Manufacturing Cost of Quality

Segment 3 of 5




Before we decide where we want the company to go, we need to know where we are. We need to know what activities are already good and what we need to improve.

• Separate Internal from External conditions—Government, Labor, and Financial institutions and their regulations create some constraints on our businesses that affect our operations. External market factors (customers, competitors, vendors) may be only marginally influenced by our efforts. Strategic management must have the wisdom to recognize what can be changed with a reasonable effort (internal conditions), and what must be accepted as is (external conditions).

• Quantify activities—Define the processes and procedures that describe our internal operations. To start, use broad flow times. It is not necessary that routings, process times, or bills of material be 100% accurate. The major problems will become clear quickly and we can focus corrective efforts on a few critical areas. Too many companies won't start until they upgrade all the data, which means they nexer start.

• Compare results with expectations—Are we competitive in the marketplace on Price, Quality and Delivery? What do the customers, competitors, shareholders, employees, and ven­dors expect from us? We don't have to like it, but we must know in order to decide if we want to change our performance to meet some criteria.

• Evaluate local actions versus global effects—Some local actions clearly have global effects. Two extra days in produc­tion or in engineering will add two days to the lead time. Other cause & effect linkages are not so apparent. Combining batches at any step often increases the lead time of all flows that use that step, or are fed by that step.

Identify Opportunities For Improvement

To achieve our vision and objectives, we must decide what needs to happen to improve our internal results (time/money) or our external results (sales/service). These improvements can be guided by the following:

The Flow Concepts

Given: The goal of the organization is making money now and in the future.

Assumption: The products and services the organization offers meet an external demand in the marketplace relative to price, quality and delivery.


The organization must produce these products and services at a low enough real cost to allow us to make money. Any activity that does not provide value to the customer or to the organization should be eliminated.

The movement of products and services to customers in the shortest possible time will turn investment into profit in the shortest possible time. Any activity that adds value to the products and services, or processes the order must be speeded up.

Maximizing the value of our products and services, simulta­neously with the above two conditions, will maximize our profit. Opportunities to improve the quality of internal and external activities and of their results must be continuously searched for at all levels of the organization.

What to Measure

Measures deal with Magnitude—the absolute and relative values of velocity, complexity, stability, control, and investment. Mea­sures deal with Flow—the time or rate of moving information, decisions, paper, and material. Measures quantify Impact—the loss of time, material, control, and reputation. Measures monitor Trends—the direction and speed of change in operating results.

Globally, a company begins with a definition of what's happening now and of what needs to happen. High-level targets and measures are designated to stimulate and track progress. Links to lower-level activities are established. Clear expectations for results are communicated and monitoring measures agreed on. Local mea­sures must be consistent, fair, understandable, objective, and relatively easy to get and use.

• Magnitude—The absolute or relative values of elements or things. Measured in units of dollars, hours, items, quantities, or occurrences. Compare expectations with results in ratios or percentages. Specific opportunities should be looked for in the following areas:

— Velocity—Something takes too long. Measures: Mfg cycle time, queue time, movement time, value-added versus non value-added time, inventory turns, total elapsed time, accounts receivable aging, process time, set-up time. Measure inventory turns by class (RM, WIP, FG), if possible.

— Complexity—Something isn't necessary. Measures: Steps, transactions, personnel, commonality of parts & processes, fixtures & tooling, adjustments, skills, long set-ups, forms generation & distribution, decision-ap­proval levels, dependencies. Simplify before you automate.

— Stability—Something is variable. Measures: Quality, war­ranty returns, maintenance, delivery, material, handling, process adjustments, specification tolerance & spread, breakdowns, inspections, dependencies. Process stability prevents product variability.

— Control—Something requires intervention. Measures: De­livery performance, schedule adherence, variances, expe­dites, reschedules, data inaccuracy, premium freight, overtime, quality, process yield, Material Review Board activity.

— Investment—Something costs too much. Measures: Dol­lars, resources, premiums, out-of-pocket costs versus in­ternal costs, inventory levels, inventory time, Throughput per employee, scrap, rework, outside services.

• Flows—The time or rate that information, decisions, or material are processed. Ultimately, the speed that money is generated by the company's operations. Opportunities are found in reducing the flow time of any internal or external process.

— Measure functional cycle time for orders: Sales processing, design, manufacturing (set-up, run, wait, move, queue), test, shipping, invoicing, and collection. Determine the total elapsed time for an order.

— Measure general activity time: Quoting, engineering

changes, material release, customer service, research and development, document generation, invoice mail-out, ac­counts receivable aging, purchase lead time, outside ven­dor service, etc. Determine which activities affect the total elapsed time of an order.

— Measure feedback/response time. Decision speed is a function of data gathering, steps in the transformation of data, and approval levels needed for evaluation and action.

— Compare value-added time versus non value-added time, Work-to-Wait Ratio, quotes made versus quotes won, products and product line performance, period to period performance.

• Impact—The deviation from planned or optimum perfor­mance. As discussed above, the Cost of Un-Quality quantifies the loss of money, time, reputation, and control. Major priority decisions are made by evaluating the impact of a problem on the customer (external measures), or on the business performance (internal measures).

Impact is a function of the cost and the frequency of occur­rence. A 10% reduction in setup time is generally easier in a two-hour setup than it is for a twenty-minute set-up. However, the impact to the business may be greater from doing the latter if many more of the shorter set-ups are normally done.

• Trends—The direction and speed of change in the measure­ments, plotted over time. Comparisons by time periods and areas of responsibility highlight areas of the need for increased understanding and cooperation.

Cause and effect expectations can be evaluated versus results. Early changes are easier to do and produce faster and larger results. Subsequent changes are more difficult to justify because of an overall slowdown in achieving results. These later activities should recognize this and have milestones with a different expec­tation of progress.

To be Continued


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