The long awaited article on how private industry controls costs, while managing risk, is finally here! Before starting our in-depth discussion on control plans and PFMEAs, we will review a few more essential concepts. In last week’s article, we dissected the different kinds of inefficiencies that may exist; control plans and PFMEAs strictly deal with productive inefficiencies. Two weeks ago, I summarized why we have inefficient systems to begin with; long story short (from that article) inefficient systems exist because before you create the optimal system, you must start with an inefficient one. Alongside Pareto charts (which will be a future blog article), these are the main tools used by private industry to lower costs (while accounting for risk).
It can be assumed there are 2 inputs into delivering products/services and those inputs are capital and labour. Modern day companies compete to deliver products and services and in turn, focus on minimizing those inputs as this directly translates into lower costs. In manufacturing, the two primary tools that have helped contain costs are the control plan and the PFMEA. The breakdown is as follows on what will be covered in this article:
- How were control plans & PFMEAs first developed
- What are control plans
- What are PFMEAs
How were control plans & PFMEAs first developed?
Before talking CPs (control plans) & PFMEAs, it is necessary to discuss how free market prices come to be. The following affect the price that can be demanded by service providers:
- How essential the need is
- The complexity of the solution
- How old the solution is
- How removed the customer is from paying for the service
It’s important to undetstand prices before we talk about cost control. CPs and PFMEAs are focused on cost side of the business equation. As to how CPs and PFMEAs were first developed, the simple answer is free and open competition (aka the free market) while the long answer just describes the simple answer in more detail. A lesson from private industry is never make the same mistake twice, as in the business world, mistakes add unnecessary costs and make your company less competitive. Making the same mistake twice is also indicative of an inefficient organization – one that likely doesn’t utilize PFMEAs properly, as this is the live document, in which mistakes are ‘captured’.
To utilize CPs & PFMEAs, it starts with the need from the market, that your company satisfies. This need will determine the price you can charge for your service – needs that are more essential (e.g. need for a home) will demand higher prices than non-essential needs (e.g. solving bad breath). The price is also determined by how many people can perform your service with more difficult services earning higher wages, and simpler tasks earning lower wages. Mature services (e.g. road maintenance) will also have lower prices as mature services translate to more people being able to perform that service. How removed the customer is from paying for the service is also an important determinant in attaining the true free market price. As a case study let me present the socialized form of medicine we have in Canada. Canadians just go into the emergency or doctor’s office, get checked out and assume it’s free. But there’s no care or worry on behalf of the service recipient that a fair cost was assessed to the service one receives – that’s why when Canadians say that we receive free healthcare, I want to scream out there’s NO such thing as free anything. We pay for it but the costs are hidden and this goes against one of my key beliefs, which is the more eyes on a problem the better the end solution. When costs are hidden or not communicated this is a symptom of an inefficient system. For the record, I think Canada has a great single payer model, one that should be emulated by the USA, however there’s still a lack of feedback to ensure that fair costs are assessed to services delivered. If the USA were to emulate single payer, some form of cost feedback would need to be instituted. By lack of a cost feedback I mean, why can’t I go to a web portal and see the cost breakdown for medical services offered by each provider in a community. This type of transparency could also be used by doctors to guide themselves on what type of future training to undertake, as they’d be able to clearly see what services get paid the most. This is a massive inefficiency in the Canadian system and one that we, as a collective nation, ignore.
So CPs (control plans) and PFMEAs were the end result of competition in the free market. They were developed by companies who understood that limiting mistakes was key to minimizing costs; from a process standpoint, they were organically created documents that have the primary purpose of minimizing costs.
What are control plans
Control plans and PFMEAs are both live documents, I will communicate rough details of what that means in this section of the article. Live documents mean that the control plan (& PFMEAs) of today could change as new information is made available, however the PFMEA is the document that gets changed more frequently. Control plans are documents that lay out the step-by-step process steps and accompanying quality standards, training documents & any other documents (e.g. Gage R&Rs frequencies for required measurement tools) needed for each process step. You can imagine that for a manufacturing line, this would detail each process step a product has to go through before shipping the product to the customer. For a service, this would likely be all the different people whose labour a company would require to deliver that service. For products, quality standards are most often quality specs that need to be satisfied to move to the next process step. Here’s where you’d be right to ask, what quality documents make the cut, as to what quality documents should be included. The experts who wrote the control plan would define “critical parameters” that would be observed and analyzed quantitatively to ensure that manufacturing is robust. For services, it would likely be customer satisfaction targets derived from those who received the service (e.g. 99% customer satisfaction rating). I mentioned in a previous article how the “quality/$ spent” relationship is important when producing goods or delivering services; it is most often captured in the control plan by these quality standards. This is why automotive companies can pick up their operations and move at a whim (or an additional tax or levy that makes their product offering uncompetitive in the current market). New auto investment is being spent mainly in Mexico for this reason as in 2014, 90% of investment spending was done in Mexico ($7B vs $0.75B in Canada). So the next question would be if all quality standards are captured in the control plan, why haven’t all automotive companies just picked up and left for Mexico. This is partially due to fixed costs already sunk into the home country but more importantly, it takes time to understand all quality control documents that need to be referenced in the control plan. If all risks are not properly assessed, then you can have customer escapes that ruin a company’s quality reputation. For services, this would be easier to detail, since the service provider would receive feedback from the customer instantly (e.g. a package was late, or a massage was unsatisfactory). For product offerings, this can be more of an unknown, since failure modes are not always apparent – especially for mass manufactured products. Suspected failure modes are not referenced in the control plan as that is what the PFMEA is for. I have yet to discuss the PFMEA in detail so here goes.
What are PFMEAs?
The PFMEA stands for Process Failure Modes Effects & Analysis – it is also a live document, which is essentially a risk barometer for each process step detailed in the control plan. Even though I said that quality documents are most often referenced in the control plan, I have also seen them referenced in the PFMEA.
Risk is assessed for each process number through a RPN (risk priority number) score. This is a quantitative score based on the occurrence of a failure mode, the severity of a failure mode and the detection methods in place. Note that one process step can have many, some or even no failure modes present.
For each process step, if it has no failure modes attributed to it, it will have not be referenced in the PFMEA. If it has 1 potential failure mode, then that 1 score will be assessed. If the process step has many failure modes, each prospective failure mode will need to be assessed with an RPN score. The max RPN score is 1000 with each of severity, occurrence and detection, scored on scales of 1-10, then multiplied together (e.g. Severity (10) * Occurrence (10) * Detection Measures (10) = 1000, but in practice this high a score would never happen). If any process step has a score above 125, this should trigger corrective action by process engineers to bring this number below 125. So you might ask how is the RPN score for each process step determined? It’s determined by a team of experts; typically in manufacturing environments, this team includes a line worker, the process engineer, an individual from the supply chain team and someone from quality control. The process engineer is then tasked with targeting high risk process steps, and imparting corrective actions to bring the RPN score down. Through the use of experiments or increased inspection at certain process steps, value add activities can be implemented to make a process more robust.
From a policy perspective, lessons learned from the Flint water disaster could have been avoided with the proper use of control plans and PFMEAs. For those of you who don’t know, the governor appointed an EM (emergency city manager) to perform the mayor’s work as the city was near bankruptcy. The EM authorized a decision to change water supply and eliminate an expensive treatment chemical that led to lead poisoning of ten thousand kids. Again, due to financial mismanagement, a desperate city was forced to make short sighted business decisions that ended up poisoning many of its children. A city where the tax base fell from under it, and raising taxes on the rich did nothing; a city where the most vulnerable were put at risk because of money. To cut costs, the EM made an ill-advised decision. However had he had a control plan and PFMEA, he would have seen that cutting that treatment chemical out for the sake of cost savings had a high RPN score. Literally looking at 1 number (specifically a score of 10 under the severity column of that process step) would’ve helped the lives of 10 thousand kids, but now we sit, with those kids poisoned and the government still acting aimlessly.
In next week’s article, we will go over an example of a government service and try to apply the concepts of control plans and PFMEAs to it and observe how they would help manage costs.
Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA.