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Iowa State University of Science and Technology Agriculture and Biosystems Engineering Agriculture and Industrial Technology 7/15/05 Calculating and Reporting.

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Presentation on theme: "Iowa State University of Science and Technology Agriculture and Biosystems Engineering Agriculture and Industrial Technology 7/15/05 Calculating and Reporting."— Presentation transcript:

1 Iowa State University of Science and Technology Agriculture and Biosystems Engineering Agriculture and Industrial Technology 7/15/05 Calculating and Reporting Benefits of QMS

2 Objectives Identify potential benchmark measures of cost/benefit of quality management system adoption by agriculture. Set scope of the project Select summarizing fiscal indicator of costs and benefits measures

3 Dual Roles for ISO 9000/9004 QMS for fulfilling customer, regulatory, etc., requirements (ISO 9000) “Management should consider development of innovative financial methods to support and encourage improvement of the organizational performance” (ISO 9004 – Guidelines for performance improvements)

4 Allocation of Costs: Process Approach Early methods of tracking quality costs was too limited “focus on cost of non- conformance i.e. external and internal failure costs”. (Juran) Process-cost broadens economics of quality by classifying cost of non- conformance and cost of conformance I.e. “costs incurred when a process is running without failure” (Schottmiller)

5 Process Approach: Added Benefits Utilize cost of non-conformance (often called Cost of Poor Quality) and cost of conformance = greater cost saving opportunities may be available in reducing cost of conformance (Schottmiller)

6 Process Costing Allows the tracking and reduction of costs normally associated with efficiency in addition to effectiveness (quality)” (Schottmiller) Process simplification in addition to reduction of errors become objectives (Schottmiller) Relate the economics of quality to the amount of activity performed (ISO/TR 10014: Economics of Quality)

7 Process Costs i.e. Costs of Inefficient Processes Examples Variation of product characteristics from optimum Unplanned downtime and/or loss of processing/storage capacity Inventory shrinkage Variation of process characteristics from ‘best practices’ (cycle times from to start to finish of activities) Other non-value added activities NOTE: Improvement is also an objective

8 Don’t Ignore Quality Failures (Juran) Cost of non- conformity: Internal failure costs External failure costs Cost of Poor Quality Cost of lost opportunities for sales revenue Cost of conformity: process approach

9 Internal Failure Costs Examples Labor and material overhead spent on defective product – spoilage, defectives, scrap etc. Correcting defectives in physical or service products i.e. reworking product Sorting bad/good product Reinspection, retest of product Changing processes to correct deficiencies (CAR’s) Downgrading product (Juran)

10 External Failure Cost Examples Costs involved in replacing/making repair for warranty product Investigation and adjustment costs to justified complaints of quality defective product Returned material Concession costs due to substandard product accepted by customer Correcting errors on external supporting processes Revenue losses in support operations (Gyrna)

11 Allocation of Costs The company must decide what to measure depending upon circumstances, objectives, etc. However, The overall idea is to “allocate costs and not to absorb such costs into overhead” (ISO/TR 10014)

12 Deriving Benefits Reduction of failures due to QMS Improvement of process efficiencies due to QMS –Pre and post measures of implementation However, improvements should be done as identified –Using quality tools such as flowcharting, value add analysis, cycle time reduction, process simplification, root cause investigation, etc.

13 Quality Improvement Examples Flow charting w/ value, non-value add analysis –Green – customer value added activity –Yellow – ‘necessary evil’ –Red – non customer value added

14 Cycle Time Reduction Stop watch time study common Also work sampling Better way to get data w/o estimating?

15 Value Add Analysis Definitions –Value added activity: only if the customer recognizes its value, it’s done right the first time, It changes the product toward something the customer expects –‘Necessary Evil’ (operational value added activity): not customer value added but required through law, regulation, or contract required to support value added activities technological barrier exists from eliminating activity –Non value added activity: not valued by customer, doesn’t change product towards customer value not required by law, contract

16 Pareto Analysis (80/20 rule)

17 Root Cause Analysis Why-because diagram: ask ‘why’ at least 5 times to reach root cause EffectCause

18 Improvements Summary Point is to have active system of improvement per ISO guidelines and would bring more value to project and study as a whole Question is: will it confound the measuring of the ISO impact study?

19 Potential Benchmark Measures “The organization can use a variety of financial decision methods (e.g. net present value, payback time, internal rate of return) to decide whether to proceed or not with a cost benefit analysis” (ISO/TR 10014:1998(E): Guidelines for Managing the Economics of Quality)

20 Overall Fiscal Impact Roll up measures into a financial indicator such as: –Benefits/cost ratio: present worth of total benefits present worth of total costs If ratio is greater than 1, project deemed worthwhile and vise versa B/C=

21 OR: –Net present worth: NPW=present worth of total benefits – total worth of total costs –Simple number; positive worth indicates program is viable –Both ignore time value of money; relative to project not company as a whole Overall Fiscal Impact con’t.

22 Data Collection and Analysis Statistical analysis of QMS impact, design study based on answering some questions: 1. Important to answer implementing QMS vs. not implementing? Larger scope, need control group, different indicators 2. Does QMS implementation pay for itself? ** 3. How do AIB vs. ISO systems compare? 4. What is QMS impact over time? Repeated measures Regardless of above, 1. How to control location variation i.e. how were present locations picked for QMS implementation?

23 Timeline

24 Timeline Questions What is finish date? How long does data collection last? What are the resources at hand?

25 Conclusion Answer questions of scope, design, particular measures, summarizing fiscal indicator(s), timeline Review relevant FC documents as necessary

26 Presentation through Balanced Scorecard (BSC) “Articulate key indicators (that management considers important) to categorize performance” (West) Balanced Scorecard is a “business management system for linking strategic goals to day to day operations requirements” (Hoffert)

27 Airspeed Only?!?* AIRSPEED *Kaplan

28 Multiple Perspectives of BSC How do we look to shareholders? (Financial) How do customers see us? (Customer) What must we excel at? (Internal) Can we continue to improve and create value? (Innovation and learning) (Kaplan and Norton)

29 Financial Perspective Business strategies: –Growth –Sustain –Harvest Where is your business? Three financial themes: –Revenue growth and mix –Cost reduction/productivity improvement –Asset utilization/investment strategy

30 Customer Perspective Core Measures: –Market share –Customer retention –Customer acquisition –Customer satisfaction –Customer profitability Beyond the Core: –Product/service attributes –Customer relationships –Image and reputation

31 Internal Business Process Perspective Three basic processes: –Innovation –Operations* –Postsale service *Measuring process quality approach of QMS benefits

32 Learning and Growth Perspective Three principles: –Employee capabilities –Information systems capabilities –Motivation, empowerment, and alignment

33 How Measures and Plans Link Measures need targets Actions/plans need to be defined for achieving targets Competitor/comparative data used to set targets Performance against targets needs regular review(Hoffert)

34 Examples (LaCount)

35 Examples cont. (Hoffart)

36 How it All Works Quality PolicyObjectives Metrics from Balanced Scorecard Internal -Return on Quality (ROQ) = benefits/investment Customer Learning/Innovation Financial (Alam, Juran)

37 Summary This is more than just the cost/benefit of a QMS, it is the development of a ‘Rich Picture’ of the business performance

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