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Adhiraj Bandyopadhyay

Calculating Cost of a process

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Hello All,

 

I am trying to calculate a cost of the process in the following scenario, please help:

 

Inter communication of an Organization.

 

I can find the Cp and Cpk for the same in the current situation where there is defined USL and LSL. Now the cost is X which I have receipt from the accounts department. 

I have a system which if I implement the Cp and Cpk shall increase in 6 months time, but by then all cost of the process can increase based on the market rates. Then if you consider that cost still remains X, how do I calculate what is the benefit from the new system if there is no cost change in term of amount. Do I need to consider the Growth rate, inflation rates to calculate the same or is there any other method.

 

Please help.

 

Thanks & Regards,

Adhiraj

 

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Dear Adhiraj,

 

You can calculate incremental costs and claim these as benefits for your project.

Cost A: Cost that would impact your organization assuming you did not do this project.

Cost B: Cost that would impact your organization assuming you did this project.

 

The difference between A and B would be your project benefits. For example -

  1. If you did not do the project, the revenue would increase by 2% and cost by 1%
  2. If you did the project, the revenue would increase by 5% and cost by 3%.
  3. Cost A: 1% increase in margin
  4. Cost B: 2% increase in margin

So, you can claim 1% as a result of your project.

 

Hope this helps!

SJ.

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Hi Suresh,

In above case is it advisable to see Ppk also? as it can throw light on Process capability over a long term? ie whether the process change will bring in the benefits over a long term?

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Hi Shalini,

 

The cost comparisons - Assuming you did this project vs. assuming you did not do this project, provide you with monetary advantage gained through a specific project.

 

The project metric normally used is Cpk as the monitoring over some period (considered as a subgroup) is considered to be enough evidence. However, Six Sigma project benefits are tracked over a year in some organizations. Ppk can also be tracked in addition to Cpk. This, as you can appreciate, shall also depend on the scope of the project.

 

It is important to note that Cpk and Ppk depend on rational subgrouping which may not always be time-based.

When we consider a limited scope project (let us say within a machine line), Cpk enhancement is considered sufficient. Success in such a limited scope project can lead to additional replication projects (several other lines) which may impact Ppk.

 

Moving away from Cpk and Ppk and focusing on the discussion above - the cost variation due to market rates is purely an external factor which does not contribute to either change in Cpk or Ppk.

 

Project success tracked through purely financial benefits (which are impacted by cost and sales price fluctuations in the market) adds some kind of complexity which Suresh has addressed with his remark.

 

We can probably add a twist to this discussion string.

  • Should financial metric (which is impacted by factors outside the scope of the project) really be considered as an appropriate measure for the success of a project?
  • If yes, should the impact of significant process capability enhancement be converted into an equivalent benefit (assuming that cost and price remained same as they were before the project started)
  • Can there be a situation where Suresh's recommendation above will not be an appropriate method?

 

Regards,

VK

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To my mind, even if the Financial metric depends on external market factors, there is no harm in taking it as a project metric if the business demands that! However in such a case, rather than taking revenue enhancement/ generated as project metric, cost saved can be taken as project Y.

 

Going by a similar example as Suresh has given -

  1. If no project is done, assume the revenue increases by 2% and cost by 1% (under stable market condition)
  2. If the project is done to improve process Cpk, the increase in revenue observed  by 3% and cost by 3% (under dynamic mkt condition)  Then there would be a 3rd condition (under dynamic mkt condition) 
  3. If no project is done, the revenue increases by 3% and probably cost by 5%

So, benifit post project completion would be the on the cost saving by 4% rather than margin earned on revenue generated.

 

Request views pse!

Shalini

 

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