© 2007 Pearson Education 6- 1 Managing Quality Integrating the Supply Chain S. Thomas Foster Chapter 6 The Voice of the Process 09/23 – 4:30AM

© 2007 Pearson Education 6- 2 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws What is the error rate in typical start-up operations? Most startup operations have ad hoc processes with error rates of 20-30% in research and design, staffing, procurement, inbound shipping, receiving, operations, marketing, sales, order fulfillment, outbound shipping, and billing. When the economy turns down or sales increase significantly, the costs of fixing these defects kills these operations if the business does not reduce these error rates.

© 2007 Pearson Education 6- 3 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws How is the 20-30% error rate in start-up operations reduced to 3% normal error rate over time? Over time, these businesses get to error rates of around 3% through trial-and-error and common sense, but progress is slow and expensive. What is the problem with allowing the 3% normal error rate to persist? These operations are vulnerable to the very few “quality” competitors.

© 2007 Pearson Education 6- 4 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws Why can operations with 3% error rates be profitable? These operations can be profitable at this level because most of the competition has the same problems. Most of these businesses fail to improve beyond this 3% level. What is the ripple effect from the 3% normal error rate? A typical 3% error rate organization is wasting a significant amount of its resources fixing errors caused by ineffective and inefficient processes that have a ripple effect of 6-18% as the effects of errors flow through marketing, sales, ordering, production, fulfilling, and billing causing more errors.

© 2007 Pearson Education 6- 5 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws Why is there a ripple effect? One error leads to other errors. What is the “hidden factory” found in normal firms? Every 3% error rate organization manages two “factories:” a mainline factory that delivers your product or service, and a hidden “fix-it” factory that cleans up all of the errors, defects, and delays that occur in the main factory. This fix-it factory includes all of the manpower, material, methods, machinery, feedback, environment, time, and technology to correct and compensate for the original error or flawed process and the flow-through effects.

© 2007 Pearson Education 6- 6 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws Where is this “hidden factory” found in normal firms? Everywhere, we are including all functions in the organization in the 3% error rate (e.g., research and design, staffing, procurement, inbound shipping, receiving, operations, marketing, sales, order fulfillment, outbound shipping, and billing), not just manufacturing or sales.

© 2007 Pearson Education 6- 7 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws How much of the organization’s resources are spent on the hidden “fix-it” factory? If you are a 3% error rate organization with a 6-18% ripple effect, then the fix-it factory, which we find throughout the organization, is costing you approximately 35% of every $100 you spend because of the ripple effect. If you spend $10 million, then you could eliminate approximately $3.5 million of these expenses if you completely eliminated the hidden fix-it factory.

© 2007 Pearson Education 6- 8 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws What is the 85/15 rule? 85% of the causes for errors are due to flawed processes and only 15% are due to human error. This is the 85/15 rule which means processes are the primary cause of errors, not people. Employees typically try to do things the right way, but the flawed process design influences their actions. So an error is more likely a sign that the process needs reworking than it is an indication that an individual needs training or reprimanding. When you have errors, the process is talking to you.

© 2007 Pearson Education 6- 9 Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws What is the 80/20 rule with regard to the location of process problems? 20% of the processes cause 80% of the problems. Why does the 80/20 rule occur? You will have a small number of key processes which are more complicated, error prone, and difficult to manage.

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws What do the 85/15 and the 80/20 rules mean to you as a manager? If you focus your improvement and correction efforts on the 20% of the operations which are giving you 80% of your problems, and you focus just on the processes and not the employees, you will have the potential of resolving approximately 68% of your problems (i.e., 80% * 85% = 68%).

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws If you focus on the 85/15 rule and the 80/20 rule, how much of your plant expenses can you recover by eliminating the hidden plant if you hold all other factors constant? If you hold all other factors constant and you do a perfect job of correcting the flawed processes, you could recover approximately 24% of your expenses (35% x 85% x 80% = 23.8%) by focusing on 20% of the processes which produce 80% of the errors.

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws If you focus on the 85/15 rule and the 80/20 rule, why can’t you recover approximately 24% of your expenses? You cannot hold all processes constant. In other words, you will have continuously changing processes and you will have new processes added. Also, you will not do a perfect job at correcting and improving processes.

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws Why can’t you hold all processes constant? Your firm is an open system and processes must constantly change, because of changes in manpower, materials, methods, machinery, feedback, environment, timing, and technology. Also, you will need to add new processes which will either replace older processes or will add to the current system. These changed processes and new processes will have design flaws which require work-arounds and will initially produce 20-30% errors. But if you can cut your “hidden-plant” fix-it expenses by 10% by continuously focusing on the most costly processes, with regard to errors and flawed design, then you will have a competitive advantage

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws Why does the 3% error rate in normal organizations persist? Because these organizations do not know how to systematically correct or improve processes, their trial-and-error and common sense efforts cannot get their error rates below 3%. And they continue to experience error levels of 6 to 18% across the enterprise because of the ripple effect from the 3% errors. One error causes many other errors.

© 2007 Pearson Education Chapter 6 - The Voice of the Process The Hidden Factory Caused By Process Flaws How do organizations react to the normal 3% error rate? These organizations have standardized the procedures used to work-around these “normal” errors. Some of their employees are making a career of managing these work- arounds and errors so they have an interest in making sure these errors continue. In fact, these employees are highly regarded for their expertise in this endeavor. They have positions of authority with subordinates and a suite of offices.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs Why do top performing firms continuously focus on reducing their costs? Top performing companies achieve nearly half of their total profit improvement directly from continuously reducing their costs. In other words, if their profit improves from $1 million to $2 million over a year, then their cost reduction programs caused $500,000 of that $1 million improvement. Top performing firms exploit their skill in cost reduction to provide increased profits without an increase in revenues. This skill in cost reduction becomes a competitive advantage. Competitors cannot buy or hire this skill. You must grow this skill within your firm because this skill is judgment intensive and context dependent.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs What do top performing firms focus on in continuously reducing their costs? WNJV These top performing companies focus on continuously reducing:  waste,  non-value-added time,  just-in-case buffers, and  variances.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs How do top-performing firms achieve their cost-reduction objectives? LCAV Disciplined cost-cutting managers continuously make clear the link between cost reduction and competitiveness. They find strong champions within the firm to lead the effort. They continuously conduct quick and rigorous analyses to discover and reduce or eliminate waste, non-value-added time, just-in-case buffers, and variances. These cost reduction methods do not change, constrain, or starve the value-added portion of the business model.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs Why do costs continuously increase without effective cost-reduction systems? All firms are bureaucracies and bureaucracies tend to become increasingly complicated and layered because of empire-building and ineffective changes and growth. Firms continuously change existing processes and create new processes. These changed processes and new processes are not automatically cost-effective (i.e., these changed and new processes will initially have 20-30% error rates). Management must consciously and continuously simplify bureaucracies and processes and eliminate waste, non-value-added time, just-in-case buffers, and variances.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs How do normal firms reduce costs? Normal companies intermittently, usually driven by a crisis, try to reduce costs using across-the-board cuts (e.g., cut head count by 10%) without excluding the value-added processes which are already cost effective. What is the problem with across-the-board cost reductions? If a process is very cost effective (i.e., highly productive) and you attempt to cut costs across-the-board, you will destroy the value-added portion of the process. Doing across-the- board cost reductions can cause irreparable harm to a company’s product portfolio and services infrastructure.

© 2007 Pearson Education Chapter 6 - The Voice of the Process Cutting Costs What are the symptoms of process flaws which cause waste, non-value- added time, just-in-case buffers, and variances ? D3/OSN2/MISS/FLP/BQL/CBEDB/TVPD/YU/MVT<>D decisions movement confusion thru-put time > value-added time delays inspection bottlenecks production rate <> demand rate downtime storage errors yield < 100% overages setups defects utilization demand non-linear loops non-level pooling batches queues lead-time When you see these symptoms, the process is talking to you.