addressing the high cost of quality
TRANSCRIPT
The Business Case for Beacon
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
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
easeinc.com 4
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
easeinc.com 5
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
easeinc.com 6
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.
easeinc.com 7
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…”
easeinc.com 8
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 $6 billion per year
Pharma Settlements by Year
Vehicle Recalls by Year
easeinc.com 9
Administrative Costs Comparison
Even if an organization is conducting traditional LPA program, Beacon
can significantly reduce the cost to operate the program while making it
much more effective. The following table reflects example administrative
savings alone for a sample facility with 75 auditors.
RoleCount
/role
Annual
Comp*/ea$/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)
easeinc.com 10
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.
easeinc.com 11
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.
easeinc.com 12
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
easeinc.com 13
The Beacon Philosophy in Bullets
• Flexible
• Adaptable
• Usable
• Insightful
• Actionable
easeinc.com 14
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
15easeinc.com
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
Mark Whitworth
949.412.4307 949.348.7511
If you’d like to know more about EASE’s
world-class solutions, please contact:
Shawn Faircloth