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  Measuring Business Excellence IDENTIFYING THE COST of POOR QUALITY Lars Sörqvist  Article information: To cite this document:Lars Sörqvist, (1998), IDENTIFYING THE COST of POOR QUALITY , Measuring Business Excellence, Vol. 2 Iss 3 pp. 12 -17 Permanent link to this document: http://dx.doi.org/10.1108/eb025538 Downloaded on: 26 June 2016, At: 14:04 (PT)References: this document contains references to 0 other documents.To copy this document: permissions@emeraldinsight.comThe fulltext of this document has been downloaded 226 times since 2006* Users who downloaded this article also downloaded: (1997), EFFECTIVE METHODS for measuring the cost of poor quality , Measuring Business Excellence, Vol. 1 Iss 2 pp.50-53 http://dx.doi.org/10.1108/eb025484(1999), Performance improvement: a total poor-quality cost system , The TQM Magazine, Vol. 11 Iss 4 pp. 221-230 http://dx.doi.org/10.1108/09544789910272904(2014), Determining the cost of poor quality and its impact on productivity and profitability , Built Environment Project and Asset Management, Vol. 4 Iss 3 pp. 296-311 http://dx.doi.org/10.1108/BEPAM-09-2013-0034 Access to this document was granted through an Emerald subscription provided by emerald-srm:448207 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors serviceinformation about how to choose which publication to write for and submission guidelines are available for all. Please visitwww.emeraldinsight.com/authors for more information.  About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of onlineproducts and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on PublicationEthics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download.    D  o  w  n   l  o  a   d  e   d   b  y   A   t   h  a   b  a  s  c  a   U  n   i  v  e  r  s   i   t  y   A   t   1   4  :   0   4   2   6   J  u  n  e   2   0   1   6   (   P   T   )  CASE STUDY Most businesses would be happy to increase turnover by 10%, yet that is the scale of loss through poor quality revealed by projects in Swedish companies. And 10% may be just the tip of the iceberg. By Lars Sörqvist. IDENTIFYING THE  COST POOR QUALITY ve  years ago a project got under way at Stockholm's Royal Institute of Technology to develop an effective method of measuring the cost of poor quality. From its initial mapping of current methods of measurement and working in Swedish manufacturing and service companies the project established a general model for measuring the cost of poor quality. The model was described in detail in Measuring Business Excellence volume  1  number 2. To aid development the model was applied in companies. Case studies carried out to test and develop principles and practices which emerged during the project are described here. All the companies are referred to anonymously. REFERENCE POINTS Company A  A large manufacturer with overseas operations and a reputation for quality. Company   Part of  a multinational looking to move beyond  SO  9001 Company C  A large service enterprise suffering a fall-off in quality and profitability. Company  D  An electronics company hampered in its quality initiatives by short-term priorities. Company  Ε  A  small  business struggling to prioritize effectively potential improvements Lars  Sörqvist is  a  researcher at the  Royal  Institute of Technology  in  Stockholm with responsibility for quality.  He  also works  as a  consultant with Sandholm Associates Djursholm Sweden. 12 MEASURING BUSINESS EXCELLENCE  VOLUME 2 NUMBER 3    D  o  w  n   l  o  a   d  e   d   b  y   A   t   h  a   b  a  s  c  a   U  n   i  v  e  r  s   i   t  y   A   t   1   4  :   0   4   2   6   J  u  n  e   2   0   1   6   (   P   T   )  CASE STUDY Company Α A large manufacturing business with 20 000 employees annual turnover of about SKr30 billion and plants and sales operations in many different countries. For most of this century Company A has been a symbol of Swedish quality and has enjoyed a strong financial position. Its already high market shares are steadily increasing in most of its global markets, where its products command some of the highest prices through a reputation for the highest quality. The company has successfully demonstrated to its customers that high quality reduces to a minimum total cost over the life cycle of the product. Its reward is higher margins than its competitors. Paradoxically, this same reputation as a model of profitable enterprise worked against the corporate quality department in selling the idea of improvement projects within the company. In getting across the message that to retain its competitive edge the company must intensify its improvement activities, the quality manager was therefore eager to demonstrate the financial potential in quality, even in a situation of strength. After training managers in the quality department in how to create understanding of the methods used for running assessments, a pilot project was set up with the backing of senior management to assess poor quality costs in a unit which designs and manufactures customized product models and contains features of all the company's areas of activity. The assessment covered the entire process chain from identifying customer needs to TO RETAIN A COMPETITIVE EDGE A COMPANY MUST INTENSIFY ITS IMPROVEMENT ACTIVITIES implementation by the end user. One of the key objectives of the project was to obtain quick results that could be used to stimulate interest in quality activities. A small project group was formed, consisting of a representative of the quality department, an accountant and the author, whose role was to communicate information and be available for advice. A reference group, comprising quality department staff trained in the concepts of poor quality costs, was also available. The quality department and company management defined poor quality costs as the total costs which are caused by deficiencies in our processes, goods and services . Likely items were identified in a brainstorming session within the quality department and interviews with representatives from the pilot unit. Starting with an analysis of information in the existing system, the assessment followed the flow of processes in the unit, but later analysis 'against the flow' - from customer to supplier - also flagged shortcomings in the earlier stages. Selected individuals were then interviewed about their current problems and deficiencies - essential because much of the information was not available in the existing system. The first stage in the assessment, which focused on the marketing, development, production and after-sales functions (see figure 1), was an analysis of the information already available in the system. Interviews were then arranged with selected individuals to isolate and measure problems and deficiencies. The study was based on business in 1995, which amounted to about 50 orders. VOLUME 2 NUMBER 3  MEASURING BUSINESS EXCELLENCE 13    D  o  w  n   l  o  a   d  e   d   b  y   A   t   h  a   b  a  s  c  a   U  n   i  v  e  r  s   i   t  y   A   t   1   4  :   0   4   2   6   J  u  n  e   2   0   1   6   (   P   T   )  CASE STUDY Costs were estimated based on average hourly staff costs. In parallel, the direct costs of each process were also established to allow for fair comparison. The poor quality costs were determined by estimating minimum and maximum deviations from the registered estimates. The narrow variance - 11%  and 13   of direct process costs -implies relatively high accuracy'. However, some poor quality costs, such as the effects of dissatisfied customers and loss of market share, remained hidden. When presented to a pre-arranged meeting of company management these results aroused considerable interest - the group concluded that the company's total poor quality costs probably amounted to at least SKr8 billion. An action plan was drawn up to identify the principal causes and establish goals for corrective measures. Priority was given to factors which could be applied to a new main product recently introduced and those particularly visible to customers. The assessment also helped to improve knowledge within the company of its own activities. The capacity to generate valuable results for a small input in terms of man-hours - a total of about 150 - was particularly appreciated. Since then, poor quality costs have also been measured in other business units using the same techniques. THE  HE VY VOLUME OF BUREAUCRACY ASSOCIATED  WITH ISO 9 1  CERTIFIC TION BRED  NEG TIVE TTITU E  TO QU LITY EXERCISES ompany C A service enterprise with annual turnover of more than  SKr30  billion and about 20,000 employees. Once regarded as one of the best in its industry, in recent years the company has suffered from poor quality and profitability. An estimated 35 of ser-vices are not pa formed on schedule, 14,000 customers are affected every day by some kind of failure and 36 of the company's resources arc not  utilized. In response to the company's deteriorating performance, its quality and financial control departments proposed to map poor quality costs to demonstrate potential for improving the financial position. The objective of the project, which eventually involved about one man-month of work, was to develop a documented model which could be used by local units to analyse their own operations for poor quality costs. These were defined as those costs which would disappear if the company's products and processes were perfect and were divided into internal failure costs, external failure costs and appraisal costs. Processes, functions and known problem areas that reflected business character were studied: sales process execution process front office personnel returns lost goods complaints unserved customers Responsibility for mapping poor quality costs in sales, which includes marketing and customer care, was delegated to the process owner. From interviews with 160 people about their work and the problems they experienced the value of poor quality costs was calculated at SKr63.8 million, or 9% of the cost base. Most costs were caused by inadequate administrative procedures and IT systems. Analysis of the relative importance of failures in the company showed that most poor quality costs are caused by problems which are of great importance to the business but readily solved (see figure 2). A follow-up assessment expanded the analysis and showed the cost of poor quality to be about 15% of cost base. Delays and non-conformities in the execution process - which directly affect the customer - were estimated to have cost SKr700-800 million in one year. Loss of business from failures probably amounted to SKr1-2 billion annually. Front office activities gave rise to two types of poor quality cost: sporadic and chronic. Sporadic costs - those which are associated with handling and correcting irregularities and compensation to customers - amounted to SKr188 million in the previous year. The extent of chronic poor quality costs - deficiencies that were accepted in the business and were often due to shortcomings in the way the service had been designed - is harder to establish; Company C's focus on under- 14 MEASURING  BUSINESS EXCELLENCE  VOLUME 2 NUMBER 3    D  o  w  n   l  o  a   d  e   d   b  y   A   t   h  a   b  a  s  c  a   U  n   i  v  e  r  s   i   t  y   A   t   1   4  :   0   4   2   6   J  u  n  e   2   0   1   6   (   P   T   )

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