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IAMOT 2014

WASHINGTON, D.C.

DESIGN OF A PREVENTION,

APPRAISAL AND FAILURE

QUALITY COST MODEL

Dr Hannelie Nel

BIE International, South Africa

Mr Ralph Grenville, Senior Vice-President

BIE International, Houston, USA

Professor Jan-Harm Pretorius

University of Johannesburg, South Africa

The BIE Value Statement

The BIE Group operates in over 40 countries worldwide and is an international and independent third-party company that provides Project Management and Quality Services from project design to

commissioning. BIE also provides Quality Assurance on manufacturing and installation during project execution; and offers

Quality Costing throughout the project lifecycle.

The BIE Group

BIE Became listed in 1994 on the UNITED Nations Approvals

Scheme for the inspection of commodities and materials

deployed to sensitive international regions of the world.

The BIE Group Global Offices

April 15, 2023 3

United Kingdom

Netherlands

Italy

Australia

Taiwan

Singapore

JapanUnited States of America

South Africa

China

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THE COST OF

POOR QUALITY

TO BUSINESS

Cost of Poor Quality: Petrobras Floating Oil Rig Disaster

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BEFORE

AFTER

Petrobras has established a new program of cost cutting on its P36 production facility. Through an integrated network of facilitated workshops, the project successfully rejected the established constricting and negative influences of prescriptive engineering, onerous quality requirements, and outdated concepts of inspection and client control.

11 crew members were killed and one member of the attending fire-fighting crew fatally injured.The estimated cost of the accident was $450 million.Environmental costs: inestimable

Cost of Poor Quality: Toyota Vehicle Recall

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AFTER“The company is paying for focusing on growth and taking its eye off quality” (James P. Womack New York Times)

“Toyota has adopted a number of measures in recent months to address its safety problems. It is sending 40 engineers from its headquarters in Toyota City, Japan, to monitor quality issues at technical centres overseas, auditing parts suppliers and adding a month to the average four-month testing time for new vehicles.”(Financial Times)

Katsutoshi Sakata, manager of a newly created division overseeing design quality, said in an interview this week that Toyota had assigned about 1,000 employees to new quality-related tasks since the recall crisis began.”(Financial Times)

Toyota CEO apologizes:Toyota CEO apologizes

US Government officials say a possible link to 93 deaths over the past decade were identified.

Estimated cost on recall: $5,5 billion Impact on firm reputation: inestimable

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Design of a Prevention, Appraisal

and Failure Cost Model:

How do we cost Quality?

Quality Cost Methodology:Design of the Study

1. The project was executed at a refurbished electricity power station in South

Africa over a period of one year.

2. The Prevention, Appraisal and Failure Cost (PAF) Model was selected as the

quality cost model for implementation.

3. The processes selected by the project team for the design of the PAF cost

model were: pre-outage, outage and post-outage.

4. Units 1,2 and 5 were selected for the study.

5. The team consisted of relevant functions within

the operation.

Quality Cost Methodology

Step 1: Obtain management commitment and support.

Step 2: Establish an installation team.

Step 3: Obtain cooperation and support of users and suppliers of information.

Step 4: Select the processes and process boundaries.

Step 5: Develop the process flow diagrams.

Step 6: Define quality categories and identify cost elements in each category.

Step 7: Develop the quality cost matrix.

Step 8: Determine sources of quality cost information and establish cost collection

procedures.

Step 9: Collect data and establish the reliability and validity of the data.

Step 10: Continuously improve the system.

Quality Cost Methodology:Phase One

Step 1: Obtain management commitment and support.

Step 2: Establish an installation team.

Step 3: Obtain cooperation and support of users and suppliers of information.

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PROJECT MANAGER

Procurement Quality SHE CommissioningControl and

Instrumenta-tion

Mechanical Engineering

Electrical Engineering

(MV)

Electrical Engineering

(LV)

Engineering Projects

Quantity Surveing

Finance

Secretary

Quality Cost Methodology:Phase Two

Step 4: Select the processes and process boundaries.

Step 5: Develop the process flow diagrams.

Step 6: Define quality categories and identify cost elements in each category.

Step 7: Develop the quality cost matrix.

Training Finance Procurement Design Freeze Manufacturing FAT Tests Installation Operational Checks Baseline Risk Assessments

All cost centres Finance manager

Procurement manager

Engineering manager

Project manager

Project, GBE managers, SHE C&I manager Commissioning

managerProject, SHE

managers

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Steps 4-5: Develop the Process Flow Diagrams → Pre-Outage

S1Training

S2Finance

S3Procurement

S4Design Freeze

S5Manufacturing

S6FAT Tests

S7Installation

S9Operational Checks

S10Baseline Risk Assessments

All cost centres Finance manager

Procurement manager

Engineering manager

Project manager

Project, GBE and SHE

managersC&I manager Commissioning

managerProject, SHE

managers

S8Installation

Mechanical manager

Projection, plan and budget

Cashflow

Insurance

BU verification and approval

of project transactions

Reporting project cost

Contract modifications

due to CPA

Forex management

Issue load schedule for basic design

Detailed design

Approval of detail design

Sheet metal work

Approval of sheet metal

work

Approval of general

arrangement

Component verification

Wiring verification

Functional tests

Defect close-out

Operational checks

Cable resout

Impulse pipes

Field instrumenta-

tion

Junction boxes

Cubicle installations

Slinging routes

Boiler cleaning

Scaffold planning

Quality control

Component verification

Wiring verification

Functional tests

Defect close-out

Identification of all risks

Integrated risk assessment

Training operations

Plant exposure

Process phase

Process owner

Process or cost

element

Step 6: Define Quality Cost Categories and Cost ElementsCost Category Pre-Outage

Prevention

The costs associated with design freeze, baseline risk assessment, quality audits and training.

Appraisal

The costs associated with manufacturing, factory acceptance tests, approval of detailed design, quality and safety audits, quality control plans, inspections test plans and defect close-out.

Internal Failure

The costs associated with the interest on late payments, internal compensation events,documentation management and warranty repairs. 

External Failure

The costs associated with defects, repairs and downtime captured as external compensation events, warranty payback claimed by contractors, cost of cover currency fluctuation, cost price adjustment and scope changes.

Outage

The costs associated with decommissioning of old equipment, daily risk assessment, non-conformance detection and waste removal.

The costs associated with installation of new equipment, cold commissioning, hot commissioning and unit light-up. 

The costs associated with the interest on late payments, internal compensation events,documentation management and warranty repairs.

The costs associated with defects, repairs and downtime captured as external compensation events, warranty payback claimed by contractors, cost of cover currency fluctuation, cost price adjustment and scope changes.

Post-Outage

The costs associated with waste removal, site clearance, documentation and lessons learned.

The costs associated with risk review, product measurement and optimisation.

The costs associated with defect detection and repair during optimisation.

The costs associated with defect repairs after hand-over; as well as penalties to contractors.

Step 7: Develop the Quality Cost Matrix

PREVENTION COSTS

Process PhaseQuality Cost Elements per Process

PhaseSource of Data and Information Process Owner

S1: Training Training Every department has a record of costs for training

All process owners

S2: Finance Insurance – as a preventative measure Cost of Cover Finance manager

S2: Finance Reporting actual project cost SAP reports Finance manager

S2: Finance Project projection, planning and budgeting SAP reports Finance manager

S2: Finance Cash flow SAP reports Finance manager

S2: Quantity Surveying

Pre-contract placement SAP reports Finance manager

S4:  Design Freeze Basic design in design freeze. Engineering and consultants (GBE) Engineering manager

S4: Design Freeze Detail design in design freeze All costs for design in engineering department.

Engineering manager

S4: Design Freeze Load Schedule (Planning and scheduling) Planning Engineering manager

 S4: Design Freeze Approval of detail design in design freeze All costs for design in engineering department.

Engineering manager

S1 – S10: All Process Phases

Resource Costs: Manpower, Skills and Experience

From Engineering Manager: Engineering Labour Recovery

All process owners

 S10: Risk Assessment (Baseline)

Identification of all risks Site Risk Committee SHE managerProject manager

 S10: Risk Assessment (Baseline)

Assessment of Safety, Health, Environment (SHE) and Quality risks

Site Risk Committee SHE managerProject manager

S1 – S10: All Process Phases

Quality Assurance Detail of activity - costs linked to names of personnel in quality

Quality manager

S1 – S10: All Process Phases

Audits Detail of activity - costs linked to names of personnel in quality

Quality manager

Quality Cost Methodology:Phase Three

Step 8: Determine sources of quality cost information and establish cost

collection

procedures.

Determine existing cost systems and examine depth of available cost data.Examine suitability of different types of cost collection methods.Identify sources of data and information and establish procedures for collection:

Collection of costs by account. Collection of costs by whole person. Collection of costs by labour hours. Collection of costs by defect type. Collection of costs by personal log.

Step 9: Collect data and establish the reliability and validity of the data.

Validation of process diagrams and cost element allocation by process teams. Relevant financial document - and procedural study. Alignment of site organogram, SAP cost centres and General Ledger accounts. Meetings and discussions with colleagues in planning, cost control, finance,

quantity surveying, engineering – confirming data, systems and processes. Relevant document and procedural study. Independent data validation by Group Capital Quality. Process diagrams validated by Engineering Manager. Data triangulation.

Data collection by cost centre was adopted as the most efficient cost retrieval method. Principle: use the existing costing systems (SAP) as far a possible. Kriel SAP is

organised by cost centres. Individual cost data collection and input methods (e.g. Cost controller and QS) are

complex, individualised, and high volume – and finally entered on SAP. The level of transactional information captured on SAP does not allow detailed

extraction of data. The framework must finally develop into a simplified, usable, workable model.

Quality Cost Methodology:Phase Three → Process/Data Validation

Quality Cost Methodology:Phase Three → % Allocatoin

Cost Category

Process Phase

Process Owner

Prevention

Design Freeze Eng Manager

Installation C&I, Elect and Mech Managers

Finance Finance Manager

Baseline RA Project and SHE Managers

Training All cost centres

Appraisal Manufacturing Project manager

Installation C&I, Elec and Mech Managers

Design Freeze Eng Manager

Operational Checks

Comm Manager

Finance Finance Manager

Procurement Procure Manager

Cost Centre % AllocationPre-Outage, Unit 5

Engineering  

Prevention 100%

Appraisal 0%

Commissioning  

Prevention 80%

Appraisal 20%

C&I  

Prevention 65%

Appraisal 35%

Mechanical  

Prevention 30%

Appraisal 70%

Quality Cost Methodology:Phase Four → Quality Cost Reports

COST OF QUALITY SUMMARY REPORT

BASED ON OPERATING EXPENDTURE

TIME PERIOD: MARCH 2007 – JULY 2010

Total Prevention

and Appraisal

Cost as a % of

TQC

48%

Total Failure

Costs as a % of

TQC

52%

Total Quality

Costs as % of

Operating

Expenditure

27%Quality Costing Benchmark for an efficient QMS:

Failure costs as a % of TQC: 8%-10%

TQC as a % of Operating Expenditure: 20%

Complexity and volume of existing data capture systems precludes

manual data collection and becomes unsustainable.

The lack of detailed quality transactional data in traditional

accounting and cost engineering systems disables accurate and

reliable quality cost data collection.

Incorrect application of quality cost methodologies.

Time-consuming retrieval of cost reports.

Exclusion of overhead costs.

Exclusion of intangible or hidden costs.

Inaccessibility to SAP and required data prolongs the process.

Quality Cost Methodology:Challenges & Critique

DESIGN OF AN AUTOMATED QUALITY COST SYSTEM:

QTRACK

• QTrack is a suite of products intended to assist industry in managing their process cost of quality - and supported by lessons learned. QTrack comprises four individual and flexible modules including:

• QTrack for Projects• QTrack for Manufacturing (both

continuous manufacturing and batch production)

• Lessons Learned.

• QTrack promotes accurate quality costing, risk mitigation and continual improvement.

Automated Quality Costing:QTRACK

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Lessons Learnt:QTRACK

PROCESS FLOW DIAGRAM

QP15_Risk Analysis and lessons learned.pdf

The contribution of QTrack is the design of an automated quality cost program that can identify and expose the allocation of resources for prevention and appraisal of quality; recognize ineffective investment in quality and motivate more efficient processes.

The ultimate value of QTrack lies in the conversion of Quality costing data to Lessons Learnt through a risk management system – which enables improved business and cost management for companies, waste reduction and continual improvement.

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Quality Quality

Lessons Learnt:QTRACK

(e.g. ISO compliance Programme)

(e.g. Quality Control Inspection Programme)

QUALITY COSTING DRIVES COST SAVING AND CONTINUAL IMPROVEMENT

Before introduction of a QMS After introduction of a QMS

Before introduction of a QMS Investment

in Prevention

Investment in Appraisal

Savings/Profit

Savings/Profit

Investment in Appraisal

Investment in Prevention

Cost of Non-Conformance Cost of

Non-Conformance

Net increase in Prevention & Appraisal costs < Reduced Costs of NC

To

tal

Bu

dg

et(

/ B

ala

nc

e S

he

et)

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The Value of Quality Costing:QTRACK

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The Value of Quality Costing:Continual Improvement

Crosby QM

Maturity

Model

Measurement

Categories

 

Stage 1 :

Uncertainty

 

Stage 2 :

Awakening

 

Stage 3 :

Enlightenme

nt

 

Stage 4 :

Wisdom

 

Stage 5 :

Certainty

Cost of Quality

as a % of sales

Reported:

Unknown

Actual: 20%

Reported: 3%

Actual: 18%

Reported: 8%

Actual: 12%

Reported: 6.5%

Actual: 8%

Reported: 2.5%

Actual: 2.5%

Quality

improvement

actions

No organized

activities. No

understanding

of such

activities.

Trying obvious

‘motivational’

short-range

efforts.

Implementation

of multi-step

programs with

thorough

understanding

and

establishment of

each step.

Continuing the

multi-step

program and

starting other

pro-active/preve

ntive quality

initiatives.

Quality

improvement is

a normal and

continued

activity.

Total Quality Costs may constitute 8% - 15% of total construction costs.

An average contractor is estimated to spend between 5% - 10% of the project costs on rework.

Spending 1% more on prevention costs reduced failure costs from 10% to 2% of construction costs.

Total construction costs can be reduced by approximately 25% with the implementation of a sound quality management system.

Cost of Quality Benchmarking

Global Benchmarks

27April 15, 2023 BIE International Engineers (Pty) Ltd

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Thank You for your Attention.

The BIE Group www.biegroup.comPACE Services www.paceservices.co.zaUniversity of Johannesburg www.uj.ac.za

Hannelie NelBIE International, South Africa

hannelie.nel@bie.co.za+27 11 82 924 6059