How To Calculate Process Improvement Savings
The Idea Trader is dedicated to spreading interesting ideas and current news to readers and interested parties. This blog contains opinions and insights for ideas and investment opportunities and is not intended as advice for investing.
A process improvement can be defined as any changes or modifications that make your job more efficient or effective. These are usually done in an office where employees work, but may also include things like changing how you order materials or manufacture products, switching up how you organize files or use software, or even moving into a new location with all of your equipment.
The term “process” is used because these improvements typically focus on improving one part of the way you do business. For example, if your goal is to increase production at your workplace, then investing in better tools to help you reach this goal is a process improvement.
You will learn about some easy ways to measure the costs and benefits of process improvements in our article here. Once you have determined the cost savings from these process enhancements, you can choose to implement them or not depending on whether or not they fit into your budget.
Another important aspect of process improvements is determining which ones to pursue and what level of investment is needed for each one.
Calculate the dollar amount of savings
The second way to calculate cost reduction is by calculating the exact dollar value of what you will save in process improvement costs. This can be done at an individual level, group level, or organization level.
At an individual level, you would find the average salary for your department and then compare that to how much money it spent on various internal processes. You could also do an anonymous survey asking about current procedures and ways to improve them.
By doing this both within your own department as well as other departments, you can get a very accurate picture of where there are waste resources and potential opportunities to create efficiencies.
Group levels are more broad than individuals. At the group level, you would look at creating new processes, finding weaknesses in existing ones, and figuring out which changes make the most sense to implement.
This is typically done through brainstorming, surveys, discussions, and interviews. There may even be external help available if needed. It depends on the size of the organization and the scope of issues being addressed.
Multiply the two to get the process improvement savings
The second way to calculate cost reduction is by multiplying the average time of each task in the process with the amount it costs per unit time. For example, if you are asked to produce a diagram for every department in your organization, then writing those diagrams takes 1 hour on average, making the cost per document 2 hours.
If we multiply this number by the average time of performing these tasks across all departments and organizations, we come up with 4 hours as the total cost for producing all documents. This value can be reduced by half since most people use pre-made templates that save time. Therefore, the effective cost is only 2 hours.
Similarly, if there’s a certain tool or software system used to perform a specific function, find out how expensive it usually is and what the average person in the workplace needs to do it for, then apply that ratio to get the cost per use. For instance, someone else in your office uses Photoshop once a month, so use that as an average.
Record your process improvement savings
At this stage, you’ve done all of the hard work. You've conducted an analysis of your current processes and methods, implemented changes where necessary, retrained team members if needed, and measured the effects of those changes on the organization.
Now it's time to calculate just how much money you saved by making these changes. There are several ways to do this, but my favorite is to use Time Saving Funnels as a starting point.
A funnel is like a glass bottle with narrow top and wide base. The narrower part gets longer as you go up the funnel, eventually merging into a wider top that represents what comes next in the process.
In business, funnels are used for promoting new products or services. The top of the funnel is changing the way people interact with your product or service, and the widening top is other steps to promote it.
With process improvement projects, the narrowing bottom is usually improving efficiency of some kind. By doing so, you have to spend less time performing them, which can save money in labor costs. So, we want to know how much time was saved when running our improved process.
That information goes into the broader part of the funnel, and then multiplied by cost per hour to get a total price. This price is what it takes to run your present process efficiently, not including the initial investment in equipment or re-training costs.
Track your process improvement goals
The next step in calculating your cost savings from process improvements is to track what you’re trying to improve and how well you’re performing on those changes.
If you are looking to reduce employee turnover, for example, you will need to keep records of all instances where an employee resigned or was let go. You can also gather information about why they left their position, and if there were other positions available within your organization that they could have considered.
By tracking these pieces of data, you can determine whether or not employees are aware of better opportunities elsewhere and if they feel like their career path at your company has run out, it may be time to look around.
Likewise, if you want to see lower employee turn over, then you must ensure that everyone feels appreciated by management and colleagues, and that they trust that their job will remain open after retirement. If this isn’t the case, chances are people will try to find such feelings somewhere else.
Do a process improvement audit
The first step in calculating savings from process improvements is to do an internal or external process improvement audit. This can be done via survey, talk with colleagues, or by doing a quick Google search to see if anyone has published tips for these similar to what you are looking to change.
Once you have determined which processes are not efficient, then it’s time to determine how much energy they use and how long each one takes. You should also find out whether there are any available alternatives to this process that could be used instead.
By taking the necessary steps to improve current processes and implement alternative ones, you will know how to calculate process improvement savings.
Measure your process improvement efforts with KPI's
One of the most important things you can do as an entrepreneur is improve how you run your business. But, how do you know if your changes are working?
You could just look at the numbers and see whether or not they're better than before, but that doesn't tell you much. More importantly, it may not be clear what caused the improvements.
It's hard to attribute success to any one factor. So, instead of looking at quantitative data, we use key performance indicators (KPIs) to determine whether or not your business is improving.
Here, KPIs are used to measure two different types of data: qualitative and quantitative.
Qualitative measurements evaluate something such as satisfaction, motivation, or engagement. For example, by asking colleagues about their experiences using your product or service, qualitative measures get insights about how well your product works for them.
Quantitative measurements assess characteristics like income, productivity, efficiency, etc. By tracking these metrics over time, you can identify whether those improved or not.
In this article, I'll discuss some easy ways to track process improvement savings. You will learn how to calculate cost reductions, return on investment (ROI), and proof of concept (PoC).
Learn to prioritize process improvement projects
The second way to calculate your savings is by determining what processes you have in place now and how effective they are. Certain processes that you have may not be very efficient, or even possible to do without changing something about them.
There are many ways to improve the efficiency of a business’s current processes. For example, instead of having people walk around taking notes during meetings, why not use digital recording software?
Instead of sending emails back and forth between each other to remind someone of an assignment, why not create a task management system where everyone has their own list of assignments?
These types of changes can be made at no cost unless things like email and/or phone systems cannot be used effectively with the old workflow.
By looking into these areas, costs can sometimes be cut off-the-shelf products that anyone could implement easily.
Conduct a process improvement event
It is very difficult to measure the return on investment (ROI) of an internal meeting or conference. Because you cannot quantify the benefits that attendees got from attending, recording the attendance and proceedings are the best ways to determine ROI.
By tracking these items, you can calculate savings by not having to pay for the event twice! If your organization holds regular meetings, start keeping records. If you’re hosting an external event, begin documenting it immediately after the event so you don’t forget.
Once everything has been documented, you can tally up the costs per person to see how much money was saved.