Value = Function / Cost
2. SIX-SIGMA AND TOTAL QUALITY MANAGEMENT
Total Quality Management (TQM) is a concept developed in the 1980s as the United States became enlightened to the need for improved quality as a competitive initiative. Total Quality starts with management commitment to formal goal setting, quality system analysis, and a measurement system.
Six-Sigma is a refinement of TQM offering proven methods for achieving customer-centric process and quality improvements. The term
“six-sigma” is derived from the statistical variability of processes and equates to a quality level of 3.4 defects per one million pieces (ppm), or 99.99966% conforming. By contrast, 2% defective is the equivalent of 20,000 ppm. Application of six-sigma methods involves statistical analysis of systems, process flows and equipment capabilities. These are combined with techniques for error proofing, redefining staffing requirements and conducting top-down training. Several major companies became known for their customer focused quality efforts using the six-sigma approach. These include, among others, Motorola, Allied Signal (now Honeywell) and General Electric.
The discipline is all about eliminating errors and reducing variability from the customer’s viewpoint. Jack Welch, former CEO of General Electric, says six-sigma is a lot more than quality control and statistics; it is an idea that can turn a company inside out, focusing the company outward on the customer. He adds that ultimately it drives leadership to be better by
providing tools to think through tough issues.26 It is critical for supply management people to understand and call for the application of six-sigma because it saves money, reduces response time, increases flexibility and improves customer (buyer) satisfaction.
Some specific quality strategies used by professional purchasing departments are as follows:
Establish supplier continuous improvement projects.
Assure top management support.
Map process flow.
Use six-sigma methods, such as root-cause analysis and error proofing.
Measure and track progress regularly.
Expect suppliers to apply Statistical Process Control (SPC).
Reduce variability.
Narrow and center the band of acceptance (more on this shortly).
Know the elements of your company’s cost of quality and manage quality to reduce the total cost of quality from all sources.
Ensure that all quality and process improvement efforts focus on satisfying the final customer.
2.1 Cost of Quality
Many will agree the definition of quality is “conformance to requirements,” or “meeting the specification.” The quality system is
“prevention,” and the performance standard is “Do it right the first time.”
The measurement is Cost of Quality (COQ).
Costs associated with quality are traditionally buried in various departments’ budgets. Assembling these data allows managing the costs through a multifunctional team approach. COQ becomes a tool used to improve quality of both products and services provided to customers.
The various costs of quality can be broken down into appraisal, prevention, external, and internal failures costs. Further, they can be broken into those quality costs tracked by accounting systems and those costs not normally visible from the system.
Traditional accounting systems report: warranty, scrap/repair, and inspection or testing. Those costs not normally reported by accounting include: lost sales, switching customers, retrofit field trips, time lost, higher inventory, obsolete materials, and expediting costs, as well as excess labor costs. Lengthy design cycle time, engineering redesigns, down time, high
26 Jack Welch, Jack, Straight from the Gut, Warner Books, 2001, page 330.
setup time, queue time, and poor plant layouts all contribute to higher costs of quality, and are not easily tracked.
The COQ draws attention to the opportunities to reduce costs. With this knowledge, measurements can be established, goals set and progress charted.
The COQ report is normally under the guidance of finance.
The report should be compiled using costs from:
Prevention costs: Expense of running a system to ensure that products conform to the customers’ requirements, including: writing
specifications, procedures to hold dimensional tolerances and training costs for quality purposes.
Appraisal costs: Cost of testing, sampling, and audits to detect errors, including staff related to quality improvements, measurements and control.
Internal failure costs: Cost connected with a rejected or failed product, including extra inventory carrying costs, labor, materials, scrap, and wastes.
External failure costs: Warranty claims costs, transportation and handling of returned products, costs of rework or “doing it over,” and costs of engineers’ trips to customers to trouble shoot and solve problems.
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Note that many of these costs are associated with activities performed by indirect and salaried personnel whose time, unlike that of direct labor, is not tracked by accounting. As a result, it may be necessary to use Activity Based Costing to get the cost details required. This is another important example of how, in order to effectively manage cost, it has become necessary to take a detailed look at the processes being performed to find the improvement opportunities.
Process analysis and subsequent process reengineering have proven to be essential in the effective management of the cost of quality. The process is mapped using TQM and six-sigma methods to define all pertinent operations, transportation, handoffs, approvals and delays. The process map includes all individuals involved in the process, the length of time each spends and the approximate cost of that time and total elapsed time for each step. With this information, the team charged with process improvement can identify ways to reduce cycle time, minimize errors, and reduce process total costs. Major improvement opportunities are almost always identified because, prior to this effort, most processes will have evolved over a period of time with changes made by one function without the benefit of a total process overview or consulting others involved.
Use of a process-focused approach to quality improvement has several advantages:
Attention is directed toward a possible flaw in the process.
Analysis is of the root cause of the error, not the person who erred.
The process can be made error-proof, instead of asking the person to stop making mistakes.
Management can remove barriers to good process flow, rather than criticize poor performance.
Everyone, including supplier and buyer, is interested in the same outcome: fewer errors and lower costs.
The interests of the final customer guide process improvement in the supply chain.