Chapter 2a Performance measures

1. Chapter 2a Performance measures This chapter provides description of cost of quality and quality award model used to measure performance

2. Performance measures • One of core values in MBNQA is manage by facts – not gut feelings • Effective management requires info from measurement activities • Performance measures used as baseline to - identify potential project - justify project resource allocation - assess improvement results • Production – defects per million (or ppm), inventory turns, on-time delivery • Service activities – billing errors, sales per square feet, engineering changes, activity times, etc.

3. Cost of poor quality • In the final analysis - value of QC / QA / TQM initiative and programs are based on ability to contribute to profits. • An effective performance measure is cost of poor quality- decisions depends on expense and income of the business activity. • Efficiency of any business measured in RM, $ (monetary value) • Costs of poor quality can be found – same as for cost of maintenance, production, design, inspection, etc. • We can measure, program, analyze and budget the cost of poor quality (COPQ) or (PONC) to achieve better quality and customer satisfaction.

4. Cost of poor quality •  COSTS ,  PROFIT • Quality costs involves all department; purchasing, design, etc. • What is quality costs? Cost of poor quality are • “those costs associated with non-achievement of product/service quality defined by the requirements”

5. Cost of poor quality • Quality cost - used in pursuit of quality improvement, customer satisfaction, and basic data for TQM • High quality cost – inefficient, ineffective management • Quality Cost Program quantifies magnitude quality problem in management language (RM); - 20% of sales dollars in manufacturing - 35% of sales dollars in service • Need to develop Quality Cost Program • Identify opportunities for improvement • Justification for corrective action • Every sen saved will  profits - Take care of the penny and penny will take care of itself!!

6. Cost of poor quality • Principle advantage – identify hidden costs which is not able to detect in operation • Program – comprehensive and not ‘fire-fighting’ problem • Real improvement occurs – ROOT CAUSE OF PROBLEM identified and eliminated

7. Quality Costs Categories Prevention • Prevention achieved by examining experience gained from identification of specific causes of failures, and developing specific activities incorporated into basic management system that make it difficult or impossible for error/failure to occur again • Cost incurred for planning, implementing & maintenance a quality system to ensure conformance to requirements • Design review, Quality Management system, Measuring Equipment Calibration

8. Quality Costs Categories Appraisal • Cost incurred to determine degree on conformance to quality requirements • Examples – incoming inspection, source inspection, operations inspections, measuring equipment

9. Quality Costs Categories Failures • Internal failure • External failure • Cost incurred when products/services, components, materials, fail to meet requirements 1) before, 2) after transfer of ownership to customer • Internal - purchasing errors, rework, repair, scrap, reappraisal, etc. • External - complaint investigation, returned goods, retrofit. Warranty costs, liability costs, etc

10. Collection and Reporting Quality Data

11. Quality Costs QUALITY COST REPORT • for control purposes • establish budget • variances measured ANALYSIS 1) Trend analysis • by cost categories (P-A-F) • product • indices (baseline) • plants in the corporation 2) Pareto Analysis • categories • department • product lines, e.g. failure costs, warranty costs, appraisal • Cost incurred to determine degree on conformance to quality requirements • Examples – incoming inspection, source inspection, operations inspections, measuring equipment

13. Optimum Costs • Mgmt. wants to know optimum costs when analyzing quality costs (this is difficult to specify). Propose techniques

15. Perfection is achievable, if 99.9% conformance (i.e. 1 error in 1000); • 16,000 pieces of lost mail every hour, • 500 failed surgical operations each week, • 2 unsafe airplane landings at O’Hare airport, • 22,000 wrong checks deduction, • 2 million dead/sick food poisoning each year, etc.

16. Quality Improvement Strategy • Guiding Principles • All failures/problems has ROOT CAUSE • Causes are preventable • Prevention cheaper than cure • Based on the three principles, possible strategy is as follows: • Reduce failure costs by problem solving • Invest in the ‘right’ prevention actions • Reduce appraisal costs where appropriate ~ statistically sound • Continuously evaluate & redirect prevention effort to gain further improvement

17. Malcolm Baldrige National Quality Award (MBNQA) • Annual award to recognize US organizations for performance excellence • Established Public Law 100-107 on August 1987 • Award promotes : • understanding of the requirements for performance excellence and competitiveness improvement • sharing of information on successful performance strategies, and benefits derived form those strategies

18. Malcolm Baldrige National Quality Award • 5 categories – manufacturing, service, small business, health care, education • Organizations use criteria as a technique to measure their TQM effort on an annual basis (conduct self assessment) • Core values and concepts embodied in seven categories • Categories further subdivided into examination items – 19 items (always improving)

19. MBNQA Framework

20. MBNQA Criteria and Score

21. Other performance measures • Balanced scorecard – Customer Measures, Financial measures, Learning and growth, internal processes (integrated as strategic management and communication tools) • Six sigma program – what sigma level