1. MacroEconomics of Quality

2. Issues + Why Estimate Cost of Quality Failures? + Quality Costs are Far Greater than Those that are Readily Identifiable (Iceberg Principle) + Gains to be Made if Cut Measured Quality Losses in Half + How to Reduce Quality Losses uRule of “Tens” uEradicate Killer Re’s uPlay Offense (Prevention) vs. Defense (Detection) + Sound Quality Practices

3. Why Estimate Cost of Quality Failures + Quantify the Cost of Quality Failures for the Business uIdentify magnitude of potential savings uSensitize Management to the size of the opportunity uHelp to re-expose problems we have learned to tolerate + Identify the Highest Loss Areas + Permit Prioritizing the Loss Areas for Corrective Action

4. Economics of Quality: TCE Statistics 1994 + TV Units Sold5 million + Estimated Revenues$2.5 billion (5 x $500 per set) + Estimated Earnings$125 million (5% of Sales)

5. +Scrap (Measured)$12 million +Total Cost of Quality$72 - 600 million (Measured & Hidden) +Cost of Scrap per TV(12/5)$2.40 per unit +Total Cost of Quality$14.40 - $120 (M+H) per TV Sold (6/1 to 50/1 Iceberg) +% Total Cost of Quality3% - 24% per TV/Selling Price (14.40/500 -120/500) +# Defects per TV? Economics of Quality: TCE Statistics 1994

6. Economics of Quality: STB Systems Statistics 1998 4 Units Sold6 million 4 Estimated Revenues$300 million (6 x $50 per unit) 4 Estimated Net Earnings$16.2 million (5.4% of Sales)

7. Average 4 Scrap (Measured)$ 1.875 million $1.875 4 Total Cost of Quality$11.25-93.75 million $52.5 (Measured & Hidden) Cost of Scrap per Unit$.3125 per unit $.3125 (1.875/6) 4 Total Cost of Quality $1.875 - $15.625 $8.75 (M+H) per Unit Sold (6/1 to 50/1 Iceberg) 4 % Total Cost of Quality3.75% -31.25% 17.5% per Unit/Selling Price (1.875/50-15.625/50) 4 # Defects per Unit???

8. Cost of Quality Failures

9. ICEBERG PHENOMENON Direct/Measured Costs: Scrap/Rework Service Calls Service Calls Warranties/Concessions Warranties/Concessions Indirect/Hidden Costs: Excess Inventory Excess Inventory Overtime Overtime Reputation/Image Reputation/Image Hidden Costs = 6 to 50 times Measured Costs

10. Cost of Quality Failures Worksheet FAILURE COST CATEGORIESESTIMATED ANNUAL COSTS $(000) MEASURED COST OF QUALITY +Internal uWaste, Scrap____________________ uRework____________________ uReinspect____________________ +External uWarranties____________________ uGuarantees____________________ uConcessions____________________ TOTAL MEASURED__________________

11. HIDDEN COST OF QUALITY + Internal uTroubleshooting and failure analysis__________________ uEvaluation to determine usability of off specification material__________________ uEngineering changes, redesign, buy-offs__________________ uCosts of reviewing quality problems (i.e.,replanning, meetings, expediting, firefighting, reports, etc.)__________________ uInventory costs on held material__________________ uOvertime because of quality problems __________________ uLate shipment premiums (delayed collections)__________________ uMaterial handling__________________ uTool & fixture redesign__________________ uMachine wear__________________ uFringe benefits on labor__________________ uLoss of productivity due to rework, scrap__________________

12. HIDDEN COST OF QUALITY + External uLoss of market share due to poor quality reputation____ uLoss of profitability____ uLoss of bond credit rating____ uOther  ___________________________________________________  ______________________________________________ Total Hidden ____ Grand Total ____

13. WHAT IF ??? We could cut losses in half? 1/2 x $12,000,000 …………………......$6,000,000 If ICEBERG is between 6/1 to50/1……$36,000,000 to $300,000,000 Total TCE net earnings in 1994 were?

14. WHAT IF??? 4 We could cut losses in half? 4 1/2 x $1,875,000$937,500 4 IF ICEBERG is between 6/1 to 50/1 $5,625,000 to $46,876,000 4 Total STB Systems net earnings for 1998 estimated to be $26,250,000 $16.2 million

15. Economics of Quality: STB Systems Statistics (1997 vs. 1998) 19971998 Sales$190 million$300 million Net Earnings (Income) $10.26 million$16.20 million (5.4% of Sales) COQ as of % of Sales10 - 25% COQ ($)$19 - 47.5 million$30 - 75 million What if COQ cut in half?$9.5 - 23.75 million$15 - 37.55 million (Savings)($16.63 million)($26.25 million) Net Income with Savings $26.89 million$42.45 million

16. How to Reduce Quality Losses + Rule of “Tens” + Eradicate Killer Re’s…Waste + Play Offense (Prevention) vs. Defense (Detection)

17. RULE OF “TENS” Not doing it right the first time costs ten times as much to find and fix each time errors escape to a subsequent stage of handling. $1 Design Effort =$10 Production Cost =$100 Assy/Test Cost =$1000 Field Cost

18. The Killer Re’s

19. Computing Cost of Quality Internal Failure 4 Scrap 4 Rework 4 Scrap/Rework - Supplier Appraisal 4 Inspection 4 Test 4 Quality audits 4 Test equipment - initial cost & maintenance External Failure 4 Cost to customer 4 Warranty costs 4 Complaint adjustments 4 Returned material Prevention 4 Quality planning 4 Process planning 4 Process control 4 Training Note: The listed categories provides an understanding of the COQ structure. In general, COQ is comprised of costs due to failure, appraisal, and prevention.

20. The Enlightened Perspective Quality Internal & External Failure Appraisal & Prevention 44 55 66 Old Belief New Belief

21. Sound Quality Practices + Operational Definitions and Standards (Metrics) + Manage by Fact u“In God we trust. But everyone else must bring data!” uWithout good data, everyone is an expert + Focus on Process (Offense) vs Product Results (Defense) + Reduce Variation

22. Questions?