Looking to cut costs, an earthmoving equipment manufacturer in South Africa
purchased a screw for the axle assembly from a supplier with the lowest price.
No big deal, or so the firm thought. But shortly after the equipment went into
production, the screws began to fail in the field in a very unusual way. Instead
of breaking or shearing at the head, which is a more typical mode of failure,
they were splitting down the middle.
A failure analysis later revealed that the problem was two-fold: First, the
screws had been insufficiently heat treated after electroplating, causing
hydrogen embrittlement; and, second, there was a basic material flaw running
right through the centerline of the failed parts. "You couldn't see these
problems with the naked eye, but those screws were just like a time bomb waiting
to go off," is how Harry Lyons, a product manager with Danaher Tool Group
Europe, describes the situation.
Ultimately, and at enormous cost, the company had to recall parts from
Africa, the U.S, and Europe. They wound up replacing the faulty hardware with a
more costly but higher quality screw from the Scotland-based Danaher Corp. End
of quality problems.
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|
Achieving high quality and reducing cost do not have to be mutually
exclusive goals. Better quality components and parts may cost more money
in the short run, but can actually save companies money in the long
run. |
Net present value. As was the case here, most organizations
are not fully aware of the potential consequences of using poor quality parts
until it's way too late. If only design engineers had a way of knowing how much
cheap parts may wind up costing in the long run, they could help discourage
others in the company who actually purchase the components from being tempted by
them in the first place!
Actually they do. It's called net present value (NPV), which is a formula for
calculating a project's net worth or return on investment (ROI). Many design
engineers learn about NPV in an industrial engineering course and later apply it
on the job to justify projects to upper management. However, most of them
probably do not recognize that the formula is a useful way to examine the
financial impact that poor quality components can wreak on a design project.
NPV takes into account the time value of money--namely that a dollar today is
worth more than a dollar tomorrow--by discounting expected cash flows (both
expenses and revenues) from each year of a project (see baseline calculation
below). These cash flows are then summed to produce an NPV for the project.
The payback period can also be determined from the NPV calculation. It is the
amount of time it takes for the NPV to equal zero, which is the point at which
the cumulative forecasted cash flow equals the original investment. A project
that produces a positive NPV is generally considered to be an attractive
investment opportunity, as is one that has a quick payback.
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Net present value: -C0 + (sigma) CN/(1 + r)n = $151
million
Initial investment = C0 = $100 million
Sales revenue = CN =
$75 million
Discount rate = r = 15%
Life of project = 5
years
Payback period: Within 1.5
years |
While the formula is relatively simple to crank through any good financial
calculator can do it for you--coming up with the specific numbers to plug into
the formula is another issue entirely. Cash flows--which are the dollars going
out and coming in for a project--are usually based on "best-guess" estimates
from engineering and sales. Most companies assume a discount rate of between 10
and 20%.
However, in nearly all cases these numbers are predicated on a best-case
scenario. In other words, the people responsible for pulling them together
assume that things will work out according to plan. Even when buying cheap,
substandard components, hardly anyone--as evidenced by the people working for
the South African equipment manufacturer--expects anything to actually go wrong.
But when it comes to poor quality, things can and do go wrong, all the time.
As the charts on the preceding page illustrate, substandard parts or components
can impact the NPV of a design project in a variety of ways. Time-to-market may
be delayed as the design team scrambles to correct unanticipated quality
problems. An extra infusion of cash in the project will probably be necessary in
order to pay for extra engineering resources or overtime. Should quality
problems arise only after the product hits the market, sales could plummet far
below initial revenue projections. And that's not even including repair,
replacement, and warranty costs. Any one of these problems can totally change
the economic picture of a project--for the worse.
A tough sell? Nonetheless, quality remains difficult to
pitch. "If companies would stop focusing on the initial purchase price and look
at total system costs, quality parts and components would not be such a tough
sell. But it's often a challenge to convince someone to spend more money on a
higher-quality part, especially when the physical differences aren't obvious,"
says Danaher's Harry Lyons. Although his company's line of Holo-Krome fasteners
has a unit cost that is 40% more than that of the competition, he likes to tell
engineers that they are not in fact the world's most expensive fasteners.
"The most costly part is not always the one with the biggest price tag. It's
the one that fails because of an incorrect grade of material, the wrong
hardness, a poor fillet radius, or other quality issues," says Lyons.
Price aside, the fact that nearly every supplier today is touting that they
have the best quality product puts engineers at a disadvantage. And though they
might not be the ones making the actual purchasing decision, they need to make
sure that others in the organization who are don't buy poor quality.
"The engineer's task, dilemma, and challenge is to be able to differentiate
between suppliers," says George Jaffe, executive vice president of Schneeberger
Inc., a manufacturer of linear bearings. Schneeberger is committed to quality
and engineering education, as evidenced by its sponsorship of the annual
Design News Quality Award. Each year, the award recognizes one company
that best exemplifies quality in its approach to product design and development.
Past winners include Xerox for its revolutionary new digital copier technology,
and Cincinnati Milacron for its line of innovative centerless grinding machines.
"The process should be expanded beyond traditional product features,
functions, and benefits to include company reputation, tech support, warranty,
price, protection, and so on," says Jaffe. "Engineers should also ask how the
product has been tested, whether test data is available, and user references."
Last but not least, engineers should always remember that when a deal seems
too good to be true, it probably is.
Quality affects Net Present Value
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Sales may be lower than expected
The steepness of this line indicates the relatively significant impact
that sales estimates make on a project’s ROI. Quality problems can affect
sales drastically, putting a big dent in the NPV. |
An extra infusion of cash may be
needed to fix quality
problems
Delays and quality problems almost always cost money, and these are
typically dollars that are not factored into the original NPV equation.
These unplanned expenses put projects deeper in the hole. |
|
Time-to-market may be delayed
Project delays—whether related to quality problems or not—are
expensive because they push expected sales revenues further into the
future. In addition to reducing the project’s NPV, even a small delay can
add a significant amount of time to the payback period. |
|
Although they may save some money upfront, low-quality components and
parts can wind up costing a lot more money in the long run. Delays, cost
over-runs, and lower-than-expected sales due to quality problems can
totally change the economic picture of a project, while the slight added
cost of a better component typically has only a minor impact on the
overall NPV. |
Tips for checking quality
What steps can you take to ensure the quality of parts and components that
go into your design? Here is advice from four vendors of different products.
Steven Verrett, product engineer, Omron, manufacturer of switches,
relays, and other products.
Check process-quality control data.
John O'Brien, director of global sales, Penn Engineering &
Manufacturing Company, fastener manufacturer.
Analyze design integrity. For example, check if thread strength of
fasteners matches the thread strength of the mating part, and whether the
amount of raw material used is the optimum for performance, weight, and
strength.
James R. Kimzey, executive vice president Research and Engineering,
Baldor Electric Co., motor and drive manufacturer.
Design for simplicity of manufacture, which lessens the chances of mistakes
being made on the factory floor and lowers the time and cost needed to produce
the most value for the customer.
Kurt Boegli, chief standards engineer, Phoenix Contact, manufacturer
of electrical/electronic connecting systems and controllers.
Choose the supplier that is best qualified to answer all technical,
quality, and product approval questions.
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