Improving Debt Collection Rate: A Six Sigma Project - Assignment Example

Improving Debt Collection Rate A Six Sigma Project PROJECT CHARTER: PROJECT INFORMATION Project Name Improving Debt Collection Rate Sponsoring Organization Collection Division Chartered Date 3rd November 2009 Project Start Date 15th December 2009 Target Completion Date 14th January 2009 TEAM SPONSORS Project Sponsor Daniel (VP – Collections) Project Black Belt Michael (Manager – Collections) Project Green Belt Emily (Asst. Manager – Collections) ADDITIONAL TEAM MEMBERS William Negotiation Team Member Sophie System Analyst Ethan Debt Monitoring Mathew Admin PRINCIPLE STAKEHOLDERS Daniel VP – Collections Joe Head of Cash Management Division at Frymix Chemicals Inc Mehta Assistant Manager of Credit Department at Zortoc Engineering Inc PROJECT GOAL To find the reason behind low debt collection rate and design and implement a system that helps increase the rate of collection. PROCESS PROBLEM The debt collection rate remains extremely low despite the added efforts of the collection team SCOPE OF THE PROJECT (1) Analyze the ongoing process and record the time taken at each stage (2) Investigate into the reasons causing delays (3) Set a standard for the expected rate of collection (4) Design and implement a process that can reduce the collection time and increase the rate (5) Compare the achieved rate of collection with the expected rate and if expectations are not met, revise the system PROCESS IMPORTANCE The collection rate is one of the most significant selling points for a debt collection agency. The company’s clientele is mainly dependent on its debt collection rate. On implementing a new and improved process, the company is expecting to annually increase the collection for a particular major client by $600,000 or more. AUTHORIZED RESOURCES Daniel – As the project sponsor, Daniel’s responsibilities would be as follows: a) Ensuring that requisite number of staff members are available to work b) Ensuring that the funds approved for the project are made available as required c) Coordinating between various divisions to ensure the smooth running of the implementation process Michael and Emily – As the Black Belt and the Green Belt of the project, their responsibilities would include: a) Setting the goal in quantitative terms b) Developing detailed plans to achieve the goals c) Establish control system to maintain the system implemented Additional staff members may need to be employed as and when the project demands and reallocation of duties may become necessary. EXECUTIVE SUMMARY: A midsized debt collection company with a limited number of clients finds it important to retain each and every client by keeping them satisfied in all ways. But the company was facing the threat of losing one of its major clients as the client was unhappy with the agency’s debt collection rate. The manager of the agency, being a Black Belt, guarantees an improvement in the debt collection rate which he plans to bring about using the Six Sigma methodology. The corporate management, realizing the need to find a permanent solution to this problem, charters a team to be led by the Black Belt manager. The Problem: The client is satisfied with the amount collected by the company, but not happy about the delay in the collection. The team, on investigating into the problem situation, found that the reasons behind such delay were as follows: 1) More time taken to negotiate payment plans 2) Wrong prioritization of accounts 3) Staff members trying to collect incorrect amounts from the debtors 4) Bad debts were not always cancelled 5) Some debtors were hard to locate 6) Oversight caused mistakes like failure to obtain debtor’s signature or to fulfill other types of formalities (http://findarticles.com/p/articles/mi_qa5308/is_200312/ai_n21339740/pg_3/?tag=content;col1) The Process: The team used Define-Measure-Analyze-Improve-Control (DMAIC) approach to understand the problem, analyze it and find a permanent solution to the problem. Findings: The collection rate increased by 4.3 percent, which was more than the company’s target of 3.1 percent. Conclusion: The Company is not only positive about retaining its existing customers, but also is confident about gaining more number of customers through recommendation. DEFINITION PHASE: Since the company is of a medium size and has few numbers of customers, it becomes obvious that customer retention is particularly essential for its survival and customer’s recommendation is equally important for its growth. Therefore, the company’s central goal remains customer satisfaction through improvement in collection rate. However, the company’s funds are not sufficient to afford new resources. It has to utilize the existing resources to the fullest in order to achieve its goal. Voice of the Customer: With the intent to understand the problems faced by the customers, the team had a discussion with the customers. The responses were mainly with regard to debt collection rate. Joe, Head of Cash Management Division at Frymix Chemicals Inc (Largest client in terms of total debt collected) said, “Managing funds is one of the biggest challenges we are facing in today’s world. The cash inflow gets delayed with every decrease in the collection rate. In our case, the opportunity cost of such delay is very high. Despite the competitive price offered by C&T, the cost of collection saved by us is far below the opportunity cost of the delay in receiving the payments. If the collection rate continues to be low, we may settle for a different debt collection agency even if they charge us more for their services”. Mehta, Assistant Manager of Credit Department at Zortoc Engineering Inc (Second largest client) explained, “Most of our business is on credit basis. With a delay in collection from our debtors, we are unable to pay our creditors in time. This is creating a negative impact on our creditworthiness as well as our image in the industry. We are even ready to pay a higher price if C&T is able to increase the collection rate”. Process Map The process of collection beginning from client request to debt collection was observed and recorded unaltered. The process before the implementation of DMAIC is diagrammatically shown in Figure 1 below. Figure 1: Process map before implementation of DMAIC (http://finance.isixsigma.com/library/content/c060222a.asp) Figure 2: Process map after implementation of DMAIC MEASURE PHASE: To establish a baseline against which the team would measure its success, historical data was pulled and the six-month cumulative recovery rates were calculated (Figure 3). The average six-month recovery rate turned out to be 3.1 percent.  Figure 3: Baseline Six Month Cumulative Collection Recovery Rate The solution was piloted in a small segment of the client's accounts. This resulted in an immediate jump in the recovery rate of $54,000 annually in gross collections. Figure 4 shows the increase in the average six-month cumulative recovery rate for the segment of client accounts affected by the pilot improvement. Figure 5 shows graphically the improvement to the recovery percentage made during the pilot program.  Figure 4: Individual/Moving Range Charts of Recovery Percentage Figure 5: Box-Plot of After and Before The results were verified to be significant both practically and statistically, so the improvement was rolled into the entire client portfolio. The collection agency hit its target of a 4.3 percent recovery rate, and the client realized an annual increase of $865,000 in gross collected debt. (http://finance.isixsigma.com/library/content/c060222a.asp) ANALYZE PHASE: The process map and the key measures were analyzed to find out the root causes of the problem and understand the cause-and-effect relationship between the process inputs and the end results. The findings were as follows: Cause Effect Negotiating payment plans: The negotiators were not clear about the most suitable type of payment plan considering the type of debtor they were approaching. The negotiators took far too much time to negotiate the payment plans with the debtors which added to the delay in pursuing the payments. Wrong prioritization of accounts: The proprietary model used by the company to score debts until now was prioritizing the accounts in a chronological order rather than on its payment potential. The collecting staff, in an attempt to collect the accounts chronologically, ended up delaying the collection of the accounts that had a high payment potential Attempt to collect incorrect amounts from the debtors: Poor education in one division led to staff members proceeding to collect incorrect amounts from the debtors The debtors refused to pay and delayed other "valid" payments as disputes became convoluted Bad debts not always cancelled Resulted in large amounts of rework as the staff tried to collect such debts time and again Hard to locate Debtors: Debtors who did not intend to pay or debtors who had moved were difficult to locate The collecting employees spent a large portion of their time locating such debtors, thereby increasing the total time taken to complete the collection procedure Oversight Gave rise to mistakes like failure to take debtors signature. The administrative rework processes caused due to this further protracted payment delays. IMPROVEMENT PHASE: In order to bridge the gap between where the company was and where it wanted to be, various steps towards improvement were taken. The following modifications were made to the system of collection: a) Improved Negotiations: A standard set of payment plans based on different types of debtors were developed. After a short review, the negotiating staff members were clear about the best suited payment plans. They were ready with various alternatives in advance. This helped reduce the negotiating time by almost fifty percent in comparison to the time taken previously. b) Prioritizing debts: A new method of segmenting and scoring the debts was introduced which prioritized the accounts as per their payment potential rather than in their chronological order of occurrence. The accounts having highest payment potential were targeted first. The skilled and more experienced staff members were made in charge of the “hard to realize” accounts. This improved the collection rates of both, the higher and the lower priority accounts. c) Better training and introduction of crosscheck system: Some of the new employees in the collection division often mixed up accounts requested by different clients. For instance, when the same debtor had borrowed from two different companies, both being clients of the company, the collection division staff members often exchanged the amounts owed to the two clients by the same borrower. A formal training program was introduced for every incoming employee. Also a system of crosschecking was introduced wherein the amounts being collected on behalf of a client by various collecting division staff members was totaled and the total was tallied with the total amount in the request initially sent by that client. d) Systematic method for cancellation of Bad Debts: The team came up with a method for cancellation that not only made it easier to cancel the bad debts promptly, but also removed the bad debt from the ongoing list and simultaneously generated a letter containing the relevant details to be sent to the client. e) Address confirmation and updating: The process of confirming debtors’ addresses and updating it was made a compulsory part of the process. A set of four employees from the Collection Division having an excellent network in the market were dedicated solely for this purpose as well as finding ways to trace debtors who were hard to locate. Such debtors were given least priority as mentioned under (b) above. The result was that they were sought after at the very end and the locating team was able to finish its job before the other employees in the Collection Division could go ahead with their regular collection procedure. f) Reallocation of duties: Instead of everyone in the Collection Division performing just the regular collection procedure, two employees from the division were allocated the duty of rechecking the formalities relating to collection that were adhered to by other employees. This helped in improving the efficiency of the division as a whole and also reduced the total time consumed for the collection procedure. CONTROL PHASE: It was very important to ensure that the implemented system continues to function as desired. To ensure its continuity and stability, the following controls were incorporated in the system: a) Each clients request list was regularly compared to the collections made and the progress was noted in quantitative terms. b) An internal audit team was set up that audited the procedure at regular intervals. c) Job rotation was used to ensure that the employees understood the entire system and their position in the system. It also helped to reduce monotony in the work which was one of the main causes of simple mistakes. CONCLUSION: The company has benefitted well from the newly introduced process. The clients that were threatening to take their business elsewhere are happy with the present collection rate. The company is now not only secure about their present customers, but is also confident of improving its clientele through the recommendations of the present clients. BIBLIOGRAPHY Doran, Colm (2003). Using Six Sigma in the Credit Department. Retrieved from http://findarticles.com/p/articles/mi_qa5308/is_200312/ai_n21339740/?tag=content;col1 Stahl, Allison. Improving Debt Collection Rate, or How to Gain $865,000. Retrieved from http://finance.isixsigma.com/library/content/c060222a.asp Read More