The Cost of Quality

 

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Our newsletters provide information on business management systems and process improvement methods. These systems include ISO 9001 QMS, AS9100 Aviation, Space and Defense, ISO/TS 16949 Automotive, ISO 27001 Information Security, ISO 13485 Medical Devices, ISO 14001 Environmental Management Standard, and others. Further subjects include performance improvement methods such as Six Sigma, Lean Enterprise, and other topics of interest to our readers.

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ATTENTION ISO 9001:2008 Organizations: Time is running out! You have less than 1 year to transition to the ISO 9001:2015 Standard, and others.  Contact us for all your transition needs.    

The Cost of Quality
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We recently gave a presentation at the Aerospace and Defense CEO Network sponsored by the Arizona Technology Council. This subject was of great interest, so we would like to share a segment of the information presented. If interested in more information on this subject, let us know.

If you’re a first-line supervisor responsible for managing operations, you know how important operational metrics are to the effectiveness and longevity of your organization.

If you’re a corporate executive, you are often inundated with data, which makes it difficult to pull out relevant insights. We have found that most metrics on the executive dashboard are finance-related, executives for example, in manufacturing organizations need visibility into operational metrics to gain more control over their businesses. They are looking to understand the effect operational performance has on their organizations’ goals.

The impact quality has on a company’s success is often well understood. However, companies have traditionally struggled to establish metrics that can easily represent the effectiveness of quality in the organization.

Cost of Quality.  The definition of this metric is similar to the way it sounds. It measures the cost incurred by an organization to manufacture a quality product. Further narrowing things down, these costs come from two main categories: cost of good quality and cost of poor quality.  There are many different definitions of the Cost of Quality available, and many are lacking in scope or precision. To remedy this, we thought building on one of our favorite basic definitions (provided by ASQ, an organization we  are senior members) would be a good starting point.

At the highest level, there are two different terms in the Cost of Quality equation: the Cost of Good Quality (CoGQ) and the Cost of Poor Quality (CoPQ). This can be understood in the below formula:

CoQ = CoGQ + CoPQ

 

Let’s start with the Cost of Poor Quality. These are the traditional quality costs companies measure. Examples would include scrap, rework, and returned materials. To give this part of the equation more structure, we think of Poor Quality costs as having two different terms: Internal Failure Costs (IFC) and External Failure Costs (EFC). This can be understood by the following equation:

CoPQ = IFC + EXC, where: IFC = Scrap Costs + Rework Costs.

 

When it comes to the Cost of Good Quality, these are the costs that are much less likely to be measured by a company. Generally, these are the costs companies incur to ensure they are producing quality products. Again we break the Cost of Good Quality calculation into two different terms: Appraisal Costs (AC) and Prevention Costs (PC).

Appraisal Costs are the costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements. Activities that fall into this category include: Inspections, Testing, and Calibration. To measure these costs it is helpful to break them down into 3 broad categories, for example: percentage of Employee Costs, percentage of Software Costs, and percentage of Equipment Costs devoted to these activities.

Prevention Costs are the costs associated with all activities specifically designed to prevent poor quality in products or services. Activities that fall into this category include: Quality Planning, Risk Management, Continuous Improvement Team Activities, Corrective and Preventive Actions, Audit Management, and more. Again, to measure these costs it is helpful to break them down into 3 broad categories: percentage of Employee Costs, percentage of Software Costs, and percentage of Equipment Costs devoted to these activities.

What is the Quality Costs Advantage? Reducing the cost of poor quality is one of the Best Ways to increase a company’s profit. It prioritizes problems and provides a means to measure change and improvement. Furthermore, it promotes the effective use of resources, and provides incentives for doing the job right every time.

 

Rough Transition to IATF 16949

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Globally, there are more than 68,000 organizations certified to ISO/TS 16949:2009 that will need to undergo a transition audit to the International Automotive Task Force (IATF) international automotive quality standard, IATF 16949:2016.

According to an article by Omnex, there is a lot that can be  learned from these audits. What areas are receiving nonconformities? What surprises lie in these nonconformities? What are third-party auditors finding or not finding? For example, who thought “total productive maintenance” was going to be one of the top nonconformities?

The list of nonconformities can be used as a preventive measure to ensure key certification body  nonconformities are addressed before your transition audit.

 

Omnex has performed a large number of gap analysis audits for customers and will be comparing their findings to the list of registrar nonconformities. What were the top findings? How many of them still remain? Why are companies still receiving major nonconformities for “auditor competencies” and “customer-specific requirements” (CSRs).

Top five nonconformities

The top five nonconformities overall are “total productive maintenance” (48 nonconformities), “control plan” (38), “contingency plans” (37), “control of production service provision” (26), and “internal auditor competency” (23).

The two biggest surprises shown in this list are total productive maintenance (TPM) and control of production and service provision. The requirements for TPM (clause 8.5.1.5 of IATF 16949) have increased significantly from those of ISO/TS 16949. We can infer that when organizations are implementing IATF 16949, they have so much to update in other areas that maintenance is not getting the attention it needs.

Despite the many additional requirements found in IATF 16949, the third-party auditors are not overlooking the expanded requirements for TPM. Total productive maintenance has also made it to the top-five list of major nonconformities, showing that it is indeed an area that needs the attention of the IATF 16949 implementation champion.

Similarly, control of production and service provision (8.5.1 of IATF 16949) has requirements for “special processes” and “implementation of actions to prevent human error.” Control of production and service provision is showing the fourth most nonconformities of all areas in IATF 16949.

Based on automotive industry data, the top-five major nonconformance clauses are customer-specific requirements (7 nonconformities), internal auditor competency (7), quality management system (QMS) audit (7), TPM (6), and management review inputs (6)-see figure 2. Omnex gap analyses are also finding major nonconformities in CSRs, internal auditor competency, QMS audits, and management review inputs.

Management review inputs have not changed drastically enough in IATF 16949 to be resulting in so many major nonconformities. It has been determined that many of the majors are the result of a variety of issues with the ISO/TS 16949 management reviews.

For those unaware, IATF 16949:2016 includes all the requirements of ISO 9001:2015.  So whether or not your company is an automotive industry supplier, this information is still relevant to your organization. We will keep you informed of further results and findings.

What Do We Mean By Adding Value?
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Many businesses are developing revised management system strategies and seeking methods for driving improved business performance with transitioning efforts. One of the most important and underrated tangible methods for improving performance and saving cost is the internal audit process.

 

We hear so much about the importance of “adding value” during management systems audits, but what does this really mean? Is it possible to add value without compromising the integrity of the audit or change course from the internal audit checklist? In principle, all audits should add value, but this is not always the case. Truly effective audits don’t just concentrate on process weakness, but on process potential.

 

Some organizations have used the ISO series of standards to develop quality management systems that are integrated into the way they do business, and are useful in helping them to achieve their strategic business objectives – in other words they add value for the organization.

Conversely, other organizations may have simply created a bureaucratic set of procedures and records that do not reflect the reality of the way the organization actually works (example: download of free Google Stuff, using template fill-in-the-blanks documented systems) which simply adds costs, without being useful. In other words, they do not “add value”.

 

It is a question of approach:
 
A non-value-added approach asks “What procedures do we have to write to get the ISO 9001 certification?”
 
A “value-added” approach asks the question “How can we use our ISO 9001 (or any other standard) based management system to help us to improve our business?” Another to consider is “Can we effectively run our risk management requirements approach, or business system on non-documented processes?”

In order to “add value” an audit should be useful by: 

  • providing information to top management regarding the organization’s ability to meet strategic objectives;
  • identifying problems which, if resolved, will enhance the organization’s performance;
  • identifying improvement opportunities and possible areas of risk;
  • the organization’s customers by enhancing the organization’s ability to provide conforming product.

 

It is so important for an auditor to have a clear understanding of the organization’s strategic objectives, and to be able to put the audit within that context. The auditor needs to dedicate time for detailed discussions with top management, to define their expectations for the business, and to incorporate these expectations into the audit criteria.

Focus more on the process, and less on procedures. Some documented procedures, work instructions, check-lists etc. may be necessary in order for the organization to plan and control its processes, but the driving force should be process performance.

 

Focus more on results and less on records. In a similar fashion, some records may be necessary in order for the organization to provide objective evidence that its processes are effective (generating the planned results) but in order to add value, the auditor should be aware of and give credit for other forms of evidence.

Interested in moving your company process auditing system from compliance to improvement? Register for our process based internal auditor courses.  Contact us with any questions.  

 

 

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In the News
Standard for Electronic Documents Evolving  

   

The reason why PDF is today’s worldwide de facto standard for electronic documents – is the fact of standardization itself. PDF files are supposed to be entirely self-contained and interoperable, working equally well with PDF software from every vendor. End-users should be able to gain equivalent results irrespective of their choice of software. This core feature – PDF files always look and work the same way – is the dominant reason for the technology’s success .

ISO 32000-2, Document management – Portable document format – Part 2: PDF 2.0, is the first PDF specification developed entirely within the ISO guidelines and process. It’s clearer, cleaner, supports non-proprietary technologies and ensures a level playing field for software vendors that create, display, edit or otherwise process PDF electronic documents. In addition to staying true to PDF’s core value, PDF 2.0 provides a solid foundation for new use-cases, capabilities and workflows.
Purchase ISO 32000-2, Document Management at the ISO Store.

 

New Standard for Education Providers  

Today’s knowledge economy requires diverse training and learning services beyond the formal, national education system. A new standard aims to not only help providers improve their service, but provide recognition and credibility on the international market.

ISO 29993 Learning services outside formal education – Service requirements is designed to improve transparency and credibility in the market by providing the minimum requirements for internationally agreed levels of quality learning services.

Purchase ISO 29993 Learning services outside formal education at the ISO Store.

 

Training Courses
 
All courses can be delivered at your company or at our training centers. We do provide training beyond our home state of Arizona. Click on the course title for description, schedule, registration and payment. Group discounts are available. We also provide custom designed training to fit your specific needs. All training is fully documented for your training records and certificates of training are awarded.
 
Don’t see a course or schedule that fits your needs?  Contact us.
 

Employee deficiencies in requisite skills

In a survey conducted by Deloitte, manufacturing employers reported that the most serious skill deficiencies of their current employees are:

* Technology and computer skills (70 percent)
* Problem-solving skills at (69 percent)
* Basic technical training at (67 percent)
* Math skills at (60 percent)

If your organization hasn’t started your QMS Transition Process, it’s time to get moving!

Walter Tighe and SES Team
Sustaining Edge Solutions, Inc.
Toll Free 888-572-9642
 

 

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