Exposing Your Hidden Costs of Performance

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Exposing your hidden costs of performanceApril 20, 2016

Dr. Joseph A. DeFeo

All Rights Reserved, Juran Institute, Inc. 2016

All Rights Reserved, Juran Institute, Inc. 2016

1Select ProjectsAll Rights Reserved, Juran Institute, Inc.6503 LSSUBBMFG.0914 v5.1

To manage for excellence, it is vital to begin by establishing a vision for the organization, along with policies, goals, and plans that attain to the vision. Managing for excellence makes extensive use of three fundamental managerial processes:

Designing or planning for qualityCompliance, controlling, or assuring qualityImproving or creating breakthroughs in quality

Todays discussion will focus around Principle #2 - compliance, controlling, or assuring quality, through the identification and analysis of Cost of Poor Quality.

Managing for EXCELLENCE

All Rights Reserved, Juran Institute, Inc. 2016Cost of Poor Quality (COPQ): These are the costs that would disappear in the organization if all products and processes performed right the first time. They are usually measured as a percentage of sales or costs.

COPQ Defined

An effective performance excellence program should prioritize removing COPQ as the expenses have already been incurred. By attacking COPQ, the organization is able to maintain sales performance but become more profitable!

All Rights Reserved, Juran Institute, Inc. 2016By ignoring the magnitude of hidden costs in our organizations today, you are basically underestimating your profit.

This phenomenon is rooted in the limited understanding of costs related to poorly performing processes.

*Regardless of industry

Why cost of poor quality?

Our research indicates that 15-25% of all work performed* consisted of redoing prior work because products and processes were not perfect.

All Rights Reserved, Juran Institute, Inc. 2016Costs of poor quality affects every business in every industry, this is not an industry-specific problem Companies do not always associate a bad process with poor qualityMany managers have been instructed to reduce costsCan be difficult initially to distinguish differences between costs and costs of poor quality or non-value-added activitiesRush decisions lead to across the board cutsCost should be the minimum amount of money that we have to spend to meet the customer and business needsCost is a good thing if its a minimum cost that meets a customer requirementCost is a bad thing if its a cost of poor qualityIn healthcare, misuse, underuse, and overuse = waste

Our lessons learned

All Rights Reserved, Juran Institute, Inc. 2016The effect of failure on income:The customer who encounters a deficiency may take action that creates additional cost for the producer (file a complaint, return a product, file a lawsuit, etc.). The customer may also elect to stop buying from the guilty producer as well, and may publicly share their poor quality interaction. Such actions can cause serious damage to a producers revenue and reputation.

The effect of failure on cost:Deficient quality results in excessive costs associated with poor quality. The Cost of Poor Quality (COPQ) is a term that encompasses all the costs that would disappear if there were no failures no errors, no rework, no field failures, etc.

Effects of poor quality

All Rights Reserved, Juran Institute, Inc. 2016example

Example: A call center requires accurate and quick calls are to meet customer expectations. Problem: Management needs to reduce costs, and opts to reduce staff. Result: May have reduced operating cost, but wait times, resolution times, and customer satisfaction are all affected. Now we are paying for the cost of poor quality in addition to having a reduction in profit. The reduction in operating costs is quickly outweighed.

All Rights Reserved, Juran Institute, Inc. 2016Visualizing the difference

ProfitTotal Operating Costs

ProfitTrue OperatingCostsCOPQProfitSales Erosion

COPQTrue OperatingCosts

ProfitCOPQTrue OperatingCosts

All Rights Reserved, Juran Institute, Inc. 2016Traditionally, there are seven specific categories that organizations begin looking for poor quality:

We refer to these as the tip of the icebergGenerally only represent about 5% of actual COPQ

Where are the costs hiding?

All Rights Reserved, Juran Institute, Inc. 2016As an organization gains a broader understanding of poor quality, the hidden portions of the iceberg become apparent.

COPQ can range between 10-25% of total operating costs.

Where the real money is

All Rights Reserved, Juran Institute, Inc. 2016Where is copq found?ReviewReviewRedoRedo

Variation

Non-Value-Added (NVA) Steps

CheckCheckProduct or Service

Step 1Step 2

All Rights Reserved, Juran Institute, Inc. 2016Costs to Prevent FailureDesign reviews, educational on the job training, work instructions; most costs in organizations that help employees to do the right thing at the right timeCompliance, Appraisal, Quality Assurance, Quality ControlRegulatory agencies, risk management/analysis, audits (SEC), ISOExcess appraisal costs are possible (too many audits, too many checks) Internal Failure Costs (that customer never sees)Inspection line failures External Failure Costs (customer does see)Cost to fix the problem after the customer gets/uses/sees itCan be more expensive; fix + extra

Total cost of quality =Internal & External failure costs can account for 60-80% of Costs of Poor Quality

All Rights Reserved, Juran Institute, Inc. 2016Effects of poor quality

Ratio of the individual category costs to total costs vary widely. Many companies exhibit ratios which look like the following:

All Rights Reserved, Juran Institute, Inc. 2016Assessment process

All Rights Reserved, Juran Institute, Inc. 2016How to begin assessing

All Rights Reserved, Juran Institute, Inc. 2016Concept of vital few vs useful manyAll improvement happens project-by-projectIdentify and allocate resources properlyPlan for successLead by example

Last thoughts

All Rights Reserved, Juran Institute, Inc. 2016Connect With Us

@Juran_Institutewww.youtube.com/user/JuranInstitutewww.facebook.com/JuranInstitutewww.linkedin.com/company/juran-institute

All Rights Reserved, Juran Institute, Inc. 2016More Resourcesbusiness innovation business process improvement continuous improvement dmaic juran quality handbooklean manufacturing lean six sigma lean transformation operational excellence process innovation

quality assurance quality control quality improvementmanagement consulting firmiso 9000 2015six sigma certification what is lean what is six sigma Click any link for more information

All Rights Reserved, Juran Institute, Inc. 2016Thank you!

Copyright 2015, Juran Institute, Inc. For more information, please visit www.juran.comWe hope to see you at future webinars or at your site.

If you would like for me to conduct this for your organization, contact me at jdefeo@juran.com

All Rights Reserved, Juran Institute, Inc. 2016