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MacroEconomics of Quality. Issues. Why Estimate Cost of Quality Failures? Quality Costs are Far Greater than Those that are Readily Identifiable (Iceberg Principle) Gains to be Made if Cut Measured Quality Losses in Half How to Reduce Quality Losses Rule of “Tens” Eradicate Killer Re’s - PowerPoint PPT Presentation
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MacroEconomics of QualityMacroEconomics of Quality
IssuesIssues
Why Estimate Cost of Quality Failures? Quality Costs are Far Greater than Those that are Readily
Identifiable (Iceberg Principle) Gains to be Made if Cut Measured Quality Losses in Half How to Reduce Quality Losses
Rule of “Tens” Eradicate Killer Re’s Play Offense (Prevention) vs. Defense (Detection)
Sound Quality Practices
Why Estimate Cost of Quality FailuresWhy Estimate Cost of Quality Failures
Quantify the Cost of Quality Failures for the Business Identify magnitude of potential savings Sensitize Management to the size of the opportunity Help to re-expose problems we have learned to tolerate
Identify the Highest Loss AreasPermit Prioritizing the Loss Areas for
Corrective Action
Economics of Quality: TCE Statistics 1994Economics of Quality: TCE Statistics 1994
TV Units Sold 5 millionEstimated Revenues $2.5 billion
(5 x $500 per set)Estimated Earnings $125 million
(5% of Sales)
Scrap (Measured) $12 million
Total Cost of Quality $72 - 600 million
(Measured & Hidden)
Cost of Scrap per TV(12/5) $2.40 per unit
Total Cost of Quality $14.40 - $120
(M+H) per TV Sold
(6/1 to 50/1 Iceberg)% Total Cost of Quality 3% - 24% per TV/Selling Price (14.40/500 -120/500)
# Defects per TV ?
Economics of Quality: TCE Statistics 1994Economics of Quality: TCE Statistics 1994
Economics of Quality: STB Economics of Quality: STB Systems Statistics 1998Systems Statistics 1998
Units Sold 6 million Estimated Revenues $300 million
(6 x $50 per unit) Estimated Net Earnings $16.2 million
(5.4% of Sales)
Average Scrap (Measured) $ 1.875 million $1.875 Total Cost of Quality $11.25-93.75 million $52.5
(Measured & Hidden)
Cost of Scrap per Unit $.3125 per unit $.3125
(1.875/6) Total Cost of Quality $1.875 - $15.625 $8.75
(M+H) per Unit Sold
(6/1 to 50/1 Iceberg) % Total Cost of Quality 3.75% -31.25% 17.5%
per Unit/Selling Price
(1.875/50-15.625/50) # Defects per Unit ???
Cost of Quality FailuresCost of Quality Failures
ICEBERG PHENOMENONICEBERG PHENOMENON
Direct/Measured Costs:Direct/Measured Costs:
Scrap/ReworkScrap/Rework
Service CallsService Calls
Warranties/ConcessionsWarranties/Concessions
Indirect/Hidden Costs:Indirect/Hidden Costs: Excess InventoryExcess Inventory
OvertimeOvertime
Reputation/ImageReputation/Image
Hidden Costs = 6 to 50 times Measured CostsHidden Costs = 6 to 50 times Measured Costs
Cost of Quality Failures Cost of Quality Failures WorksheetWorksheet
FAILURE COST CATEGORIES ESTIMATEDANNUAL COSTS
$(000)MEASURED COST OF QUALITY
Internal Waste, Scrap ____________________ Rework ____________________ Reinspect ____________________
External Warranties ____________________ Guarantees ____________________ Concessions ____________________
TOTAL MEASURED __________________
HIDDEN COST OF QUALITYHIDDEN COST OF QUALITYInternal
Troubleshooting and failure analysis __________________ Evaluation to determine usability of off
specification material __________________ Engineering changes, redesign, buy-offs
__________________ Costs of reviewing quality problems
(i.e.,replanning, meetings, expediting, firefighting, reports, etc.) __________________
Inventory costs on held material __________________ Overtime because of quality problems __________________ Late shipment premiums (delayed collections) __________________ Material handling __________________ Tool & fixture redesign __________________ Machine wear __________________ Fringe benefits on labor __________________ Loss of productivity due to rework, scrap
__________________
HIDDEN COST OF QUALITYHIDDEN COST OF QUALITYExternal
Loss of market share due to poor quality reputation ____ Loss of profitability ____ Loss of bond credit rating ____ Other
______________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________
Total Hidden ____
Grand Total ____
WHAT IF ???WHAT IF ???
We could cut losses in half?
1/2 x $12,000,000 …………………......$6,000,000
If ICEBERG is between 6/1 to50/1……$36,000,000
to $300,000,000
Total TCE net earnings in 1994 were?
WHAT IF???WHAT IF???
We could cut losses in half?
1/2 x $1,875,000 $937,500 IF ICEBERG is between 6/1 to 50/1 $5,625,000 to
$46,876,000
Total STB Systems net earnings for 1998 estimated to be
$26,250,000$26,250,000
$16.2 million$16.2 million
Economics of Quality: STB Economics of Quality: STB Systems Statistics (1997 vs. 1998)Systems Statistics (1997 vs. 1998)
1997 1998Sales $190 million $300 million
Net Earnings (Income) $10.26 million $16.20 million(5.4% of Sales)
COQ as of % of Sales 10 - 25% 10 - 25%
COQ ($) $19 - 47.5 million $30 - 75 million
What if COQ cut in half? $9.5 - 23.75 million $15 - 37.55 million(Savings) ($16.63 million) ($26.25 million)
Net Income with Savings $26.89 million $42.45 million
How to Reduce Quality LossesHow to Reduce Quality Losses
Rule of “Tens”Eradicate Killer Re’s…WastePlay Offense (Prevention) vs. Defense
(Detection)
RULE OF “TENS”RULE OF “TENS”
Not doing it right the first time costs ten times as much to find and fix each time errors escape to a subsequent stage of handling.
$1 Design Effort
=$10 Production Cost
=$100 Assy/Test Cost
=$1000 Field Cost
The Killer Re’sThe Killer Re’sReadjust ReprocessReapply ReprogramRecalibrate RerunRecertify RescheduleRecheck ResealRecondition ReshipRecycle RestampRefinish ResockReidentify RetapReinspect RetestRelevel ReturnRemearsure ReweldRenormalize RewindReorder RewireRepack Rework
Reject (The worst kind)
Computing Cost of QualityComputing Cost of Quality
Internal Failure Scrap Rework Scrap/Rework - Supplier
Appraisal Inspection Test Quality audits Test equipment - initial cost
& maintenanceExternal Failure Cost to customer Warranty costs Complaint adjustments Returned material
Prevention Quality planning Process planning Process control Training
Note: The listed categories provides an understanding of the COQ structure. In general, COQ is comprised of costs due to failure, appraisal, and prevention.
The Enlightened PerspectiveThe Enlightened Perspective
QualityQuality
Internal &
External Failure
Appraisal &
Prevention
45
6
Old BeliefOld BeliefNew BeliefNew Belief
Sound Quality PracticesSound Quality Practices
Operational Definitions and Standards (Metrics)
Manage by Fact “In God we trust. But everyone else must bring data!” Without good data, everyone is an expert
Focus on Process (Offense) vs Product Results (Defense)
Reduce Variation
Questions?Questions?