Cost-Benefit Analysis

The overall Six Sigma process seeks to improve the quality of outputs by identifying, classifying, and removing the possible causes of defects. This ultimately reduces variability in business processes and manufacturing. In other words, it is a measure of quality in an organization that strives to achieve near perfection.

Cost benefit analysis is one of the most used tools in Six Sigma. It is simply a decision making tool that makes a thorough comparison between negative and positive results. Negative results in this case are costs and positive results are the benefits to be achieved once the costs are incurred.

In other words, it is a technique used to determine how successful, or unsuccessful, thereof, a planned action will be. Since the evaluation relies on the addition of all possible positive factors and the removal of all possible negative factors to be able to determine the net result, some people refer to cost benefit analysis as ‘running the numbers’. Here is how the process is done.

The process will basically find, quantify, and add all possible positive factors that relate to the expected outcome. Then it identifies, quantifies, and removes all the negative factors that are likely to influence the results-this is the cost.

The difference achieved between the two is what indicates whether the planned course of action is viable (profitable) or not. The trickiest part of this tool is to do a thorough evaluation to ensure all costs are factored in, and that all benefits are properly quantified.

When getting started in the process of running the numbers, it is often recommended not to use the selling price when calculating the value. This is because the sales price will often include so many other additional factors which may complicate the process. The best approach is to use an activity based value.

With that being said, it is important to mention that this strategy/methodology falls under the DMAIC method. This is a problem solving approach that can be used for quality improvements in a company or on existing projects. The term stands for the five main steps in perfecting any existing six sigma business process: Define, measure, analyze, improve and control.

Cost benefit analysis as a tool falls under the evaluation step; data that pertains to a given process is collected and analyzed critically for the main purpose of determining how viable or valid a project would be.

The DMAIC problem solving approach can play a significant role in an organization that has implemented the six sigma methodology and tools. This five-step approach is a clearly defined roadmap, which, when followed, ensures issues are resolved in a structured methodology. When emphasis is put on the cost benefit analysis step, can organization can save time by knowing the viability of a project before they start it.