Session 16 (Chap.

7 & 8)
Benchmarking (Ch -7)and Performance Management Through Cost of Quality (Ch -8)

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Benchmarking
Benchmarking the search of industry best practices that lead to superior performance. Best practices approaches that produce exceptional results, are usually innovative in terms of the use of technology or human resources, and are recognized by customers or industry experts. Hierarchy of Best Practices
World Class Any Orgz. USA, etc.. Industry -wide Competitor
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Internally

Gaining Insight Through Benchmarking

Benchmark
A benchmark is an organization recognized for its exemplary operational performance. There are many benchmarks in the world including

Toyota for processes, Intel for design, Motorola for training, Scandinavian Airlines for service, and Honda for rapid product development. Benchmarking
The sharing of information between companies, so that both can improve.

Purposes of Benchmarking
I II III IV V VI VII Learning from successes Borrowing ideas Best-in-firm Beating industry standards Best-in-class National leadership Best-in-World

Types of Benchmarking
1. Internal benchmarking Orgz. Need not always look outside to find out the best practices. They could study the best performing division in house. E. G against the measures such as cycle time error rate quality cost; customer feedback etc. E. G. -- Error in dvn. Is 1ppb(parts per billion) & other 1%. Obj improve it.
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Types of Benchmarking - Contd..

2. Competitive benchmarking When an orgz. Is performing well, they will definitely advt. and make their performance indicators public. Such data like: pricing, technical quality, features, and other quality or performance characteristics of products and services. E.g. Motorola looked to Dominos & Federal Express --- to speed up the del system.
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3. Process benchmarking Strategy ---- expressed in terms of mission & vision statements E.G. Take the case of 2 Insurance Orgzs. A. Ist Orgz vision as becoming the easiest in the industry to do business with. Emphasizing Speed of writing policies & an outstanding level of cust. Service. Benchmarking Customer Service Processes
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Types of Benchmarking - Contd..

Types of Benchmarking - Contd..

B. IInd Orgz intends to reduce the cost of insurance through excellent investment performance. Benchmarking Investment Processes How : By hiring & training good financial managers, using telecommn. To track & act upon the developments in the global money markets.

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Benchmarking
Selecting best practices to use as a standard for performance
Determine what to benchmark Form a benchmark team Identify benchmarking partners Collect and analyze benchmarking information Take action to match or exceed the benchmark

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Reasons for measurement

If you dont measure results, you cant tell success from failure If you cant see success, you cant reward it and will probably end up rewarding failure If you cant recognize failure, you cant correct it.

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The Cost of Quality (COQ)

COQ the cost of avoiding poor quality, or incurred as a result of poor quality Translates defects, errors, etc. into the language of management Rupees Provides a basis for identifying improvement opportunities and success of improvement programs

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Common Process Quality Measures

Nonconformities (defects) per unit In Mfg. Sector its implications in liability suits. Errors per opportunity analogous to defects per unit, each customer transaction provide an opportunity for many diff types of errors. Dpmo defects per million opportunities common measure to both Mfg & services.

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Prevention Costs
Quality planning costs
costs of developing and implementing quality management program

Training costs
costs of developing and putting on quality training programs for employees and management

Product-design costs
costs of designing products with quality characteristics

Information costs
costs of acquiring and maintaining data related to quality, and development of reports on quality performance

Process costs
costs expended to make sure productive process conforms to quality specifications

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 Inspection and testing Test equipment costs

Appraisal Costs

costs of testing and inspecting materials, parts, and product at various stages and at the end of a process

costs of maintaining equipment used in testing quality characteristics of products

Operator costs
costs of time spent by operators to gather data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality

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Internal Failure Costs

Scrap costs
costs of poor-quality products that must be discarded, including labor, material, and indirect costs

Process downtime costs

costs of shutting down productive process to fix problem

Rework costs

Price-downgrading costs
costs of discounting poorquality productsthat is, selling products as seconds

costs of fixing defective products to conform to quality specifications

Process failure costs

costs of determining why production process is producing poor-quality products

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External Failure Costs

Customer complaint costs
costs of investigating and satisfactorily responding to a customer complaint resulting from a poor-quality product

Product liability costs

litigation costs resulting from product liability and customer injury

Product return costs

costs of handling and replacing poor-quality products returned by customer

Lost sales costs

costs incurred because customers are dissatisfied with poor quality products and do not make additional purchases

Warranty claims costs

costs of complying with product warranties

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Measuring and Reporting Quality Costs

Index numbers
ratios that measure quality costs against a base value labor index
ratio of quality cost to labor hours

cost index
ratio of quality cost to manufacturing cost

sales index
ratio of quality cost to sales

production index
ratio of quality cost to units of final product
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Quality Costs and Index

YEAR 2001 Quality Costs Prevention Appraisal Internal failure External failure Total Accounting Measures Sales Mfg costs 2002 2003 2004

$ 27,000 155,000 386,400 242,000 $ 810,400

41,500 122,500 469,200 196,000 829,200

74,600 113,400 347,800 103,500 639,300

112,300 107,000 219,100 106,000 544,400

$ 4,360,000 1,760,000

4,450,000 1,810,000

5,050,000 1,880,000

5,190,000 1,890,000

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Index
Quality Quality Mfg Sales Index Cost Index --------------------------------------------------------2001 18.58 46.04 2002 18.63 45.18 2003 12.66 34.00 2004 10.49 28.80
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Year

QualityCost Relationship
Cost of quality
Difference between price of nonconformance and conformance Cost of doing things wrong
20 to 35% of revenues

Cost of doing things right

3 to 4% of revenues

Profitability
In the long run, quality is free

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Quality and Productivity

Productivity = output input

Fewer defects increase output Quality improvement reduces inputs

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Measuring Yield and Productivity

Yield = (total input) (% good units) + (total input)(1 - % good units)(% reworked)

Y = (I)(%G) + (I)(1 - %G)(%R)

where

Y I %G %R
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= yield = number units started in production = percentage good units = percentage of defective units reworked
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Product Yield
Start 100 motors per day 80% are good 50% of poor quality units can be reworked Yield = (I)(%G) + (I)(1 - %G)(%R) Y = 100(0.80) + 100(1 - 0.80)(0.50) = 90 motors If product quality is increased to 90% good,

Y = 100(0.90) + 100(1 - 0.90)(0.50) = 95 motors

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Product Cost
(direct manufacturing cost per unit)(input) + (rework cost per unit)(reworked units) Product cost = yield

Product cost = where Kd I Kr R Y

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(Kd)(I) + (Kr)(R) Y

= direct manufacturing cost per unit = input = rework cost per unit = reworked units = yield
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Product Cost
Direct mfg cost = $30, Rework cost = $12 100 motors started, 20% defective 50% of defective motors can be reworked Product cost = Product cost = (Kd)(I) + (Kr)(R) Y = $34.67 per motor

($30)(100) + ($12)(10) 90 motors

The manufacturing cost after quality improvement is Product cost =

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($30)(100) + ($12)(5) 95 motors

=$32.21 per motor

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Multistage Product Yield

Y = (I) (%g1)(%g2)...(%gn)

where
I = input batch size %gi = percent good at stage i

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Multistage Process Yield

STAGE
Start with 100 motors 1 2 3 4 AVERAGE PERCENTAGE GOOD QUALITY 0.93 0.95 0.97 0.92

Y = (I) (%g1)(%g2)...(%gn) = (100)(0.93)(0.95)(0.97)(0.92) Y = 78.8 motors Solve for I I=

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Y = (%g1)(%g2)...(%gn)

100 (0.93)(0.95)(0.97)(0.92)

= 126.8 motors
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Quality Productivity Ratio (QPR)

Includes productivity and quality costs Increases
if processing or rework costs decrease if process yield increases
Good quality units (100) (input)(processing cost) + (defective units)(rework cost)
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QPR =

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QPR Example
Direct cost = $30/unit Rework cost = $12/unit Start with 100 motors per day 80% are good, 50% of defective units can be reworked Company studies 4 changes 1. Increase production to 200 units/day 2. Cut processing cost to $26 & rework cost to $10 3. Increase yield to 95% 4. Combine 2 and 3

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QPR Example
Direct cost = $30/unit Rework cost = $12/unit Start with 100 motors per day 80% are good, 50% of defective units can be reworked
Base case: QPR = 80 + 10 ( 1 0 0) (100)($30) + (10)($12) = 2.89

Case 1: Increase input to capacity of 200 units QPR =

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160 + 20 (100) (200)($30) + (20)($12)

= 2.89
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QPR Example
Case 2: Reduce processing cost to $26 and rework to $10 QPR = 80 + 10 (100) (100)($26) + (10)($10) = 3.33

Case 3: Increase initial good-quality to 95% QPR = 95 + 2.5 (100) (100)($30) + (2.5)($12) = 3.22

Case 4: Decrease costs and increase initial good-quality QPR =

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95 + 2.5 (100) (100)($26) + (2.5)($10)

= 3.71
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Return on Quality (ROQ)

ROQ measure of revenue gains against costs associated with quality efforts Principles
Quality is an investment Quality efforts must be made financially accountable It is possible to spend too much on quality Not all quality expenditures are equally valid

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Problem - 1
At H & S motor Company, motors are produced in 4 stage process. Motors are inspected foll. Each stage, with % yield (on avg) of good quality, WIP units are as follows:

Stage Avg % good quality ------------------------------------------1 0.93 2 0.95 3 0.97 4 0.92 -------------------------------------------------------The company wants to know the daily product yield for pdt. Input of 100 units per day. Further more, it would like to know how many input units, it would have to start with each day to result in a final daily yield of 100 good quality units.
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Problem -2 (QPR)
A retail tel. Co. takes catalogue orders from customers & then sends the completed orders to the W/H to be filled. An operator processes on an avg of 45 orders/day. The cost of processing orders is Rs. 1.15 and it cost Rs. 0.65 to correct an order. An operator averages 7% bad orders per day, all of which are reworked prior to filling the customer order. Determine the QPR for an operator.

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Thanks

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