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Topic Title: Assigning Dollar Savings to 5S
Topic Summary: 5S - Assigning Dollar Savings
Created On: 10/03/2008 02:28 PM
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10/06/2008 08:51 AM
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127135
Kris Hilty



WE have implemented 5S in our financial organization, however, have not assigned a dollar savings to the project. Is there a method to assign savings to 5S projects??
10/06/2008 09:18 AM
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JohnPod
John Podlasek



Dont bother. Do it to solve a problem, dont try to justify it with money.
If you are doing it for the right reason, then its priceless.
10/06/2008 02:40 PM
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Jay_Michaels
Jay Michaels



Ditto on what John said. Do the right things. The dollars will take care of themselves in the mid to long run.

If your management wants to justify every step financially, ask them to define the distance they live from their facility (Unless they live extremely close) and the amount of travel time. Then calculate the cost, including lost opportunity cost of time, based on where they live.

Then challenge them to financially justify the cost of traveling back and forth to work vs. moving closer or working remotely. Some things, like 'work environment' and 'quality of work life' cannot be easily measured financially, and probably should not be measured financially, but they are still critical to success.

Keep doing the right thing and have fun.
10/09/2008 02:58 PM
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FRBDan
Daniel Wooten



Those are some poor answers. I would think the easiest way to assign dollar savings is to tie any sort of time savings to ANP. A minute saved is dollars earned, then annualize them.

Of course that only takes care of the wastes of transportation, waiting, and motion...

I suppose 5S is really a launching point for a good LEAN value stream mapping excercise. At that point, reductions in inventory, and cycle time become more measurable.

Anyone else have a way to assign dollars to 5S ?
10/09/2008 05:19 PM
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duecesevenOS
Kris Hallan



They aren't poor answers, they are the truth. If you try to cost justify any single one of the tools used in the Toyota Production System, the return is almost always poor. I don't care which part of the system it is, if you only did the projects with a good financial return, you wouldn't be doing many projects and you would never create a lean culture of continuous improvement/learning.

You can do a little research on this and look into the archives here on the forum...this has been discussed multiple times.

If on the other hand you try to cost justify the system as a whole, the return is priceless. This is what cost analysts and finance guru's can never figure out. Just because one penny plus one penny equals two cents, does not mean that one project plus one project equals two projects worth of improvement.

Lean projects have math that can relate more to chemistry than finance. Add 1 cup of vinegar to 1 cup of baking soda and you don't get 2 cups of vinegar/baking soda... One 5s project has very little return and one pull project has a little more return. If you use the finance departments theories your just going to get a little plus a little more. If you truly understand the reactions of the two systems however, you would know that the return is actually a visual factory that has immense returns across the board (these can be measured in time to train, productivity, quality, continuous improvement, etc.).

So if you want to measure the financial return of a 5S project, you are going to have to look at the entire system and not be myopic to this one part of the whole.

In order to cost justify 5S you will need a good Hoshin. Hoshin is the vision of where you want to be as a business in the future. When you create the vision, you will cost justify it. In fact your vision for where you want to be should have strict financial returns that will ensure best in market success. Then you should ask yourself how it is that this company is going to meet up with that vision.

Anyone who understands the chemistry of manufacturing excellence will tell you that 5s is absolutely essential to the success of the business. It will be one of the steps in the journey to your Hoshin, guaranteed. It is an ingredient that has positive reactions with every other system/tool/principle in lean manufacturing.

Trying to cost justify 5s is like trying to cost justify the purchasing of sawdust for dynamite. First of all, it's practically free so why are you asking? Second of all, you won't make anything but a volatile mess without it.
10/10/2008 08:37 AM
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MarkRosenthal
Mark Rosenthal



How do you calculate cost savings on:
- People work together as a true team.
- The searches they never had to do.
- The mistakes they never made.
- The faster response to requests.
- The better service to customers.
- People having the right answers... and knowing if they don't.
- The more reliable system.
While there are aggregate bottom line savings created by these things, they are the results of complex interactions between people, customers, products, working environment, morale, support, and everything else in the system.

Then there is the value of (properly done) 5S as a launching point for general daily kaizen - learning how to focus improvements on things that actually made a difference (however small) to the goals of the system; solving small problems rapidly and quickly; becoming immediately aware of anything that departs from expectation (and responding immediately).

If you try to implement 5S as a stand-alone process, things will certainly look nice (at least for a while), but the likelihood of it sustaining on its own is very low, and people will question the value of it past a cleanup and organization exercise... with good reason.
10/10/2008 04:54 PM
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FRBDan
Daniel Wooten



Perhaps the question is misunderstood.

I'm not necessarily trying to "cost justify" anything. And yes, I do know of the priceless value Lean and 5S bring.

One has to realize that we aren't in manufacturing anymore. In some service sectors, regardless of the "soft" dollars one saves/makes with Lean, there needs to be an "assignable" dollar value. That's how much of the mandates and budgets work. It isn't necessarily about profit, but more about allocation of resources. The only way to get more is to assign the "savings" in hard dollars. (in these particular service industries such as banking, government, law)

Speaking in grand generalities of improvement, culture change, and soft values does nothing to a committee when determining whether or not to devote budget dollars to hiring more Lean practioners when someone with more tangible assets can more easily dictate the raw profit potential of a competing project.

Anyhow. The soft versus hard dollars culture takes a long time to break. In the meantime, the battle can be won by figuring out a way to assign dollars to Lean projects, 5S, etc.

Hopefully this sheds some light on the quagmire surrounding "cost justification".

Anyone who finds a way to assign real dollars will probably single-handedly expand the usage of Lean in many new directions.

Just my opinion.
10/14/2008 11:45 AM
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JohnPod
John Podlasek



Daniel,
Its easy to cost justify the improvements of Lean. Just document the amount of time it took you do something before the improvement, and then the amount of time after. Time is money.
The amount of inventory before, or after,
The amount of needed space before or after.
Its really not that hard to come up with some calculation. There are several.
However these are improvements in only one part of the overall process of delivery of services to the customer. The improvement rarely shows up in the bottom line immediately since the savings gets lost in the other inefficient costs of the company. You will come to this arguement to justify eventually. When this happens you will either have to convince people of the benefits, or the program will fail, because it will be argued that there were no improvements.
I can tell you have the best intentions in trying to solve this problem. You are not the first. You wont be the last.
My advice would be not to draw alot of attention to this venture. Just start without any fanfare. Then once you are organized and "Leaner', and the financial results start to turn around, people will take notice and ask you why. Then you can easily sell that it takes time and effort and commitment, etc. Explain to them what you did and why etc. Then you will have a chance to succeed. Dont get all caught up in selling the "lean solution' to problems. Just solve problems.
John
10/14/2008 11:45 AM
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duecesevenOS
Kris Hallan



The want of management to compartmentalize and allocate funding is not something that is only found in service industries. Manufacturing managers LOVE to budget and mandate every single dollar that is out there to fund.

Frankly, if it was possible to cost justify 5s using traditional financial metrics and simple ROI calculations, than we wouldn't have to start lean conversions with 5s because it would already be done. I don't care what type of traditional business you work in, budget/cost is always the most important (if not only) metric out there. If managers could have justified the savings from things like 5s in the past, they would have gone out and done it already. It's not like 5s is some new fangled technology that no one but Toyota could have come up with. The hardest thing about starting a 5s project (or most any other lean tools implementation) is the fact that your traditional metric for success will tell you that it is not justifiable.

This is why lean is NOT a toolbox of solutions. It's called the Toyota Production System not the Toyota Production Set of tools. A system is a:

set of interacting or interdependent entities, real or abstract, forming an integrated whole.


The point of any lean implementation is to change the culture of every person in the organization from the current Traditional System to that of a Lean System.

The Traditional System claims that compartmentalized budgets will point us toward success as long as we strictly adhere to them. As long as we cost justify every single dollar that we spend and get a good return on investment for that dollar, than we will be successful. In the old world, before lean, the most successful business was the one that managed the money the strictest. Things like 5s, visual factory, and standardized work were never considered justifiable so they were never done.

The new Lean System tells us that facilitating flow and eliminating waste will point us toward success and it has many tools to make that happen. As long as we justify every activity with the understanding of adding value to the customer, than we will be successful. In this new world, the most successful business is the one that adds the most value to the customer with the least waste. Things like 5s, visual factory, and standardized work are essential to efficiently adding value to the customer, so they have to get done.



Interesting side note: I think this is the major difference between Six Sigma and Lean. Six Sigma tries to do everything within the bounds of the traditional metrics. They have most of the same tools that lean does but they never try to change the perspective of success. Everything is cost justified (to an extreme degree...look at what it takes to become a green/black belt) and as a result they never seem to do 5s, kaizen, or visual factory to any real degree. I think this is why a lot of managers love Six Sigma but don't latch onto Lean. Management doesn't have to change anything about themselves when they start a Six Sigma program. For Lean to work, they have to trust in the paradigm shift and change themselves.
12/11/2008 11:17 AM
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2891
Michael Rusate



Kris, I agree with the majority that it is difficult to put a $ value to any of these tools. But I did get lucky recently. With the high price of gas and the fact we have over 1000 vans in our fleet, we started doing 5s for the vans. For every 100 pounds of weight removed translates into a 2% mpg gain. IN these events we are averaging removing 109 pounds. Opened some eyes.
12/11/2008 04:06 PM
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goleanwjohn
John Hehl



We have had a recent conversation among our facilitation team regarding the importance of quantifying the gains to be had by application of 5S techniques. Some of us feel it important to identify metrics to help make the value of the process more salient to the teams we are beginning to work with. We identified a few seemingly obvious metrics that should show benefit from 5S - reduced accidents and injuries, reduced waste of motion - better ergonomics - faster processing, improved machine uptime. Other benefits such as pride and ownership and improved corporate citizenship are also derived benefits, but much more difficult to "chart". Perhaps numbers of contributions to "solution boxes" or a reduction in "sick days" could be used.

Just my 2 cents...

john
12/15/2008 10:10 AM
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duecesevenOS
Kris Hallan



I agree that 5s will have an effect on all of the things mentioned and I would not feel at all uncomfortable in justifying the activity by saying those things. The thing to realize is that these are long term metrics and they are almost all cost avoidance. You can't directly tie 5s to any single cost.

I wanted to share one thing that HAS helped me to justify 5s: We were in a downward spiral for safety over two years ago and there didn't seem to be much control on it. We were already doing accident investigations so we started asking the question at every accident, "If we were better organized, could it have prevented this accident?" What we found was that about 75% of accidents could have been prevented with a disciplined 5s program. This is something that management latched on to and allowed us to start driving 5s.

Overall safety for the plant has gone up dramatically in the last year and a half and it coincides almost exactly with us getting serious about 5s. I am certain that there is a direct relationship there, the safety group is certain that their hard work and programs made the improvement happen, and management thinks that adding a doctor with clinic hours to the plant made a huge difference. Everyone is right. Safety has gone up dramatically as a result of a lot of different variables. 5s is definitely one of them.

For the most part, everyone sees the connection but correlation does not equal causation. There is no doubt in our mind that our people are safer today because of 5s. We can't prove it after the fact however so there is definitely no way that we could have proven it before hand. So go ahead and say that 5s will result in safety, efficiency, and whatever else but don't try to quantify it.
12/29/2015 11:27 AM
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179622
steve newlon



"Trying to cost justify 5s is like trying to cost justify the purchasing of sawdust for dynamite. First of all, it's practically free so why are you asking?"

Great point!
03/11/2016 06:39 AM
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LeahD
Leah Dent



This is brilliant Jay. Do you mind if I use this quote in a learning resource I am writing for a lean management workshop?
03/23/2016 01:46 PM
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Kelley
Kelley Buckentine



I agree with the comments so far. I liken the effects of 5S to a quality sonar system--5S is an early warning indicator of issues to come. When you 5S scores deteriorate, your quality is closely behind that. Stay in tune to your 5S!
03/14/2017 07:33 AM
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Jayesh72
Jayesh Bharti



I find 5S as a great way to position and frame a problem, it helps to categorise and classify both problems and answers (standardise). If we have a cost on the problems and the answers are related to dollar affecting entities then this mapping ought to be your answer (discipline). My advice is take a step-back before or after doing the analysis and use 5S to structure your argument(organise). Then use simple maths to do the adding and taking away (file). I find 5S as being a frame of mind and visual management tool so the real answer is experiencing the space (cleanliness). Good hey!
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