Tag Archives: cost

Designing a Business

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I have been starting up a new business division in our company.  Nationwide Parts Distributors has been an inside sales business with connections dating back to 1992.  Now with the advent of Automotive Electronic Solutions, we are also a remanufacturer.

This is a completely different business model for Nationwide Parts Distributors.  We designed the work flow, defined the core competencies for each position, set up infrastructure, hired employees, and opened for business.  The ROI for the business turned out to be less than one month.

We did all of this in a new business format and performed well enough to maintain the highest possible rating with the Better Business Bureau. This is remarkable in that we avoided the typical start-up quality issues of a new business venture.

We are now in our third month of operation and have raised enough working capital to begin the process of purchasing the building we are operating in.  This will increase our valuation in the market place and reduces our monthly cost of operation.

It has been hard work managing  the changing design of the organization as we went through a steep growth curve. Even with a flexible, lean, organizational design, we have doubled the number of employees in the new business to accommodate the increase in throughput that our customers demand.

I am very proud of the team of professionals that work here at Nationwide Parts Distributors and Automotive Electronic Solutions. Their belief in the vision, and commitment to achieving it, has made it all possible.

Standardizing Processes

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When working to improve a process, it is not enough to implement a solution and stop. Without a plan to maintain the gains, at the first sign of trouble, systems will revert to what has been comfortable in the past. That usually means a return to some past operating procedure. To prevent this, there must be a linkage of the improvement to the management system. This involves monitoring important metrics, documenting methods and procedures, and providing a strategy for dealing with problems in the future.

 This is the purpose of the Control Phase of a Six Sigma Project. It involves a plan to maintain the gains from the new process, and building that plan into the management system. This will provide for on going accountability. Considering that process improvement projects will typically cross functional boundaries, the various process owners, and what they are accountable for, will be need to be specified, and included in the plan, in order to insure long-term success.

 The result is consistent customer satisfaction, a linkage between quality initiatives and strategic objectives, direction for future improvement activities, and a reliance on data by the process owners. These are the ingredients of successful improvement projects

 Discipline (Standardization)

 Discipline, in this case, applies to the adherence to standardization. Just as a disciplined athlete adheres to a standard practice routine to reach the highest level of their performance, a business must have the discipline to adhere to proven methods of doing work. This is standardization.

 Standardization is about making sure that important elements of a process are performed the same way every time, as prescribed by the standardized process. A lack of consistency will cause the process to generate defects and compromise safety. Standardization also provides predictability, which allows the process owners to prevent problems before they affect the customer.

 In a process improvement project, the improvement team can use the PDCA (Plan, Do, Check, Act) cycle to find the best way to do the work. The data collected in the PDCA cycle becomes the basis for changing a process, or for leaving it as is. Eventually, when no further improvement is mandated, a standard work practice is developed.

 When a process or practice is standardized, changes are made only when data shows a need to change. This prevents individuals from doing the work the way that seems best to them, thus compromising quality and negatively affecting the customer. The objective is to maintain consistent quality over time in spite of environmental changes.

 Documentation is an underlying principle in standardization. Making sure documentation is up to date and utilized encourages the ongoing use of standardized methods. In addition, documentation provides the information necessary to anticipate problems and to see where potential improvements can be made.

 If managed properly, standardized work establishes a relationship between people and their work processes. This relationship can enhance ownership and pride in the quality of work performed. From the customer’s perspective, standardized work keeps processes in control so that the highest quality products and services are provided. From the service or product provider’s perspective, standardized work improves safety, improves employee morale, controls production costs, and provides business longevity by returning satisfied customers.

 Standardization has three components: elimination of waste, workplace simplification (5-S philosophy), and work process analysis. All three of these components are necessary. If work is standardized without waste elimination, waste production becomes standardized. If work is standardized without workplace simplification, complexity becomes standardized. If a process is not being measured, it is not being managed.

 The place to do all of this documentation is in a work process analysis document. This tool documents how work is done. It is convenient to look at work process analysis as a detailed description of the process’ process map. It can also be a documentation of workflow through an area of space (e.g., a factory floor). The restraints of this article prevent me from including a Work Process Analysis template.  You can get this, though, by visiting my website at leanmeanprocessimprovement.com.

 The work process analysis tool also makes an excellent training tool. The process steps are detailed and the expected cycle time is given. This becomes a target for the process operators. The process diagram can also be the floor layout of the workflow. The exact content is dependent upon the needs of the process owners.

Cost of Poor Quality

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The cost of poor quality (COPQ) is the total cost impact of defects produced by the process. There have been many discussions, some heated, about what categories of costs should be considered in this important  process metric. Many organizations make the mistake of only counting the COPQ that they can see. The problem is that this is only the tip of the iceberg. One way to see these costs is to look at what expense types in the process’ operating budget will decrease if the process operates defect free. With this point of view, the cost of poor quality becomes the difference between the as-is cost of producing a product or service, minus the cost of production with no defects.

 The COPQ of a process appears in three categories: prevention costs, appraisal costs, and failure costs. Failure costs can be broken down further into internal failure costs and external failure costs.

 Prevention costs are associated with any activity designed to prevent defects. This includes quality improvement efforts, re-engineering, and new process design. These activities are non-value added in the eyes of the customer.

 Appraisal costs are associated with inspection activities. These activities are designed to prevent existing defects from getting to the customer. Referring back to the Define Phase, remember that any activity associated with finding defects after they occur is non-value-added. Even though the customer may be glad that the defects were caught before the delivery of the product or service, they do not want to pay for the cost of removing bad outputs.

 Failure costs are associated with the mitigation or correction of defects. All internal and external failure activities are non-value added. Internal failure costs are incurred before the defective product or service is delivered to the customer. Examples are scrap and rework. External failure costs are incurred after the defective product or service is delivered to the customer. Examples are warrantee costs, customer returns, customer complaints, and lawsuits.

 An improvement team needs to investigate all potential cost categories in order to capture all of the costs of poor quality. The advantage for the improvement team is more than just a set of data. An understanding of the cost structure surrounding a process will prove extremely valuable when analyzing the process’ performance and when trying to determine which process problem areas to focus on.