Savings

Continuous improvement focuses on cost reduction—the actual dollar savings that increase profit.

The term “savings”, though, has many nuances to it.

1. Hard savings vs. soft savings.

Hard savings are the ones with a specific invoice, credit card statement, or payroll expense associated with it.

Soft savings are the ones that are harder to measure directly—improved job satisfaction, lower turnover, less absenteeism, etc. Because soft savings are hard to measure, they are often ignored when assessing the impact a project had.

2. Cost avoidance vs. true savings.

Cost avoidance means that a planned new expense is no longer necessary. True savings occur when an existing expense is reduced. Lowering a scrap rate can reduce raw material expenses.

3. Actual savings vs. projected savings.

Actual savings are a historical measure. Your company spent $1000 in April, did a kaizen in May, and spent $500 on the same expense in June. The $500 in savings was “actual”. Back in May, though, you probably projected what you would save. Projected savings in projects are notoriously inaccurate and inflated.