Calculating and Reporting Benefits of QMS

Iowa State University

of Science and Technology

Agriculture and Biosystems Engineering

Agriculture and Industrial Technology

7/15/05

Objectives
Identify potential benchmark measures of cost/benefit of quality management system adoption by agriculture.  Set scope of the project  Select summarizing fiscal indicator of costs and benefits measures


Dual Roles for ISO 9000/9004

QMS for fulfilling customer, regulatory, etc., requirements (ISO 9000)  Management should consider development of innovative financial methods to support and encourage improvement of the organizational performance (ISO 9004 Guidelines for performance improvements)


Allocation of Costs: Process Approach

Early methods of tracking quality costs was too limited focus on cost of nonconformance i.e. external and internal failure costs.  Process-cost broadens economics of quality by classifying cost of nonconformance and cost of conformance I.e. costs incurred when a process is running without failure

(Juran) (Schottmiller)

Process Approach: Added Benefits



Utilize cost of non-conformance (often called Cost of Poor Quality) and cost of conformance = greater cost saving opportunities may be available in reducing cost of conformance
(Schottmiller)

Process Costing
Allows the tracking and reduction of costs normally associated with efficiency in addition to effectiveness (quality)  Process simplification in addition to reduction of errors become objectives

(Schottmiller) (Schottmiller)

Relate the economics of quality to the amount of activity performed

of Quality)

(ISO/TR 10014: Economics

Process Costs i.e. Costs of Inefficient Processes Examples



 

 

Variation of product characteristics from optimum Unplanned downtime and/or loss of processing/storage capacity Inventory shrinkage Variation of process characteristics from best practices (cycle times from to start to finish of activities) Other non-value added activities NOTE: Improvement is also an objective

Dont Ignore Quality Failures

Cost of Poor Quality Cost of nonconformity: Internal failure costs External failure costs Cost of conformity: process approach Cost of lost opportunities for sales revenue

(Juran)

Internal Failure Costs Examples



    

Labor and material overhead spent on defective product spoilage, defectives, scrap etc. Correcting defectives in physical or service products i.e. reworking product Sorting bad/good product Reinspection, retest of product Changing processes to correct deficiencies (CARs) Downgrading product
(Juran)

External Failure Cost Examples

     

Costs involved in replacing/making repair for warranty product Investigation and adjustment costs to justified complaints of quality defective product Returned material Concession costs due to substandard product accepted by customer Correcting errors on external supporting processes Revenue losses in support operations
(Gyrna)

Allocation of Costs
The company must decide what to measure depending upon circumstances, objectives, etc. However,  The overall idea is to allocate costs and not to absorb such costs into overhead (ISO/TR 10014)


Deriving Benefits
 

Reduction of failures due to QMS Improvement of process efficiencies due to QMS

Pre and post measures of implementation

However, improvements should be done as identified

Using quality tools such as flowcharting, value add analysis, cycle time reduction, process simplification, root cause investigation, etc.

Quality Improvement Examples

J OB SE UP Bi r Pr r m li Mi i li Fix t r i P rt S t p G

ook f or a in

Wait ?

S l r/ S p rv i r

P r

Expe it e mi ss in tool, fi xture, or a e

Flow charting w/ value, non-value add analysis

Green customer value added activity Yellow necessary evil Red non customer value added

C r tifi C

1 t Pi k r

irst piece c eck

ri

p ate bin er from isto r s eet ; f ile bin er

 )

"

 

e rite pro ram

  

$

et pro ram f rom a r riv e

ook for t ool in ot e r m ac ines

in pro ram ?

  

Op r t r / S p r vi r/ li

in tool?

ubst i tute tool?

in miss in a e(s)?

  

 "

ook for m issi n fi xture, ja s, etc.

Op r t r / S p rv i r

in mis sin part(s)?

 "

 

 "

  "

Op r t r

oa

pro ram



 !

et bi n er f or nex t job

eck f or pro ram on m ac ine

O perat or oes tool layout

ac ine uploa s to ol ata from pro ram

eck tool cart

ys ically c eck tool c ain

i sual inspecti on of t ool

ut tool in c ain& et fixture, ja s , et c.

etup part in mac ine

et a in for part from t oolin

un f irst pie ce on m ac ine

ut bin er at slot by En r. of fice

 

   

 

&



 

ro ram avai lable ?

Tool in c ain? (mac ine ata)

Tool on c art?

Tool in c ain? (visual)

Tool in crib?

OK t o us e?

Tool available i n cri b?

i ss i n fixture, etc ?

jus t p ro ram to m atc ne tool; fill pro ram c an e s eet & i st ory form

a in available ?

  

li

      '

Tool layout for next jobs

etup t ools for next j ob (base on tool layout)

ut tools on c art

ar rive up at e f rom f loor pro .

   (

an e s eets c ollect e (J ay/Dav e); pro ram retreive f rom f loor

i
Y

Pr r m j tm t

1 t Pi R / Q lit C k

Bi r j tm t

   

    

 



 



 

Cycle Time Reduction

Department:____________________ Part Name:________________________ Date of Timestudy:_______________________ Supervisor:_____________________ Part #:____________________________ Measurer:______________________________ Operator:_______________________Operation:_________________________ Operator Tools:_________________________

 

Stop watch time study common Also work sampling Better way to get data w/o estimating

Step

Element Description

10

TOTAL

Avg

S/E

Mins

Normal Minutes:

Foreign Elements: A
S ILL:

EP
EFFORT:
1

-20 -20

B C D

Performance Rating Data VP Poor Fair Avg Gd VG Exc Sup -15 -10 -5 0 5 10 15 20 -15 -10 -5 0 5 10 15 20

10% PF D: Standard Minutes: Hrs/Piece: Pcs./hour:

Operator Average at Time of Study: Machine Cycle: Comments:

Value Add Analysis



Definitions
Value added activity:
only if the customer recognizes its value, its done right the first time, It changes the product toward something the customer expects

Necessary Evil (operational value added activity):

not customer value added but required through law, regulation, or contract required to support value added activities technological barrier exists from eliminating activity

Non value added activity:

not valued by customer, doesnt change product towards customer value not required by law, contract

Pareto Analysis (80/20 rule)

aseline ata /2/0 - / /0
00 00 80

ount

000

0 0

00 20 0
I

0
A AI I P A PA A I IA / P A I P IX I I I I AI AI I P rs te

efe t
ount Per ent u

0 2 2

2 20

8 0

2 0

2 8

20 8

2 2 8 8 2

8 2

2 2

2 8

2 2 00

Per ent

Root Cause Analysis

7 4 6 54

hy-because diagram: ask why at least 5 times to reach root cause

Lost time to tooling @ workcenter

Why-Because hart - 9/25/03 K Tooling- ed T ea

No tooling inventory updates Fixture loading problem Operator error Fixture quality; design
2

Don't know what is in tool chain

Tooling not returned to crib after job No trigger to replenish tooling Tooling breaks, machine crashes Running tool past tool life Most correct measurements

No spare tooling

No tooling available Takes time to change inserts

(binder descp.)

Tool wear Take up to tool room to measure

No standardized tooling

Not enough tools Engr. not aware of std. tools

(program descp.)

P rograms change Anyone can change programs Try to change program to match print

$$$ Tools disappearing from chain

Same tool but diff. descriptions

Same tool but diff. lengths

Too much specialized tooling Lack of control over tools descriptions Tool setup diff. from tool room Manufacturer specs. vary

Lengths changed

PC's changed

Effect

Cause

Out of tolerance

Easy fix

Load procedure not consistant Not paying attention Going too fast

ant to hit higher efficiency

Can't measure all char. @ mach. Tools used on other jobs No compatible tool lists btwn. P rod. And Engr.

1 pre-setter

Improvements Summary
Point is to have active system of improvement per ISO guidelines and would bring more value to project and study as a whole  Question is: will it confound the measuring of the ISO impact study


Potential Benchmark Measures

The organization can use a variety of financial decision methods (e.g. net present value, payback time, internal rate of return) to decide whether to proceed or not with a cost benefit analysis (ISO/TR 10014:1998(E): Guidelines for Managing the Economics of Quality)

Overall Fiscal Impact



Roll up measures into a financial indicator such as:

Benefits/cost ratio: present worth of total benefits B/C= present worth of total costs If ratio is greater than 1, project deemed worthwhile and vise versa

Overall Fiscal Impact cont.

OR:
Net present worth: NP =present worth of total benefits total worth of total costs Simple number; positive worth indicates program is viable Both ignore time value of money; relative to project not company as a whole

Data Collection and Analysis

Statistical analysis of QMS impact, design study based on answering some questions: 1. Important to answer implementing QMS vs. not implementing  Larger scope, need control group, different indicators 2. Does QMS implementation pay for itself ** 3. How do AIB vs. ISO systems compare 4. hat is QMS impact over time  Repeated measures Regardless of above, 1. How to control location variation i.e. how were present locations picked for QMS implementation


Timeline

Timeline Questions
hat is finish date  How long does data collection last  hat are the resources at hand


Conclusion
Answer questions of scope, design, particular measures, summarizing fiscal indicator(s), timeline  Review relevant FC documents as necessary


Presentation through Balanced Scorecard (BSC)

Articulate key indicators (that management considers important) to categorize performance ( est)  Balanced Scorecard is a business management system for linking strategic goals to day to day operations requirements (Hoffert)


Airspeed Only ! *

AIRSPEED

*Kaplan

Multiple Perspectives of BSC

How do we look to shareholders (Financial)  How do customers see us (Customer)  hat must we excel at (Internal)  Can we continue to improve and create value (Innovation and learning)

( aplan and Norton)

Financial Perspective


Business strategies:
Growth Sustain Harvest here is your business

Three financial themes:

Revenue growth and mix Cost reduction/productivity improvement Asset utilization/investment strategy

Customer Perspective


Core Measures:
Market share Customer retention Customer acquisition Customer satisfaction Customer profitability

Beyond the Core:

Product/service attributes Customer relationships Image and reputation

Internal Business Process Perspective



Three basic processes:

Innovation Operations* Postsale service *Measuring process quality approach of QMS benefits

Learning and Growth Perspective



Three principles:
Employee capabilities Information systems capabilities Motivation, empowerment, and alignment

How Measures and Plans Link

Measures need targets  Actions/plans need to be defined for achieving targets  Competitor/comparative data used to set targets  Performance against targets needs regular review (Hoffert)


Examples
Da e _____ _____ _____

Quality Metrics
Scrap ($) Over-Consumption ($) Productivity Cycle Time (Days) $ amount of Returns issued

M arch Actual
$6 420 847 00 0 85 31 4 TBD
A A D

Target
$19 583 00 D D
A C B B @ C B

Status

($18 955 00
A @

TBD

Financial Metrics
A @

$202 000 00 $1 32 $6 482 333 00 $7 311 55

A @ A @ @ A A @

$157 000 00 $1 27 TBD TBD

A

Employee Satisfaction
F E

12 15 33 1 84 91 $79 722 00 5
A @ A A A

No

oa

6 28 0 43 90 0 0
A A

Customer Satisfaction
On-Time Delivery (%) Customer Spoilage ($) # of Customer Complaints

Company Objectives
ISO Set-up Reduction 5S Six Sigma Projects

Comments:

RR

RG

RR

XG

Q W

PG

RR

RR

S GR G X X

GR

G`

No e a ge
P

een ean able p o e on a ge ello ean able p o e no on a ge able ean n a al p o e con ol and capable o mee ng requ remen

ed

ean p o e

no

able

no on

GR G

GR R

Employee Turnover Rate Employee Absenteeism Rate Recordable Accident Rate Days Away Case Rate

13

No

oa

EBIT ($) EVA ($) Finished Goods Inventory Work-in-Process ($) VAR / Employee ($/Employee)

$1 561 000 00

$1 730 000 00

Balanced Scorecard
A @ @

GR R

P I

(LaCoun )

Examples cont.

(Hoffart)

How it All
Quality Policy

orks
Objectives

Metrics from Balanced Scorecard

Internal -Return on Quality (ROQ) = benefits/investment Customer Learning/Innovation Financial

(Alam, Juran)

Summary


This is more than just the cost/benefit of a QMS, it is the development of a Rich Picture of the business performance