Cost of Quality

2011 A tool for competitiveness

2

About your presenter

Roles:

Production Test Engineering Product Design Validation Reliability Growth Quality Assurance PCBA Test & Repair QMS Development

Marc A. Leclair

Employers

1 - Cost of Quality Today

the bottom line

4

Phil Crosby

5

Thesis Statement

6

Tylenol Recalled For Musty Odor Oct 19, 2010 by Meagan Morris

FDA requests court-ordered action over Tylenol facilities

The Food and Drug Administration and the maker of Children's Tylenol ask a judge to approve a plan to fix manufacturing problems

at three plants.

By Andrew Zajac, Washington Bureau March 10, 2011

7

C P S C Fines Mattel Record $2.3M Over Lead-Laden Toys by Cate Nelson on June 8, 2009

8

Toyota Announces Two Voluntary Recalls and Amends Potential Floor Mat Interference Recall Announced in 2009 Click here for more information about the Safety Recall Campaigns

Toyota Statement in Response to NHTSA/NASA Study Click here for Toyota VIN Recall Lookup

2- Is Cost of Quality passé?

10

The Giants of Quality

Are gone

11

CoQ High Water Mark?

12

13

Six Sigma obfuscates CoQ

Teaches about Cost of Poor Quality It’s not quite the same thing!

14

Your Boss today’s executive (1)

Top management not aware of the potential for high return on investment that a CoQ program may offer.

15

Your Boss today’s executive (2)

So… Top management often does not plan and prioritize internal improvement efforts.

16

Your Boss today’s executive (3)

Top management dedicates their time to projects with clear ties to cash flow, sales, and profit.

17

This skews results

The strategic planning cycle then has a bias toward new product development and financial outcomes.

18

Often, The quality profession doesn’t help

CoQ Improves the bottom line though quality improvement efforts that lead to cost reduction opportunities. Bueller? Ferris Bueller?

19

Here’s another barn-burner

“Quality costs represent the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products or defects in their manufacture.”

Jack Campanella, ASQ Quality Press, 1999, pages 4-5.

20

How about this?

If an organization does not have an effective Cost of Quality Program, they have tacitly accepted higher cost, lower performance, and decreased competitiveness for recurring operations over the long term.

3- CoQ & Finance

Quick Review

22

Overview The concept of quality related costs provides vocabulary to communicate between the quality staff and top management. Juran’s widely accepted model accounts for the cost of both attaining and missing the desired level of quality in a service or product

Juran, Juran’sQuality Handbook, Fifth Eddition,, 1998, page 8.2

23

Cost of Quality Categories

Cost of Quality

Failure Cost Appraisal Cost Prevention Cost

Internal Failure External Failure

24

Failure Costs

The costs resulting from products or services not conforming to requirements or customer/user needs.

25

External Failure

Failure costs occurring after delivery or shipment of the product — and during or after furnishing of a service — to the customer.

Examples are the costs of: Processing customer

complaints Customer returns Warranty claims Product recalls

26

Internal Failure

Failure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples are the costs of:

Scrap Rework Re-inspection Material review Downgrading

27

Appraisal Costs

The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements. These include the costs of:

Incoming and source inspection/test of purchased material In-process and final inspection/test Product, process or service audits Calibration of measuring and test equipment Associated supplies and materials

28

Prevention Costs

The costs of all activities specifically designed to prevent poor quality in products or services. Examples are the costs of:

New product review Quality planning Supplier capability surveys Process capability evaluations Quality improvement team meetings Quality improvement projects Quality education and training

29

CoQ Strategy

1. Drive failure costs toward zero

2. Invest in prevention activities

3. Enable appraisal costs reduction

4. Continuously evaluate and redirect prevention activities

Campanella, Principles of Quality Costs, 1999, page 9

30

Know your Financial Terms

Prime Costs or Direct Costs Overhead Costs Cost of Goods Produced Revenues and Profit The Balance Sheet

31

The Profit and Loss Statement

Also known as the Income Statement, it shows how well a company buys and sells its products or services to make a profit.

32

The Profit and Loss Statement

Consists of these sections

Sales

Cost of Goods Sold

Gross Profit

Operating Expenses

Operating Profit

Provisions for Income Tax

Net Income

EBITDA

33

Financial Structure of P&L

Revenue

Profit Gross Profit

Cost of Goods Sold

Selling Costs

General and Administrative (G & A) Costs

Cost of Goods Produced

Overhead

Misc Expenses

Fixed Expenses

Indirect Labor

Indirect Materials

Direct Costs Direct Material

Direct Labor

$

4 - Building your CoQ Program

You need it, but does your boss know it?

35

Vince Lombardi

If winning isn't everything, why do they keep score?

36

CoQ Recap

Remains an effective method to foster competitiveness

Largely forgotten outside of QA Essential for top performance You can make it work for you to get a

competitive edge

37

Are Crosby’s words still true?

38

CoQ an effective tool to measure and prioritize improvement efforts.

Already have effective improvement programs? Use CoQ to make them better.

Unless top management asked for the CoQ program, you’ll have to sell the idea.

39

(Kaplan & Norton, 1996)

Organizations rely on financial metrics to both measure their success and to plan their strategy.

How does your Quality Program fit in?

40

Top management rarely understands quality assurance concepts or terminology. To make an impact, you must prepare to communicate to executives in a way that is clear and compelling.

Let top management see that Quality = Cash Doing things right is cheaper

41

An organization’s success is dependent upon its ability to excel in

all aspects of internal operations

Senge (1990), Rosenzweig (2007), Foster and Kaplan (2001) and Kaplan and Norton (1996)

Management Guru Consensus

42

Why Change is Difficult -One view

Each faction has its own culture. There is little dialogue between groups. It is exceedingly difficult to focus all groups on desired change.

Executives focus

on revenue generation

Change Agents

make improvement in reaction to problems

Workforce understands

formal and informal networks

43

Your mission, if you choose to accept it…

Top Management is busy and distracted by many other issues. Help them to understand why CoQ is an

asset Make it easy for them

44

Make CoQ about them The executive presentation rubric

Do Don’t

Explain the financial benefits Explain all the details of a quality cost program

Understand key points of current strategic initiatives and link the quality cost program to these

List any possible quality department benefits

Show genuine concern for the overall organization

Use a too-slick, polished, overly rehearsed presentation

Demonstrate how each part of he organization benefits; accounting, operations, and quality are the key business areas

Talk about long term benefit while ignoring short-term impact

Wood, Quality Cost Programs, 2007, page 67

45

Find the link

Connect CoQ to your company’s strategic initiatives to show its relevance Show a link to performance or KPIs Target areas of concern Provide comparisons or examples Be prepared to do a pilot

Wood, Quality Cost Programs, 2007, page 64

46

The CoQ Team

Many CoQ systems never get off the ground because they are planned, organized, and implemented solely by the quality assurance function.

Harrington, Poor Quality Cost, 1987, page 66

47

Partner with Finance

Finance Role: Connect quality to the P&L statement Confirm the accuracy of the quality cost

methodology Explain how costs flow through the organization

Wood, Quality Cost Programs, 2007, page 65

48

Reporting: Don’t do this

Does your top management think in these terms? I doubt it.

49

Cost of Quality At a typical US Medical Device Manufacturer

Cost of Quality 2010

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Feb Mar AprMay Ju

n Jul

Aug Sep Oct Nov Dec Jan

Cos

t Internal AuditCost of ComplaintsTermination/Severance/New HireReturn CostScrapRN and D/L Rework ($873.02 ea)EM Calls

Product Recall

Sales Restructure

•Severance is now included in the termination cost

50

Cost of Failure RMA 6194

Dawn VME 05-1003036 100pcs x 2069 = $2,069

Y027650 100pcs x 12.94 = $1294

RY028802 100pcs x 12.94 = $1294

Epec authorized spec deviation

RY029316

MX029650

Purchase Price

Factory can’t hold tolerance Epec accepts parts on waiver

20pcs x 10.39 = $208 Epec expedites at Cheer Time

Epec completes order at Cheer Time

90pcs x 10.39 = $935

Failure Mode: Holes have +/- 0.0015” tolerance, which exceeds manufacturing capability.

Epec also incurred additional costs for:

•Shipping(4x),

•Inspection,

•RMA processing, and

•Customer Teleconferences

•Sales Commission

Other recent RMA Costs:

RMA 6214 (Marco 641773) – 20 hours of rework

RMA 6221 (Legacy LE16DDT…) – 5 hours of investigation

Customer cannot use parts

Customer cannot use parts

Done? -$1662

51

CoQ Methodology

Failure Root Cause

Causes Preventable

Prevention Cheaper

Wood, Quality Cost Programs, 2007, page 66 Campanella, Principles of Quality Costs, 1999, page 9

1

2

3

52

Method of Attack

Plan A Attack the largest quality costs first – if you can.

Plan B Go after the easiest to deal with costs first – if you must.

Wood, Quality Cost Programs, 2007, page 5

53

Communication

Regularly and broadly communicate small successes along the way toward your bigger goals.

Bestow ample praise for a job well done.

54

Changing Behavior A quality cost program changes behavior by:

Highlighting the costs of not solving quality

problems. Demonstrating the financial value of prevention

activities. Measuring the financial impact of changes and

enabling further improvements.

Wood, Quality Cost Programs, 2007, page 10

55

The Bottom Line

1. CoQ remains an effective tool for improving competitiveness.

2. The benefits of CoQ may not be apparent to your top management,

3. To run an effective CoQ program you’ll have to adapt CoQ concepts to the language, structure and goals of your organization.

56

More CoQ info

http://costofquality.wordpress.com/