Are You Dying to Deliver Quality? Part 3

In our previous posts, we have looked at the first two elements of the Cost of Quality – namely, Failure Costs (the costs you incur by NOT getting things right first time) and Appraisal Costs (the money you spend on inspections which don’t actually fix the root cause of the problem). If you have reached this far, you may be beating your head against a brick wall in frustration at having uncovered huge waste in your organisation, but not knowing how to fix it.

So what is the solution?

Well, let’s start by asking a deceptively simple question: “who is responsible for the quality of everything that goes into your end product?”

The answer, of course, is “the originator”, i.e. whoever manufactured the component and fed it into your process.

And yet, by measuring high failure costs and then spending on appraisal, we are actually admitting that we are taking on the responsibility of guaranteeing the quality of everything we use.

And that’s why it gets so expensive, so quickly, to generate the quality our customers require.

So where we should be spending our money is on what we call Prevention Costs. By this we mean actually investing in programmes by which suppliers are able to guarantee the quality of everything they deliver – whether they are external or internal suppliers.

This may sound trite, but it is a subtle shift in the supplier/consumer relationship. Traditionally (particularly in this country), we spend a lot of time pressurising our external suppliers on price, forgetting perhaps that they are also in business to make money. Internal suppliers are commonly not really regarded as suppliers, but rather as just cogs in the total machine, and hence not really bound to quality criteria.

External suppliers will react initially by bending the knee and reducing price, but will be looking at their own p&l and identifying areas where costs caan be cut. This may result in decisions to use cheaper raw materials, or to reduce the amount of time and effort spent on their own quality control. The more they are hit over the head on price, the more they will cut their own costs to simply keep hold of your business. In the end, though, you lose.

Internally, the more individual cogs are treated as just that, the less they will feel that they need to contribute in effort to what they are doing….the result being rushed work, careless work or sometimes even deliberate sabotage (we have seen all of these in real life, right up to six-inch bolts being deliberately thrown into a hopper to wreck an extremely expensive packaging line).

When we talk about Prevention Costs, we mean programmes by which we work WITH our suppliers to improve the end result of our collective efforts. As an example: we worked some years ago with a drinks manufacturer who was experiencing reduced profitability in their bottling hall. the client’s initial thought was that the losses were being caused by spillage and ullage, but our investigations revealed that the main culprit was actually downtime – machines and employees standing idle while incurring costs all the time.

Root cause analysis revealed that three things were causing 87% of the downtime: bottles exploding, crowns not fitting and labels falling off. When asked why, each respective supplier responded with “we know there is a problem, but at the prices we are paid we simply can’t afford to provide, let alone guarantee, better quality”. So, in effect, a procurement decision to buy based on lowest price and then further pressurise the suppliers was causing failures, which inspection hadn’t managed to correctly rectify.

The cost in lost sales due to this and the concomitant downtime? ZAR1,2 million.

Per week.

Per bottling line (there were 6).

Per client location (at the time they had 14).

So the fix? Invest on Prevention Costs by working with, rather than against, the suppliers to financially incentivise them to measurably reduce our clients downtime by controlling the quality of their goods.

The results? Massively reduced downtime, better factory output, hugely improved profits and, perhaps most significantly, suppliers buying into the success of our client and receiving healthy compensation for their efforts. Win-win.

This is obviously the simplified version – but we at CTS would love to discuss how attacking the Cost of Quality could step-change your business – no matter how small or large you are, talk to us and let’s see how we can help!

Are you dying to deliver quality? Part Two…

So you have finally started to measure your failure costs (all the costs incurred by doing thinks wrong first time), and can now put a monetary value on how much you have to currently spend to generate the quality your customer demands.

And you realise it’s a big, big, number.

How big do we mean? We have worked with organisations where, on first measurement, we discovered the Cost of Quality was sitting at +/- 20% of turnover: effectively, this is 20% of turnover that nobody gets – it just disappears as a “normal cost of doing business”. So, a complete waste. Great organisations, by way of comparison, spend 3% of turnover, and target a reduction every year – we know of one highly successful business that even targeted a 50% reduction EVERY YEAR.

Discovering high Failure Costs through measurement is the moment where, in many organisations, panic sets in. The consequence of panic is often a knee-jerk reaction, and the knee-jerk reaction we see most often is, “we’ve got to inspect everything to make sure it’s right”.

So staff are redeployed and inspection stations set up – goods receiving to inspect incoming raw materials, each workstation to make sure what is received from the previous workstation in line works, pre-final-assembly to make sure all the components function individually, and then pre-dispatch to make sure nothing has gone wrong in final assembly. Sometimes we even see specialist inspectors brought in to supplement the production team.

Let’s take a really prosaic example to see the good sense in doing this.

One of the 200 components in your finished product is a rubber plug that fits into one of the end caps of your product and must stand between 1.18 and 1.22mm proud of the surface when hand-pressed into place. The plugs are delivered in boxes of 2000 on pallets of 400 boxes.

Clearly you can’t measure every single plug to check if it is dimensionally within spec, so you generate a random sample plan and stipulate that if appraisal returns a random sample of more than 2% off-spec, the pallet is rejected (2% is actually very tight control – many sample plans we see accept anything up to 10% off-spec).

Your inspector tests a random sample from a pallet and finds 1.5% of the sample off-spec, so passes the pallet into the stores, to be used in production. It is dutifully noted down that 1.5% of the sample was off-spec so everyone is happy. The inspector has done the job, stores are happily sitting with full shelves, and production knows they will not run out of rubber plugs. Job done, and you can look forward to significant reduction in Failure Costs, and be back home in time for tea and bonuses.

Except…..12,000 faulty rubber plugs have just found their way into your production process.

Bottom line is that inspection, or appraisal, often only generates a statistic. It rarely actually physically finds faults or duff products.

So you pay for the staff, you pay for the time, you pay for the delay in processing inbound goods, you pay for everything and you are still building faults into your products. Simple reason: APPRAISAL ONLY WORKS IF YOU INSPECT ABSOLUTELY EVERYTHING.

The business risk is that you now have the following situation: you started with high failure costs, so you decided to appraise/inspect everything. Appraisal/inspection doesn’t significantly reduce your failures, but you have the added cost of staff, time, reduced uptime, rejected product etc etc etc. In essence, you may have made your financial situation even worse.

So Failure Costs are a no-no, and Appraisal Costs often don’t contribute to the reduction of Failure Costs.

In our next post, then, we will look at the only way to sustainably reduce your Cost of Quality….through Prevention.

Are you dying to deliver quality?

How often have we heard clients say “customer satisfaction comes before everything”? Every time we hear it, we have mixed reactions: on the one hand, the client is absolutely right – dissatisfied customers are the quickest way to kill your business. On the other hand, however, we wonder at what cost to the organisation must customer satisfaction be delivered?

Let me try to explain: the key to a profitable business lies in delivering what the customer wants, when he/she wants it, at a fair price to all….but NOT if the process of this delivery is flawed internally. This is the route to profit erosion, unexplained costs and eventually loss-making sales.

Let’s take an example: a recent client was in the business of making components critical to the mining industry, but was not adept at quality control during the manufacturing process. Mining houses would buy their products and use them in batches of 12-24 at a time, but would keep stock for an average of two months. When the mining houses used the products, they found that, of a batch of 24, on average 6-7 would fail, resulting in stoppages, frustration and return of goods for free replacement.

Our client duly replaced the products and took the loss of revenue on the chin, factoring it into their forward planning as a normal cost of doing business….which is where the problems started.

We refer to these costs as Cost of Quality, i.e. how much money do I spend to deliver the quality my customer stipulates: in this case, the lost revenue could be clearly labelled as a Failure Cost – unnecessary and caused purely by incompetence during the production process. Failure Costs can, however, get really big really quickly – let’s remember that any returned product has to be either scrapped or reworked (a cost), there may be warranties to honour (a cost), the customer may demand compensation for downtime (a big cost), and you will almost certainly have to sweeten subsequent sales to keep the customer happy (more cost).

But here’s the really worrying bit…..the client in question wasn’t even measuring these costs. Hence, they didn’t know they had a problem. Hence they were doing nothing about it….and wondering why their profits were sitting about 30% below expectation based on revenue.

Moral number 1:

  • We don’t know what we don’t know
  • We can’t act on what we don’t know
  • We won’t know until we search
  • We won’t search for what we don’t question
  • We don’t question what we don’t measure
  • Hence, we just don’t know

Next Post: what NOT to do when you discover high failure costs

Corporate Learning and Training

At CTS, we regularly deal with organisations with a perceived need for training: often, the perception will be based on nothing more than a manager’s feeling, or – even worse – a need to deliver a training and development plan to tick the necessary boxes and spend the allocated budget.

A couple of things we believe about training:

  1. Training should be linked to a measurable ROI. Meaning that training should address issues which have been identified through measurement and should consequently deliver an improvement on the same measurement. Training-for-training’s-sake does not achieve this, and is thus potentially wasted money
  2. Training should be backed up by ongoing coaching. The training-room rarely, if ever, generates sustained behavioural change, but usually only serves to impart the theory of why change is necessary. Change only occurs on the job, with constant support, coaching, feedback and mentoring
  3. Training should involve ALL levels of the organisation. Change tends to be driven from the bottom, operative, level upwards. Often we see organisations where training is really only offered down to supervisory or management levels….hence, the lowest unskilled level remains just that: unskilled.

If you are involved in L&D, Training Management or OD, you may want to ask yourself the following questions:

  • What is the process capability of your corporate learning process?
  • How has it been designed?
  • Is its capability such that it can produce the desired end result, which is satisfying customers or creating wealth?
  • Can you directly measure the ROI on your training?

If the answer to any of the above questions is “no”, perhaps your corporate learning process needs redesign to improve its process capability. Talk to us: we can help you unlock the potential of your employees and deliver trackable results.

Business Gaps 5

In many instances process failure is blamed on employees when it is caused by inadequate process capability

In practice, many businesses/organisations are actually maintaining processes that do not satisfy or create customers at all. These processes add to costs, tie up investment capital and demand management attention. This is a specific case of process failure.

Process variations are caused by many contributing factors. Some of these are materials, methods, people, machines, measurement, environment, suppliers, etc.

One very important factor is process capability, which is a function of the design of the process.

A normal family car is not designed to perform like a formula one racing car. Its process capability is inadequate for the demands made on the process. It’s no good blaming the driver for not succeeding!

Example:

Take a poorly made gun, mount it in a bracket, aim it perfectly at a target and fire 100 shots. Due to the inherent inaccuracy of the gun, only a few bullets will hit the target. Most bullets will be spread over an area bigger than the target. The process has failed because of inferior process capability, which is result of the process design. Even the best hunter could not improve on this result. This process cannot improve by training the hunter. Many organisations throw everything at training when they haven’t addressed process capability!

The priority is to always ensure processes are redesigned to achieve process capability.

Business Gaps 4

“Most employees do not know within what limits their processes have to be maintained and why”

 

Ask any machine operator the following question: “Why do you have to run that machine at a certain constant rate?”, and you will receive answers which, in some cases, will demonstrate that the operator knows their job, knows the machine and knows how to get the best results from it.

In other cases you will get the answer, “because I’ve been told to do it like that.”

However, if we probe deeper, we almost universally find that operators have no clue why they are being told to do what they do, i.e. what role their function plays in the big picture of delivering products to a customer.

Consequently, they will have no idea of the consequences for the whole organisation of them operating just slightly outside the set limits and specs of their function.

Taken to silly lengths: the guy fabricating one component of the wiring harness for an Airbus decides to make his job easier by using exactly 2-metre lengths of wire instead of the specified 2.05 metres. The harness, when mounted, sits slightly to close to an air-conditioning condenser unit which, after 27 hours in service, burns through the insulation of the harness and causes a short…..you get the picture.

The more employees are helped to understand the “big picture” of how their organisation works, and what its customers want, the more they will see their role as important and, therefore, worth doing well.

 

Business Gaps 3

Next gap to be found in many businesses:

“Most employees do not know who are or how they satisfy customers”

Most businesses/organisations use different processes, people, suppliers and technologies to satisfy customers. Even a simple product like bread uses many complex processes in four different businesses (farming, milling, baking and retailing) to satisfy customers.

Each of these processes is subject to variations. These variations have to be contained within certain limits. These limits are specified to safeguard the end result, which is to satisfy the customer. Customers mean all customers internal and external. Most processes have multi- dimensional limits. When the variations within the process move outside these limits, the process becomes a risk to the end result

How many employees (or indeed, yourselves) could readily answer the following questions?

  • Who are you customers and how do you satisfy them (or enable someone else to satisfy them)?
  • How well should you do this (what are the limits and where are the risks)?

Most employees cannot answer these questions.

Business Gaps 2

Here’s the next gap we see in many organisations:

“Excess wealth is not normally shared by the owners/directors and employees. This limits economic growth”

Employees at every level of an organisation are a lot more savvy than we may credit them to be: they know full well that, if they put extra effort into their job and achieve above-expectation results, any excess profit generated will disappear into the pockets of someone else – bosses, shareholders or parent companies. Consequently, they often do not see any point in trying harder than the bare minimum.

If excess wealth is created, would it not be wise to take a portion of the money and distribute it to the people actually generating the results?

Ask us about our experiences with petrol stations to get a real-life example of how employee incentivisation can work to drive performance.

What’s wrong with Businesses?

We have put together a list of the most common gaps to be found in many organisations, which limit their ability to grow or be successful. Here’s the first:

“The majority of employees have little or a distorted view of the purpose of their business/organisation.”

Ask yourself whether this could be true, or better: ask your people what they think is the purpose of your organisation…

Change Management 8

Change management principles

  1. At all times involve and agree support from people within system (system = environment, processes, culture, relationships, behaviours, etc., whether personal or organisational).
  2. Understand where you/the organisation is at the moment.
  3. Understand where you want to be, when, why, and what the measures will be for having got there.
  4. Plan development towards above No.3 in appropriate achievable measurable stages.
  5. Communicate, involve, enable and facilitate involvement from people, as early and openly and as fully as is possible.