Q: I am new to the quality profession and have been asked to determine the cost of product returns by customers. I am wondering what items roll into that. I’ve included transportation costs, the average labor wage per hour and how much average time is involved in processing a return. Is there anything else? Is there a formula I should use?
Resource Optimization and Innovation
A: The question you ask is interesting and, of course, depends on how a return is processed.
When trying to determine the cost of any process, I do not guess at the costs involved. Instead, I always return to a map of the process. If you don’t have one, I strongly encourage you to build one.
In this case, I suggest a value stream map. This tool provides a systematic means of determining probabilities of process paths, time delays, cycle times and transportation times, as well as a host of other highly useful information. In addition, it will allow you to define the boundaries of the return process and minimize the possibility of overlooking anything.
Once the details of the process become visible, you can examine each element and identify the various costs, times or rates you will need to determine the overall cost of the product return. At this point, you will probably have sufficient information to develop a formula of your own for computing the cost of a return.
This is where I usually turn to the finance department, which will be able to help plug in any missing information. Finance departments are generally the final authority on costs in most organizations. They’re an important component if the final number for the cost of a product return is to have any credibility.
Remember: Use the process as the basis for developing the metric you are seeking. If you do, it will be accurate and defensible.
Author and consultant
For more information
- Kubiak, T. M., "Data Dependability: Improve data accuracy for managing, improving processes," Quality Progress, June 2008, pp. 61–64.
- Kubiak, T. M. and Donald W. Benbow, The Certified Six Sigma Black Belt Handbook, second edition, Quality Press, 2009.
- Manos, Tony, "Value Stream Mapping—An Introduction," Quality Progress, June 2006, pp. 64–69.
Q: I work for a telecom company. I am the head of the department of business excellence and cost leadership. The responsibilities are scattered in the following departments:
- Quality and business processes support: covers ISO 9001 quality audits, process improvement and enhanced Telecom Operations Map (eTOM) standards. Also does Six Sigma projects.
- Performance measurements: responsible for Six Sigma measures, quality of service measures and Six Sigma projects.
- Sustainable business improvement: performs Six Sigma projects and is responsible for program continuity.
- Cost leadership: Looks at initiatives to reduce operating costs.
I need to restructure these activities in a better way.
A: I work with a number of clients who claim they’re implementing Six Sigma, but when I ask what they mean by Six Sigma, I get a lot of different answers. For some, Six Sigma is little more than a lean initiative. For others, it’s the define, measure, analyze, improve and control approach or Six Sigma projects under the leadership of a Black Belt (BB). Elsewhere, Six Sigma appears to be a lot of number crunching and charting with various software tools.
Seldom, if ever, do I see any evidence that Six Sigma is understood as a method, not a goal, and even more seldom do I see any evidence it has been accepted and applied by top management as a strategic initiative. Six Sigma remains something that is delegated to the BB and attached to the organization’s body. It hasn’t been integrated to become a part of the body.
This question seems to reflect this phenomenon. You refer to the business excellence and cost leadership department’s responsibilities as "scattered" among four apparently different areas. One will note, however, the term "Six Sigma projects" showed up in three of the four scattered responsibilities. You conclude, "I need to restructure these activities in a better way."
To your credit, you seem to have made real progress in all four areas of responsibility and seem to be addressing most of the elements of a solid quality initiative. Rather than restructuring, however, I would recommend integrating all of these activities into one strategic initiative for the organization.
I don’t care what you call this effort. You can call it a quality system, continuous improvement process, Six Sigma or whatever. I’d prefer to see it viewed as the company’s management system. Regardless, time should not be spent on restructuring, but on combining current strengths and past progress into one strategic initiative.
This can be accomplished by drafting a plan to be executed over the next year, preferably in Gantt chart format, for taking action in six strategic areas (I provide my clients this worksheet for their initial implementation plans):
- Customer relations.
- Projects and teams.
- Supplier relations.
- Measurement systems.
This approach can be used to integrate the department’s current responsibilities into one cogent initiative. Business processes support and sustainable business improvement responsibilities will be addressed in the customer relations and supplier relations portions of the worksheet. Six Sigma projects and cost leadership (reduction) projects will be slotted into projects and teams. Quality audits, eTOM standards and similar items can be incorporated into the measurement and communication portions of the plan.
Training will be essential for any and all future business leadership progress—in particular, training for top management. Too often, senior managers see that a few BBs and Green Belts are trained, but the same managers do not learn the leadership theory, concepts and methods that are critical for survival in this new economic age.
Finally, I must add the caveat that all of my recommendations are based on something I learned from the late W. Edwards Deming. For the past 22 years, I have specialized in teaching a new system of management based on the principles of Deming, who taught the need for a transformation of the Western style of management.
We do not need any more improvement in American industry, nor do we need restructuring. What’s needed is transformation, which implies a complete change of state. To accomplish the transformation, we need more leadership, less use of software tools and fewer ISO audits.
For more information
- Imler, Ken, "Core Roles in a Strategic Quality System," Quality Progress, June 2006, pp. 57–63.
Q: I am in the process of completing performance evaluations. A portion of the rating is determined by an employee’s error rate in documentation.
Performance cutoffs are 96% or greater for exceptional performance, and fully successful performance is 95% or less. One employee has generated 3,600 records over the rating period. How many of these records should be audited to prevent bias?
A: This question appears to relate to auditing samples, because we know the population size (3,600) and are interested in identifying the sample size needed to ensure that if the error rate is less than or equal to 4%, the sample size is large enough to detect that error rate.
There are a number of tables that could be employed in this situation. The most widely used tables that give these sample sizes with 95% or 99% confidence are by Herbert Arkin in his book, Handbook of Sampling for Auditing and Accounting.1 So, in your example, to detect an error rate of not over 2% + 2% (which would give a lower bound of 96%) with 95% confidence, you would need a random sample of 179 records.
If you need further assistance, there are online calculators that can help determine the appropriate sample size.2
I. Elaine Allen
Associate professor of statistics
- Herbert Arkin, Handbook of Sampling for Auditing and Accounting, McGraw Hill Higher Education, 1983.
- iSixSigma, "Sample Size Calculator," www.isixsigma.com/offsite.asp?A=Fr&Url=http://www.surveysystem.com/sscalc.htm.