In Lean Six Sigma (LSS), selecting the right projects is crucial for achieving operational excellence and continuous improvement. A well-chosen project not only aligns with organizational goals but also ensures the efficient use of resources and maximizes returns. Key Performance Indicators (KPIs) play a pivotal role in this selection process. They offer measurable values that help in determining how effectively a project can achieve key business objectives. Below, we delve into a list of essential KPIs for LSS project selection, accompanied by their respective formulas.

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Cost Reduction (%):

• Formula :(CurrentCost−ProposedCost)/CurrentCost x 100

• Explanation: This KPI measures the percentage of cost savings a project is expected to achieve. It's crucial for projects aimed at reducing operational or production costs.

• Example: A manufacturing company incurs a current cost of $500,000 annually in its packaging line. After implementing a Lean Six Sigma project, the proposed cost is reduced to $450,000. The cost reduction percentage is calculated as [(500,000 - 450,000) / 500,000] x 100 = 10%. This indicates a 10% reduction in costs due to the project. 

Defects Per Million Opportunities (DPMO):

• Formula: (Number of Defects / (Number of Units x Number of Opportunities)) x 1,000,000

• Explanation: DPMO is a standard Six Sigma calculation to assess the quality aspect of a process. It measures how often defects occur in every million opportunities.

• Example: In a smartphone manufacturing line, there are 50 defects identified in 10,000 units produced. Each unit has 20 opportunities for defects. The DPMO is calculated as [50 / (10,000 x 20)] x 1,000,000 = 250. This means there are 250 defects for every million opportunities. 

First Pass Yield (FPY):

• Formula: Number of Units without Defects / Total Number of Units Produced

• Explanation: FPY measures the efficiency and effectiveness of a process in producing units that meet quality standards the first time without the need for rework.

• Example: An automotive assembly line produces 1,000 vehicles, out of which 900 pass the quality check on the first attempt without rework. The FPY is 900 / 1,000 = 0.9 or 90%. This indicates that 90% of the vehicles meet quality standards on the first pass. 

On-Time Delivery (OTD):

• Formula: (Number of On-Time Deliveries / Total Number of Deliveries) x 100

• Explanation: This KPI measures the rate at which services or products are delivered on time, which is vital for customer satisfaction and supply chain efficiency.

• Example: A logistics company has 200 delivery orders, and 180 of these are delivered on time. The OTD rate is (180 / 200) x 100 = 90%. This shows that 90% of deliveries are made within the promised time frame. 

Return on Investment (ROI):

• Formula: (Gain from Investment - Cost of Investment) / Cost of Investment

• Explanation: ROI calculates the financial return on a project, an essential metric for evaluating the project's economic feasibility and effectiveness.​

• Example: A company invests $100,000 in a new project and gains $120,000 from it. The ROI is calculated as (120,000 - 100,000) / 100,000 = 0.2 or 20%. This indicates a 20% return on the investment made in the project. 

Rolled Throughput Yield (RTY):

• Formula: RTY = Y1 x Y2 x Y3 x ... x Yn (where Y represents the yield at each step of the process)

• Explanation: RTY is a measure of the cumulative yield of a series of processes. It's the probability of being able to pass a unit of product through each step of a process without defects. RTY is crucial for understanding the effectiveness of the entire process, not just individual stages.

• Example: A product goes through four stages in its production process, with yields of 98%, 95%, 97%, and 96% respectively. The RTY is 0.98 x 0.95 x 0.97 x 0.96 = 0.857 or 85.7%. This means the cumulative yield across all stages is 85.7%. 

Net Present Value (NPV):

• Formula: NPV = Σ [Ct / (1 + r)^t] (where Ct is the net cash inflow during the period t, r is the discount rate, and t is the number of time periods)

• Explanation: NPV is a financial metric that calculates the value of a series of cash flows by discounting them back to their present value. This KPI is pivotal in assessing the profitability and financial feasibility of a project.

• Example: A project expects cash flows of $50,000 each year for 5 years, with a discount rate of 5%. The NPV is calculated as Σ[50,000 / (1 + 0.05)^t] for t = 1 to 5, which equals approximately $215,000. This positive NPV indicates the project's profitability. 

Net Promoter Score (NPS):

• Formula: NPS = % Promoters - % Detractors

• Explanation: NPS is a customer loyalty and satisfaction measurement taken from asking customers how likely they are to recommend your product or service to others. It's categorized into Promoters (score 9-10), Passives (score 7-8), and Detractors (score 0-6). This KPI is crucial for projects aimed at enhancing customer experience or service quality.

• Example: Out of 100 surveyed customers, 70 rate their likelihood to recommend a product as 9 or 10 (Promoters), 20 rate it as 7 or 8 (Passives), and 10 rate it 0 to 6 (Detractors). The NPS is (70% - 10%) = 60%. A higher NPS indicates greater customer loyalty and satisfaction. 

Overall Equipment Effectiveness (OEE):

• Formula: OEE = (Availability Rate) x (Performance Rate) x (Quality Rate)

• Explanation: OEE is a metric that identifies the percentage of manufacturing time that is truly productive. It encompasses availability (uptime), performance (speed), and quality (yield). This KPI is essential for projects targeting manufacturing process improvements.

• Example: A production line has an availability rate of 90%, a performance rate of 95%, and a quality rate of 98%. The OEE is 0.90 x 0.95 x 0.98 = 0.837 or 83.7%. This high OEE suggests efficient and effective use of equipment. 

Conclusion

The selection of Lean Six Sigma projects should be a strategic decision, backed by quantitative analysis using relevant KPIs. These KPIs provide a clear, measurable way to assess potential projects and choose those that align best with organizational goals and resources. By applying these KPIs, organizations can prioritize projects that promise the greatest impact, thereby ensuring the success and sustainability of their Lean Six Sigma initiatives.