Manufacturing Cost of Quality

Segment 2 of 5




The Cost of Un-Quality quantifies errors, defects, delays, and other problems that tend to slow operations or add costs. It measures the loss to the company of not achieving the planned result. Most people will agree that any loss should be avoided. The hard part has been ranking identified losses from different functional areas according to a common standard, one that should demonstrate the problem's relative impact on the business.

The Cost of Un-Quality calculation is:

Time to Correct (in hours or dollars) Plus Out-of-Pocket costs (including material and services) Equals Event Cost-to-fix


Event Cost-to-fix Times Frequency of Occurrence Equals Cost of Un-Quality

The frequency a problem occurs multiplied by the cost to fix it gives us a relative measure of its impact on the business.

Example: If sales of 100,000 pieces of Item A requires production of 110,000 units (an 11 % reject rate), and each replacement piece contains $10 labor and $5 material, then the Cost of Un-Quality equals $150,000. If sales of 10,000 of Item B requires 11,000 to be made (also an 11% rejection), and each replacement contains $20 labor and $30 material, its Cost of Un-Quality equals $50,000.

Though the individual cost is greater to replace Item B ($50 versus $6), the frequency of Item A problems creates a larger business impact for it. Even adding an estimate of substantial indirect costs (management, MRP analysis, additional paperwork, etc.) may

not shift the priority.

Each of our businesses may be driven by different prime consid­erations, so the Cost of Un-Quality should be expressed in units of measure that are relevent to the company's operations and that focus improvements along lines that have immediate impact.

The Cost of Un-Quality formula quantifies two basic types of loss to business operations (Time and Money):

• Loss of Money—A company that is traditionally cost- or profit-driven should express problems in terms of dollars spent, wasted, or lost. This measure shows effects on net profit, return on investment, and cash flow.

• Loss of Time—A highly competitive industry requires quick response to orders, changes, new products, and new technol­ogies. Also, where operating costs or profits are not widely published, time can be a meaningful surrogate. Most people can agree that time is money. This format shows effects on Throughput, Inventory, and Operating Expenses.

Note: For those using the Theory of Constraints to focus improve­ments (Bottlenecks versus Non-Bottlenecks), time is not neces­sarily money. A deeper analysis of resource utilization will be required, and added weight must be given to losses from a Bottleneck.

Two other types of loss are more subjective and cannot be measured directly with the above formula. Losses here tend to be caused by the earlier problem events and are additive, or even multipliers, to their effect.

• Loss of Control—Some business environments look like a Chinese Fire Drill. It is generally helpful to get better organ­ized before establishing detailed measurements. Two types of control problems are measured in this category.

The first, database integrity, asks questions like: How many Routings are incorrect? (or) What percentage of all Routings are incorrect? There is a high cost to correcting the database. It must be balanced against the actual Cost of Un-Quality it produces, i.e. making things incorrectly. Correction should probably be a free-time activity, and be prioritized by the impact of individual Routings errors, as measured through line operations.

The second control issue is the frequency of management interventions. A variation of the Cost of Un-Quality formula should be agreed on in each company. As we drive decision authority closer to the point where action is taken, this issue will lessen. The measurement itself, though, is one of the best motivators to increase delegation.

• Loss of Reputation—Very hard to objectively quantify, but a critical intangible. Relativity can be achieved using consen­sus estimates of event impact and resources expended. This requires honest, widespread communication. This kind of measure applies to customers, vendors, competitors, manag­ers, and the general work-force.

The latest, or loudest, phone call cannot drive long-term planning, though it might define today's activities. The poten­tial damage to our reputation increases as more, and higher-level, external people get involved. A multi-part (1-5 each) grade might be given to each contact. Grading could include who the complaint was handled by, how serious (upset) the complainant was, how many contacts were required for reso­lution, how many people (internal and external) got involved, and how long it took to resolve.

Whether you are concerned with sales, purchasing, manufactur­ing, distribution, or any other company function, the basic goals

of measurement are:

1. To benchmark current operations.

2. To identify opportunities for improvement.

3. To set relative priorities for actions

4. To monitor progress and validate improvement actions.

To be Continued


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