CONTROL. Chapter 3-7. Cost of Quality Institute of Industrial Engineers 3-7-1

Transcription

1 Chapter 3-7 Cost of Quality 2011 Institute of Industrial Engineers 3-7-1

2 Cost of Quality Topics Introduction Understanding Quality Cost Categories and Models Hidden Costs Benefits of a Cost of Quality System Management Reports 2011 Institute of Industrial Engineers 3-7-2

3 What is Cost of Poor Quality? In addition to the direct costs associated with finding and fixing defects, Cost of Poor Quality also includes: The hidden cost of failing to meet customer expectations the first time The hidden opportunity for increased efficiency The hidden potential for higher profits The hidden loss in market share The hidden increase in production cycle time The hidden labor associated with ordering replacement material The hidden costs associated with disposing of defects In almost every company where the COPQ is unknown, the COPQ exceeds the profit margin Institute of Industrial Engineers 3-7-3

4 Cost of Quality Project Savings $ $ Return on Investment Cost of Poor Quality $ Profit Cost Analysis 2011 Institute of Industrial Engineers 3-7-4

5 Why Use COQ In Process Improvements Most Quality Costs are NOT MEASURED, they are HIDDEN. Most Quality Costs captured are caused by upstream process failures. Any costs can not be measured effectively unless they are measured and reviewed Institute of Industrial Engineers 3-7-5

6 Hidden Costs 2011 Institute of Industrial Engineers 3-7-6

7 The Cost of Poor Quality (COPQ) Iceberg Traditional Quality Costs 4-8% Rejects Warranty Inspection (tangible) (Easily Identified) Scrap Rework Engineering change orders Additional Costs of Poor Quality (Difficult or impossible to measure) Long cycle times More Setups Expediting costs (intangible) Lost Opportunity Lost sales 25-35% Late delivery Lost Customer Loyalty Excess inventory 2011 Institute of Industrial Engineers 3-7-7

8 Objectives Of A COQ System Quantify the Problem in the Language of Management Identify Opportunities for Cost Reduction Reduce Customer Dissatisfaction Expand Budgetary & Cost Controls Stimulate Improvement 2011 Institute of Industrial Engineers 3-7-8

9 Why Quality Costs and Process Measurements? Evaluation of Business Strategies Right Size Organization Identify Key Indices Focus on Key Business Processes Better Assess Impact on Organization of Process Changes 2011 Institute of Industrial Engineers 3-7-9

10 Traditional COQ Categories Prevention Appraisal Failure - Internal Failure - External Failure 2011 Institute of Industrial Engineers

11 Prevention Costs: Costs Designed to Attempt to Keep Failures from Occurring. $ Methods Improvements $ Training $ Planning $ Procedures $ Quality Improvement Projects $ Quality Reporting $ Data gathering and analysis $ Preventive maintenance $ SPC training costs $ ISO 9000 training Costs 2011 Institute of Industrial Engineers

12 Appraisal Costs: Costs associated with the measuring, evaluating, or auditing of products or services. Inspections Process Audits Product Audits Testing and Test Equipment Receiving Inspection and Testing Reviews (Meeting Time) Data Collection Outside Endorsements Outside Certifications 2011 Institute of Industrial Engineers

13 Internal Failure Costs: Resulting from products or services not conforming to internal customer requirements. Re-work Re-audit Re-test Defects Unscheduled lost time Excess Inventory Obsolescence Scrap White Collar Mistakes 2011 Institute of Industrial Engineers

14 External Failure Costs: Resulting from products or services not conforming to paying customer requirements. Warranty Tech Support Customer Complaints Customer Bad Will Customer Appeasement Lost Business Liability Returns Refunds White Collar Errors 2011 Institute of Industrial Engineers

15 Not Every Activity is a COQ Component Value added activities are the investment required to produce a product or service. These are not part of the cost of quality. Order Entry Sales Purchasing Necessary Goods and Services Standard Production Installing New Service Meeting Contractual Requirements 2011 Institute of Industrial Engineers

16 Goals Of A COQ System To Facilitate Quality Improvement Efforts That Will Lead to Operating Cost Reduction Opportunities 2011 Institute of Industrial Engineers

17 Goals Of A COQ System Strategy - COQ Use Take Direct Attack on Failure Costs in an Attempt to Drive Them to Zero Invest in the Right Prevention Activities to Bring About Improvement Reduce Appraisal Costs According to Results Achieved Continuously Evaluate and Redirect Prevention 2011 Institute of Industrial Engineers

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19 COQ Benefits The Prime Value of a Quality Cost System is in Identifying Opportunities for Improvement and then Providing a Measurement of That Improvement Over Time st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2011 Institute of Industrial Engineers

20 How Large is Your Cost of Quality? 2011 Institute of Industrial Engineers

21 Typical Industry Figures COQ as Percent of Sales $ Manufacturing: 20-30% $ Service: 30-50% $ Software: 40-65% 2011 Institute of Industrial Engineers

22 Harrington s Model Direct poor-quality cost A. Controllable poor-quality cost (1) Prevention cost (2) Appraisal cost (3) No-value-added cost B. Resultant poor-quality cost (1) Internal error cost (2) External error cost C. Equipment poor-quality cost Indirect poor-quality cost A. Customer-incurred cost B. Customer-dissatisfaction cost C. Lost-opportunity cost D. Loss-of-reputation cost 2011 Institute of Industrial Engineers

23 Beheiry s Model 1. Productive activities: making a product, designing a machine, writing a report, conducting financial analysis, selling a service, etc... These are our budgeted operating costs. 2. Preventive activities: making sure that our processes and procedures will lead to the desired results (conformance to requirements) every time without breakdown. These activities would include such things as preventive maintenance, quality education and training, process proving, procedure verification,customer-orientation training, design review, etc Institute of Industrial Engineers

24 Beheiry s Model 3. Corrective activities: finding where we went wrong (inspection after the fact) and then correcting the nonconformance (defect). This could include reworking or reprocessing a transaction, or if not possible, scrapping the old product/service and redoing the whole operation. Also, expediting the output to meet deadline requirements, computer reruns, excess inventories, downtime, service after service, warranty activities, obsolete material disposal, etc Institute of Industrial Engineers

25 Gryna s Model Cost of Poor Quality Cost of Cost of Cost of Non Conformities Inefficient Lost Opportunities Processes of Sales Revenue 2011 Institute of Industrial Engineers

26 Wilson s Model Non Conformance. This area covers the price paid by not having quality systems or a quality product. Examples of this are: (1) Rework. Doing the job over again because it wasn't right the first time. (2) Scrap. Throwing away the results of your work because it is not up to the required standard. (3) Waiting. Time wasted whilst waiting for other people. (4) Down Time. Not being able to do your job because a machine is broken Institute of Industrial Engineers

27 Wilson s Model Conformance. Conformance is an aim of quality assurance. This aim is achieved at a price. Examples of this are: (1) Documentation. Writing work instructions, technical instructions and producing paperwork. (2) Training. On the job training, quality training, etc. (3) Auditing. Internal, external and extrinsic. (4) Planning. Prevention, do the right thing first time and poka yoke. (5) Inspection. Vehicles, equipment, buildings and people Institute of Industrial Engineers

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29 Workshop The Federated Screw Company manufactures a wide variety of screws for industrial companies to designs usually supplied by customers. Total manufacturing payroll is 260 people with sales of about $12,500,000. Operations are relatively simple, but geared to high-volume production. Wire in rolls is fed to heading machines at high speed, where the contour of the screw is formed. Pointers and slotters perform secondary operations. The tread-rolling operation completes the screw configuration. Heat treatment, plating, and sometimes baking are the final steps and are performed by an outside contractor located nearby. You have been asked to prepare a quality cost summary for the company and have made the following notes: The Quality Control Department is primarily a Final Inspection Department (eight inspectors) who also inspect the incoming wire. Another inspector performs patrol inspection in the Heading Room, checking first and last pieces. The Quality Control Department also handles the checking and setting of all ring, snap, and plug gages used by themselves and production personnel. Salaries of inspectors are approximately $32,000 per year Institute of Industrial Engineers

30 Workshop Continued Quality during manufacture is the responsibility of the operator-setup teams assigned to batteries of about four machines. It is often difficult to estimate how much of their time is spent checking setups or checking the running of the machines, so you have not tried to do this as yet. Production has two sorting inspectors, earning $39,000 each, who sort lots rejected by Final Inspection. The Engineering Department prepares quotations, designs tools, plans the routing of jobs, and establishes the quality requirements, working from customers' prints. They also do troubleshooting at a cost of about $27,000 a year. Another $18,000 is spent in previewing customers' prints to identify critical dimensions, trying to get such items changed by the customer, and interpreting customers' quality requirements into specifications for use by Federated inspectors and manufacturing personnel Institute of Industrial Engineers

31 Workshop Continued Records of scrap, rework, and customer returns are meager; but you have been able to piece together a certain amount of information from records and estimates. Scrap from Final Inspection rejections and customer returns amounted to 438,000 and 667,000 pieces, respectively, for the last 2 months. Customer returns requiring rework average about 1,000,000 pieces per month. Scrap generated during production is believed to be about half of the total floor scrap (the rest not being quality-related) of 30,000 lbs. per month. Final Inspection rejects an average of 400,000 reworkable pieces per month. These are items that can be flat-rolled or re-rolled. Rough cost figures have been obtained from the accountants, who say that scrap items can be figured at $16.00 per thousand pieces, floor scrap at $900 per thousand pounds, reworking of customer returns at $8.00 per thousand pieces, and flat-rolling or re-rolling at $1.60 per thousand pieces. All of these figures are supposed to include factory overhead. Prepare a quality cost summary on an annual basis. (This example was adapted from one originally prepared by L. A. Seder.) 2011 Institute of Industrial Engineers

32 Hidden Costs An Example A seemingly innocuous defect is traced through the manufacturing process at a window plant. At each point, the costs of wasted time and material are calculated. This example illustrates the hidden costs of poor quality and the Cost of Confusion that results Institute of Industrial Engineers

33 Hidden Costs Event Description Cost 1 The extrusion department makes 100 pounds of C extrusion that is defective. One flange is bent slightly inward. The defect is not detected. At this point, the extrusion has cost $1.16/lb. $ The extrusion moves through several additional processes including paint. It is stored, handled, and records are kept. The additional cost is $0.19/lb. $ An operator sets up a punch press to notch the ends. The setup requires 0.5 $11.75/Hr. $ Institute of Industrial Engineers

34 Hidden Costs An operator attempts to notch the extrusions. The bent flange prevents entry into the punch die. The operator calls for a supervisor and waits for 15 minutes. Operator cost is $11.75/hour. 4 $ Supervisor arrives. Operator and supervisor attempt to process the parts without success. Supervisor calls Diemaker. Both wait for arrival of diemaker. Total time is 20 minutes. Supervisor's time costs $14.75/hour. $ Supervisor, Operator, and Diemaker discuss the problem and attempt to process without success. They decide to grind out the die so the extrusion with the bent flange will fit into it. All three work to remove the die and take it to the die shop. Total time required is 1.0 Hours. Diemaker's cost is $13.50/hour. $ Institute of Industrial Engineers

35 Hidden Costs 7 Diemaker grinds out die, returns to press and sets up the press. Total time 3.4 hrs. $ Diemaker, Operator, and Supervisor assemble to determine status. The operation seems to work. Diemaker and Supervisor go on to other activities, Operator prepares to process parts. Total time required 17.0 minutes. $ A Scheduler spends 1.5 $15.75/Hr to change schedule and advise customers of change. $ Operator processes parts and carries them to the Assembly department. Total time for the lot of 100-lb of parts is 50.0 minutes. $ Assembly builds windows with the defective parts. Many windows do not operate properly because of the bent flange. Assemblers expend 4.2 extra man-hrs attempting to make the windows operate. Assembler time costs $10.50/hr. $ Institute of Industrial Engineers

36 Hidden Costs 1 1 An Inspector notices that some windows are difficult to operate. She confers with Assembler for 15.0 minutes and decides to summon the inspection supervisor. Inspector rate is $12.75/Hr and Inspection Supervisor is $17.25/Hr. $ A The Inspection Supervisor arrives and the Assembly Supervisor comes to see what the problem is. Four persons meet on this problem for 13.0 minutes and decide to summon the Engineer. All wait for an additional 11.0 minutes until the Engineer arrives. The Engineer, Inspection Supervisor, Assembly Supervisor, Assembler, and Inspector confer for 25.0 minutes and determine a way to fix the problem. All then depart to other activities. The Engineer's time costs $26.75/Hr. Inspector Documents events-- 25 minutes. $ $ $ Assembler works for 3.9 hours to repair windows and then sends them to shipping and eventually to the customer. $ Institute of Industrial Engineers

37 1 5 After 2 weeks, customer calls. Some of the windows worked OK until they were installed. Then the bent flanges caused additional problems. Customer requests a Field Service Engineer to fix the problems. Engineer spends 35 minutes. $ After many phone calls, it is decided to send a Field Service Engineer to the construction site. Times involved in making this decision: Engineer $26.75/Hr QA Supervisor $17.25/Hr Plant Manager $52.00/Hr Field Engineer $17.00/Hr Field Service Engineer spends 37.0 Hrs in travel to site, fixing problems, and reporting. In addition, Engineer spends 1.6 Hrs on the problem. The Sales Manager spends 3.4 $48.00/Hr. Travel costs $987. $ $ Weeks later, the same part is run again. It is found that the die can no longer run parts that are in spec because it has been "relieved" too much. A similar chain of events occurs. Time required: Diemaker Hrs Supervisor Hrs Operator Hrs Engineer Hrs Inspector Hrs Scrap $0.17/lb $ $ Cost of Original Error...$ Total Cost Of Error...$ Institute of Industrial Engineers

38 COQ & Hidden Costs Hidden Costs are Intangible Costs What you see is only part of what you have You must look below the surface for process savings Institute of Industrial Engineers

39 COQ & Hidden Costs Error made Defect found The Total Quality Cost Impact Must be Summed 2011 Institute of Industrial Engineers

40 What you See is only Part of What you Have Above the Surface Scrap Rework Repair Inspection Test Below the Surface Warranty and Recalls Returns ECN s Complaints Corrective Action Turnover Injuries Billing Errors Shipping Costs Material Delays White Collar Errors 2011 Institute of Industrial Engineers

41 Workshop Hidden Quality Costs Background Assume your workgroup is the Human Resources Department. Your quality requirement is to have zero turn over of personnel during the year. In March a R&D engineer responsible for the design of the ABC product line resigns, feeling frustrated because marketing has constantly changed their design requirements. He must be replaced with an outside individual immediately, due to project scheduling. Assignment Please identify in the following format the tasks/impacts and the quality costs associated with replacing the R&D engineer. Look at the quality costs on a company wide basis. You have creative freedom. Make any realistic assumptions Institute of Industrial Engineers

42 Category Amount Category Amount Total Cost 2011 Institute of Industrial Engineers