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Quality Investment

     Justification
 Raghav Raghunathan
Quality System implementation
Estimate of Defect cost, rollout expense and savings
Estimated Average Cost of Defects (2008...
Quality System – Return On Investment
                  300000                                                            ...
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Quality system justification

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Quality system investment: payback period and expected returns.

Published in: Business, Economy & Finance
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Transcript of "Quality system justification"

  1. 1. Quality Investment Justification Raghav Raghunathan
  2. 2. Quality System implementation Estimate of Defect cost, rollout expense and savings Estimated Average Cost of Defects (2008) Count of Units Average Defect Per Unit ~ 7 X Average cost per defect ~ € 100 Average Cost per Unit ~ € 700 X Total Number of Units Shipped ~ 700 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Average Defect Cost per Year ~ € 500,000 Defect Per Unit Source: Internal Defect Database One Example from 2008 (Validation of Estimated Cost) • One pervasive defect – Annual cost ~ € 70,000 • Cumulative cost based on 7 Defects per Unit ~ 70,000 X 7 ~ € 500,000 Quality System: Estimate Cost and Savings Estimated Cost Potential Benefits & Savings Hardware & Software ~ € 52,000 2. Traceability Estimated Saving 3. Speed of response Travel ~ 30,000 20% of Average 4. Visibility & Transparency Defect Cost Training & Reserve ~ 25,000 Total Estimated Cost ~ 107,000 Estimated Yearly Savings ~ 100,000
  3. 3. Quality System – Return On Investment 300000 Analysis Amount in Euros 250000 • Estimated cost does not include regular maintenance cost. 200000 • Savings estimates are based on direct cost of poor quality and does not include any indirect 150000 cost. 100000 • Investment Payback time based on a conservative estimate of 20% error reduction is Projected Payback time ~ 1 year 50000 1 year • Projected year on year savings: 0 0 5 10 15 20 25 • 15% reduction = € 75000 Month • 20% reduction = € 100000 Fixed Investment Cost 20% reduction in Defects 15% Reduction 25% reduction • 25% reduction = € 125000 Source: Projected cost and savings based on Quality system project planning Based on a conservative 20% error reduction target, Quality system investment would have 1 year payback time and a year-on-year saving of € 100000.
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