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Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding

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1 Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding
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 Each product line at PSI has only a handful of standard products Changes and add-ons can be accommodated as long as they’re not radically different from the standard systems Due to rising competition and increasing customer demand for quality, PSI adopted….. Employees received training, and quality initiatives were launched High-quality output from the order department improves quality later in the process and allows PSI to deliver higher-quality systems both faster and cheaper, thus meeting the goals of timely delivery and lower cost

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 COQ for order entry dept. accelerated the improvement effort

7 Q2: Flow of activities between the order entry dept
Q2: Flow of activities between the order entry dept. and its suppliers, internal customers (within PSI), and external customers (outside PSI) Sales rep Order Entry Dept. Manufacturing Invoicing Dept. 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 External customer: Sales reps meet with customers to discuss type of system desired Sales reps fill out paper form and fax or phone it to an order entry employee Order entry employee reconfirm with sales rep, customer, and mfg dept to check on exchangeability of parts, part numbers, current prices for parts, or allowable sales discount Order entry employee prepare the quote  assigned a quotation number Manufacturing produces system with standard configuration Order information is reentered into the system to produce an order acknowledgement Order acknowledgement is sent to invoicing department Invoicing dept. review order and generate invoice to customer Internal customers: Use information from order entry department Direct Users: manufacturing, service (repair), stockroom, invoicing, and sales administration Indirect users: Shipping, customer/tech support, and collection department Sales admin dept. prepares commission payment & track sales performance After a system is shipped, paperwork is sent to customer support to maintain a service-installed DB in anticipation of tech support questions that may arise Customer support is also responsible for installation of system A good order acknowledgement can greatly reduce errors downstream within the process and prevent later non-value-added costs Send order to mfg Receive order acknowledgement Customer

8 Q3: Classify the failure items into internal failures and external failures
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 Internal failure – defective before delivery to internal/external customers External failure – nonconforming “products” (incorrect quotes or orders) delivered to internal or external customers Which order entry’s internal customers will be affected

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) Order Entry Other Department Total Costs Class I Failure Costs Quotations 1.1% 0.4% 1.5% Orders 0.9% 1.7% 2.6% Total Class I Failure 2.0% 2.1% 4.1% Class II Failure Costs Order acknowledgements 4.4% 7.0% Change orders - Final customers 0.02% 0.1% 0.12% Return authorizations 1.9% Total Class II Failure 7.12% 4.5% 11.62% Total Failure Costs 9.12% 6.6% 15.72%

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 Space costs (rent, utilities, etc.) Telephone and computer expenses
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 QC on order acknowledgements, both human and electronic
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 Types of errors and success percentages (monthly)
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 defects per million opportunities

21 Six Sigma-DMAIC Control Improve Analyze Measure Define
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 Master 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 All other belts are selected top-performers Black Belts Technical & cultural change agents for quality Lead small teams that implement the Six Sigma approach Coach green belts in business-related projects Over 4,500 Black Belts today in GE Master Black Belts full-time teachers Develop 6 Sigma tools Over 800 within GE

24 Six Sigma GE Champions Drive the promotion of methodology
Work with executives Develop measurement -drive initiatives into daily operations & develop measurement in business metrics All belts: create mentoring structure and momentum

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 Looking back at the initial 5 year of implementation Individual projects (Thousands) Cumulative Popcorn: One kernal = one project Keep heat on to pop thousands of kernals, multiplies exponentially GE managers expect saving for each project… Calculated internally Results: Yes, definate payback! Complete dedication Enterprise-wide Improvement in quality and productivity

26 Six Sigma and Customers
GE Medical Systems Healthcare industry Lower reimbursement Competition Consolidation 1980’s quality Today Quality and efficiency Healthcare industry experienced constant changes that makes it so much more challenging 1980’s model targeted quality at all costs Today’s approach to healthcare: quality & efficiency are driving forces

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 1990’s the healthcare industry attempted to remedy the situation with quality & reenginerring consultants lack of change management & lack in transfer of skills 2000: By Dec 2000, GE Medical Systems reported 1,149 GE even created service unit dedicated to providing six sigma management tools/processes to healthcare organizations requiring more assistance to improve performance. Commonwealth Health Corporation 478 bed medical center in Kentucky started Six Sigma 3 years ago Within 18 months: process order Continues to expand programs to other areas.

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 Why is this program working??? Connects the dots among quality, cost, process, people, & accountability There are several variations of Six Sigma, one is DFSS DFSS is a Six Sigma process where there are existing processes in place. Formal DEFINE & MEASURE phase where customer requirements and market plans are scrutinized.

29 Q&A

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