Economics of quality 2012 rev

Economics of Quality

The Connection Between Quality and Profits

www.quantumassocinc.com847.919.6127

1Quantum Associates, Inc

About Quantum Associates

Quantum Associates, Inc

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O Certified professionals with an average of 20+ years hands-on industry experience in Lean, Six Sigma, Theory of Constraints, Quality Management, Business Process Improvement, Change Management, and ISO 9000

O Experience with Clients in various industry sectors (chemicals, product safety, food processing, pharmaceuticals, automotive, tool and die, retail, non-profits, government, etc.). We can leverage this know-how and experience to help improve your organization

O We deliver sustainable solutions that can double your labor and working capital productivity while simultaneously reducing your costs at least 20%


Is It Management’s Fault?

O It is time that we re-examine the issue of "top management support" that Deming proposed

O Prior to Deming's death in 1993, the quality movement was showing real, bottom-line results in organizations. These accomplishments were attained without the benefit of ISO 9000 registrations



O Since Deming's death in 1993, the quality profession as a whole has declined

O Top management no longer calls upon the quality professional's skills to drive fundamental business competitiveness improvements. Instead, quality professionals are often relegated to compliance activities



O Quality managers are operating in an environment where top management has spent lots of money on quality programs, such as ISO 9000 or Six Sigma, that quality professionals recommended, but these programs have not delivered the expected results



O The best way to regain top management support for fundamental quality techniques is to demonstrate the techniques' effectiveness

O Make it easy and riskless for top management to endorse basic -- not trendy, not expensive -- quality methods again



O Find a problem in your organization where quality techniques could solve a problem. Ideally, the problem would be a high-profile, nagging issue affecting profitability. Attack the problem using solid, basic quality techniques

O Since management only understands the “language of money” we should use an economics of quality approach

Quantum Associates, Inc 7

Economics of QualityO Conduct Cost of Poor Quality

AssessmentO Perform Cost Driver analysisO Select ProjectsO Measure ResultsO Monitor Ongoing Performance and

Management Reporting

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Cost of Poor Quality Assessment

O Identify and quantify the financial impact of non-value-added activities and waste driven by poor quality across the entire business

O The cost of poor quality assessment approach has two unique elements:O Define non value-added activities and waste

in terms of the failure to meet customer requirements.

O The white collar, service, support, indirect, and management functions participate in the improvement process.



O The Elimination of Non Value-Added Activities and Waste to Improve Financial Performance Gives Top Management a New Perspective on Using Quality to Manage Costs



O White Collar, Indirect Costs of Poor Quality Are Often 300% to 500% Greater Than The Direct Costs of Poor Quality

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Cost of Poor Quality

Warranty Claims

White Collar rework

Rework/Scrap

Unscheduled Overtime

Policy Allowances

Premium Transportation

Past Due Accounts receivable

Obsolete & excess inventory

Cash Impact



O Cost of Poor Quality Assessment Focuses on Internal and External Customer Failures

O Internal FailureO Costs of non value-added activities and

waste associated with the failure of processes. products, services, and materials to meet customer requirements prior to receipt by the external customer:O Scrap – Rework – Rejects – Safety stockO Downtime due to failure of product or

peopleO Productivity losses due to failure of product

or services12Quantum Associates, Inc


O External FailureO Costs of non value-added activities and

waste associated with the failure of processes, products, services, and materials to meet customer requirements received by the customer:

O Returned goods – Recall costs – Warranty claims

O Liability insurance – Downgraded productO Damaged reputation - Penalties



O Scrap – the total cost of material, labor and overhead for defective products or services that is wasted or disposed of because the product or service does not conform to requirements

O Problem in identifying and quantifying the cost of poor quality (the failure to meet customer requirements) is to:O Identify the customersO Use terminology that makes sense to the

customers14Quantum Associates, Inc


O Survey the internal and external customer and not the internal or external supplierO Ask users of IT how useful are the

reports that are produced. What type of answers would you expect?

O Ask Purchasing how useful are the sales forecasts for establishing supplier commitments and issuing purchasing orders. What type of answers would you expect?



O Using our definition of scrap list a function or process you work in and tabulate the following:O A. Labor CostsO B. Materials or Expense BudgetO C. OverheadO D. Total Costs (A + B + C)O E. Percentage Wasted (% Non-

value-add)O F. Dollars Wasted (D X E)



O The Hidden factoryO For most manufacturing companies

the hidden cost of poor quality is 75 to 80 percent of total operating costs

O For service companies the hidden cost of poor quality approaches 100 percent of total operating costs



O Controllable Poor Quality CostsO Under the control of the function or

process driverO Uncontrollable Poor Quality costs

O Outside the control of the function or process customer

O The percent uncontrollable tells you how much cross-functional cooperation you need to eliminate poor quality costs


Cost Driver AnalysisO Helps to prioritize improvement

projects on the basis of both increasing customer satisfaction and profitsO Determines the root causes of the poor

quality costsO Determines the financial impact of each

root causeO Conducts a cost benefit analysisO Identifies projects with the highest

payback and ROI19Quantum Associates, Inc

Cost Driver AnalysisO Key COPQ Element - Returns

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Returns

NRG

Poor workmanship

Wrong purchase

$1.5 M

$1.2M

$0.180M

$0.120M

$.960M

Cost Drivers

80%

15%

5%

80%

Critical to select the right projects and manage the link of quality to profits

Confusing instructions

Key COPQ

element

Root cause

NRG = no reason given


Cost Driver AnalysisO Adding a financial dimension to the

root cause analysis demonstrates the financial impact of effective quality management

O Helps selects improvement projects that can make a genuine difference to the business


Improvement Project Criteria-Financial Performance and

Customer SatisfactionO Select projects based on a logical

connection to financial paybackO Set a BHAG (“Big Hairy Audacious

Goal”), identify appropriate team members, finalize financial and non financial performance measures

O Departmental boundaries do not limit the scope or breadth of solutions

O It is not the quantity of teams that counts, it is the significance of the problems that teams are solving


Improvement Project Selection

O Most common fatal error is picking the wrong projectO Correct project selection allows the quality

process to contribute to the achievement of business goals and objectives

O Identifying the projects that are capable of generating greater sales or lower costs increases profits

O The “Field of Dreams” strategy doesn’t work


Improvement Project Selection

O The frequency of defects is an important basis for setting improvement project priorities

O Convert the frequency impact to dollar impact to ensure correct project selection relative to financial impact

O Adding a financial dimension to the root cause analysis demonstrates the financial impact of effective quality management


Monitor and Measure Progress

O Accurate and timely measurement of improvement team progress provides a powerful support mechanism for the economics of quality process by:O Gaining and maintaining top management

commitment by focusing on issues that make a difference

O Supports the efforts of the individual teams by identifying problems or barriers that hamper success

O Manage on the basis of facts- the connection between quality and profits is grounded in fact-based decision-making


Monitor and Measure Progress

O The Economics of Quality process has to be managed

O Top level performance measures determine performance against objectives and goals


Reporting to Top management

O Elevate the Economics of Quality process to the same stature as any other process within the business by linking it to the achievement of meaningful business results

O The Economics of quality approachO Identifies and quantifies the payback and

performance of quality improvementO Answers how quality improvement contributes

to the achievement of lower costs, increased profitability, and improved competitiveness.

O Evaluates quality projects in the same terms that other business investments are evaluated


Conclusions

OThe Economics of Quality Approach O Focuses priorities and resources

on achieving both increased customer satisfaction and profits

O Adds a financial dimension to the quality improvement process
