How to Measure of Cost of Poor Quality Using % Rework

hello everyone this is sheila shafi and welcome back to process arc where we provide you with digestible business insights in today's video we're going to continue our discussion around metrics now metrics are irreplaceable in the business without them it's very difficult to know exactly which way we're heading and we're doing nothing but exposing ourselves to chance and luck to make sure that we're going to actually hit the performance targets that have been given to us or the financial targets that have been given to us so instead of just leaving it up the chance let's start measuring things and in today's video we're going to go to metric number two which is percent rework and i'm going to highlight for you what exactly percent rework is all about how do you measure it and then with an example provide you with a sample set of calculations but before we dive into percent rework i just want to have one final thought or note on the entire topic of metrics which is that what we're going to be talking about the top five metrics is by no means an all-encompassing list of metrics the world of business is really complicated and every business unit has its own nuances and so there is a much bigger universe of metrics out there that we as business owners and executives need to be cognizant of when it comes to measuring performance so these five are purely think of them as the 101 metrics for process performance but as long as we have an understanding that all business metrics need to tie back to either cost revenue or customer experience or customer satisfaction we should be in good shape so without further ado let's jump into metric number two which is percent rework and in this one i wanted to provide you with a process map to start the conversation let's dive in so here's a very high level process map that outlines the client journey from the time that they're a prospect all the way to the point where they are onboarded and you may notice that there are three distinct milestones in this journey the first milestone has to do with the financial rep being able to develop a proposal and get the client to accept it and then ultimately completing an application and submitting it for processing then the operation team takes over to make sure that they have everything they need so that they can process that request and get it imaged in their dock management system and then a different department one that once that's done picks it up to generate and assemble a welcome kit and ultimately now it's in the hands of the customer to determine if they got everything they needed and all the services that they asked for they've been signed up so what you will see from a rework perspective which is very important to us is that we have a couple of points in the process where things it looks like are not going as we had anticipated which means that in this situation 65 of the time the customer did not accept the proposal that the financial rep provided here 45 of the time the packet that the financial reps submitted to the operations team was not deemed complete so the process essentially came to a stop the packet was sent back to the financial rep in order for it to be completed and one last point in the process where things again came to a halt or resulted in re-contacting of a financial rep was right here when roughly 10 percent of the time the client felt like they did not get everything that they had anticipated in that packet every time the process comes to a stop or it does not proceed as was anticipated or hoped or designed that by definition means you're going to end up with some rework so let's now define what rework means rework is actually a pretty dirty word when it comes to process performance because by definition it means that we have to stop the process or we have to allocate resources to correcting a defect a mistake an issue that has arisen in the process so it has everything to do with a correction and any time you see the word or the prefix re-rework redefine revisit reissue that means that what we were supposed to do right the first time didn't quite happen that way so rework by definition is a non-value-add activity which means that it's going to cost us more to perhaps issue an application or complete processing of an application it ultimately doesn't increase the value or the profitability of that product for us it chokes the process meaning that it stops us from being able to process something right and first time it means we have to stop correct and then re-issue or restart the process in order for us to complete the processing of an application or whatever it may be so by definition rework is really important for us to understand and measure because it's cost that we're embedding in the process in the service in the product that ultimately gets us nowhere and increases the likelihood of us not being able to process something on time so it impacts cost and it impacts cycle time because again remember you have to stop to correct it or wait for additional information to come in in order for us to complete our work now let's go to an example where we can now apply the mathematical calculations so again remember percent rework is like junk it's just the amount of junk that now we have to deal with so the mathematical calculation is one minus whatever you got out of the process divided by whatever you put into the process so i put in 100 applications and only 45 of them came out without me having to re-contact somebody or correct an error or maybe resequence the paperwork i got so that it gets imaged properly every time you cannot process something as you should correctly the first time every time you stop it means you reworked it and then you multiplied by 100 to get the percent rework value for that process now let's go back to the process map where we had the financial rep submitting roughly 100 proposals to its prospective clients and only 35 of those clients would accept the proposal so either out of that 65 that was left over either some clients ultimately decide to leave and go with a competitor or they may ask the financial rep to listen to them better or perhaps they explain their situation better to the financial rep in which case they will have to redesign a proposal for them that better fits the prospective client's financial situation in either way the way to calculate percent rework is one minus the 35 that actually accepted the proposals as they were over the hundred which is what was submitted to the prospective clients clients times 100 percent and the ultimate number comes out to be 65 percent so 65 of your customers are not accepting the work as the financial reps are proposing to clients now all of these metrics can be used to answer a bigger question of like who cares who cares if 65 of the customers lost or only 35 of the material that i put into the machine actually result in widgets the ultimate reason we actually calculate any of these things have to do with the metrics that we talked about earlier on which is revenue cost and customer experience so let's talk about how to use that 65 percent now to calculate the material the financial implications of a process that is performing at a 65 rework rate so one way to use percent rework is to look at the incremental revenue loss it's kind of a very close metric in this situation two percent conversion because we are looking at this metric on the sales side of the business which is essentially the revenue generating side of the business so if you have roughly 65 of your customers that are not coming back to you or not giving you a second chance to submit a proposal for them and you submit 800 proposals on a given year and you anticipate to get 29 000 of incremental revenue or that's the level of profit associated with each customer multiplying those three factors with one another gives you a sense of the incremental revenue opportunity that we have now again this doesn't mean that i'm going to be able to capture all 65 of it but now we have a sense that the 65 equates to roughly 15 million dollars of incremental revenue opportunities so every percent inching upwards that we have we have hundreds of thousands of dollars of opportunity to regain from a business perspective now it's time to question what do we need to do differently to recover some of that 65 lost opportunity now let's go to the other side of the scale which is cost and how do we use the 65 rework rate to associate a cost to the business in this situation we need four factors you need the percent rework we need the annual volume we need to know the labor cost associated with this particular part in the process which is proposal generation and we need to know the amount of time allocated to this particular task so again we're back to 65 rework rate roughly 800 is the annual volume of proposals it's costing us a hundred dollars an hour between the financial rep and their assistant to actually generate a proposal and it takes them four hours to do so multiplying all those factors ultimately gives us the final number which is roughly around two hundred thousand dollars now again you may not be able to capture all the revenue and all the cost back into the business but this just gives you an example this gives you an understanding of where the opportunities lie in terms of reduction of cause and increasing revenue and we will use the metric of percent rework for our next metric which is percent yield and i will explain that of course next week so hopefully we have a deeper appreciation of why percent rework is important because it is robbing us of labor and our resources and adding cost back into the business without us being able to actually reap the fruits of the work that we have put into the business so the more cognizant we are of what percent rework we have in every single business unit and every single milestone within the business the deeper sense we have of what do we have to do in order to increase our efficiency and profitability which ultimately has to do with revenue and cost i hope you enjoyed this week's video please don't forget to subscribe leave your comments below would love to know if your business is measuring percent rework and how mathematically you've gone about doing that and i look forward to seeing you again next week

Channel: Sheila Shaffie - ProcessArc

Views: 122

Keywords: critical thinking, processarc, sheila shaffie, problem solving, client experience, Business process mapping, Process mapping, Process boundaries, Segmentation, Process validation, Mapping methodologies, Lean, Six sigma, Agile, Design thinking, Financial services, Services sector, Change management, Lean six sigma training, Lean six sigma certification, AI, Robotics, Data, PowerBI, Data vizualization, Data mapping, %yield, Business transformation

Id: v-z-trviJFQ

Length: 11min 42sec (702 seconds)

Published: Sun Feb 07 2021