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Thomas Mathew

Six Sigma For Reducing Dso

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Need to know how do i work out on reducing the DSO ....what are the steps involved in working out the same.


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Dear Thomas,

As you will be aware that DSO (Days Sales Outstanding) provides an average (aggregate) time in days it takes to convert accounts receivables into cash. Hence as a first step, it should be tracked over time and compared to previous company results or industry/competitor benchmarks. Setting an unrealistic DSO target which gets difficult to improve (or reduce) is the bigges pitfall in this project.

Secondly, for a simpler measure like DSO, the process of tracking and improving should also be simple. Since in most of the cases DSOs have direct corelation with No. of contractual violations. Hence its important to communicate and reinforce Sales Contracts with customers are regular intervals. Also communicate their historical payment performance for their perusal (Just as Credit Card companies do).

Lastly, improving human efficiency. Sales Managers, Executives, Reps, etc must be made accountable for DSO targets and should be made part of their performance appraisal. Unless they take ownership of their client's timely payments, it will difficult for one person (Sales Head) to take ownership of improving DSO for all customers.

Hope it serves your purpose.

Regards,

Punit Joshi

      

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Dear Thomas,

Punit has provided some ideas to reduce DSO. If DSO improves by implementing such ideas, you may benefit immediately. However, this would not be considered a Six Sigma project.

In most companies, high DSO is a chronic issue and requires a detailed improvement project that uses data driven techniques. Six Sigma is specifically needed when common sense approaches have already been tried. Six Sigma is of specific use if causes of the problem are unknown and solution is unknown.

If you attend Benchmark Six Sigma Green Belt training, there is a case study that focuses on reducing DSO.

The case study is DMAIC based. Appropriate output parameter (DSO) is selected initially in DEFINE phase. A team is chosen for the project. Curr net status is assessed in MEASURE phase. Also reliability of data is verified. In the ANALYZE phase, study various factors are considered which could have impact on DSO.

These include

  • Order Size
  • Region
  • Billing Errors
  • Customer type
  • ]Product type
  • Invoice categorization
  • Experience of the person doing follow ups for payments

These factors are analyzed with the help of data. Graphical, Quantitative and Qualitative tools are used to find which factors are critical ones. IMPROVE phase techniques are used in generating alternative solutions that focus on the identified critical factors and selecting and implementing the best. In CONTROL phase, good controls are put in place to ensure that benefits are sustainable in longer term.

Hope this helps.

Regards,

VK

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Hi Punit,

To begun with i do have the data for my accounts and this being a new line for me , i have did my Green belt way back in 2004-05 and now i actually got an oppurtunity to go complete one project as Green Belt .

Now as said earlier i have the data with me for the accounts that im handling...as of day the average DSO sums up to 80 - 95 days range. I need to work out and get it to around 40 -45 days... Personally speaking i wud need proper guidance in taking this forward.

Lookng forward for your assitance in drving this...

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Hi Mathew,

Have prepared the Project Charter ?

What analysis have you already done ?

Have you plotted the histogram of the existing data ?

Have you stratified the data ?

Anupam

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how histogram is going to help thomas mathew ?

what is the benefit he is going to get out of histogram graph.

This question is to undestand about the benefits in histogram

 

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When Mathew is saying DSO is 90-days, how he has arrived at this figure. This must be from average of past few months. That means the data would have a spread MIN-MAX.

Moreover, DSO is an implied matrics derived from Outstanding Invoices. Surely he must have collected data by selecting Invoices which are overdue.

DSO = Amount Outstanding / (Avg Sales/Day )

Amount Outstanding = SUM(Invoice Outstanding X Invoice Amount)

So, findout how many outstanding invoices were settled in 7-days, 15-days etc and Amount Settled respectively

Therefore, one must plot a histogram and find out whether it follows normal distribution and calculate Mean and Std Deviation from basic statistics.

This will help in setting the realistic target ( 45-Days if lies beyond 2-sigma is not practical )

Hope it is clear !

Anupam

 

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