projects are around half this value. This can be seen in the data below.

Fig 1. Lean Six Sigma Project Savings

Returning to our 100 employee company example. The savings in a full year, assuming 9 projects returning £120,000 each at the median level, will return £1m in benefits. At the 25% percentile, project savings will be £400k and at the 75% percentile £700k. In the first year 50% of these benefits are assumed.

It is now possible to calculate the return on investment and payback periods as shown in the table below:

Savings level	Year 1 Payback	Year 1 ROI	Year 2 ROI
75% percentile £180k/project	9 mths	80%	400%
Median £120k/project	12 mths	25%	250%
25% percentile £65k/project	15 mths	-30%	100%

 

Table 1. Typical Return on Six Sigma Projects

Comparing this to other companies published figures, Charles Waxer in a study, reports that GE broke even in their first year of deploying Lean Six Sigma and in year 4 had an ROI of 233%. Later figures suggest that this has increased still further.

Other figures show that companies who have successfully deployed Lean Six Sigma have shown savings in the region of 1.2% to 4.5% of revenue. For a £100m company that is an eye catching amount of money and will translate into high profit percentage addition.

In recent green belt certification projects SigmaPro have seen returns of £200k-£300k per project.

GE estimated that the benefit of moving from a three/four level sigma performance to a six sigma level will be worth 10-15% of revenue!

Further research reveals that 80% of business leaders deploying Lean Six Sigma judged it successful or very successful. Increasing profitability, job satisfaction and customer satisfaction.

It is difficult to find other investments with these level of returns, making Lean Six Sigma a serious proposition for businesses.

SigmaPro work with companies in a 'train do' style, helping to solve business process problems through training and coaching business champions and all level of belts to solve problems. This has proven very successful where median and higher levels of benefits have been achieved.

Author

David Cowburn - Lean and Six Sigma Specialist

David has 25 years of running companies to Managing Director level and is experienced in utilising Lean Six Sigma in a wide variety of businesses including, manufacturing, process industry, service, and administrative.

In a people based hands-on style, he works and trains at all levels in an organisation from Board to shop floor to bring about rapid measurable step changes in performance.

David was originally trained in the Toyota Production System and has since developed a high level blend of Lean and Six Sigma philosophies and tools through working with businesses all around the World.