Using the Cost of Poor Quality toDrive Process ImprovementMarch , 2006Presented by:Dan Olivier, Certified Software Solutions, Inc.([email protected])Javad Seyedzadeh, Bayer Healthcare Diagnostic Division([email protected])Page - 1

Objectives: To Understand COPQ1. What is COPQ2. Elements of the model3. Calculating COPQ3. Real World Applications4. Implementing Improvement actionsPage - 2

1.1. COPQCOPQ IntroductionIntroductionPage - 3

The Cost of Poor Quality(COPQ) Represents the difference between– The actual cost of production or service– What the cost would be if the process wereeffective in manufacturing products that met customer needs and were defect free.Page - 4

COPQ EquationCOPQ Costs (external failures internalfailures appraisal preventive action)Many times white collar poor quality costs are notincluded in COPQ calculations (out ofconformance purchases, excess inventory, .)(Atkinson)Page - 5

Why Cost of Poor Quality? Speaks in the language of management, Shows how profit is affected by quality Can prioritize quality improvement actions Serves as the impetus for actionsIn the US about a third of what wedo consists of redoing workpreviously “done”. (Juran)Page - 6

Related Quality Initiatives Six Sigma uses defect costs to quantifysavings Lean Manufacturing focuses on reducingappraisal costs Design Controls focuses on early reviewand test activities to find defects earlyDefects are not free. Somebody makes them andgets paid for making them. (Deming)Page - 7

2.2. ElementsElements ofof thethe ModelModelPage - 8

Cost of External Failures Costs for defects found by the customer:–––––MDRs,Reports of corrections and removals,Field service corrections,Field service bulletins, andSoftware patches.Page - 9

Cost for Internal FailuresCost for defects found by R&D or Mfg Unclear requirements Improper design and implementation Improper design and implementation Incorrect test documentation Incoming inspection defects In-process testing defects Final acceptance testing defects ReworkPage - 10

Cost for AppraisalCosts for checking defects including: Review of system specifications (R&D), Review & inspection during manufacturingprocesses, Review of quality records, and AuditsPage - 11

Cost for Preventive ActionCost for initiatives to improve processes: Use techniques to better understand requirements Employ programs to reduce design defects Implement tools to reduce manufacturing defects Institute quality improvement programsPage - 12

3.3. CalculatingCalculating COPQCOPQPage - 13

Estimating the NumbersCalculate full time personnel– 200,000/year for full time personnel– Assume 2000 hours per year 50 weeks x 40 hours 100/hourPage - 14

Sample Spreadsheet WorksheetsLabor RatesDefect Costs (External and Internal)1. Estimate the number of defects2. Estimate the hours to address each defect3. Estimate the cost per defect including various labor rates4. Estimate any additional costs that may be incurred for defects5. Estimate the total cost per defect category6. Estimate the total cost for all defects for a year periodAppraisal Costs1. Estimate appraisal labor costs2. Estimate appraisal capital costs3. Estimate appraisal total costsPreventive Action Costs1. Estimate total preventive action costsTotal COPQPage - 15

4.4. RealReal WorldWorld ApplicationsApplicationsPage - 16

Implementing COPQ With little or no financial system changes Medical DeviceManufacturers can– Identify their external failure costs– break these costs out by product, complaint symptom, part usage,serial number, customer and region– Pareto these costs and prioritize corrective actions Through appropriate statistical analysis we can;– Identify any changes in rate for a particular issue and tie down thetimeline.– Determine if differences exist in either serial numbers / lot numbersor regions This additional information can dramatically reduce the timespent investigating the root cause.Page - 17

Internal Failure: Safety Accidents Bayer considers the costs of work related accidents to be a cost of poor quality.Bayer has estimated that indirect costs are 6-8 times direct costs (replacementworkers, missed shipments/sales/development schedules, administrative costs,OT).To improve in this area we initiated the Bayer Structured Safety & Healthprogram (BSSHP).One of the key elements within this program is a employee close call systemwhich encourages the identification and correction of potential hazards andraises employee awareness and participation in safety.Bayer Healthcare Safety performance100806040200200020012002200320042005 YTDGlobal InjuriesPage - 18Performance in 2005represents a 73% reductionover year 2000performance with estimatedsavings of over 2 Million.

Customer Complaint ReductionI Chart of Error Rate by Tool0.0014Individual Value0.00120.00102-Cavity4-Cavity4-Cavity-R48.5% reduction incomplaints asociated with thenew 4-cavity tool. Areduction of approximately1,000 customer complaintsper year.X 0.0008690.00080.0006UCL 0.000574X 0.0004480.0004LCL 0.0003220.0002246810 12 14 16Observation18202224In this case Bayer hasreduced customercomplaints associatedwith this issue byover 48%. Thiscorrection also hadhard cost savings inexcess of 275,000.00By utilizing our external failure data Bayer has been able to identifyhigh impact (cost and customer) issues and drive improvements inthese areas.Page - 19

Field Corrective Actions Field Corrective Action: A correction or removal for product nolonger under Bayer’s control. The costs associated with an individual FCA can range from 20K to up to 30 Million for a full product recall. We have consistently reduced the number of FCAs every yearsince 1999, and 2004 represented an 83% reduction in FCAsover 1999.Bayer Healthcare FCAsWith an average cost of70 250,000 this equates to6050over 13,000,000 in403020savings through FCA100prevention.199920002001200220032004FCAsPage - 20

COPQ: Data By analyzing the data already collected through ourquality system we have been able to determine that– Worldwide part replacement costs 3.4% of sales– Worldwide complaint handling costs 0.8% of sales– Worldwide field service visit costs 4.8% of sales Direct External failure costs total 9% of sales. We have used this information to begin the process ofaddressing our COPQ.Page - 21

Industry ExampleCOPQ as a percent of total costsBefore Failure cost6.3% Appraisal cost2.8% Preventive action cost0.2% Total9.3%Savings Appraisal costs reduced 430,000 Scrap and rework reduced 2,068,000 Complaint costs reduced 536,000After4.0%2.2%0.6%6.8%Reference: Total Quality Control, Armand V. Feigenbaum, p.131For many companies quality costs are 20% of sales (Juran)Page - 22

5.5. DrivingDriving ProcessProcess ImprovementImprovementPage - 23

Four Assumptions in the Model1. There is a root cause for each defect2. Defects are preventable3. It is better to prevent than correct defects4. Inspection/testing can be reduced for capableprocessesInvestment in Preventive Actions can yieldsignificant savings!Page - 24

Trend Chart using COPQ ModelExternal Failures CostsInternal Failures CostsAppraisal Costs 100K 90K 80K 70K 60K 50K 40K 30K 20K 10KPreventive Action Costs01/0404/0407/0410/041/054/057/05Cost Of Poor Quality (cost of external failures) (cost of internal failures) (cost of appraisal) (cost of preventive actions)Page - 25 300K 270K 240K 210K 180K 150K 120K 90K 60K 30K

Improvement Activities:Manufacturing Reduce errors with process design changes (poka-yoke)Addition of test fixtures to simplify manual processesCapability studies to define optimum parameter settingsEnhance supplier controls to refine part specificationsRedesign of device for improved manufacturabilityAddition of automated manufacturing equipmentEnhanced automated test equipmentRefinement of acceptance test criteriaReal time automated test data trendingRefinement of work instructions/formulationsPage - 26

Improvement Activities:Research and Development Redesign to reduce parts to improve reliability More system integration testing for design changes Closer participation of R&D in definition of manufacturingprocesses Conduct early parallel design and test activities Use focused checklists to enhance review effectiveness Employ focus groups to better understand customer needs Use project post-mortems to identify root cause for historicalfailures Redesign to facilitate future changes Implement a culture of defect preventionPage - 27

Effectiveness of Quality SystemQuality Improvement EvolutionLevel III Quality System:Continuous improvementemphasisLevel II Quality System:Measures implemented totrack effectivenessLevel I Quality System:Procedures establishedLevel 0 Quality System:Ad hoc processesPhases/ TimePage - 28

Summary: Why COPQ Add to the “toolbox” of the quality professional Shows that investment in quality yields dividends Defines priorities for improvement actions Facilitates a culture of continuous improvementPage - 29

For Further InformationDan Olivier at Certified Software Solutions, Inc. (CSS)[email protected](858) 675-8200Javad Seyedzadeh at Bayer [email protected](914) 524-2682CSS specializes in providing quality system and validationservices for medical device and pharmaceuticalmanufacturers.Page - 30

Manufacturing Reduce errors with process design changes (poka-yoke) Addition of test fixtures to simplify manual processes Capability studies to define optimum parameter settings Enhance supplier controls to refine part specifications Redesign of device for improved manufacturability