Chapter 16

Adnan AlibegovicJenny HonVivian NgoTom Spaulding

Precision Systems, Inc. Manufactures and sells high-tech instruments for

more than 25 years Has a few standard products, but changes are

common => Make to order Implemented TQM for Manufacturing in 1989,

included Order Entry in 1992.TQM - The unyielding and continuous effort by everyone in the

firm to understand, meet, and exceed the expectations of customers

First step: Cost of quality study System for identifying order entry errors Determine costs of order entry errors

Order Entry Dept. Prepares quotes for potential customers

(forwarded by sales reps) Takes sales orders (forwarded by sales or

service reps or direct) Two supervisors Nine employees: 3-parts orders, 3-system order

quotes, 3-taking system orders Final output:

The price quotes The order acknowledgement, “green sheet”

Order Entry Dept. Order Entry Dept.’s major suppliers

Sales or service representatives The final customers Technical information and marketing department

Internal customers which use OE info: Direct Users: Manufacturing, service (repair),

stockroom, invoicing, and sales administration Indirect users: Shipping, customer/tech support, and

collection department

No direct communication between sales and manufacturing—OE in middle Differing info can cause multiple reworking of quotes

Manufacturing produces standard systems in anticipation of quotes becoming orders Duplicate orders results if customers fail to use quote

numbers on actual orders

Good order acknowledgement reduces downstream errors and associated costs

Precision Systems, Inc.

Q1: Role that assigning costs to order entry errors played in quality improvement efforts

Types of errors were helpful information to make changes to process and accelerated the improvement effort

Determined the communication gaps between the order entry staff, sales reps, and manufacturing

Adoption of ISO 9002

Q2: Flow of activities between the order entry dept. and its suppliers, internal customers (within PSI), and external customers (outside PSI)

Sales rep Order Entry Dept. Manufacturing

Get order from customers

Fill out order and fax/phone to

order entry dept

Prepare quote & assign quotation #

and inform sales rep

Receive order from sales rep

Reconfirm order

Produce standard config. system

Invoicing Dept.

Receive order

Acknowledge quoted price

Send order acknowledgement

Send order to mfg

Receive order acknowledgement

Receive order acknowledgement

Send invoice to customer

Customer

Customize order as needed

Q3: Classify the failure items into internal failures and external failures Internal failures (on

purchase order) Incomplete information Transposition of prices Freight terms missing Credit approval missing Customer number terminated

on the computer’s DB Part number mismatch

External failures (on order acknowledgement) Incorrect business code (used for

tracking product line profitability) – Sales Admin

Incorrect shipping or billing address – Shipping, Collection

Incorrect sales tax calculation – Invoicing, Collection

More than one part number when only one is required – Manufacturing

Incorrect part number – Manufacturing

Missing part number – Manufacturing

How to identify internal/external failures? Inspecting the documents

Who would be involved in documenting these failures? Sales representative Order entry staff and supervisor Manufacturing staff

Which individuals or dept. should be involved in making improvements to the order entry process? Order entry manager, sales rep manager, manufacturing

manager

Q4: Internal/External failures

Quality costs arise from poor quality Poor quality in OE is insufficient or

incorrect information on order or quote Costs of poor quality

Class I: Rework of quotes, orders prior to leaving OE dept

Class II: Costs of incorrect order acknowledgements transferred out of OE

Precision Systems, Inc.

Order Entry Other Department Total Costs

Class I Failure Costs

Quotations 1.1% 0.4% 1.5%

Orders 0.9% 1.7% 2.6%

Total Class I Failure 2.0% 2.1% 4.1%

Class II Failure Costs

Order acknowledgements 2.6% 4.4% 7.0%

Change orders 2.6% - 2.6%

Final customers 0.02% 0.1% 0.12%

Return authorizations 1.9% - 1.9%

Total Class II Failure 7.12% 4.5% 11.62%

Total Failure Costs 9.12% 6.6% 15.72%

Precision Systems, Inc.

Estimated Annual Failure Costs (as a percentage of order entry’s annual salary and fringe benefits budget)

Over 20 types of order acknowledgement errors Many change order errors not controllable by OE

(71 per 100 new orders) Invoice errors cause delays in payment RA’s caused by sales and service errors Total cost of quality amounts to over 15% of OE’s

annual budget Internal customers rarely provided feedback

concerning problems caused by poor OE quality

Precision Systems, Inc.

Q5: What costs, in addition to salary and fringe benefits, would you included in computing the cost of correcting errors?

Space costs (rent, utilities, etc.) Telephone and computer expenses Manufacturing rework direct materials (for

class II order acknowledgement errors) Office supplies Cost of capital for delayed payments Shipping for RA orders

Q6: Provide examples of incremental and breakthrough improvements that could be made in the order entry process, esp. prevention, and prioritize.

1. QC on order acknowledgements, both human and electronic

2. Require sales-manufacturing communication prior to submission of quotes/orders

3. Establish process for tracking and reviewing errors—require internal customers to report and analyze impact

Q7: What non-financial quality indicators might be useful for the order entry department? How frequently should data be collected/reported? Usefulness of COQ info vs. non-financial?

Types of errors and success percentages (monthly)

Change orders and RA’s as percentage of new orders

Satisfaction report of internal customers incl. suggestions for improvement (quarterly)

This info is more important than cost info since it is what drives quality costs

Q&A

Reading 16-6 – 16-10:GE Takes Six Sigma Beyond the Bottom Line

Adnan AlibegovicJenny HonVivian NgoTom Spaulding

GE Background

1981 25 billion bureaucracy 20 years later 100 billion well run company 1989 Work-out initiatives

Improving back-office processing with new financial systems

Improving internal paperwork controlStreamlining approval process

GE Background

Mid 90’s Six Sigma initiativeWelch puts it as a priority for the companyProclaims it is largest initiative ever at GESets goals and targets for 5 yearsConsidered a core competency

Increased annual productivity Gains by 266% Operating margins from 14.4% to 18.4%

Started passing it on to the customers

Six Sigma

Derived form a statistical approachMeasures product or process defect ratesMeans almost error free performance

Six sigma 3.4 defects per million opportunities Four sigma 6210 defects per million opportunities Three sigma 66807 defects per million

opportunities

Six Sigma-DMAIC

Define

Control

Improve

Analyze

Measure

Define the problem

Measure what you care about

Statistically find root causes

Mobilize change initiatives

Sustain Improvements

Six Sigma GE

10 classroom days over 4 sessions and 90 calendar days

Works through action teams Green Belts

All employeesRequired training and 2 projectsOne project and post-certification each year to

maintain

Six Sigma GE

Black BeltsTechnical in natureLead small teams in business related projects Coach green beltsOver 4,500 today

Master Black BeltsTeach, Mentor, Develop Six Sigma toolsOver 800 teach the methodology

Six Sigma GE

ChampionsDrive the promotion of methodologyWork with executivesDevelop measurement

Six Sigma GE

PaybackOne division reduced annual teleconferencing

cost by $1.5 mil encompassing 19 mil minutesAnother cut customer processing time in halfEach project is expected to save $50,000 and

$150,000“Popcorn” effectOverall 2 billion in 2000 in savings

Six Sigma and Customers

GE Medical SystemsHealthcare industry

Lower reimbursement Competition Consolidation

1980’s qualityToday Quality and efficiency

Six Sigma and Customers

Attempt to remedy:Quality and reengineer consultantsCut costs

Six Sigma as solution2000: 1,149 projects for customersCommonwealth Health Corporation

Error reduction in order process reduced by 90% Operating expense reduced by $800,000 Overall $1.5 million savings

Six Sigma and Customers

Process Customers determine scope They get onsite training and tools Verify benefits received Complete loop process

Variations DFSS-Design for Six Sigma

Customer requirement and market plans scrutinized Everyone involved acquires immediate understanding and

provides feedback Apply to other areas immediately without delay with project

tracking

Q&A