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Economics of                            Quality                The Connection Between Quality and                         ...
About Quantum Associates  O Certified professionals with an average of 20+ years hands-on    industry experience in Lean, ...
Is It Management’s Fault?        O It is time that we re-examine the issue of          "top management support" that Demin...
Is It Management’s Fault?        O Since Demings death in 1993, the quality          profession as a whole has declined   ...
Is It Management’s Fault?        O Quality managers are operating in an            environment where top management has   ...
Is It Management’s Fault?        O The best way to regain top management          support for fundamental quality techniqu...
Is It Management’s Fault?        O Find a problem in your organization where          quality techniques could solve a pro...
Economics of Quality        O Conduct Cost of Poor Quality Assessment        O Perform Cost Driver analysis        O Selec...
Cost of Poor Quality                       Assessment        O Identify and quantify the financial impact of          non-...
Cost of Poor Quality                       Assessment        O The Elimination of Non Value-Added            Activities an...
Cost of Poor Quality                       Assessment        O White Collar, Indirect Costs of Poor Quality Are Often     ...
Cost of Poor Quality                       Assessment        O Cost of Poor Quality Assessment Focuses          on Interna...
Cost of Poor Quality                       Assessment             O External Failure                  O Costs of non value...
Cost of Poor Quality                       Assessment       O Scrap – the total cost of material, labor and         overhe...
Cost of Poor Quality                       Assessment        O Survey the internal and external            customer and no...
Cost of Poor Quality                       Assessment        O Using our definition of scrap list a function            or...
Cost of Poor Quality                       Assessment        O The Hidden factory             O For most manufacturing com...
Cost of Poor Quality                       Assessment        O Controllable Poor Quality Costs          O Under the contro...
Cost Driver Analysis        O Helps to prioritize improvement projects            on the basis of both increasing customer...
Cost Driver AnalysisO Key COPQ Element - Returns                                                         5%               ...
Cost Driver Analysis        O Adding a financial dimension to the root          cause analysis demonstrates the financial ...
Improvement Project Criteria-Financial     Performance and Customer Satisfaction        O Select projects based on a logic...
Improvement Project                       Selection        O Most common fatal error is picking the            wrong proje...
Improvement Project                       Selection        O The frequency of defects is an important          basis for s...
Monitor and Measure                      Progress        O Accurate and timely measurement of            improvement team ...
Monitor and Measure                      Progress        O The Economics of Quality process has to be          managed    ...
Reporting to Top                            management        O Elevate the Economics of Quality process to the           ...
Conclusions        O The Economics of Quality Approach           O Focuses priorities and resources on             achievi...
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Economics of quality 2012 rev

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The economics of quality focuses priorities and resources on achieving both customer satisfaction and profits. It adds a financial dimension to the quality improvement process.

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Economics of quality 2012 rev

  1. 1. Economics of Quality The Connection Between Quality and Profits www.quantumassocinc.com 847.919.6127Quantum Associates, Inc 1
  2. 2. About Quantum Associates O Certified professionals with an average of 20+ years hands-on industry experience in Lean, Six Sigma, Theory of Constraints, Quality Management, Business Process Improvement, Change Management, and ISO 9000 O Experience with Clients in various industry sectors (chemicals, product safety, food processing, pharmaceuticals, automotive, tool and die, retail, non-profits, government, etc.). We can leverage this know-how and experience to help improve your organization O We deliver sustainable solutions that can double your labor and working capital productivity while simultaneously reducing your costs at least 20% Quantum Associates, Inc 2Quantum Associates, Inc
  3. 3. Is It Management’s Fault? O It is time that we re-examine the issue of "top management support" that Deming proposed O Prior to Demings death in 1993, the quality movement was showing real, bottom-line results in organizations. These accomplishments were attained without the benefit of ISO 9000 registrationsQuantum Associates, Inc 3
  4. 4. Is It Management’s Fault? O Since Demings death in 1993, the quality profession as a whole has declined O Top management no longer calls upon the quality professionals skills to drive fundamental business competitiveness improvements. Instead, quality professionals are often relegated to compliance activitiesQuantum Associates, Inc 4
  5. 5. Is It Management’s Fault? O Quality managers are operating in an environment where top management has spent lots of money on quality programs, such as ISO 9000 or Six Sigma, that quality professionals recommended, but these programs have not delivered the expected resultsQuantum Associates, Inc 5
  6. 6. Is It Management’s Fault? O The best way to regain top management support for fundamental quality techniques is to demonstrate the techniques effectiveness O Make it easy and riskless for top management to endorse basic -- not trendy, not expensive -- quality methods againQuantum Associates, Inc 6
  7. 7. Is It Management’s Fault? O Find a problem in your organization where quality techniques could solve a problem. Ideally, the problem would be a high-profile, nagging issue affecting profitability. Attack the problem using solid, basic quality techniques O Since management only understands the “language of money” we should use an economics of quality approachQuantum Associates, Inc 7
  8. 8. Economics of Quality O Conduct Cost of Poor Quality Assessment O Perform Cost Driver analysis O Select Projects O Measure Results O Monitor Ongoing Performance and Management ReportingQuantum Associates, Inc 8
  9. 9. Cost of Poor Quality Assessment O Identify and quantify the financial impact of non-value-added activities and waste driven by poor quality across the entire business O The cost of poor quality assessment approach has two unique elements: O Define non value-added activities and waste in terms of the failure to meet customer requirements. O The white collar, service, support, indirect, and management functions participate in the improvement process.Quantum Associates, Inc 9
  10. 10. Cost of Poor Quality Assessment O The Elimination of Non Value-Added Activities and Waste to Improve Financial Performance Gives Top Management a New Perspective on Using Quality to Manage CostsQuantum Associates, Inc 10
  11. 11. Cost of Poor Quality Assessment O White Collar, Indirect Costs of Poor Quality Are Often 300% to 500% Greater Than The Direct Costs of Poor Quality Cost of Poor Quality Cash Impact Obsolete & excess inventory Past Due Accounts receivable Premium Transportation Policy Allowances Warranty Claims Unscheduled Overtime Rework/Scrap White Collar reworkQuantum Associates, Inc 11
  12. 12. Cost of Poor Quality Assessment O Cost of Poor Quality Assessment Focuses on Internal and External Customer Failures O Internal Failure O Costs of non value-added activities and waste associated with the failure of processes. products, services, and materials to meet customer requirements prior to receipt by the external customer: O Scrap – Rework – Rejects – Safety stock O Downtime due to failure of product or people O Productivity losses due to failure of product or servicesQuantum Associates, Inc 12
  13. 13. Cost of Poor Quality Assessment O External Failure O Costs of non value-added activities and waste associated with the failure of processes, products, services, and materials to meet customer requirements received by the customer: O Returned goods – Recall costs – Warranty claims O Liability insurance – Downgraded product O Damaged reputation - PenaltiesQuantum Associates, Inc 13
  14. 14. Cost of Poor Quality Assessment O Scrap – the total cost of material, labor and overhead for defective products or services that is wasted or disposed of because the product or service does not conform to requirements O Problem in identifying and quantifying the cost of poor quality (the failure to meet customer requirements) is to: O Identify the customers O Use terminology that makes sense to the customersQuantum Associates, Inc 14
  15. 15. Cost of Poor Quality Assessment O Survey the internal and external customer and not the internal or external supplier O Ask users of IT how useful are the reports that are produced. What type of answers would you expect? O Ask Purchasing how useful are the sales forecasts for establishing supplier commitments and issuing purchasing orders. What type of answers would you expect?Quantum Associates, Inc 15
  16. 16. Cost of Poor Quality Assessment O Using our definition of scrap list a function or process you work in and tabulate the following: O A. Labor Costs O B. Materials or Expense Budget O C. Overhead O D. Total Costs (A + B + C) O E. Percentage Wasted (% Non-value-add) O F. Dollars Wasted (D X E)Quantum Associates, Inc 16
  17. 17. Cost of Poor Quality Assessment O The Hidden factory O For most manufacturing companies the hidden cost of poor quality is 75 to 80 percent of total operating costs O For service companies the hidden cost of poor quality approaches 100 percent of total operating costsQuantum Associates, Inc 17
  18. 18. Cost of Poor Quality Assessment O Controllable Poor Quality Costs O Under the control of the function or process driver O Uncontrollable Poor Quality costs O Outside the control of the function or process customer O The percent uncontrollable tells you how much cross-functional cooperation you need to eliminate poor quality costsQuantum Associates, Inc 18
  19. 19. Cost Driver Analysis O Helps to prioritize improvement projects on the basis of both increasing customer satisfaction and profits O Determines the root causes of the poor quality costs O Determines the financial impact of each root cause O Conducts a cost benefit analysis O Identifies projects with the highest payback and ROIQuantum Associates, Inc 19
  20. 20. Cost Driver AnalysisO Key COPQ Element - Returns 5% Cost Wrong purchase 15% Key Drivers COPQ Poor workmanship $0.120M element 80% NRG $0.180M Critical to select the right projects and manage the 80% link of quality to profits Returns $1.2M Confusing instructions NRG = no reason given $1.5 M Root $.960M cause Quantum Associates, Inc 20
  21. 21. Cost Driver Analysis O Adding a financial dimension to the root cause analysis demonstrates the financial impact of effective quality management O Helps selects improvement projects that can make a genuine difference to the businessQuantum Associates, Inc 21
  22. 22. Improvement Project Criteria-Financial Performance and Customer Satisfaction O Select projects based on a logical connection to financial payback O Set a BHAG (“Big Hairy Audacious Goal”), identify appropriate team members, finalize financial and non financial performance measures O Departmental boundaries do not limit the scope or breadth of solutions O It is not the quantity of teams that counts, it is the significance of the problems that teams are solvingQuantum Associates, Inc 22
  23. 23. Improvement Project Selection O Most common fatal error is picking the wrong project O Correct project selection allows the quality process to contribute to the achievement of business goals and objectives O Identifying the projects that are capable of generating greater sales or lower costs increases profits O The “Field of Dreams” strategy doesn’t workQuantum Associates, Inc 23
  24. 24. Improvement Project Selection O The frequency of defects is an important basis for setting improvement project priorities O Convert the frequency impact to dollar impact to ensure correct project selection relative to financial impact O Adding a financial dimension to the root cause analysis demonstrates the financial impact of effective quality managementQuantum Associates, Inc 24
  25. 25. Monitor and Measure Progress O Accurate and timely measurement of improvement team progress provides a powerful support mechanism for the economics of quality process by: O Gaining and maintaining top management commitment by focusing on issues that make a difference O Supports the efforts of the individual teams by identifying problems or barriers that hamper success O Manage on the basis of facts- the connection between quality and profits is grounded in fact- based decision-makingQuantum Associates, Inc 25
  26. 26. Monitor and Measure Progress O The Economics of Quality process has to be managed O Top level performance measures determine performance against objectives and goalsQuantum Associates, Inc 26
  27. 27. Reporting to Top management O Elevate the Economics of Quality process to the same stature as any other process within the business by linking it to the achievement of meaningful business results O The Economics of quality approach O Identifies and quantifies the payback and performance of quality improvement O Answers how quality improvement contributes to the achievement of lower costs, increased profitability, and improved competitiveness. O Evaluates quality projects in the same terms that other business investments are evaluatedQuantum Associates, Inc 27
  28. 28. Conclusions O The Economics of Quality Approach O Focuses priorities and resources on achieving both increased customer satisfaction and profits O Adds a financial dimension to the quality improvement processQuantum Associates, Inc 28

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