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Chapter 16

Chapter 16. Adnan Alibegovic Jenny Hon Vivian Ngo Tom 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

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Chapter 16

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  1. Chapter 16 Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding

  2. 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

  3. 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”

  4. 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

  5. Precision Systems, Inc. • 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

  6. 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

  7. Q2: Flow of activities between the order entry dept. and its suppliers, internal customers (within PSI), and external customers (outside PSI) Order Entry Dept. Manufacturing Invoicing Dept. Sales rep Get order from customers Receive order from sales rep Produce standard config. system Receive order acknowledgement Fill out order and fax/phone to order entry dept Receive order Reconfirm order Send invoice to customer Send order acknowledgement Prepare quote & assign quotation # and inform sales rep Acknowledge quoted price Customize order as needed Send order to mfg Receive order acknowledgement Customer

  8. 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 Q3: Classify the failure items into internal failures and external failures

  9. Q4: Internal/External failures • 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

  10. Precision Systems, Inc. • 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

  11. Precision Systems, Inc. Estimated Annual Failure Costs (as a percentage of order entry’s annual salary and fringe benefits budget)

  12. Precision Systems, Inc. • 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

  13. 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

  14. Q6: Provide examples of incremental and breakthrough improvements that could be made in the order entry process, esp. prevention, and prioritize. • QC on order acknowledgements, both human and electronic • Require sales-manufacturing communication prior to submission of quotes/orders • Establish process for tracking and reviewing errors—require internal customers to report and analyze impact

  15. 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

  16. Q&A

  17. Reading 16-6 – 16-10:GE Takes Six Sigma Beyond the Bottom Line Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding

  18. 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 control • Streamlining approval process

  19. GE Background • Mid 90’s Six Sigma initiative • Welch puts it as a priority for the company • Proclaims it is largest initiative ever at GE • Sets goals and targets for 5 years • Considered a core competency • Increased annual productivity Gains by 266% • Operating margins from 14.4% to 18.4% • Started passing it on to the customers

  20. Six Sigma • Derived form a statistical approach • Measures product or process defect rates • Means 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

  21. Six Sigma-DMAIC Control Improve Sustain Improvements Analyze Mobilize change initiatives Measure Statistically find root causes Define Measure what you care about Define the problem

  22. Six Sigma GE • 10 classroom days over 4 sessions and 90 calendar days • Works through action teams • Green Belts • All employees • Required training and 2 projects • One project and post-certification each year to maintain

  23. Six Sigma GE • Black Belts • Technical in nature • Lead small teams in business related projects • Coach green belts • Over 4,500 today • Master Black Belts • Teach, Mentor, Develop Six Sigma tools • Over 800 teach the methodology

  24. Six Sigma GE • Champions • Drive the promotion of methodology • Work with executives • Develop measurement

  25. Six Sigma GE • Payback • One division reduced annual teleconferencing cost by $1.5 mil encompassing 19 mil minutes • Another cut customer processing time in half • Each project is expected to save $50,000 and $150,000 • “Popcorn” effect • Overall 2 billion in 2000 in savings

  26. Six Sigma and Customers • GE Medical Systems • Healthcare industry • Lower reimbursement • Competition • Consolidation • 1980’s quality • Today Quality and efficiency

  27. Six Sigma and Customers • Attempt to remedy: • Quality and reengineer consultants • Cut costs • Six Sigma as solution • 2000: 1,149 projects for customers • Commonwealth Health Corporation • Error reduction in order process reduced by 90% • Operating expense reduced by $800,000 • Overall $1.5 million savings

  28. 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

  29. Q&A

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