How to measure the ROI of your process improvement
06 March 2012
As with any major change program, measuring the Return on Investment of your process improvement efforts is key for convincing internal stakeholders that what you are doing is worthwhile. Despite this, many companies undertaking lean manufacturing do not measure the effectiveness of their efforts on improving the bottom line.
That is the finding of AlixPartners LP, a Chicago based consulting company. AlixPartners director Andrew Csicsila suggested that whilst 85% of companies in their study were undertaking a form of process improvement, a surprising number had no measurable ROI to determine if it was working or not.
“One thing that we feel is the benefit of lean and Six Sigma is actually the return on investment in these programs,” he said. “Where’s the cash?”
So how can you ensure that your process improvement efforts are being tracked effectively? Here are a few simple steps you can take to get you moving in the right direction.
Step 1 - Identifying opportunities where process improvement can be measured
It seems an obvious thing to say, but if you want to measure your process improvement efforts, you first need to identify process improvements that can be quantified and measured.
You'll need to benchmark your current performance to give you something to compare against, and then continue to measure outcomes as you make your improvements.
Step 2 - Construct your method of calculating savings
Lets say that you want to reduce the amount of time you spend in meetings (something I suspect most of us would enjoy). You'd need to create your baseline, using something like:
Meetings (in hours) per week x employees in each meeting x cost per employee per hour
You might even want to throw in an extra 10% saving for the productivity gains from not having people stuck in meetings. A simple formula like that gives you a method of quantifying your improvements though.
Step 3 - Turn these figures into a bottom-line ROI
So you have your baseline figure. You can then figure out how much you expect to save by implementing your process improvement. So if you want to reduce your meeting hours per employee by 20% you can gauge from that the financial savings you will make.
You will then need to figure out how much implementing these savings will cost you. The meeting example is probably very cheap, but other improvements may require investment in new technology, training or tools.
Once you have the costs and benefits you can map out your ROI over the period of the project to determine the net gain you're likely to receive from implementing it.
This is obviously a simplistic example but gives you a basic framework for measuring the ROI of your process improvement efforts.