How Lean Six Sigma reduces the Cost of Poor Quality in Organisations. Alex Colman. Lean Six Sigma MBB - BEng Mech. Eng.

Transcription

1 How Lean Six Sigma reduces the Cost of Poor Quality in Organisations Alex Colman Lean Six Sigma MBB - BEng Mech. Eng. MCIPS - PGCE 1

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9 Philip B Crosby ( ) "Quality is conformance to requirements; non-quality is nonconformance."

10 CROSBY'S 4 ABSOLUTES 1. Quality means conformance to requirements, not goodness. 2. The system for causing quality is prevention, not appraisal. 3. The performance standard must be zero defects, not "that's close enough." 4. The measurement of quality is the price of non-conformance, not indexes.

11 Total Cost of Quality 11

12 Total Cost of Quality 12

13 Traditional Costs of Quality Cost of Achieving Good Quality Prevention costs costs incurred during product design Appraisal costs costs of measuring, testing, and analyzing Cost of Poor Quality Internal failure costs include scrap, rework, process failure, downtime, and price reductions External failure costs include complaints, returns, warranty claims, liability, and lost sales 13

14 Quality planning costs Prevention Costs costs of developing and implementing quality management program Product-design costs costs of designing products with quality characteristics Process costs costs expended to make sure productive process conforms to quality specifications Training costs costs of developing and putting on quality training programs for employees and management Information costs costs of acquiring and maintaining data related to quality, and development of reports on quality performance 14

15 Appraisal Costs Inspection and testing costs of testing and inspecting materials, parts, and product at various stages and at the end of a process Test equipment costs costs of maintaining equipment used in testing quality characteristics of products Operator costs costs of time spent by operators to gar data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality 15

16 Internal Failure Costs Scrap costs costs of poor-quality products that must be discarded, including labor, material, and indirect costs Rework costs costs of fixing defective products to conform to quality specifications Process failure costs costs of determining why production process is producing poorquality products Process downtime costs costs of shutting down productive process to fix problem Price-downgrading costs costs of discounting poor-quality products that is, selling products as seconds 16

17 External Failure Costs Customer complaint costs costs of investigating and satisfactorily responding to a customer complaint resulting from a poor-quality product Product return costs costs of handling and replacing poor-quality products returned by customer Warranty claims costs costs of complying with product warranties Product liability costs litigation costs resulting from product liability and customer injury Lost sales costs costs incurred because customers are dissatisfied with poor quality products and do not make additional purchases 17

18 Measuring and Reporting Quality Costs Index numbers ratios that measure quality costs against a base value labour index ratio of quality cost to labour hours cost index ratio of quality cost to manufacturing cost sales index ratio of quality cost to sales production index ratio of quality cost to units of final product 19

19 Cost of quality Quality Cost Relationship Difference between price of nonconformance and conformance Cost of doing things wrong 20 to 35% of revenues Cost of doing things right 3 to 4% of revenues Profitability In the long run, quality is free 20

20 Selection DMAIC sequence Trigger G Define G Tollgate Review (assessment) Measure G G Analyse Improve G Control Post Project Reviews

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28 Theory of Constraints!! Bottleneck!! 29

29 Waste Customer Value Added Business Value Added

30 Activity Based Costing and Lean Accounting What is Activity Based Costing? Cost Accounting Systems Traditional Cost Systems Activity Based Costing Implementing ABC Benefits & Limitations of ABC Lean Accounting 31

31 Traditional, Volume-Based Product- Costing System With these product costs, Aerotech established target selling prices (Cost 125%). M ode I M ode I I Mode III Direct materials $ $ $ Direct labor M anufacturing overhead Total $ $ $ M ode I M ode I I Mode III Cost per unit $ $ $ Target selling price x

32 Activity-Based Costing Two pieces of information are required to compute the cost-driver rate: Activity Cost Activity Volume = Cost-Driver Rate Activity Cost Activity Volume EXAMPLE #1 The proper activity in this case is the # of units produced. The cost-driver rate would be: $360, ,000 units = $.72 per unit 33

33 Benefits of Activity-Based Costing ABC leads to more activity cost pools with more relevant cost drivers ABC leads to enhanced control of overhead costs since overhead costs can be more often traced directly to activities ABC leads to better management decisions by providing more accurate product costs, which contributes to setting selling prices that will achieve desired product profitability levels 34

34 Activity-Based Management Model Cost View Resources Operational View Driver Analysis Activities Performance Analysis Products & Customers 35

35 Lean Accounting Lean accounting is the general term used for the changes required to a company's accounting, control, measurement, and management processes to support lean manufacturing and lean thinking. Most companies embarking on lean manufacturing soon find that their accounting processes and management methods are at odds with the lean changes they are making. The reason for this is that traditional accounting and management methods were designed to support traditional manufacturing; they are based upon mass production thinking. Lean manufacturing breaks the rules of mass production, and so the traditional accounting and management methods are unsuitable and usually actively hostile to the lean changes the company is making. 36

36 Lean Accounting A valid assessment of the financial impact of lean manufacturing improvement. Many companies are looking for short-term cost cutting to come from their lean efforts. They are usually disappointed. Lean manufacturing does not cut costs; it turns waste into available capacity. The financial impact comes as you make decisions on how to use this capacity (and the cash flow from reduced inventory). These are strategic decisions. Lean Accounting uses a specific tool for understanding the impact of lean changes on the company financially. 37

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