Cost Benefit Analysis

Project Financial Benefits. Harry states simply that six sigma is about making money. It is about profitability, although improved quality and efficiency are immediate by-products. The financial benefits of six sigma projects are the measurements that create a link between philosophy and action. Financial benefits and associated risks are the factors used to evaluate, prioritize, select, and track all six sigma projects. This Section describes the common financial measures, methods for risk analysis, and the features of quality cost systems used for this purpose.

Cost-Benefit Analysis

Project cost-benefit analysis is a comparison to determine if a project will be (or was) worthwhile. The analysis is normally performed prior to implementation of project plans and is based on time-weighted estimates of costs and predicted value of benefits. The cost-benefit analysis is used as a management tool to determine if approval should be given for the project go-ahead. The actual data is analyzed from an accounting perspective after the project is completed to quantify the financial impact of the project.

The sequence for performing a cost-benefit analysis is:

• Identify the project benefits.

• Express the benefits in dollar amounts, timing, and duration.

• Identify the project cost factors including materials, labor, and resources.

• Estimate the cost factors in terms of dollar amounts and expenditure period

• Calculate the net project gain (loss)

Decide if the project should be implemented (prior to starting), or if the project was beneficial (after completion) If the project is not beneficial using this analysis, but it is management’s desire to implement the project, what changes in benefits and costs are possible to improve the cost-benefit calculation?