How can one correlate the quality level with a company's bottom-line?
Most of the quality initiatives can not answer this question,
but Six Sigma can. Six Sigma is a process of asking questions that lead to
tangible and quantifiable answers that ultimately produce profitable results.
There are four groups of quality costs:
- External failure cost: warranty claims, service cost
- Internal failure cost: the costs of labor, material
associated with scrapped parts and rework
- Cost of appraisal and inspection: these are materials for
samples, test equipment, inspection labor cost, quality audits, etc..
- Cost related to improving poor quality: quality planning,
process planning, process control, and training.
Typical North American companies' average Sigma level is around 3 Sigma. In
other words, 25-40% of most company's annual revenue gets chewed up by their
cost of quality. Thus, if a company can improve its quality by 1 sigma level,
its net income will increase hugely, approximately 10 percent net income
improvement (see Table 3.1).
Table 3.1: Sigma Quality
Level and Related Cost of Quality
Sigma Level
|
% Good
|
PPM/DPMO
|
Cost of Quality as % of Sales
|
2
|
95.45
|
45500
|
Over 40%
|
3
|
99.73
|
2700
|
25 - 40%
|
4
|
99.9937
|
63
|
15 - 25%
|
5
|
99.999943
|
0.57
|
5 - 15%
|
6
|
99.9999998
|
0.002
|
Less than 1%
|
Furthermore, when the level of process complexity increases
(eg. output of one sub-process feeds the input of another sub-process), the
rolled throughput yield of the process will decrease, then the final outgoing
quality level will decline, and the cost of quality will increase. For example,
if a company satisfies its single process yield with 93.32% of good, 3 sigma
level, it may end up with an unacceptable final yield which represents a very
high cost of quality.
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