Cost of Non-Conformance (CONC)

What is the Cost of Non-Conformance (CONC)?

We’ve been talking in this blog about quality topics and how to utilize Epicor in ensuring that your organization meets your customer’s quality needs. Virtually every company uses Epicor in slightly different ways, but measuring the cost of non-conformance (CONC) is absolutely possible.

First, let’s review what the cost of non-conformance is or can be. Suppose an organization was to eliminate some form of waste. In that case, they could potentially eliminate the expense of that waste, and this savings would drop to the bottom line because profitability would be increased. For instance, let’s say we’re working on our packaging, and we figure out a way to spend the same amount of money on the packaging but eliminate returns because our packages don’t hold up to the rigors of the shipping process. By doing this, we avoid the cost of sending the product back to our facility, repackaging, shipping it again, and the possible cost of damage to our product. Just the damage to the product alone could be pretty costly, not to mention the administrative cost of handling the return, issuing an RMA, processing a replacement order, and using additional packaging on the return.
 

Using our above example, how could we track the cost of non-conformance to improve our profitability? The answer is MUDA.

What is the Meaning of Muda?

So, what is Muda? Quite simply, it’s an attitude.

“Continuous Improvement” is the underlying theme for all LEAN efforts, and an easy way to propel continuous improvement projects is to look at the 7 wastes of LEAN.  These give the practitioner of LEAN places to look for clues on where to find waste, but we’ll get to that in a minute.

First, we need to understand the meaning of Muda. The Japanese word ‘Muda’ (loosely translated as unnecessary waste) is spoken with distain, kind of a guttural muttering while shaking ones head from side to side.  It’s this powerful feeling about Muda that becomes an attitude: waste is useless, unnecessary.

Just like any attitude, there can be a downside of continuous improvement and Muda in that the more you do it, the harder it is to find items to improve, and even when you do find more items to improve, you may actually make other things worse. This barrier becomes more strained the further an organization has traveled along its LEAN journey because it’s difficult to not undo other efforts. 

When contemplating what Muda is, it’s important to also remember that not every LEAN idea will actually advance the goal of LEAN without creating other unintended waste.  This results in another unexpected attitude of “don’t rock the boat” where every new idea needs to be vetted against all other ideas that came before it, and many new ideas get shot down well before implementation. So, the meaning of Muda is essentially a balance between “necessary” and unnecessary waste without sacrificing productivity. However, this is easier said than done.

For example, a few years ago, we consulted with a company that won the prestigious Shingo Prize.  The Shingo Prize is awarded to the company that best exemplifies the concept of Lean, named after Shigeo Shingo, the father of Japanese continuous improvement.  This prize is awarded after a company self nominates, and is scrutinized by the Shingo committee, but if chosen, they are known as having won the “Nobel Prize” for business for fully exemplifying the meaning of Muda. 

Now, one would expect an organization like this to be extremely conscious of searching for new lean opportunities, especially since after the first few hundred ideas, it becomes gradually more difficult to find more lean projects. 

In our work with this organization, virtually every person had their own ideas of what the impact of a new change would have on the system, and the proliferation of new ideas actually suffered from internal political pressure to align with certain people and not with others.  The net result was that it was much more difficult to implement new ideas in an organization that spent many years evaluating and implementing new lean ideas.

So, when asking “what is Muda?”, it’s the attitude that has to be managed.  An organization must guard against internal politics, keep an open mind to new ideas, and most of all, identify the key performance indicators they can use to ultimately determine whether new initiatives actually improve the overall performance of the organization.  The more ideas there are, the more measurements may need to be developed.

Ultimately, most commercial organizations can measure improvement financially, as in profit or by certain ratios that identify in monetary terms, whether a new idea actually helps.  It’s very important to have an ERP system that allows these kinds of metrics to be developed, tracked, and posted on dashboards, mobile devices etc.  Proliferating this information keeps it in the forefront of everyone’s minds.

The 7 Forms of Waste Lean

Remember when I mentioned the 7 wastes of LEAN? Well, now that we know the meaning of Muda, let’s identify the waste involved. These 7 forms of waste are traditionally measured in seven ways:

  1. Waste of overproduction – How many “extra” units do we produce in anticipation of some number of damaged products from shipping? This is an easy enough measure, likely through the final job cost of the finished parts.
  2. Waste of “time on hand” or “waiting time” – In Epicor, every transaction has a timestamp associated with it. A simple calculation would identify this waste and then report it periodically to track its progress.
  3. Waste of transportation – When an Epicor reason code has been generated for an RMA, you could easily report on associated transportation costs for that transaction.
  4. Waste of processing – The raw overhead cost of processing this extra transaction. Once again, Epicor time stamps every transaction; so, measuring the elapsed time it takes to process the RMA, repair job, shipment, etc., could all be rolled up into this waste calculation.
  5. Waste of stock at hand – This would be the cost of the extra inventory required to produce the replacement and the carrying cost of having it on the shelf.
  6. Waste of movement – How many transactions happened to produce and track this? This includes raw material movement, job processing from operation to operation, and maintaining finished goods inventory. All of these are easily reportable, and if you have Epicor’s Advanced Material Management module, it’s even that much easier to calculate.
  7. Waste of making defective products – This is the core and most egregious waste: the cost of producing the waste product, to begin with.

Epicor Can Mitigate Cost of Non-Conformance

Now, you might be asking if Epicor has a standard dashboard or a way of calculating these measures. That’s a logical question, but in our experience, every organization has nuances with how they make these calculations; so, Epicor provides all the raw data, and the sophisticated query tools and fields to build the calculations the way you want them. The data can then be reported in real-time dashboards with conditional alerts sent out automatically, such as when a cost of non-conformance is encountered or exceeds a certain threshold.

 

Contact EpiCenter To Reduce Cost of Non-Conformance

So, as you can tell, Epicor is ideally suited for applying lean concepts, cost of non-conformance and tracking the seven Wastes. If you’d like further information on how this can be done for your organization, please feel free to contact us below, and our team of experts will reach out to you.

written by Jeffrey W. Glaze, President

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