addressing the high cost of quality

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The Business Case for Beacon Addressing the High Cost of Quality

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Page 1: Addressing the High Cost of Quality

The Business Case for Beacon

Addressing the High Cost of Quality

Page 2: Addressing the High Cost of Quality

2easeinc.com

The Problem

Independent studies have shown

organizations estimate their cost of quality

(CoQ) to be approximately 10 percent of

revenues while their actual cost is closer to

20 to 30 percent.

“The cost of poor quality in manufacturing companies ranges from 5 percent to 35 percent of sales. In service organizations, it ranges from 25 percent to 40 percent.”

- Institute of Industrial Engineers

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3easeinc.com

Why the disparity?

Many organizations use the term “cost of quality”

only to reference commonly reported “visible”

failure costs, such as rework, scrap, and returned

materials.

A full account must also include hidden costs of

poor quality (CoPQ) as well as the cost of

conformance.

Many organizations will have true quality-related costs as high as 15 to 20 percent of sales revenue, some going as high as 40 percent... A general rule of thumb is that costs of poor quality in a thriving company

will be about 10 to 15 percent of operations.- American Society for Quality

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Conformance Costs

While not as widely reported, the operating costs of the quality function

are significant – up to one-third of the overall cost of quality (CoQ) and 5-

10% of an organization’s cost of sales (CoS).

Prevention (~5-10% CoQ,1-4 % CoS) – costs of all activities specifically

designed to prevent quality problems

Quality planning

Error proofing

Supplier evaluations

Quality training

Appraisal (~20-25% CoQ, 4-6% CoS) – costs associated with auditing to

ensure standards are met

Product, process, or service audit execution

Equipment calibration testing

Scheduling and managing audit programs

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Non-conformance Costs

Failures result from not conforming to standards, and process-related

failures represent the largest contributor to these costs. There are two

primary failure categories:

Internal (~40-48% CoQ, 10-12% CoS) – costs of defects identified before the

product or service is delivered to the customer

Scrap

Rework

Lost capacity and delays

Excess inventory

Accelerated equipment failures

External (~52-60% CoQ, 10-15% CoS) – costs related to failures which reach

the customer

Repairs and servicing

Warranty claims

Complaints and lost goodwill

Litigation, fines, and penalties

Lost growth opportunities

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High Level Failure Cost Model

Example Costs, $100MM Revenues Manufacturing Facility

% of

Revenues

Calculated Cost

(on $100MM rev)Operating Costs

Scrap 4% 4,000,000$

Improper Maintenance 1% 1,000,000$

Warranty Holdbacks 3% 3,000,000$

Labor Savings

Rework 1% 1,000,000$

Inspection Costs 1% 1,000,000$

Annual Cost 10,000,000$

This model reflects only those “visible”, typical quality process-related

costs, based on commonly reported performance data, for a site

contributing $100MM annual sales.

Even $10MM in annual costs doesn’t reflect the significant hidden costs of

external failures, nor does it count the costs of operating audit programs.

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External Failure Costs

Without process verifications, deviations and quality issues should be expected.

Manufacturers and service providers are struggling to meet demand for better,

faster, cheaper in an increasingly connected world.

Each of these well-known companies have mature quality programs, but they’ve

also had very public quality failures – because traditional approaches focus on

product inspection instead of process verification.

“GM’s CEO Mary Barra pledged to ‘hold ourselves accountable and

improve our processes…’”

“Takata’s public report focused on the broken safety culture and identified

multiple process weaknesses…”

“Boeing’s battery supplier needed to review its cell manufacturing process

and ensure that employees were properly trained…”

“Chipotle announced a new rigorous restaurant inspection program to

address the process failures at the chain…”

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External Failure Costs

When external failures occur, they can be

extraordinarily costly:

“GM agrees to pay $900M in ignition-switch scandal…”

“Takata air-bag recalls will cost the company $2.5B. ...”

“Boeing 787 battery fires cost company more than $600M…”

“Chipotle sales drop $53M in one quarter on E. coli fears…”

These failures reach well beyond individual

companies as well

The auto industry has seen 3 years of

progressively larger recalls, with over

51 million vehicles recalled in 2015 at

a total cost in excess of $10 billion.

The pharma industry has seen annual

regulatory settlements and penalties

spike by over 300% in recent years,

averaging over $6 billion per year

Pharma Settlements by Year

Vehicle Recalls by Year

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Administrative Costs Comparison

Even if an organization is conducting traditional LPA program, Beacon

can significantly reduce the cost to operate the program while making it

much more effective. The following table reflects example administrative

savings alone for a sample facility with 75 auditors.

RoleCount

/role

Annual

Comp*/ea$/Hour*

Checksheet

MgmtScheduling Chasing

Audit Data

Input

Data

CollectionAuditing

NC

MitigationReporting

Total

Hours/wkWeekly Cost Annual Cost

LPA Admin 1 $100,000 $50.00 2 0.5 2 4 0.5 1 10 $500.00 $25,000.00

Auditors L1 46 $75,000 $37.50 0.1 2.4 2.5 $4,312.50 $215,625.00

Auditors L2 23 $120,000 $60.00 0.1 0.5 0.6 $828.00 $41,400.00

Auditors L3 2 $150,000 $75.00 0.1 0.25 0.35 $52.50 $2,625.00

Ops Management 1 $150,000 $75.00 3 2 0.5 5.5 $412.50 $20,625.00

Quality Management 1 $150,000 $75.00 0.5 1 1 1 3.5 $262.50 $13,125.00

Plant Manager 1 $200,000 $100.00 0.25 0.5 0.75 $75.00 $3,750.00

Totals 75 2.5 0.8 6.25 4 0.5 3.15 3 3 23.2 $6,443.00 $322,150.00

RoleCount

/role

Annual

Comp*/ea$/Hour*

Checksheet

MgmtScheduling Chasing

Audit Data

Input

Data

CollectionAuditing

NC

MitigationReporting

Total

Hours/wkWeekly Cost Annual Cost

LPA Admin 1 $100,000 $50.00 1 0.2 0.1 0.1 1.4 $70.00 $3,500.00

Auditors L1 46 $75,000 $37.50 1.2 1.2 $2,070.00 $103,500.00

Auditors L2 23 $120,000 $60.00 0.25 0.25 $345.00 $17,250.00

Auditors L3 2 $150,000 $75.00 0.125 0.125 $18.75 $937.50

Ops Management 1 $150,000 $75.00 0.5 1 0.1 1.6 $120.00 $6,000.00

Quality Management 1 $150,000 $75.00 0.25 0.25 0.25 0.1 3.5 $262.50 $13,125.00

Plant Manager 1 $200,000 $100.00 0.1 0.1 0.2 $20.00 $1,000.00

Totals 75 1.25 0.2 0.85 0.1 1.575 1.25 0.4 8.275 $2,906.25 $145,312.50

LPA Time Tracker

Beacon (hours/wk)

Paper Based Programs (hours/wk)

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Beacon LPA Benefit Case

“Best-in-Class manufacturers...produce products at a higher quality, and ...(spend) 38% less (of their) annual revenue on their total cost of quality when compared to their peers.”

- Aberdeen Research

Example Annual Savings from a Process Audit System

($100MM Manufacturing Facility)

Even modest improvements from LPA efforts demonstrate tremendous

value to the organization.

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Paper and ExcelTraditional

Systems

DeployInexpensive, inefficient, Inconsistent adoption

Slow and expensive, managed by IT, decentralized

Cloud-based, rapid deployment throughout

the enterprise

ScheduleDifficult to set up and

maintain, significant effort, high chance of gaps

Lack ability to handle layers, complex

organization structures, single site focus

Powerful, with automated assignment, shift rotation

handling, randomized assignment

CaptureManual, time-consuming collection, inaccurate,

unsearchable data

Require extensive training,

siloed data creates blind spots, often don’t address

data quality

Easy to learn, uses existing

mobile devices, complete coverage including visual

and location content

ReportHigh effort, stale content,

poor visibility

Typically static, reactive focus, new reports are

difficult to build

Real-time interactive dashboards drive

immediate action; new reports are easy to define

and build

Managing the LPA Process

Compared to Beacon- run LPA programs, those managed via paper and

Excel or even traditional systems can be very costly, with limited

effectiveness.

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Cloud-based platform means new

customers launch within weeks and

implementation risk is eliminated.

Modern, intuitive interface requires

less training, allowing faster

adoption.

Rapid Time-to-Value.

Real-time dashboards with drill-down

reporting provide actionable insights

into current results and corrective

actions.

Real-Time Insights.

Easy-to-use mobile interface with

sophisticated data integrity safeguards

leads to the consistent collection of

timely, accurate, and complete data

from everyone in the organization.

Powerful scheduling capability

ensures complete coverage for

quality initiatives and reduces

administrative time by up to 85%.

High-Quality Data.

Beacon is a world-class system that can handle virtually any assessment, from

5S to safety, from training to LPA, while virtually eliminating the overhead and

significantly enhancing the benefits of these activities.

Introducing

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The Beacon Philosophy in Bullets

• Flexible

• Adaptable

• Usable

• Insightful

• Actionable

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Key Takeaways

• The cost of quality is much higher than most organizations realize

• LPA programs can be very effective, but they can be very costly to

operate

• Paper and Excel or traditional system-based LPA programs add

substantial overhead, introduce delays, and limit visibility into issues

and opportunities

• As a cloud-based system, Beacon is significantly more cost-effective,

and it can be deployed rapidly

• The Beacon affect can extend to suppliers, providing tremendous

additional benefit to organizations and their suppliers

Overall, the total cost of ownership for a cloud-based solution can be 50 to 60 percent less than for traditional solutions over a 10-year period

- Booz & Company

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About Ease

Ease software has been successfully deployed

across a wide range of enterprise environments

worldwide – wherever customer satisfaction and

high product quality are critical to brand strength. 2015 Gartner Cool Vendor

for Manufacturing

Operations

Page 16: Addressing the High Cost of Quality

[email protected]

Mark Whitworth

[email protected]

949.412.4307 949.348.7511

If you’d like to know more about EASE’s

world-class solutions, please contact:

Shawn Faircloth