Sample COPQ Study

All Rights Reserved, Juran Institute, Inc. (slide name here) 2.PPT Managers and workers speak the language of things but Senior leaders speak the language of money … COPQ allows us to translate the things into money.

All Rights Reserved, Juran Institute, Inc. (slide name here) 3.PPT Prevention Appraisal:Prediction Audit Appraisal:Detection Failure:Internal External Cost of Attaining Quality Cost of Poor Quality Cost Of Poor Quality

All Rights Reserved, Juran Institute, Inc. (slide name here) 4.PPT Components Non-Conformance $ Conformance $ $ Quality Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 5.PPT Total Quality Cost AppraisalInternal Failure External Failure I want my money back! Cost of Quality (COQ) $ Prevention

All Rights Reserved, Juran Institute, Inc. (slide name here) 6.PPT COPQ Overview Definitions  All activities and processes that do not meet agreed performance and/or expected outcomes  Costs that would disappear if every task were always performed without deficiency  Actual Cost - Minimum Cost = COPQ

All Rights Reserved, Juran Institute, Inc. (slide name here) 7.PPT Waste Testing Costs Rework Customer Returns Inspection Costs Rejects Recalls Traditional Cost Of Poor Quality (4-5% of Sales) When quality costs are initially determined, the categories included are the visible ones as depicted in the iceberg below.

All Rights Reserved, Juran Institute, Inc. (slide name here) 8.PPT Late Paperwork Customer Allowances Premium Freight Costs Pricing or Billing Errors Excessive Field Services Expenses Incorrectly Completed Sales Order Lack of Follow-up on Current Programs Excessive Employee Turnover Planning Delays Development Cost of Failed Product Expediting Costs Excess Inventory Excessive System Costs Overdue Receivables Complaint Handling Unused Capacity Time with Dissatisfied Customer Excessive Overtime Waste Testing Costs Rework Customer Returns Inspection Costs Rejects COPQ ranges from 15-25% of Sales As a company gains a broader definition of poor quality, the hidden portion of the iceberg becomes apparent: Recalls Cost Of Poor Quality

All Rights Reserved, Juran Institute, Inc. (slide name here) 9.PPT Efficiency Study Total Cost of Poor Quality is $59,728,973 Recurring Costs in One Year $32,089,143 $13,106,268 $14,533, % 21.9% 24.3% Internal Costs External Costs Appraisals Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 10.PPT Efficiency Study Cumulative Total Cost of Quality is $143,178,401 Internal Failures External Costs Appraisal Costs $115,538,571 $13,106,208 $14,533, % 9.2% 10.2% Internal Costs External Costs Appraisals Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 11.PPT Cumulative Internal Costs A B C D E F G H J K L M Q N O P % 20% 40% 60% 80% 100% Categories COPQ Dollars/Year Millions CUM.%

All Rights Reserved, Juran Institute, Inc. (slide name here) 12.PPT Cumulative Internal Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 13.PPT Internal Costs – 12 Months A. Excess inventory reserves - Reserves for on-hand slow moving inventory that exceeds the 24 month sales forecast. Reported on the Year 1 Excess and Obsolete Analysis Report from Cost Accounting. B. Safety stock - Excess inventory maintained as an in- house bank because of the inability to produce reliable yields, forecast consistently, or receive procured products on a timely basis. FGs valued at 2 months the Year 1 annual standard cost of sales; packaging materials valued at 1 month the usage in dollars; raw materials valued at 1 month the usage in dollars. Information reported from Materials Management and Production Planning. Component Descriptions

All Rights Reserved, Juran Institute, Inc. (slide name here) 14.PPT Internal Costs – 12 Months C. Intermediate stock inventory (net) – Work-in-process material used as a buffer for inadequate foundry yields, inaccurate sales forecasts and launch plans, design changes which necessitate rapid response, and to support the complexities of instrument assemblies. Data derived from Stock Analysis Report. Net inventory is utilized to not duplicate excess and obsolete reserves costs. D. Obsolete inventory reserves - Reserves for inventory of inactive product (removed from the price list). Reported on the Year 1 Excess and Obsolete Report. Component Descriptions (continued)

All Rights Reserved, Juran Institute, Inc. (slide name here) 15.PPT Internal Costs – 12 Months E.Production scrap - Material discarded in one year and reported by cell and product family. Reported on the Scrap Report as well as multiple journal entries. F.Provisions for excess inventory - Only money provided from the operations to cover identified excess and obsolete inventory. Reported on the Year 1 Excess and Obsolete Report and the Cost of Sales Analysis. H.Dispositions (unreserved outermediate scrap) - Quarantine and disposal of units with questionable packaging by QA. Reported on the Full Year Dispositions Report. Component Descriptions (continued)

All Rights Reserved, Juran Institute, Inc. (slide name here) 16.PPT Internal Costs – 12 Months J. Production rework - Rework as reported by department. Dollars are actual direct labor hours by department times the conversion rate. G., K., L. Carrying costs (excess inventory reserves, safety stock, intermediate stock, obsolete inventory reserves) - Calculated values for the cost to maintain inventory and reserves to inventory. Calculated as the weighted average cost of capital (14%) times the specific inventory or reserves dollars. Component Descriptions (continued)

All Rights Reserved, Juran Institute, Inc. (slide name here) 17.PPT M.QC re-inspection indirect costs - Estimated non-reported QC indirect labor hours expended in a year as part preparation prior to performing a re-inspection of reworked product. Calculated as an estimated 212 indirect hours per week as part preparation for rework times 46 production weeks times $66 per hour (direct labor rate + variable overhead rate). N.Investigation of failures (Mfg. Eng.) - Estimate of time spent by manufacturing engineering personnel in the investigation and resolution of internal failure problems. Calculated as approximately 35% of time in units 1, 2, and 3 times an average cost/hr. of $35 times the number of personnel. O.Design changes scrap - Scrap principally on vended items because of design enhancements. Reported on the Year 1 Customer Returns- Scrap/Rework Report. Component Descriptions (continued) Internal Costs – 12 Months

All Rights Reserved, Juran Institute, Inc. (slide name here) 18.PPT Internal Costs – 12 Months P.Production downtime - Reported downtime by department/cell. Calculated as actual reported hours of downtime (bar-coded as downtime) times each cells specific fixed overhead rate. Q. Vendor rework charges - Vendor charges for reworking a product because of company error. 95% was because of a blister packaging re-inspection that had channeling which was suspect for sterility. Reported on the Cost Accounting Sundry Schedule (misc. charges). R.Backing S.Accounts receivable Component Descriptions (continued)

All Rights Reserved, Juran Institute, Inc. (slide name here) 19.PPT Internal Costs Category A Excessive Inventory Reserves is: $36,253,810 Finished goods Work in process Raw materials EXCESS INVENTORY TOTAL $ Finished goods$31,292,402 Work in process$4,460,408 Raw materials$501,000 TOTAL $$36,253,810 $31,292,402 $4,460,408 $501, % 12.3% 1.4%

All Rights Reserved, Juran Institute, Inc. (slide name here) 20.PPT Pareto Analysis Product Group A1A2A3A4A5A6A7A % 20% 40% 60% 80% 100% Product Group Categories DOLLARS / YEAR Millions CUM.% Category A: Excessive Inventory Reserves

All Rights Reserved, Juran Institute, Inc. (slide name here) 21.PPT Internal Costs Category B Safety Stock (Just In Case Inventory) $24,832,000 $762,083 $191,916 SAFETY STOCKTOTAL $ Finished goods$24,832,000 Raw material$762,083 Packaging materials$191,916 TOTAL $$25,785,999 Finished goods Packaging materials $191,916 Raw material Finished goods Work in process Raw materials

All Rights Reserved, Juran Institute, Inc. (slide name here) 22.PPT Internal Costs Category C Intermediate Stock is $ 16,213,000 $9,249,000 $6,964, % 43.0% Units Instruments INTERMEDIATE STOCK (NET)TOTAL $ Units$9,249,000 Instruments$6,964,000 TOTAL $$16,213,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 23.PPT Internal Costs Category C Unit Products Total Value is $ 9,249,000 Unit 1 Unit 2 Unit 3 Unit 4 Accessories Custom Other Ultra STOCK IMPLANTS (NET)TOTAL $ Unit 1$3,877,000 Unit 2$2,330,000 Unit 3$2,151,000 Unit 4$483,000 Accessories$270,000 Custom$83,000 Other$37,000 Ultra$18,000 TOTAL $$9,249, % 23.3% 5.2% 2.9% 0.9% 0.2% 0.4%

All Rights Reserved, Juran Institute, Inc. (slide name here) 24.PPT Internal Costs Category C Instruments Total Value is: $6,964,000 Instrument 2 Instrument 1 Instrument 3 Accessories Instrument 4 Custom Ultra Other STOCK INSTRUMENTS (NET)TOTAL $ Instrument 2$3,740,000 Instrument 1$1,823,000 Instrument 3$739,000 Accessories$349,000 Instrument 4$283,000 Custom$22,000 Ultra$7,000 Other$1,000 TOTAL $$6,964, % 53.7% 10.6% 5.0% 4.1% 0.1% 0.3%

All Rights Reserved, Juran Institute, Inc. (slide name here) 25.PPT Internal Costs Category D Obsolete Inventory Reserves is: 11,552,776 OBSOLETE INVENTORYTOTAL $ Finished goods$7,639,002 Work in process$3,913,774 TOTAL $$11,552,776 $7,639,002 $3,913, % 33.9% Finished goods Work in process

All Rights Reserved, Juran Institute, Inc. (slide name here) 26.PPT Pareto Analysis Product Groups D1D2D3D4D5D6D7D % 20% 40% 60% 80% 100% Product Group Categories DOLLARS / YEAR Millions CUM.% Category D: Obsolete Inventory Reserves

All Rights Reserved, Juran Institute, Inc. (slide name here) 27.PPT Year 1 Internal Costs Pareto Analysis E Z F G H J K L M Q N O P % 20% 40% 60% 80% 100% Categories COPQ Dollars/Year Millions CUM.%

All Rights Reserved, Juran Institute, Inc. (slide name here) 28.PPT Year 1 Internal Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 29.PPT Pareto Analysis SCRAP CATEGORIESDOLLARS / YEAR '% INDIV '% CUMCATEGORIES Unit 1$1,843, % E1 Unit 2$1,651, %54.0%E2 Unit 3$1,576, %78.4%E3 Fixed heads$823, %91.1%E4 Custom$237,0003.7%94.8%E5 Internal fixation$235,0003.6%98.4%E6 Accessories$44,0000.7%99.1%E7 External fixation$33,0000.5%99.6%E8 Other$27,0000.4%100.0%E9 TOTAL PLANT$6,469, % E1E2E3E4E5E6E7E8E % 20% 40% 60% 80% 100% Scrap Categories DOLLARS / YEAR Millions CUM.% Internal Costs Category E Production Scrap

All Rights Reserved, Juran Institute, Inc. (slide name here) 30.PPT Internal Costs Category E1 Unit 1 Total Scrap Value is: $1,843, % 33.0% 13.2% 11.2% 9.4% PCA OTHER PRECISION PARTNERSH LOCK Unit 1 PCA$611,000 Other$609,000 Precision$243,000 Partnership$206,000 Lock$174,000 TOTAL$1,843,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 31.PPT Internal Costs Category E2 Unit 2 Total Scrap Value is: $1,651,000 Unit 2 PCA$1,154,000 MAX$288,000 OTHER$125,000 MATIC$84,000 TOTAL$1,651, % 17.4% 7.6% 5.1% PCA MAX OTHER MATIC

All Rights Reserved, Juran Institute, Inc. (slide name here) 32.PPT Internal Costs Category E3 Pareto Analysis Instruments INSTRUMENTS '% INDIV '% CUMCATEGORIES PCA 2$675, % E3.1 OTHER 1$223, %57.0%E3.2 PARTNERSHIP 1$158, %67.0%E3.3 MAX$133,0008.4%75.4%E3.4 ENDO$115,0007.3%82.7%E3.5 INTERNAL FIXATION$104,0006.6%89.3%E3.6 OTHER 2$80,0005.1%94.4%E3.7 PCA 1$44,0002.8%97.2%E3.8 PRECISION 1$38,0002.4%99.6%E3.9 DISPOSABLE INSTRUMENTS$5,0000.3%99.9%E3.10 MATIC$1,0000.1%100.0%E3.11 TOTAL$1,576, % E3.1E3.2E3.3E3.4E3.5E3.6E3.7E3.8E3.9E3.10E % 20% 40% 60% 80% 100% Scrap Categories DOLLARS / YEAR Millions CUM.%

All Rights Reserved, Juran Institute, Inc. (slide name here) 33.PPT Category Z: Pareto Analysis Product Groups Z1Z2Z3Z4Z5Z6Z7Z % 20% 40% 60% 80% 100% Product Group Categories DOLLARS / YEAR Millions CUM.% Provisions for Excessive and Obsolete Inventory

All Rights Reserved, Juran Institute, Inc. (slide name here) 34.PPT Pareto Analysis Rework Categories J1J2J3J4J5J6J7J8J % 20% 40% 60% 80% 100% DOLLARS / YEAR Millions CUM.% Internal Costs Category J Production Rework

All Rights Reserved, Juran Institute, Inc. (slide name here) 35.PPT Internal Costs Category J1 Inspection Instruments Total Value is $714,000 $540,000 $174, % 24.4% Instruments & machines Inspection INSPECTION Instruments & machine $540,000 Inspection$174,000 DOLLARS / YEAR$714,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 36.PPT Internal Costs Category J2 Inspection Recon Total Value is $467,000 INSPECTION RECON Inspection$401,000 X-ray$66,000 DOLLAR / YEAR$467,000 $401,000 $66, % 14.1% Inspection X-ray

All Rights Reserved, Juran Institute, Inc. (slide name here) 37.PPT Internal Costs Category J3 Unit 2 Rework Total Value is $390,000 $262,000 $128, % 32.8% Part A Part B Unit 2 Part A$262,000 Part B$128,000 DOLLAR / YEAR$390,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 38.PPT Internal Costs Category J4 Unit 1 Rework Total Value is $376,000 Unit 1 Finishing$251,000 Titanium$79,000 Cup$31,000 Screw & pin$9,000 Primary A$6,000 DOLLARS / YEAR$376,000 $251,000 $79,000 $31,000 $9,000 $6, % 21.0% 8.2% 2.4% 1.6% Finishing Titanium Cup Screw & pin Primary A

All Rights Reserved, Juran Institute, Inc. (slide name here) 39.PPT Pareto Analysis by Department % 20% 40% 60% 80% 100% Departments Dollars/Year Thousands CUM.% Internal Costs Category O Downtime

All Rights Reserved, Juran Institute, Inc. (slide name here) 40.PPT External Cumulative Costs Pareto Analysis ABCDEFGH % 20% 40% 60% 80% 100% CATEGORIES COPQ Dollars/Year Millions CUM.%

All Rights Reserved, Juran Institute, Inc. (slide name here) 41.PPT External Cumulative Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 42.PPT External Costs A.Product liability assessment charges - Product liability charges for self insured risk sensitive, self insured loss sensitive, and excess insurance premiums. The two main elements of product liability costs are a reserve accrual for self assumed losses and premium costs for the insurance that comes over the self assumed loss level. The self insured reserve accrual is allocated based on risk weighted sales and 5 year loss history. B.Code 4 scrap customer returns - Customer returns identified by the Customer Returns Department as available for scrap by Inspection Code. Reported on the Year 1 Customer Returns and Scrap/Rework Report. Component Descriptions

All Rights Reserved, Juran Institute, Inc. (slide name here) 43.PPT External Costs Category A Product Liability Assessment 1996 is $ 5,554,000 $4,750,000 $414,000 $390, % 7.5% 7.0% Self insured loss se Excess insurance pre Self insured risk se PRODUCT LIABILITY ASSESSMENTTOTAL $ Self insured loss sensitive$4,750,000 Excess insurance premium$414,000 Self insured risk sensitive$390,000 TOTAL $$5,554,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 44.PPT External Costs Category B Pareto Analysis Code Scrap C1C2C3C4C5C6C7C8C9C10C11 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 0% 20% 40% 60% 80% 100% PRODUCT FAMILY CATEGORIES DOLLARS / YEAR CUM. %

All Rights Reserved, Juran Institute, Inc. (slide name here) 45.PPT Code Scrap

All Rights Reserved, Juran Institute, Inc. (slide name here) 46.PPT External Costs Category B Litigation Expenses is $2,240,000 $1,970,000 $270, % 12.1% General internal General outside LITIGATION EXPENSESTOTAL $ General internal$1,970,000 General outside$270,000 TOTAL $$2,240,000

All Rights Reserved, Juran Institute, Inc. (slide name here) 47.PPT Cumulative Appraisal Costs Pareto Analysis A B C D E F G H J K L M N % 20% 40% 60% 80% 100% Categories COQ Dollars/Year Millions CUM.%

All Rights Reserved, Juran Institute, Inc. (slide name here) 48.PPT Cumulative Appraisal Costs

All Rights Reserved, Juran Institute, Inc. (slide name here) 49.PPT Appraisal Costs Component Descriptions A-E, K,L. Recon intermediate and final inspection, instrument inspection, vendor inspection (instruments), trauma inspection, primary inspection, packaging verification officers - actual dollars spent for inspection of Reconstructive, unit and instrument product. Reported on the Year 1 Responsibility Report for each department. F. Quality Engineering - time spent in shop floor inspection support and raw material inspection. Calculated as 30% of Year 1 Responsibility Report for Dept. (minus sub-dept. B activity).