True Cost Of Quality In The Automotive Industry

To be successful and competitive, all organizations must understand and control two essential and integral criteria – their cost and their quality.

The automotive industry is no exception and is projected to go through some major changes throughout 2020. According to S&P Global, the global automotive sales number is unlikely to see significant growth in 2020, meaning organizations can’t afford to make mistakes.

There are two major challenges that automotive suppliers and OEMs will likely need to address to remain profitable – building brand loyalty and simplifying supply chains. This will ultimately put pressure on organizations to cut costs while exceeding their customers’ expectations.

Now more than ever, automotive suppliers need to focus on their true cost of quality, in order to reduce the impact on their bottom line.

The true cost of quality is a model used to evaluate the efficiency in which a company meets customer expectations, or, how efficient a company uses its resources to produce a product or service. The true cost of quality equals the cost of poor quality AND the cost of quality.

The cost of poor quality, or non-conformance costs, is made up of internal and external failures.

Internal failures: costs incurred when a defect is found before the customer receives the product.

External failures: costs incurred when a defect is found after the customer has received the product.

A common scenario of failures would be a quality inspection finding a missing hole in a stamping part number “ZZYY” in a final stage of assembly “YYZZ”.

Typical internal failure costs would include:

• Cost of lost production – Stop production in the presshop and call maintenance to replace broken punch. Establish a “clean production point”:  Cost of idling production equipment
• Containment – Initiate internal sorting all in-house stock to find a “clean point” – the cost of using internal or external labor for sorting as a no- value-added activity.
• Rework – setup a rework station to punch/drill the missing hole on all defect parts – the of Added Operations & Operators
• Scrap – the cost of any products that cannot be reworked.
• Premium Freight – as production operation idles, if the client is set up as “just-in-time”, cost of organizing separate transportation to make up for lost shipments

Typical external failures that could be experienced include:

• External containment actions – organize labor to protect the customer’s assembly line. Feed only good parts to the customer. Cost of establishing a “clean production point at the customer”
• External rework – Setup an offline rework station at the customer to continue feeding only good products to the customer.
• Field and warranty cost: establish field actions to rework products in the field of contamination outside of assembly plant
• Loss of Business – loss of confidence in the client’s product quality

S.N. Teli estimates that the automotive industry experiences a cost of poor quality ranging from 10% to 40% of annual sales. The cost of quality, or conformance costs, is made up of inspection or appraisal costs and prevention costs.

Inspection or appraisal costs: costs incurred to determine the degree the product/process conforms to the quality requirements. These costs could include:

• Labor cost for a quality inspector and weld inspector,
• Cost of operator’s cycle time spent on checking the product/process characteristics,
• Cost of quality audits and similar

Prevention costs: costs associated with all actions and processes used to prevent failures. These costs could include:

• Quality assurance actions (building control plans),
• Error proofing mechanisms (Poka-Yoke, preventive and predictive maintenance,
• Process design improvements that prevent product failures,
• Operator training and similar

Organizations who are not measuring and controlling their true cost of quality are likely to experience:

• Slowed rates of improvement
• Increase in complexity of processes
• Disengaged employees
• Lack of direction and priorities
• Changes that don’t improve all departments or sites

In my experience, all companies who do not think long term, miss an opportunity to “invest” in their quality for the product lifetime.

The first reaction of a product failure is to increase inspections (appraisal cost). Spending money on increased inspection is money spent, dare I call it “wasted”, with no chance to provide much return on investment.

Appraisal activities are only about 80% effective due to human nature and when failures still reach the customer, the first reaction is to further increase inspection to so-called “200% sorting” or double 100% inspection. This is not effective and sometimes the non-productive cycle continues to the 3^rd level.

The loss of customer’s confidence at that point is very high. Spending even a portion of that money on error-proofing mechanisms (preventive cost) will instead provide ROI for the life of the product.

Another point that is important to understand that any early process engineering designs with failure prevention in mind tend to cost 1/10 of the cost of an “after-thought” solution as an addition to an already built production line. So early investments in preventive costs are the right approach to long time product quality.

Despite making financial sense, understanding and improving your true cost of quality is referenced throughout the IATF 16949 Standard. Clause 5.1.1.2 requires leadership to review, support and evaluate the product realization processes and improve their effectiveness and efficiency. Similarly, clause 6.1.2.2 requires a process for preventive action, where the organization must establish a process to assess nonconformance risks and implement appropriate action.

Putting it into practice: a real-life example of the true cost of quality management process.

The following is a 4-staged process approach to evaluate your true cost of quality.

Understand

Use data to understand what failures are occurring. Your observations should include the time, place, type, symptoms of the problem and voice of the customer.

Consider the tools and devices that are used in the processes of product development.

Analysis/Root Cause

Data visualization is imperative to understand where these failures are coming from. Analyze the problems using a range of tools to narrow down to the root cause of the problem. Tools like Control Charts, cause-and-effect diagrams, fishbone diagrams, histograms, and the ‘5 Why’ model are among popular tools used.

Common errors when analyzing:

• Working on the symptom instead of the real problem. Making premature assumptions about the root cause.
•  Creating a problem description by revising the customer description of the problem, which is often a symptom.
• The root cause is not a true root cause. Operator error, set-up piece, or the symptom or effect of a problem is given as the root cause.

Use 3x 5 why analysis. Why made (error prevention), why not detected (why escaped, error detection), why the control system didn’t predict the error (PFMEA and CP)

• Start by separating generic symptoms into multiple problem statements. Why — problem-solving works best on 1 problem at a time.

Action

Once a root cause is identified, you are ready to take action. This could take form in a number of different ways including process changes, adjustments to resources and training.

When implementing an action, consider the following:

• Does the action cover all processes identified in the root causes?
• Do the actions cover all systems identified in the root causes?
• Do the actions address the timing of the problem?
• Do the actions adequately address the condition?
• Do the actions adequately address the countermeasure requirements?
• Do the actions adequately address the magnitude of the problem?

Assess

Organizations often make the mistake to assume that once an action has been implemented, the problem is fixed. Instead, continual monitoring of the adapted process should be conducted to determine whether it is performing as expected.

Common errors that need to be considered include:

• If the prevention action is comprised solely of an audit or an added in-process inspection, ask yourself how effective is the corrective actions listed?
• Is there a Paynter chart, and all components of it, verifying the effectiveness, including throughput and scrap?

Read our whitepaper on “True Cost of Quality” here.

Learn more about the current version of the IATF 16949 Standard.

View our Quality and Automotive Training courses here.