exposing your hidden costs of performance

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Dr. Joseph A. DeFeo All Rights Reserved, Juran Institute, Inc. 2016 EXPOSING YOUR HIDDEN COSTS OF PERFORMANCE APRIL 20, 2016

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Page 1: Exposing Your Hidden Costs of Performance

Dr. Joseph A. DeFeo

All Rights Reserved, Juran Institute, Inc. 2016

EXPOSING YOUR HIDDEN COSTS OF PERFORMANCE

APRIL 20, 2016

Page 2: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

To manage for excellence, it is vital to begin by establishing a vision for the organization, along with policies, goals, and plans that attain to the vision.

Managing for excellence makes extensive use of three fundamental managerial processes:

1. Designing or planning for quality2. Compliance, controlling, or assuring quality3. Improving or creating breakthroughs in quality

Today’s discussion will focus around Principle #2 - compliance, controlling, or assuring quality, through the

identification and analysis of Cost of Poor Quality.

MANAGING FOR EXCELLENCE

Page 3: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Cost of Poor Quality (COPQ): These are the costs that would disappear in the organization if all products and processes performed right the first time. They are usually measured as a percentage of sales or costs.

COPQ DEFINED

An effective performance excellence program should prioritize removing COPQ as the expenses have already been incurred. By attacking COPQ , the organization is able to maintain sales performance but become more profitable!

Page 4: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

By ignoring the magnitude of hidden costs in our organizations today, you are basically underestimating your profit.

This phenomenon is rooted in the limited understanding of costs related to poorly performing processes.

*Regardless of industry

WHY COST OF POOR QUALITY?

Our research indicates that 15-25% of all work performed* consisted of redoing prior work because products and processes were not perfect.

Page 5: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Costs of poor quality affects every business in every industry, this is not an industry-specific problem

Companies do not always associate a bad process with poor quality

Many managers have been instructed to “reduce costs”

Can be difficult initially to distinguish differences between costs and costs of poor quality or non-value-added activities

Rush decisions lead to “across the board” cuts

Cost should be the minimum amount of money that we have to spend to meet the customer and business needs

Cost is a good thing if its a minimum cost that meets a customer requirement

Cost is a bad thing if its a cost of poor quality

In healthcare, misuse, underuse, and overuse = waste

OUR LESSONS LEARNED

Page 6: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

The effect of failure on income: The customer who encounters a deficiency may take action that creates

additional cost for the producer (file a complaint, return a product, file a lawsuit, etc.). The customer may also elect to stop buying from the guilty producer as well, and may publicly share their poor quality interaction. Such actions can cause serious damage to a producer ’s revenue and reputation.

The effect of failure on cost: Deficient quality results in excessive costs associated with poor quality.

The Cost of Poor Quality (COPQ) is a term that encompasses all the costs that would disappear if there were no failures – no errors, no rework, no field failures, etc.

EFFECTS OF POOR QUALITY

Page 7: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

EXAMPLE

Example: A call center requires accurate and quick calls are to meet customer expectations. Problem: Management needs to reduce costs, and opts to reduce staff. Result: May have reduced operating cost, but wait times, resolution times, and customer satisfaction are all affected. Now we are paying for the cost of poor quality in addition to having a reduction in profit. The reduction in operating costs is quickly outweighed.

Page 8: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

VISUALIZING THE DIFFERENCE

Profit

Total Operating

Costs

Profit

True Operating

Costs

COPQ

ProfitSales Erosion

COPQ

True Operating

Costs

Profit

COPQ

True Operating

Costs

Page 9: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Traditional ly, there are seven spec ific categor ies that organizations begin look ing for poor qual i ty :

We refer to these as “the tip of the i ceberg ” General ly on ly represent about 5% of actual COPQ

WHERE ARE THE COSTS HIDING?

Page 10: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

As an organization gains a broader understanding of poor quality, the hidden portions of the iceberg become apparent.

COPQ can range between 10-25% of total operating costs.

WHERE THE REAL MONEY IS

Page 11: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

WHERE IS COPQ FOUND?

Review Review

Redo Redo

Variation

Non-Value-Added (NVA) Steps

Check Check Product or Service

Step 1 Step 2

Page 12: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

1. Costs to Prevent Failure Design reviews, educational on the job training, work instructions; most costs

in organizations that help employees to do the right thing at the right time

2. Compliance, Appraisal, Quality Assurance, Quality Control Regulatory agencies, risk management/analysis, audits (SEC), ISO Excess appraisal costs are possible (too many audits, too many checks)

3. Internal Failure Costs (that customer never sees) Inspection line failures

4. External Failure Costs (customer does see) Cost to fix the problem after the customer gets/uses/sees it Can be more expensive; fix + extra

TOTAL COST OF QUALITY =

Internal & External failure costs can account for 60-80% of Costs of Poor Quality

Page 13: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

EFFECTS OF POOR QUALITY

Ratio of the individual category costs to total costs vary widely. Many companies exhibit ratios which look like the following:

Page 14: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Identify product or process

Create process map to

understand value

Classify non-value-added activities as

COPQ

Estimate COPQ based on fiscal

year

Prepare Quality Cost Report

(Pareto charts)

Define projects for improvement

ASSESSMENT PROCESS

Page 15: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Determine the use of COPQ against business

strategy

Develop assessment team

Define scope and tactics•Scope discussion, size of business unit, etc. Larger scope = more $ = more attention

Develop list of COPQ elements, processes, and documentation

Develop implementation plan

Conduct pilot assessment

Adjust process and drive projects

HOW TO BEGIN ASSESSING

Page 16: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

Concept of vital few vs useful many All improvement happens project-by-

project Identify and allocate resources

properly Plan for success Lead by example

LAST THOUGHTS

Page 18: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

MORE RESOURCES

business innovation business process improvement continuous improvement dmaic juran quality handbook lean manufacturing lean six sigma lean transformation operational excellence process innovation

quality assurance quality control quality improvement management consulting firm iso 9000 2015 six sigma certification what is lean what is six sigma

Click any link for more information

Page 19: Exposing Your Hidden Costs of Performance

All Rights Reserved, Juran Institute, Inc. 2016

THANK YOU!

Copyright ©2015, Juran Institute, Inc.

For more information, please visit www.juran.com

We hope to see you at future webinars or at your site.

If you would like for me to conduct this for your organization, contact me at [email protected]