Six sigma within the finance department of a defense contractor

Nowadays many companies are implementing Six Sigma Methodologies in their processes to reduce errors, excessive cycle times, inefficient processes, and cost overruns related to financial reporting systems. This could be applied to almost any aspect of life, even the financial aspect. The following case relates to the Continuing Account Reconciliation Enhancement project undertaken by the finance department of a major U.S. defense contractor and how they applied the six sigma methodology in order to streamline and standardize the establishment and maintenance of costing and planning for all business activities within the current financial management process. They did so by following these stages:

Definition

In this part the division identified the undesirable or non–value added activities within the current process, implemented improvements in control systems for achieved sustainability, and delivered measurable results that changed the way people think and act. The Six Sigma team used the customer´s knowledge to define the objectives of the project, which included the deliverable, opportunity statement, scope, schedule, budget, and constraints. The team defined the current problem as “the process cannot produce all Financial Planning and Analysis (FP&A) requirements in the most efficient and effective manner.” In this stage the Six Sigma team recognized two primary issues: First, there was a need to clarify and simplify the current financial reporting process for internal customers by identifying all non–value added and confusing steps; second, the team envisioned an improved process for both internal and external customers that would  result in more timely, complete, and accurate data for planning.

Measurement

At this stage, the team  did a mapping analysis to measure the performance of the current reporting process in terms of average hours required to complete the FP&A reports and the cost of preparing all the reports using activity based costing (ABC) methods. The existing cost and financial planning process was not clear and people really didn’t follow it, which in turn provoked rework and dual update loops which led to errors, excess movement, additional IT training and maintenance costs, inconsistent data, and waiting time in the process. The team found that they were spending on average 150 hours to produce 10 internal Firm financial statements and 50 hours on 10 outside Non-Firm reports. In summary, the finance department spent a total of 200 hours to generate 20 reports (including the ongoing costs of preparing 12 monthly reports) for an overall cost of $360,000.  

Analysis

The team began this stage by creating a cause-and-effect diagram that would help them identify possible root causes of why “the process cannot produce all cost and FP&A requirements in the most efficient and effective manner.” The team pointed out three categories:

  1. Lack of complete Firm cost and financial plans
  2. Multiple sources of data and databases
  3. Lack of complete Non-Firm cost and financial plans

Next, the team used these categories as the basis for a detailed analysis to identify the contributing factors for each major cause. The team concluded that there was a lack of planning and that it was not consistently performed at the cost-element level because it was not previously considered necessary for FP&A requirements. It all pointed towards the fact that planning was not required for contracts to be established in SAP, nor was it necessary for FP&A requirements.

Improvement

Lean Six Sigma_david kiger_Six Sigma Methodologies
Image courtesy of Herald Post at Flickr.com

This stage saw the team provide solutions for implementation by the finance department. First, comply with all the requirements identified through VSM analysis. Second, create a process that eliminated the non-value added steps in the current process.  In addition, the Six Sigma team recommended the following actions to enhance financial reporting capabilities:

  1. Develop initial cost-element plans by project for both internal and external contracts.
  2. Regularly copy cost plans to various FP&A versions for five-year planning, sales forecasting, and bookings forecasting.
  3. Update and maintain cost-element plans as new businesses are identified and funding is received.
  4. Update and maintain financial plans.
  5. Copy updated financial plans to various FP&A versions accordingly.

Control

In order to control the project, sustain results and have a comprehensive report for analysis and monthly program presentations, the team standardized, documented, and distributed the new process for the finance department to follow. Additionally, ongoing performance was monitored and became part of the formal performance evaluation process.

The implementation of the six sigma methodology resulted in 100 hours reduction in cycle time, which in turn resulted in cost savings of $130,000 per year or roughly a 64 percent reduction. The number may not appear to be much considering the cost of Six Sigma implementation, but we should keep in mind that this was only one project out of 40, so imagine the impact the six sigma implementation had in the total bulk of the project for the defense contractor

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