Do you know what risks your organization faces, but have trouble gaining top leadership attention?
Consider this: all managers have an unwritten duty to reduce risk for their organization. It falls under “other duties as assigned” in job descriptions. You may have determined what these risks are and started to work on them, or you may be trying to ignore them as risks.
There are many tools to help with risk identification and mitigation, a primary tool being Failure Modes and Effects Analysis (FMEA). The major issue, however, is not tool-related; the major issue is not paying attention to the right risks. After all, we humans often reduce risk by denying that it exists. Do you know a doctor who smokes? How about a driver who won’t wear a seat belt? And doesn’t everyone think of themselves as a better than average driver? Top leaders are human, too.
The language of top leadership and strategy is money. If you are not talking ‘money,’ you are speaking a foreign language to them. Fortunately, there is a discipline known as cost of quality. But how to you convert risk into cost? Let’s look at an example.
Say you identified supplier reliability as a major risk, but you have been using a particular supplier for years and top management is not inclined to devote attention to improving what they perceive as a stable situation. Let’s further say you have done an FMEA on this area of risk, and this supplier’s lack of reliability has shown one truly significant problem area: not shipping on time to you.
Your FMEA identified scores for severity and frequency for this risk area: a severity of 5, defined as “low: product may have to be reworked with no scrap, 100% of product will have to be reprocessed”. (Leadership is not excited yet.) Your occurrence figure is higher, a 7: defined as ‘10 per thousand pieces.’ (Leadership is still not excited.)
Now, for cost. You may use an ‘expected value’ calculation, starting with identifying consequences to the issue should it occur. We know reprocessing is one consequence, happening 100% of the time a shipment gets delayed. Upon investigation, you find that delaying your production process so that your customer may fine you is a second consequence, but it happens only 75% of the time. (The FMEA team felt this was not likely and left the severity at 5.)
You will need cost estimates for reprocessing and for the customer fines. Set the calculation up like this:
| Trigger | FMEA Occurrence | Annual shipments | Consequences | 2nd frequency | Cost Estimates | Expected annual value |
| Late shipment | 1% | 45 | Rework | 100% | $8000 | $6000 |
| Late shipment | 1% | 45 | Customer fines | 75% | $15000 | $8437 |
| $14437 | ||||||
If finding a new supplier as a backup would cost $5000, then this is a four-month return on investment. (Use the expected annual value above divided by the investment to fix it, in months.)
This technique may be used as part of an FMEA, by adding columns to the analysis. Such an approach takes some of the subjectivity out of the FMEA RPN score, which is only good for priority.
Biography:
Mr. Wood has worked over 40 years in the areas of cost of quality, office waste, root cause analysis, performance measurement. He has helped others with various ASQ certifications in quality auditing, management and engineering. He has also taught auditing, Lean, Six Sigma, cost of quality, statistics, and failure modes and effects analysis. He has 4 ASQ certifications: CQE, CQA, SSBB, and CMQ/OE.
Mr. Wood has been an examiner with the Kansas and the Missouri quality awards, and authored “The Executive Guide to Understanding and Implementing Quality Cost Programs”, (ASQ Press 2007); edited “Principles of Quality Cost: Financial Measures for Strategic Implementation of Quality Management” 4th ed. (ASQ Press 2013). He also contributed to the Certified Manager of Quality/ Organizational Excellence Handbook 4th Edition (ASQ Press, 2014).
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CONTACT INFORMATION:
Douglas C. Wood
President, DC Wood Consulting, LLC
ASQ CQE, SSBB, CMQ/OE, CQA
5507 Mission Road, Fairway, KS 66205
Email: doug@dcwoodconsulting.com
Phone: (913) 669-4173
Linked in: www.linkedin.com/in/douglascwood/