Calculating and Reporting Benefits of QMS

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

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

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

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

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. Overall Fiscal Impact con’t. 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

22. Data Collection and Analysis • Statistical analysis of QMS impact, design study based on answering some questions: • Important to answer implementing QMS vs. not implementing? • Larger scope, need control group, different indicators • Does QMS implementation pay for itself? ** • How do AIB vs. ISO systems compare? • What is QMS impact over time? • Repeated measures Regardless of above, • 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