Dr. Joseph A. DeFeo
All Rights Reserved, Juran Institute, Inc. 2016
EXPOSING YOUR HIDDEN COSTS OF PERFORMANCE
APRIL 20, 2016
All Rights Reserved, Juran Institute, Inc. 2016
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:
1. Designing or planning for quality2. Compliance, controlling, or assuring quality3. Improving or creating breakthroughs in quality
Today’s 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. 2016
Cost 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. 2016
By 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. 2016
Costs 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 quality
Many managers have been instructed to “reduce costs”
Can be difficult initially to distinguish differences between costs and costs of poor quality or non-value-added activities
Rush decisions lead to “across the board” cuts
Cost should be the minimum amount of money that we have to spend to meet the customer and business needs
Cost is a good thing if its a minimum cost that meets a customer requirement
Cost is a bad thing if its a cost of poor quality
In healthcare, misuse, underuse, and overuse = waste
OUR LESSONS LEARNED
All Rights Reserved, Juran Institute, Inc. 2016
The 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 producer ’s 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. 2016
EXAMPLE
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. 2016
VISUALIZING THE DIFFERENCE
Profit
Total Operating
Costs
Profit
True Operating
Costs
COPQ
ProfitSales Erosion
COPQ
True Operating
Costs
Profit
COPQ
True Operating
Costs
All Rights Reserved, Juran Institute, Inc. 2016
Traditional ly, there are seven spec ific categor ies that organizations begin look ing for poor qual i ty :
We refer to these as “the tip of the i ceberg ” General ly on ly represent about 5% of actual COPQ
WHERE ARE THE COSTS HIDING?
All Rights Reserved, Juran Institute, Inc. 2016
As 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. 2016
WHERE IS COPQ FOUND?
Review Review
Redo Redo
Variation
Non-Value-Added (NVA) Steps
Check Check Product or Service
Step 1 Step 2
All Rights Reserved, Juran Institute, Inc. 2016
1. Costs to Prevent Failure Design reviews, educational on the job training, work instructions; most costs
in organizations that help employees to do the right thing at the right time
2. Compliance, Appraisal, Quality Assurance, Quality Control Regulatory agencies, risk management/analysis, audits (SEC), ISO Excess appraisal costs are possible (too many audits, too many checks)
3. Internal Failure Costs (that customer never sees) Inspection line failures
4. External Failure Costs (customer does see) Cost to fix the problem after the customer gets/uses/sees it Can 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. 2016
EFFECTS 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. 2016
Identify product or process
Create process map to
understand value
Classify non-value-added activities as
COPQ
Estimate COPQ based on fiscal
year
Prepare Quality Cost Report
(Pareto charts)
Define projects for improvement
ASSESSMENT PROCESS
All Rights Reserved, Juran Institute, Inc. 2016
Determine the use of COPQ against business
strategy
Develop assessment team
Define scope and tactics•Scope discussion, size of business unit, etc. Larger scope = more $ = more attention
Develop list of COPQ elements, processes, and documentation
Develop implementation plan
Conduct pilot assessment
Adjust process and drive projects
HOW TO BEGIN ASSESSING
All Rights Reserved, Juran Institute, Inc. 2016
Concept of vital few vs useful many All improvement happens project-by-
project Identify and allocate resources
properly Plan for success Lead by example
LAST THOUGHTS
All Rights Reserved, Juran Institute, Inc. 2016
CONNECT WITH US
@Juran_Institute
www.youtube.com/user/JuranInstitute
www.facebook.com/JuranInstitute
www.linkedin.com/company/juran-institute
All Rights Reserved, Juran Institute, Inc. 2016
MORE RESOURCES
business innovation business process improvement continuous improvement dmaic juran quality handbook lean manufacturing lean six sigma lean transformation operational excellence process innovation
quality assurance quality control quality improvement management consulting firm iso 9000 2015 six sigma certification what is lean what is six sigma
Click any link for more information
All Rights Reserved, Juran Institute, Inc. 2016
THANK YOU!
Copyright ©2015, Juran Institute, Inc.
For more information, please visit www.juran.com
We 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 [email protected]
Top Related