The data driven approach to project prioritization.
I originally wrote this article as a guest blog post for SixSigmaStudyGuides.com, which is an excellent resource for anyone preparing for their Six Sigma Green Belt of Black Belt exam. I am currently spending the week in Vilfredo Pareto’s ancestral homeland in Northern Italy and thought it would be a good time to repost the article to my other channels with some minor updates.
Six Sigma is for Everyone
I have spent a lot of time advising small businesses on process improvement. Most of these companies make consumer goods with a small team. They typically have a deep knowledge and passion for their product, but very limited engineering experience. When I suggest the implementation of Lean or Six Sigma, I am often met with (at worst) outright resistance or (at best) perplexed stares. There is an unfounded belief in many smaller organizations that Six Sigma is really only for giant companies with engineering staffs and continuous improvement teams. In this post, I am going to discuss how one of the smaller companies I worked with gained valuable insight using Six Sigma tools.
The customer is a smaller artisan candy producer in the Pacific Northwest. They were pretty much a 100% manual operation. With labor costs rising, they knew that they would need to invest in some automation to increase their output. In a traditional academic setting, you would look at this problem and say that it’s a classic “Theory of Constraints”-type situation, and the customer should simply automate the slowest part of the process first. Unfortunately, process speed is only one variable in the equation. The customer was getting a loan for the project. This meant the budget was capped and the interest rate was considerable. They would also have to contend with long lead times. This is because, for many of the automation options, equipment was being built to order.
Enter the Pareto Priority Index
So, how should we decide where to focus their automation dollars? Fortunately, there is something in the Six Sigma tool box for just this sort of situation. It is called the Pareto Priority Index (yes, the same Pareto who invented the 80/20 rule). The Pareto Priority Index or PPI takes in a project’s savings, its likelihood of being successful, cost of the project, as well as its implementation time. The below formula shows how all of these inputs are factored together. The result gives you a single, objective metric for comparing projects.
|Project||Cost||Completion Time||Probability of Success||Savings||PPI Value|
|Flow Wrapper||$75,000||18 weeks||90%||Est. $600,000||0.400|
|Cooling Tunnel||$35,000||16 weeks||90%||Est. $90,000||0.144|
|Candy Drop Roller||$11,000||22 weeks||95%||Est. $30,000||0.118|
|Chocolate Depositor||$105,000||18 weeks||90%||Est. $700,000||0.333|
Estimated savings were based on the labor and material savings the project would create during a five-year time window. It is not uncommon for this type of equipment to have a service life of ten or even twenty years. However, if the customer achieved their sales growth targets, they would need to upgrade in about five years.
Probability of Success
The complexity of the equipment involved in the project drove this estimate. Highly customized equipment means a much higher risk of late delivery, cost overruns, or other unforeseen issues.
All costs associated with the equipment, engineering and testing, installation and support work.
Time for Completion
Lead time for equipment delivery, training, and startup time.
We combined the results of this study with feedback from discussions with operators. As a result, we were able to come up with an effective and data driven strategy for selecting the next automation project. They selected, order and installed a flow wrapper and are now seeing tremendous benefit. Quality improvement projects can also apply this same methodology. Hopefully the Pareto Priority Index can become another great asset in your Lean Six Sigma toolbox.