MacroEconomics of Quality

Issues
Why Estimate Cost of Quality Failures?
Quality Costs are Far Greater than Those that are Readily

Identifiable (Iceberg Principle) Gains to be Made if Cut Measured Quality Losses in Half How to Reduce Quality Losses
Rule of Tens Eradicate Killer Res Play Offense (Prevention) vs. Defense (Detection)

Sound Quality Practices

Why Estimate Cost of Quality Failures

Quantify the Cost of Quality Failures for

the Business
Identify magnitude of potential savings Sensitize Management to the size of the opportunity Help to re-expose problems we have learned to tolerate

Identify the Highest Loss Areas

Permit Prioritizing the Loss Areas for

Corrective Action

Economics of Quality: TCE Statistics 1994

TV Units Sold
Estimated Revenues

5 million $2.5 billion

$125 million

(5 x $500 per set) Estimated Earnings (5% of Sales)

Economics of Quality: TCE Statistics 1994

Scrap (Measured) $12 million

Total Cost of Quality

(Measured & Hidden) Cost of Scrap per TV(12/5) Total Cost of Quality (M+H) per TV Sold (6/1 to 50/1 Iceberg) % Total Cost of Quality per TV/Selling Price (14.40/500 -120/500) # Defects per TV

$72 - 600 million

$2.40 per unit $14.40 - $120

3% - 24%

Economics of Quality: STB Systems Statistics 1998

Units Sold
Estimated Revenues

6 million $300 million

(6 x $50 per unit) Estimated Net Earnings $16.2 million (5.4% of Sales)

 Scrap (Measured) Total Cost of Quality

$ 1.875 million $11.25-93.75 million

Average $1.875 $52.5 $.3125

$8.75

(Measured & Hidden) Cost of Scrap per Unit (1.875/6) Total Cost of Quality (M+H) per Unit Sold (6/1 to 50/1 Iceberg) % Total Cost of Quality per Unit/Selling Price (1.875/50-15.625/50) # Defects per Unit

$.3125 per unit

$1.875 - $15.625

3.75% -31.25%

17.5%

???

Cost of Quality Failures

ICEBERG PHENOMENON
Hidden Costs = 6 to 50 times Measured Costs
Direct/Measured Costs:

Scrap/Rework Service Calls Warranties/Concessions

Indirect/Hidden Costs:

Excess Inventory Overtime

Reputation/Image

Cost of Quality Failures Worksheet

FAILURE COST CATEGORIES MEASURED COST OF QUALITY
Internal
Waste, Scrap Rework Reinspect ____________________ ____________________ ____________________

ESTIMATED ANNUAL COSTS $(000)

External
Warranties Guarantees Concessions ____________________ ____________________ ____________________

TOTAL MEASURED __________________

HIDDEN COST OF QUALITY

Internal
Troubleshooting and failure analysis Evaluation to determine usability of off specification material Engineering changes, redesign, buy-offs Costs of reviewing quality problems (i.e.,replanning, meetings, expediting, firefighting, reports, etc.) Inventory costs on held material Overtime because of quality problems Late shipment premiums (delayed collections) Material handling Tool & fixture redesign Machine wear Fringe benefits on labor Loss of productivity due to rework, scrap __________________ __________________ __________________

__________________ __________________ __________________ __________________ __________________ __________________ __________________ __________________ __________________

HIDDEN COST OF QUALITY

External
Loss of market share due to poor quality reputation Loss of profitability Loss of bond credit rating Other
______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

____ ____ ____

_____ _____ _____

Total Hidden Grand Total

____ ____

WHAT IF ???
We could cut losses in half?
1/2 x $12,000,000 ......$6,000,000

If ICEBERG is between 6/1 to50/1$36,000,000 to $300,000,000 Total TCE net earnings in 1994 were?

WHAT IF???
We could cut losses in half?
1/2 x $1,875,000 IF ICEBERG is between 6/1 to 50/1

$937,500 $5,625,000 to $26,250,000 $46,876,000

Total STB Systems net earnings for 1998 estimated to be $16.2 million

Economics of Quality: STB Systems Statistics (1997 vs. 1998)

Sales Net Earnings (Income) (5.4% of Sales) COQ as of % of Sales COQ ($) What if COQ cut in half? (Savings) Net Income with Savings 1997 $190 million $10.26 million 1998 $300 million $16.20 million

10 - 25% $19 - 47.5 million $9.5 - 23.75 million ($16.63 million) $26.89 million

10 - 25% $30 - 75 million $15 - 37.55 million ($26.25 million) $42.45 million

How to Reduce Quality Losses

Rule of Tens
Eradicate Killer ResWaste Play Offense (Prevention) vs. Defense

(Detection)

RULE OF TENS
Not doing it right the first time costs ten times as much to find and fix each time errors escape to a subsequent stage of handling. $1 Design Effort =$10 Production Cost =$100 Assy/Test Cost =$1000 Field Cost

The Killer Res

Readjust Reapply Recalibrate Recertify Recheck Recondition Recycle Refinish Reidentify Reinspect Relevel Remearsure Renormalize Reorder Repack Reprocess Reprogram Rerun Reschedule Reseal Reship Restamp Resock Retap Retest Return Reweld Rewind Rewire Rework

Reject (The worst kind)

Computing Cost of Quality

Internal Failure Scrap Rework Scrap/Rework - Supplier Appraisal Inspection Test Quality audits Test equipment - initial cost & maintenance Prevention Quality planning Process planning Process control Training

External Failure Cost to customer Warranty costs Complaint adjustments Returned material

Note: The listed categories provides an understanding of the COQ structure. In general, COQ is comprised of costs due to failure, appraisal, and prevention.

The Enlightened Perspective

Internal & External Failure Appraisal & Prevention Old Belief New Belief 4s

5s

6s

Quality

Sound Quality Practices

Operational Definitions and Standards

(Metrics) Manage by Fact

In God we trust. But everyone else must bring data! Without good data, everyone is an expert

Focus on Process (Offense) vs Product

Results (Defense) Reduce Variation

Questions?