How do you calculate the savings from a kaizen?

Price each thing the change improves for a year and add them up. Labour: minutes saved each time × times per year ÷ 60 × the loaded hourly cost. Scrap: units no longer scrapped × cost per unit. Then add any other yearly savings and take off what it costs each year to keep the change going. Saving 1.5 minutes on 12,000 orders at $35 an hour is 300 hours, or $10,500 a year.

How do you work out the payback period of an improvement?

Payback in months = one-time cost ÷ net annual savings × 12. A change that cost $6,000 and saves $16,000 a year net pays back in 6,000 ÷ 16,000 × 12 = 4.5 months. If the running cost is as large as the savings, it never pays back.

How do you calculate the ROI of a kaizen?

This calculator uses first-year ROI = (net annual savings − one-time cost) ÷ one-time cost, so 0% means the change has just paid for itself in its first year. With $16,000 of net savings and a $6,000 cost it is (16,000 − 6,000) ÷ 6,000 = 166.7%. Some teams divide the full year's savings by the cost instead, which gives a higher figure, so say which one you report.

What is the difference between hard and soft savings?

Hard savings show up in the accounts as money not spent: less material, less scrap, less overtime, a temp not hired. Soft savings are real gains that do not cut spending on their own, such as hours freed or a cost avoided. Labour time saved is a soft saving unless it removes overtime or extra staff, or the freed hours make output you can sell, so many finance teams list it separately.

Why track savings for small kaizens at all?

Because small changes add up. A few minutes saved on a task done thousands of times a year is often worth more than one large project, and a running total of savings is what keeps support for continuous improvement when budgets get tight. Agree the rules with Finance first, such as how long a saving is counted and which savings count as hard, so the totals are trusted.

Free tool

Kaizen savings calculator

A kaizen savings calculation turns what an improvement changes on the floor, such as minutes saved, scrap avoided and other costs cut, into money per year, and sets that against what the change cost. Net annual savings are the yearly savings minus any running cost, and the payback period is the one-time cost ÷ net annual savings × 12 months.

Labour savingsequalsMinutes saved × Times per year divided by 60 × Labour cost per hour

Net annual savingsequalsLabour + Scrap avoided × Cost per unit + Other − Running cost

Payback (months)equalsOne-time cost divided by Net annual savings × 12

First-year ROIequalsNet annual savings − One-time cost divided by One-time cost

Use yearly figures in one currency. The labour cost is the loaded rate: wages plus benefits and payroll taxes.

Labour time saved

All people together, per unit, order or changeover

How often per year

Units, orders or changeovers a year

Labour cost

Loaded: with benefits and taxes

Scrap avoided

Scrapped or reworked units no longer made

Cost per scrapped unit

Material and work lost on each one

Other savings

Material, energy, overtime, freight

One-time cost

Parts, fixtures and the team's hours

Running cost

What it costs each year to keep going

Currency

Pre-filled with the worked example. Enter 0 for anything that does not apply. Use figures Finance would sign off.

Net savings per year

$16,000

$16,500 saved a year, less $500 running cost.

Payback

4.5 months

One-time cost ÷ net savings × 12

First-year ROI

166.7%

(Net savings − one-time cost) ÷ one-time cost

First-year net

$10,000

Net savings − one-time cost

Labour hours freed

300 h

Per year

Where the yearly savings come from

Labour time$10,500

Scrap avoided$4,800

Other$1,200

How to calculate it

Measure before and after, then price it

Labour time saved comes from timing the task before and after the change. Multiply by how often the task happens in a year: units made, orders picked, changeovers run. Count everyone involved, so two people each saving a minute is two minutes.

Scrap avoided is the drop in scrapped or reworked units per year, priced at what each one cost in material and work. The COPQ calculator puts a total on poor quality if you need the bigger picture.

Other savings cover anything else that costs less each year, such as material, energy, overtime or freight. One-time cost is what it took to make the change, including the team's hours, and running cost is what it costs every year after.

Keep hard and soft savings apart when you report them. Hours freed are capacity, and only become cash when they cut overtime, avoid a hire or make output you can sell.

Worked example

Illustrative numbers, not a benchmark

A kaizen on a packing line takes 1.5 minutes of labour off each of 12,000 orders a year, at a loaded labour cost of $35 an hour. It also stops 400 parts a year being scrapped, at $12 each, and saves $1,200 a year in packing material. It cost $6,000 to make and costs $500 a year to keep going.

1Labour = 1.5 × 12,000 ÷ 60 = 300 h × $35 = $10,500 a year.
2Scrap = 400 × $12 = $4,800 a year. Other = $1,200.
3Net annual savings = $10,500 + $4,800 + $1,200 − $500 = $16,000.
4Payback = $6,000 ÷ $16,000 × 12 = 4.5 months.
5First-year ROI = ($16,000 − $6,000) ÷ $6,000 = 166.7%.

$16,000 a year net, paid back in 4.5 months. Of that, $10,500 is labour time. If the 300 hours freed do not cut overtime or staffing, report $5,500 as hard savings ($4,800 + $1,200 − $500) and the 300 hours as capacity freed.

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How LeanSuite helps

LeanSuite's Continuous Improvement Software records hard and soft savings next to each project's costs, sets yearly targets per department and shows closed and projected savings against target on a glide path.

See Continuous Improvement Software

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