Understanding the concept of Cost Benefit Analysis requires seeing how it is used in a real-world setting. In this section, we’ll look at a real-world use of Cost Benefit Analysis in a Lean Six Sigma project.
The project in question is a manufacturing company that creates a hand-assembled product. By implementing a Lean Six Sigma initiative, the company hopes to increase the efficiency and quality of its manufacturing process. The project’s goal is to cut the time it takes to build the product in half while keeping the same level of quality.
The first step in the process is to determine the project’s costs and benefits. The costs in this scenario include the cost of training staff on Lean Six Sigma principles, the cost of procuring new equipment and materials, and any additional labour required to implement the changes. The project’s advantages include shorter assembly times, higher quality, and increased production.
The following step is to calculate the costs and benefits. Employee training on Lean Six Sigma principles is anticipated to cost $50,000, new equipment and materials are estimated to cost $100,000, and additional labour is estimated to cost $50,000. The project’s benefits include a 50% reduction in assembly time, which is expected to save the company $500,000 in labour costs per year, and an improvement in product quality, which is expected to enhance revenue by $1,000,000 every year.
The next step is to examine and compare the costs and benefits. In this scenario, the project’s advantages clearly outweigh the expenditures, with a net benefit of $850,000 each year.
The final step is to conduct a sensitivity analysis to assess the impact of any risks and uncertainties on the project. In this example, the project team assessed the risks of not being able to achieve the 50% decrease in assembly time as well as the risks of not being able to retain the same level of quality. The project team judged that these risks are manageable and that the project is still financially viable.
Finally, this example demonstrates how Cost Benefit Analysis may be utilised in a real-world context to assess project viability and make educated decisions. The organisation was able to conclude that the project is financially viable and will give considerable benefits by breaking down and assessing the project’s costs and benefits. This example demonstrates the significance of Cost Benefit Analysis in Lean Six Sigma initiatives and how it can be used to make better decisions.