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Session 16(Chap. 7 & 8)
Benchmarking (Ch -7)andPerformance 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
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World Class
Any Orgz. USA, etc..
Industry -wide
Competitor
Internally
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Gaining Insight Through
Benchmarking
Benchmark
A benchmark is an organization recognized for its
exemplary operational performance.
There are many benchmarks in the world includingToyota 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.
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Purposes of Benchmarking
I Learning from successes
II Borrowing ideas
III Best-in-firm
IV Beating industry standards
V Best-in-class
VI National leadership
VII Best-in-World
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Types of Benchmarking1. Internal benchmarkingOrgz. Need not always
look outside to find out the best practices.
They could study the best performing division inhouse.
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) & other1%. Obj improve it.
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Types of Benchmarking - Contd..
2. Competitive benchmarking When an orgz. Isperforming well, they will definitely advt. andmake 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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Types of Benchmarking - Contd..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 inthe 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..
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 opportunityanalogous 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 qualitymanagement program
Product-design costs costs of designing products
with quality characteristics
Process costs costs expended to make sure
productive process conformsto quality specifications
Training costs
costs of developing andputting on quality trainingprograms for employees andmanagement
Information costs
costs of acquiring andmaintaining data related toquality, and development ofreports on quality
performance
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Appraisal Costs Inspection and testing
costs of testing and inspecting materials, parts, andproduct at various stages and at the end of a process
Test equipment costs costs of maintaining equipment used in
testing quality characteristics of products Operator costs
costs of time spent by operators to gatherdata 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, andindirect costs
Rework costs costs of fixing defective
products to conform to qualityspecifications
Process failure costs
costs of determining whyproduction process isproducing poor-qualityproducts
Process downtime costs
costs of shutting down
productive process to fix
problem
Price-downgrading costs costs of discounting poor-
quality productsthat is,
selling products as seconds
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External Failure Costs
Customer complaint costs costs of investigating and
satisfactorily responding to acustomer complaint resulting froma poor-quality product
Product return costs costs of handling and replacingpoor-quality products returned bycustomer
Warranty claims costs costs of complying with product
warranties
Product liability costs litigation costs resulting
from product liabilityand customer injury
Lost sales costs
costs incurred becausecustomers aredissatisfied with poorquality products and donot make additional
purchases
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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 2002 2003 2004
Quality Costs
Prevention $ 27,000 41,500 74,600 112,300
Appraisal 155,000 122,500 113,400 107,000Internal failure 386,400 469,200 347,800 219,100
External failure 242,000 196,000 103,500 106,000
Total $ 810,400 829,200 639,300 544,400
Accounting MeasuresSales $ 4,360,000 4,450,000 5,050,000 5,190,000
Mfg costs 1,760,000 1,810,000 1,880,000 1,890,000
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Index
Year Quality Quality Mfg
Sales Index Cost Index
---------------------------------------------------------2001 18.58 46.04
2002 18.63 45.18
2003 12.66 34.002004 10.49 28.80
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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
Quality improvement reduces inputs
Fewer defects increase output
Productivity =output
input
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Measuring Yield and Productivity
where
Y = yieldI = number units started in production
% G = percentage good units
% R = percentage of defective units reworked
Yield = (total input) (% good units) +
(total input)(1 - % good units)(% reworked)
Y= (I)(%G) + (I)(1 - %G)(%R)
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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
Y= 100(0.90) + 100(1 - 0.90)(0.50)
= 95 motors
If product quality is increased to 90% good,
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Product Cost
Product cost =(Kd)(I) + (Kr)(R)
Y
Product cost =
(direct manufacturing cost per unit)(input) +(rework cost per unit)(reworked units)
yield
where
Kd = direct manufacturing cost per unitI = input
Kr = rework cost per unit
R = reworked units
Y = 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 =
(Kd)(I) + (Kr)(R)
Y
Product cost = = $34.67 per motor($30)(100) + ($12)(10)
90 motors
The manufacturing cost after quality improvement is
Product cost = =$32.21 per motor($30)(100) + ($12)(5)
95 motors
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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
Start with100 motors
AVERAGE PERCENTAGESTAGE GOOD QUALITY
1 0.93
2 0.95
3 0.97
4 0.92
Y = (I) (%g1)(%g2)...(%gn)
= (100)(0.93)(0.95)(0.97)(0.92)
Y = 78.8 motors
Solve for I
I= = = 126.8 motorsY
(%g1)(%g2)...(%gn)
100
(0.93)(0.95)(0.97)(0.92)
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Quality Productivity Ratio (QPR)
Includes productivity and quality costs
Increases
if processing or rework costs decrease
if process yield increases
QPR = (100)Good quality units(input)(processing cost) +
(defective units)(rework cost)
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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 = ( 1 0 0) = 2.8980 + 10
(100)($30) + (10)($12)
Case 1: Increase input to capacity of 200 units
QPR = (100) = 2.89160 + 20
(200)($30) + (20)($12)
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QPR Example
Case 3: Increase initial good-quality to 95%
QPR = (100) = 3.2295 + 2.5
(100)($30) + (2.5)($12)
Case 4: Decrease costs and increase initial good-quality
QPR = (100) = 3.7195 + 2.5
(100)($26) + (2.5)($10)
Case 2: Reduce processing cost to $26 and rework to $10
QPR = (100) = 3.3380 + 10
(100)($26) + (10)($10)
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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 - 1At 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. Inputof 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 befilled. 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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