Hoshin Kanri for Business Performance Improvement
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Hoshin Kanri courses are best conducted 'in house' with the whole top team present. The DHI Hoshin kanri course is not talk and chalk but a practical programme where Hoshin Kanri for the organisation is actually facilitated and developed during the event. Participants will be given the oppportunity to create or improve an existing VISION, MISSION, and SUCCESS CRITERIA for the organisation and by using the Policy Deployment features contained in a good Hoshin Kanri programme to cascade goals and objectives to all levels of organisation including the direct employees.
From there, the DHI Hoshin Kanri approach embraces all of the tools and techniques of such continuous improvement programmes as Six Sigma, Lean Manufacture, Project by Project improvement and Quality Circles or Kaizen. Kaizen Blitz or Blitz teams may then be used to close the gaps between current performance and where we would like it to be.
Participants will receive a copy of David Hutchins latest and best selling book Hoshin Kanri - The Strategic Approach to Continuous Improvement.
See what the critics have to say -
Book Review of Hoshin Kanri:
Hoshin Kanri, Buy this book. Don't borrow it, don't browse through it--just get your own copy (because you'll want to own it), and get it soon!
The book as a whole is very enriching and all comprehensive. It is a rare master piece and one of the best books I have ever read - pertaining to this area of interest.
The style of presentation is simple but concrete, credible and irresistable.
Kudos to the author and the publisher for the wonderful initiative!
(Dr. (Mrs) Vineeta Kamran)
Principal, City Montessori School & College *
Lucknow India
* Worlds' Biggest School as the per the guinness book of world records with over 35,000 children in any city. Hoshin Kanri is without doubt the most powerful means available to enable your organisation to move up through the pack and get clear water between your company and all of its competitors.
Target audience: Business Executives and Strategic Planners, those involved in business performance improvement through the development of Business Management Systems and those who are already using Hoshin Kanri but wish to develop it even further. Hoshin Kanri (also known as Hoshin Planning) is the name used in Japan to best describe what might otherwise be referred to as an Integrated Management System and It is an especially powerful choice for those organisations confronted with severe international competition. The DHI Hoshin Kanri course even more beneficial and cost effective when conducted 'in house' for the whole management team.
Duration: 3 days as a public course or it can be 3 + 3 + 3 +3 days when conducted 'in house' and where DHI are assisting in the implementation of a Hoshin Kanri programme. In the latter case there will be a gap of aproximately one month between each 3 day event to allow time for the work to be completed.
Location: arranged with client
Hoshin Kanri Course description:
During the boom years of the 1950s and 1960s, when industry could sell everything it could produce, when demand consistently outstripped supply, then quality was almost the last consideration. Today, with massive over-resourcing on a world-wide scale, the customer has become king and decides the fate of most industries. This has resulted in the need for rapid Business Performance Improvement using several competing strategies for market domination – Six Sigma; Business Excellence; ISO 9001:2000; Theory of Constraints etc. At the core of the best of these lies Hoshin Kanri which is the keystone overarching them all.
Why Hoshin Kanri?
Hoshin Kanri replaces the three mutually dependent concepts Management By Objectives (MBO), Management By Policy and Policy Deployment. These which were popular in the 1970s were largely a failure, the reason being that whilst they were excellent at identifying needs, there were often stated in non quantifiable euphemisms and lacked any means to close the gap between current and target performance. Hoshin Kanri on the other hand embraces all of these and is a stunningly effective approach to business management
Hoshin Kanri impacts on chances of survival
Hoshin Kanri has dramatically changed the basis of business strategy, and together with the concept of Benchmarking and the ‘Loose Brick’ concept, Hoshin Kanri has been thrown into focus as the most critical business tool for survival. Recognition of the importance of this led David Hutchins International (DHi) to develop a powerful and effective structure through which organisations can identify best-in- class across the spectrum of key factors, and then use these to put and sustain their own position at the front.
Hoshin Kanri and ISO 9001:2000
Since the publication of ISO 9001:2000 Quality Management System, ISO 14000 (Environmental Management System and OHSAS 18001(Occupational Health and Safety Management System) business are becoming increasingly aware of the need for an Integrated Management System (IMS) and this is the most obvious opportunity to introduce Hoshin Kanri which can be adapted to embrace all of these and other standards and regulations into a single business approach.
Hoshin Kanri course objectives:
To provide delegates with the knowledge and skills necessary to develop a Hohin Kanri based management system to deploy strategies that consider customer needs, market trends, threats and best-in-class levels of performance through continuous Improvement.
Hoshin Kanri course benefits:
Organisations that achieve "World Class" status are engaged continuously in Benchmarking their products, processes and results against the best in their group, amongst the competition and from other industry sectors and carefully selected performance indicators. This is achieved through the adoption of Hoshin Kanri or Hoshin Planning which includes the development, deployment and control of business strategy. It is an extremely powerful process and is adopted by such organisations as Hewlett Packard, Motorola, Toyota, Komatsu, Unilever etc.
Suitable delegates for Hoshin Kanri courses:
The Hoshin Kanri programme is aimed at business executives at Board level who are normally concerned with long-range planning, visioning and strategy development and who wish to use the Hoshin Kanri approach as the basis of their business model.
To gain maximum benefit, ideally the entire Board should attend especially if Hoshin kanri is to be immediately implemented. Athough, if this is contemplated, it would probably be better for the Hoshin Kanri programme to be conducted in-house. This can be arranged.
Hoshin Kanri course Programme:
- Principles of Strategy Development & Deployment (Hoshin Kanri Management)
the Business Strategic Development Model vision, mission, aims and success factors, setting medium-term and annual goals. How Hoshin Kanri facilitates the automatic development of Integrated Management Systems, The ‘Loose Brick’ concept. Identification of Key Performance Indicators (KPIs)
- Deployment Strategy
the cascade process, identification of resources and assignment of responsibilities
- the Control Loop (PDCA Plan, Do, Check, Act Cycle) of Hoshin Kanri.
measurement of goals achievement, the audit process, holding the gains
- Recognition and Reward
- The Seven Elements of Hoshin Kanri based Benchmarking
competitors, customer, processes, technology, finance, people factors, activities
- Customer Analysis
identification of key customers, determination of customer-related key factors, ranking of factors, identification of weaknesses, strategy development
- Competitor Analysis
Using Hoshin Kanri for the identification of key competitors, strengths and weaknesses, ranking levels of importance, strategy development
- Best-in-Class Analysis
identification of criteria, sources of information, relevance to customer and competitor analysis
- Business Process Analysis
identification of critical business processes, plans for improvement
- Internal Quality Health Check based on UK and European Quality Award Criteria
policy, organisation, Quality related costs, Quality improvement, Quality control, Quality assurance, education and training, standardisation, attitude surveys
- Integration of ISO 9001:2000, ISO 14000 and OHSAS 18001.
- Fusion of Results into Strategic Business Planning.
- Links between Hoshin Kanri and Six Sigma, Business Excellence (EFQM), TPM, VOC (Voice of the Customer) etc.
Please click below for Hoshin Kanri course registration form which may be faxed, emailed or mailed to DHI |
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Excerpt from David Hutchins latest book Hoshin Kanri - The Strategic Approach to Continuous Improvement
Chapter 1
Hoshin Kanri – an overview.
In the 1950s the American Management Guru, Peter Drucker suggested that in order to be successful in business it is necessary to be better than all of your competitors for at least something that will be important to the customer. There must be some specific reason why they would choose to buy from you rather than to buy from a competitor even if on average the competitor can outperform you.
If for example your organisation scores more points in total for Quality, Price and Delivery, but a competitor can out score you on one of them, say Quality, then that supplier will win when the customer is mostly concerned with that issue. If another has a reputation for being better on price then he will win in a price competitive market irrespective of your abilities on the other two criteria.
It is not only important to actually be the best, it is even more important to be ‘perceived’ as being the best. Perceptions and reality are often very different. Many organisations fail because they do not understand this important fact. They may know what they are good and bad at doing but the customer may well see things very differently. Even if the customer is mistaken it will still be his or her prerogative to choose.
In a fiercely competitive global market, the pressure is on to attempt to be the best across the broadest possible spectrum of customer sensitive features. This raises several questions. What for example does ‘best’ mean? Again it is the customer’s perception that is important not the vendors. To find the answer we need to be inside the customer’s socks and see what the world looks like from there. It probably looks very different from how we would like to be, but if we do not do that then we will be living in a fools paradise.
When demand exceeds supply and the vendor can sell everything he can make, it is possibly difficult to convince him of the importance of this philosophy. The customer will have to buy his product regardless of the quality of the service, the price, delivery or after sales support. This will usually be the case in monopolistic situations where the customer has no choice. There is therefore no pressure on the supplier to achieve anything because he knows that he is secure.
Alternatively, when supply exceeds demand, the rules change completely. Suddenly the customer becomes king and collectively has the power of life or death over the hapless vendor.
Since in this situation, every competing vendor wants to be amongst the survivors, the pressure is on to be amongst those who are favoured by the customers and in the end it will only be the best who will survive.
Hoshin Kanri is the only proven means by which this can be achieved when competition is at its most severe. It is a systematic approach which can be ruthlessly applied to grind down even the most severe competition.
Toyota have persistently applied Hoshin Kanri style management for several decades. They have never wavered in this. In the 1950s, they were well behind most of the worlds leading Automotive producers but year by year, one by one they moved through the pack passing one competitor after the other until in the end in 2007 they outstripped the giant General Motors to become the worlds leading Automobile producer. For years both Ford and GM attempted to stop their advance but they were unable to do so for no other reason they did not fully understand Hoshin Kanri, Japanese TQM (they did attempt the American version) and now they are fighting for survival with huge losses reported on the internet.
Organisations that have applied Hoshin Kanri have in some cases come from being also ran’s in their field to becoming performance record breakers in only a matter of three to four years. Hoshin Kanri is not a difficult concept to understand or to apply. Most organisations will have some of its elements in place and in some cases a large percentage. However, Hoshin Kanri does require meticulous planning, targeted benchmarking and the effective and systematic use of the tools for continuous improvement at all levels of the workforce. In short it is a means of managing a business.
Hoshin Kanri is a Japanese Management term which has no direct equivalent in the English language. The term roughly embraces four key elements of business management namely Vision, Policy Development, Policy Deployment and Policy Control. It is also directly linked to a fifth which is Total Quality Management which is the means by which the goals which have been determined in the Hoshin Kanri process are achieved.
Figure 1.1 (not included) gives an outline of the elements of Hoshin Kanri
To see the illustrations in Hoshin Kanri - The Strategic Approach to Continuous Improvement, please follow this link https://www.ashgate.com/pdf/SamplePages/Hoshin_Kanri_Ch1.pdf
1. The goals, aims and future scope of the organisation are derived from the ‘VISION’.
2. It requires the development of strategy, policy, benchmarking and targets.
3. The deployment of the targets must be to all levels through a cascade process and the creation of policy at each level of management.
4. There must be a feedback loop of results to complete the Plan-Do-Check-Act (PDCA) Cycle which is the ‘Shewhart Cycle’ (which some nowadays refer to as the ‘Deming Wheel).
5. It has no value unless it also includes Total Quality Management (the Japanese version not the suspect version that fluttered for a while in the West in the late 1980s) which is not part of Hoshin Kanri but represents the ‘DO’ part of the PDCA Cycle
Hoshin Kanri and Japanese style Total Quality management (TQM) are intrinsically related to each other. In fact, the Japanese would say that Hoshin Kanri represents the ‘what it is that we want to achieve’ and Total Quality Management (often referred to as Total Quality Control TQC) is the means by which to close the gap between current performance and target performance. Japanese TQC/M includes everything that is to be found in Six Sigma, Lean Manufacturing, Total Productive Maintenance, Quality Function Deployment (QFD) and Quality Circles and all other quality related sciences and disciplines. It would be nice to be able to include an in-depth treatment of all of these in this book but unfortunately it would thenextend to several volumes. The intention has been to provide a solid base on all the key concepts and to encourage organisations to acquire ever greater expertise in each of the disciplines. As Professor Ishikawa said on many occasions ‘Quality begins and ends with education’.
The term Hoshin Kanri has four components:
Ho means ‘Direction’
Shin refers to ‘Focus’
Kan refers to ‘Alignment’
Ri Means ‘Reason’
It can be likened to ‘a leading star’ or the way that one point of a compass always points towards the North Pole.
Perhaps more appropriate is the way that iron filings go into alignment on a piece of paper if the pole of a magnet is placed underneath. Each small iron filing could be considered to be just one employee with everyone focused towards the Vision and Aims of the organisation.
The concept is based on the principle that the most powerful organisation is the one which has managed to harness the creative thinking power of all of its employees in order to make it the organisation the best in its business. It requires that each person in an organisation be regarded as the expert at his or her own job and their contribution recognised. All the members of an organisation must have a clear understanding of the organisation’s Vision and Goals. With all members in perfect alignment and clearly understand their own role in the achievement of those goals and are trained and encouraged to work together to achieve them, then the productive power of the organisation would be optimal.
The challenge! – the negatives that Hoshin seeks to eliminate
Unfortunately most organisations are a very long way from the Hoshin ideal. In many cases, they exhibit a blame culture with recriminations and punishment when things go wrong and very little in the way of praise when they go well. Direct employees are treated as robots, nobody asks them anything or involves them in anything. They are only given the minimum training and in some cases no training at all. They are not given much information as to how the company is doing in its market place or even the purpose of their own jobs. Only the directly relevant negative financial goals and financial constraints are clear. All other organisational goals are either stated in vague and very subjective general terms and are often open to wide interpretation.
In an organisation which does not practice Hoshin Kanri or something similar, then in the absence of clearly defined quantitative goals, managers are somehow mysteriously expected to ‘know’ them. Usually they struggle to do so but their perceptions as to their meaning will often vary widely from person to person and across the organisation. The resulting confusion will generally lead to serious under achievement against the potential capabilities of the organisation when everything is in alignment.
Since all departmental managers will be managing in line with their own interpretations of the business goals and targets, there will be considerable conflict and sub optimization. Departmental goals which may seem clear to the managers will be considered to be more important than organisational goals which appear vague and indistinct. Goals for quantity which will derive from the financial goals and constraints will often appear to be very clear whereas goals for Qualitative requirements will usually be stated in euphemistic terms if at all. For example: ‘we must have better performance’ or ‘increase customer satisfaction’. On the face of it, these seem like laudable goals but in reality they mean nothing because they are too vague. This vagueness cannot compete with the clarity of the financial goals; as a consequence the qualitative goals will always be the poor relation even though their sustained non achievement could result in dramatic financial impact or even threaten the future of the operation.
This lack of clarity also leads to rivalry and conflict between departments. Managers have their own ambitions and these may not always be compatible with the goals of the organisation as a whole or the local goals of other departments. For example, the IT manager might have the goal of perfect information flow. In order to achieve it he might propose the use of some complex documentation by other departments. In order to satisfy his needs the relevant managers might be required to spend their precious time filling the forms required by IT when they would prefer to use it on their own needs. The consequence being that there is now a conflict between the demands of one department and the local needs of the others.
A further common problem is the lack of process ownership. For most of the 20th Century, the so called Scientific Management system prevailed in the West and also throughout the Soviet system. In such organisations, each department was almost an independent fiefdom. In some cases, it literally bought and sold its products and services from or to the other departments within the organisation. Each of these ‘fiefdoms’ were fiercely hierarchical. Promotion, hiring and firing only occurred within the department, with the consequence that each was a self contained unit. Whilst the organisation may have had business wide advisory and service departments such as maintenance, training, HR, Industrial engineering etc. they were often regarded as intruders by the managers and treated with hostility and suspicion.
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To read the whole of chapter 1 including the illustrations in Hoshin Kanri - The Strategic Approach to Continuous Improvement, please follow this link and a further excerpt from Chapter 7 below.
https://www.ashgate.com/pdf/SamplePages/Hoshin_Kanri_Ch1.pdf
Excerpt from Chapter 7 Hoshin Kanri - Prioritising the KPIs – impact of
‘Cost of Poor Quality’
Figure 7.1 Prioritising the KPIs
Prioritising KPIs
In Chapter 5, (Hoshin Kanri) it was shown that the total number of Performance Indicators can be huge and sometimes runs into several hundreds. This can be quite discouraging but the problem is not difficult to deal with. Initially the simple Selection Matrix can be used to get started and isolate what are thought to be the most important performance indicators. This will enable the development of Hoshin Kanri and get the process working but it is a subjective method and is inferior to the use of factual data. However, once the programme has started and benchmarking has produced more information it will become possible to refine this important stage and use more objective data to prioritise the PIs and convert to KPIs.
The most important PIs which will become KPIs are those that have the biggest impact on the achievement of the VISION. The benchmarking process should be a continual activity and if it covers the broad spectrum suggested in the last chapter, the importance of some KPIs will be constantly changing as market forces determine.
Obviously this book cannot predict what these will be and it will be the opinion of those who are driving Hoshin Kanri in the organisation to analyse the data and make the decisions. What is likely to be somewhat more constant are the internal problems that result in poor process performance. In this chapter these problems will be referred to as Quality Related Costs. In this sense the word ‘quality’ is the big ‘Q’ meaning the quality of business performance and not the small ‘q’ meaning product quality. The focus will be on those important Performance Indicators resulting from unnecessary Quality Related Costs. Most people are unaware of the very high cost of this problem. This lack of awareness is due to the fact that most of the important ‘Quality Related Costs’ are buried in the processes and thought to be part of the process.
As a consequence, most managers have become used to them and accept them as a fate. However, once we start to attempt to isolate them, they become more obvious and managers are shocked not only by the scale of the problem which is likely to be in the order of 30% sales revenue! If they had appreciated this fact and known how to deal with them, they might have tackled them a long time ago. When they are isolated and listed, they can be many and varied.
Once these costs are identified, they can be prioritised using the PARETO Principle. This states that where large numbers of items are to be ranked against some common criteria for example - cost, approximately 80% of the impact will come from just 20% of the items. The converse is also true. Only 20% of the impact will come from the remaining 80%. Dr Juran refers to this as the Important few and useful many. The task therefore will be to identify these costs so to be able to prioritise them.
Quality-Related Costs
The ‘Cost Of Poor Quality’ (COPQ) or ‘Quality-Related Costs’ – whichever term is preferred, includes all costs and activities that do not add value. The cost of lost business is also worth considering but is unfortunately not quantifiable. However, it is usual that when successful attempts are made to reduce COPQ, there is generally a significant increase in business as a consequence. This fact applies as much to service industry as it does to manufacturing organizations, in fact experience indicates that these costs are often much higher in a service industry because they are less visible.
For example, the consequence of many manufacturing problems result in excessive inventory, process downtime, customer returns and warranty costs, late payments due to disputes over quality quantity and delivery. These are usually highly visible.
In contrast, the costs in a service operation might include the less visible computer crashes, slow operators, poor software etc. In the travel industry, the equivalent to a customer repair or return may be booking the wrong hotel room. In many cases, this would be dealt with by the hotel staff, and it is possible that neither the hotel nor the customer will inform the travel agent of the error. Nevertheless the reputation of the agency will suffer, and consequently its market share will be lost without the agent knowing why. Equally, the agent will not have the equivalent of a returned product appearing in the profit and loss account. In the office environment the equivalent to a scrapped or reworked product may involve redoing a task, but the effect will be far less visible than an equivalent manufacturing problem since there will be no visible scrapped or reworked product.
In non-manufacturing situations, inspection is frequently an ad hoc activity carried out either by a colleague or by supervision. The time involved is not monitored, and if the work being inspected is returned to the originator to be redone or corrected, this may not be recorded either. Because these costs are less visible and therefore unlikely to be controlled, there is a tendency to ignore them, and therefore, these costs slowly increase as inefficiencies creep in.
The daily activities of a secretary, travel courier, nurse, surgeon or salesperson may not be recorded, and the breakdown of time spent on each activity may not be known even to the individual concerned, other than by unreliable, subjective means. Even when timesheets are used to record time spent on various activities, it does not follow that the time was used efficiently. A secretary is unlikely to record that three hours were spent looking for a file, if the location of it was the secretaries responsibility.
Also, in service industries, as distinct from manufacturing, the customer is part of the process and affects the quality of the process. A polite customer will often receive a different quality of service from an impolite customer. The customer is present when the service is provided and observes and influences the delivery of the service.
Unnecessary operations in manufacture in many cases will require additional plant, and this must be justified financially. A machine operator's tasks are usually precisely defined and leave little scope for variation.
Quality-related cost elements
Within the scope of Hoshin Kanri, there are two classes of quality-related cost:
1. Costs related to non conforming products or services.
2. The costs incurred because the system to produce them is itself less than adequate. This includes the costs which Toyota refer to as ‘MUDA’ and are dealt with in the Chapter on Lean Manufacturing.
In both cases, the consequential costs are frequently far greater than the cost to repair or replace.
Quality Related Costs can be placed in three categories and are often referred to as FAP –
Failure, Appraisal and Prevention.:
Failure costs (internal and external) including the associated consequential costs:
Appraisal costs – the cost of monitoring, surveillance and inspection.
Prevention costs – the cost of the activities designed to prevent failures from occurring.
Failure costs – (internal)
Internal failure costs can be many and varied. They include all costs and losses due to doing again what has already been done, or repairing or modify result of an activity, the cost of post mortems, and all other consequential costs together with the waste of resources performing the tasks that need to be redone .
The consequential costs will include the effect on the balance sheet of excessive inventory and work in progress resulting from quality-related deficiencies. In service situations, the equivalent problems do not show in inventory, but are hidden in direct costs. Most inventory and ‘work-in-progress’ (other than work actually being processed) can be regarded as a quality-related cost.
Reworking, redoing or repeating activities already performed because of inadequate performance at the first attempt. Costs of modification resulting from previously undetected design or planning weaknesses. These costs includes the associated design or planning activity, changes to software, cost of retraining if methods are changed,
Retro design of products with a known design fault and all of the associated new jigs, fixtures and tools. Extra space in stores to accommodate replacement parts with different issue numbers. Revisions to parts lists, instruction manuals and the increased complexity of related service activities.
Increases to inventory and work in progress due to disruptions to the smooth flow of work. Storage space.
Modifications due to poor quality design
The Ford Motor Company conducted an intensive study of its main Japanese rivals across a wide range of criteria including the cost of design changes after the vehicle had gone into production. It found that whereas Japanese companies invest more at the design and planning phases, their overall costs are substantially lower due to significantly fewer alterations both during and post-production.
Failure costs – external
These costs can be further subdivided into residual and random categories. The residual problems include the underlying costs of warranty calls, servicing, complaints, engineers, etc. Some of the more spectacular costs may be in the random category which, if they do occur, can produce catastrophic results. These will include:
Product recall or product withdrawal - the Perrier Water case, John West Canned Foods, Farley’s Baby Foods, bones in fish fingers and many examples from the automotive industry. Companies normally spend fortunes on advertising how good they are, then suddenly they are plunged without warning into huge expenditure telling the public that they have put their lives at risk. In many cases, this negative publicity is overwhelmed by media attention which puts the very survival of the business at stake.
The costs to Union Carbide from the Bhopal disaster, John West and Farleys with food poisoning, and Perrier with its chemical problem have become historical milestones. Chernobyl already has its place in history and the English nuclear plant Windscale was renamed Sellafield in an attempt to shake off its bad reputation following the radiation leakage disaster. All of these incidents were preventable, as was the Zeebrugge Ferry disaster. The risks associated with all of these would have been greatly reduced had the principles of Hoshin Kanri been employed.
The catalogue of events leading up the series of DC9 failures and the account of security at Birmingham Airport broadcast on Trevor McDonald’s Today TV programme have done nothing to increase the confidence of the wary air traveller.
Other external costs which can also be included in the statistics include:
Failed product launches which are due to deficiencies in the product and identified and exposed by its first customers. These costs are invariably incurred when the producers of a product or service are overzealous in their attempt to obtain prior franchise with an innovative new product is a common problem. In these cases, the organisation tries to take shortcuts and fails to test and prove the product’s performance characteristics prior to sale. This results in the customer unwittingly being the first inspector.
Failure to meet either the emotional or specified needs of the customer.
This is usually caused by poor market research poor competitor-related information.
Inadequate and misdirected promotion, wrong launch time, etc. short shelf life in the case of chemical, food and pharmaceutical products, contamination, poor packaging and consequent adverse publicity.
Customer complaints and the recording and analysis of customer complaints, and the cost of running a so-called Customer Service Department a euphemism for Customer Complaints Department.
Excessive after-delivery, service or maintenance support. Excessive costs including storage, delivery and all related administration, particularly those that infer conceal or mislead the public.
Appraisal costs
Appraisal or monitoring activities include those activities that exist for no other reason than the probable presence or expectation of some deficiency that must be detected at the earliest opportunity.
Appraisal costs have two components.
Firstly there are those that must be incurred regardless of the probability of the risks because the consequences of such an event are severe and potentially life threatening. Such is the case for many of the controls and procedures at nuclear Power Stations. This form of Appraisal Cost is not included in this argument because they will always be incurred regardless of the likelihood of an event.
The second type of Appraisal cost and which are included are those Costs related directly to the likelihood of error or failure. In this case, the amount of Appraisal increases as the likelihood of error increases more or less in direct proportion and vice versa. Activities which are included embrace all the costs of on line inspection, testing and monitoring which are carried out for no other reason than that the related failures occur.
Some of these failure costs can be eliminated by foolproofing or mistake proofing (Referred to in Japan as ‘Poke Yoke’) but this would be classified as a prevention cost.
Prevention costs
These can also be divided into two categories. There are those prevention costs that may be regarded as an essential part of the process, for example, field testing, design proving, failure modes and effects analysis. These are really a cost associated with good business practice, they would be incurred regardless of the Failure and Appraisal costs and are not included in this argument.
The Prevention costs that are included are those that must be incurred if the current cost of failure and appraisal is to be reduced. These represent an investment in the Continuous Improvement process and, if effective, should result in a significant reduction in the overall costs as shown in the following diagram. Obviously they are likely to be too small otherwise the failures would not occur and the relevant Appraisal cost would not be necessary.
Cost of Poor Quality ratios
It was claimed earlier that the Cost of Poor Quality as a ratio of sales revenue is likely to be at least 20% of sales revenue and probably much higher. This is because many of these costs are hidden in the accounting process. For a company with sales of £10 million per year, the total cost of Poor Quality is likely to be at least £ 2 million! Assume also that annual net profit is 10% sales at £1 million.
Figure 7.2 The FAP relationship (Illustration not included in this excerpt from Hoshin Kanri)
The figure shows that by increasing the expenditure on Prevention the total cost of the three types combined can be reduced by some 50% in 3 years. This means that total costs can be reduced by £1 million and the saving in this example will double annual profit. The increase in prevention costs is likely to be a maximum of 10% of the saving at £100000. This implies a very good return on investment and is achievable!
It is for this reason that this chapter on prioritising the KPIs is concentrated on this topic. Many of the KPIs will include some hidden Quality Related costs and this should be taken into account when prioritising.
The optimum quality cost fallacy
There is a serious flaw in the FAP argument which can lead to problems. Many readers will be familiar with the graph shown below. The theory underlying this set of curves is intended to convey the impression that there is an optimum level of quality cost, which therefore becomes the desirable target. This is a flawed argument.
The curves suggest that if a producer is at position A, then the total costs will be high due to excessive failure and appraisal costs. It is then suggested that costs will fall as more attention is given to prevention costs. This is correct. However, the advocates of this model then suggest that continued and progressive reductions in quality costs will eventually lead to a situation where an optimum value is reached, beyond which the cost of further prevention efforts will outweigh the benefits; hence the overall costs will rise. Figure 7.3 The fallacious Minimum Cost curve
For example, in the above figure, the company would move from position A, through position B to position C. The flaw in the argument results from the fact that it ignored the fact that the organisation has competitors. At point ‘A’ the probability is that all of them are fairly tightly bunched at the same place on the graph. The reason being that if any one of the competitors were much better than the others, then at least the worst one would be pushed out of the market. The customer would naturally prefer the better products. This is what happened in the automotive industry in the 1970s. What then happens is illustrated in figure 7.4.
Figure 7.4 The real effect of one competitor aggressively reducing Quality Related Costs (Illustration not included in this excerpt from Hoshin Kanri)
Figure 7.4 indicates that as the ‘best producer’ continually reduces his Quality related Costs, it will effectively drive the costs of the less capable competitors upwards behind him. The reason being that society will now expect the better product and will recalibrate his expectations accordingly. This will result in a lower level of tolerance for the poorer performers with the result that they will get more complaints and fewer sales.
This implies that the 'best' producer (in the eyes of the customer) will always be at the optimum, irrespective of other considerations, provided that the improvements that he has made result in greater consumer preference. The optimum therefore will appear always to move ahead of him. This is why, there are no markets where anyone has ever reached an optimum. Always there are better ways of doing things and for the Hoshin Kanri led organisation, this is another opportunity to exploit the competition.
The Customers perception of his wants are to a large extent driven by the best and most perceptive supplier. By examining the KPIs collectively all those which can result in both cost reduction and greater customer satisfaction should be given priority.
The only way in which a poor performer can compete with a high performer if he is not able to close the gap is to attempt to sell at a lower price. Of course this is a popular strategy for many people because there is always someone looking for a bargain. However, as Figure 7.5 indicates, this is of dubious merit because the better performer will have the advantage of lower costs and can also sell at premium prices. The profits of the poor performer on the other hand is squeezed both on selling price and by incurring higher costs to produce. He is also vulnerable if the better performer decides to use price competition and sets a level below the inferior company’s cost to produce.
Figure 7.5 Comparative costs – best and worst. (Illustration not included in this excerpt from Hoshin Kanri)
It is evident, therefore, that
there are no absolutes where quality is concerned. Quality is a comparative concept, and is and always will be dynamic. That is why no one has
ever reached the optimum. It does not exist. Always people will want something better if someone finds a way to produce it.
Identifying Quality related Costs
Having argued the case for quality related cost reduction, the interested reader will want to be able to identify quality related costs in his or her own organisation but it is already mentioned that many of these are hidden in the accountancy process.
Fortunately there are ways that can use to pull them out. One way is to use the Hidden Factory concept first described by Dr Feigenbaum in his book ‘Total Quality Control’ first published in the 1950s.
The Hidden Factory concept.
Figure 7.6. The Hidden Factory concept (Illustration not included in this excerpt from Hoshin Kanri)
In this concept Figure 7.6 shows that an organisation really consists of two organisations. In one of them only good work is produced. In the other only rubbish, waste, delays and errors. In this latter organisation how many people does it employ? How much floor space, how many machines or equipment are used just to produce the bad product?
The following diagram shows some of the more likely of these on a department by department basis.
Figure 7.7 Some typical Quality Related Costs (Illustration not included in this excerpt from Hoshin Kanri)
Unnecessary perfectionism
'The argument thus far is based on the assumption that improvements in quality are perceived by the customer to be desirable, and that the customer is prepared to pay for them. Quality improvements that cannot be perceived by the customer, or to which the customer is indifferent and cost more to achieve, or for which the customer is not prepared to pay, must be regarded as unnecessary perfectionism and should be avoided. These improvements should be regarded as quality deficiencies just as much as those that relate to failure to achieve.
Sometimes unnecessary perfectionism can be one of the most significant quality-related costs.
One example of this was the manufacturer who had a near absolute monopoly of the smoke detector market. At that time, soon after clean air laws had been introduced, the company was able to sell its products at premium prices because they had no competition. However, the company had also fallen into the trap of unnecessary perfectionism. The directors insisted that the outer cases of the product should be die-cast and vitreous-enameled in order to look nice and to be consistent with the appearance of its other products. These design features were extremely costly to produce and were totally unnecessary from a practical point of view.
Once installed in a chimney the customer would be indifferent as to the aesthetics of the product and much more concerned with its reliability, effectiveness and, of course, safety compatibility with related instrumentation. The aesthetic product features were included for no other reason than vanity. Because of the importance of the visual characteristics of other products in its range, the company made the false assumption that its customer expected all its products to look alike.
This turned out to be an expensive mistake. When the market was at its peak, a competitor appeared. The competitor has also done his homework and his product was simple, functional and cheap. The customer naturally preferred the lower cost item especially since it was going to be located in a tall chimney and out of sight. The over specified product was wiped from the market at a single stroke.
The most insidious and difficult to control form of over specification occurs in the tolerances on dimensional variation in engineering products. Only a relatively small number of dimensions on most products require tightly controlled tolerances. For most of the remainder, the designer often faces a dilemma. The dimensions must have specified limits to guide manufacture, but there are few guidelines as to what would be acceptable to the user. the designer is most likely to be cautious, because, he knows that if the tolerances are too loose, the product will be regarded as inferior in some way and the designer will be blamed. However, if they are unnecessarily tight the designer is unlikely to suffer criticism because the dimension will probably not be challenged, provided that the product is manufacturable. In most instances this would be the case - but only at a price! Production engineers, production departments and inspectors will make the assumption that the designer knows best and therefore accept the specified constraints. Any items that subsequently fail to meet these requirements will either be scrapped or reworked, even though in practice they may be perfectly functional. Costs associated with such over-perfectionism must run to untold millions every year and may even threaten the life of the organisation.
ISO 9000:2000 – Cost or Value?
Many organisations have become wary of any quality related initiative as a consequence of bad experiences with ISO 9000. They have often introduced this Standard not because they wanted to but because some over bearing customers have virtually forced it on them. In some other cases, they have introduced it in order to take advantage of its marketing value in being able to claim to be a ‘quality’ organisation. In most cases, their aim has been simply to obtain the certificate with the least amount of effort. Since ‘fooling the auditor’ is not at all difficult, a significant number of these programmes fall far short of the intentions of those who drafted the Standard. As a consequence, most of them incur all of the costs associated with certification and little of the benefit. This is unfortunate because the content of the Standard especially ISO 9004:2000 is excellent and well thought out. If it is implemented for the purpose of improving the business and not as a means just to mount a certificate on the wall of the visitor’s reception area then significant benefit can be obtained.
Supply Chain Quality Related Costs
Many quality related costs are built in even before the component goods and services reach our company. This is because unless our supply chain in total is also operating a Hoshin Kanri Management system, then we will inevitably be paying for and absorbing the cost of all their inefficiencies.
However we cannot force them to do this against their will. If we do then they will simply attempt to fool us with a sham scheme with similar results as discussed in the ISO 9000 argument above.
Toyota and other leading Japanese companies have largely overcome this problem by dispensing with Multiple Sourcing and changed to the development of long term relationships with a selected number of suppliers that they have learned to trust and who participate willingly in mutually beneficial improvement activities. In Toyota this is referred to as ‘The Toyota Family’.
Summary
1. Quality-related costs occur in all industries and in all forms of work.
2. Quality-related costs can be categorized into three elements: (a) failure
(b) appraisal (c) prevention. These collectively account for a minimum of 20 per cent of sales revenue and can be as high as 30% and even more than 40% in some cases. The largest being failure costs, which normally represent 60-80 per cent of the total.
3. By identifying and tackling failure costs, the cost of poor quality can be reduced by over 50 per cent in 3-5 years. These savings represent profit.
4. Quality-related costs include the consequential cost of failure. When that is included, quality-related costs become comparable to the 'best' performer. The best performer will always be operating at the optimum value. Inferior competitors' costs will be progressively higher and will increase if the best performer improves, even though their performance remains the same - the Hutchins Hypothesis.
5. Quality-related costs due to excessive stocks of raw materials and part-finished products. Finished goods and work in progress can only be reduced through first party assessment in collaboration with suppliers. Reliance on third party assessment schemes such as ISO 9000:2000 cannot produce Total Quality performance.
6. The concept of multiple sourcing of suppliers is outmoded and must be eliminated. The 'Toyota Family' system is the most promising alternative.
Finally, from all that we have now organised, how will the KPIs be achieved? Generally there will be some important and significant gaps between where we are and where we want to be. The means to close the gaps will depend on the nature of the situation. Sometimes they will require Six Sigma projects, in others Lean Manufacturing and of course Quality Circles. The next few chapters cover the main means to achieve and collectively they may be regarded as TQM. (Total Quality Management). They are not exhaustive and the content is nowhere near definitive. If they were then this book would have to be split into many volumes. Every one of these chapters could be expanded into a book in its own right.
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Content copyright David Hutchins International Limited. David Hutchins International are leading consultants in Business Performance Improvement though Hoshin Kanri, Six Strategy and Policy Deployment, Sigma, Lean Manufacturing, Risk Management including ISO related training and Implementation and relevant leadership and People development.