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

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calculating and reporting benefits of qms

Calculating and Reporting Benefits of QMS

Iowa State University

of Science and Technology

Agriculture and Biosystems Engineering

Agriculture and Industrial Technology


  • 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
dual roles for iso 9000 9004
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)
allocation of costs process approach
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)
process approach added benefits
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)
process costing
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)
process costs i e costs of inefficient processes examples
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
don t ignore quality failures

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


internal failure costs examples
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)
external failure cost examples
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


allocation of costs
Allocation of Costs
  • The company must decide what to measure depending upon circumstances, objectives, etc.


  • The overall idea is to “allocate costs and not to absorb such costs into overhead” (ISO/TR 10014)
deriving benefits
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.
quality improvement examples
Quality Improvement Examples
  • Flow charting w/ value, non-value add analysis
    • Green – customer value added activity
    • Yellow – ‘necessary evil’
    • Red – non customer value added
cycle time reduction
Stop watch time study common

Also work sampling

Better way to get data w/o estimating?

Cycle Time Reduction
value add analysis
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
improvements summary
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?
potential benchmark measures
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)

overall fiscal impact
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


overall fiscal impact con t
Overall Fiscal Impact con’t.


  • 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
data collection and analysis
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?
timeline questions
Timeline Questions
  • What is finish date?
  • How long does data collection last?
  • What are the resources at hand?
  • Answer questions of scope, design, particular measures, summarizing fiscal indicator(s), timeline
  • Review relevant FC documents as necessary