Overview

The goal of the business case is to ensure that the project delivers value greater than the corporate hurdle rate for capital investments. This paper provides a proven step-by-step process to developing a business case for a Quality Management System (QMS) within an enterprise.

 

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Most enterprise software projects require its champion to build a business case to justify the capital spend. In building a business case, the champion needs to capture all tangible benefits that the company would obtain from implementing the software and then place a defensible monetary value on these benefits in terms of annual savings to the organization. The goal of the business case is to ensure that the project delivers value greater than the corporate hurdle rate for capital investments. This paper provides a proven step-by-step process to developing a business case for a Quality Management System (QMS) within an enterprise.

A business case for a Quality Management System can be developed very rapidly by following the seven step process mentioned below:

  • Step 1: Identify Key levers
  • Step 2: Capture ‘as-is’ Scenario and Collect Baseline Metrics
  • Step 3: Identify Root Causes of ‘as-is’ Scenario
  • Step 4: Develop a ‘to-be’ Scenario
  • Step 5: Model ‘to-be’ Metrics
  • Step 6: Populate ROI model and Quantify the Benefits
  • Step 7: Communicate Value

Step 1: Identify Key Levers: 
The first step of the process is to identify the top 3 to 5 quantifiable business levers which will be impacted by implementing the QMS. The key criterion for selecting these levers is that they should be exhaustive but should not overlap (to prevent double counting of benefits) and the impact of QMS on these levers should be quantifiable. A set of sub-levers helps identify detailed quantifiable cost savings or revenue increase from the selected levers. The following chart identifies the key levers for a QMS for an industrial products manufacturer, but may be applicable to most other manufacturing environments.

Identify Key levers

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Step 2: Capture ‘as-is’ Scenario and Collect Baseline Metrics 
The next step is to identify the business processes that are related to the primary levers and sub-levers listed above, document the ‘as-is’ scenario of such processes, identify the key metrics associated with these processes and determine the current value of these metrics. The user should also determine the calculations that enable him/her to leverage the metrics to determine the current value of each sub-lever. Finally the user should use these calculations to create a model for each sub-lever. See Appendix A for the screen shots of the model for each of the sub-levers identified in the example in Step 1 of this paper.

For example, if a sub-lever is ‘recovering non-material related Cost of Poor Quality’, then the user needs to document the current process for cost-recovery and then determine:

  • What is the current dollar amount of cost recovery last year?
  • What % of this cost recovery was non-material related?
  • What % of Suppliers are currently covered under chargeback/recovery program?
  • Hours spent on following steps (non material costs due to poor supplier quality)
    • Operator/Foreman handling
    • Eventual disassembly of the part
    • Administration to take the part out of stock
    • Quality department handling
    • Handling by the planner to get a new part
    • Transportation back to the receiving area
    • Communications with the supplier - what shall be done with the part?
    • New instructions
    • Attention from engineers
    • Packing and arranging transport back to the supplier
  • Administrative man-hours spent on chargeback (non material costs)
    • Computing chargeback
    • Communicating chargeback with suppliers
    • Resolving disputes
    • Communicating final resolution to purchasing & Payables
  • Calculation: Sum (hours of non-material activities needed on the component that failed inspection due to poor supplier quality *standard costs for each activity)

Similarly, if the sub lever is ‘reducing scrap’, the user needs to capture the current process for scrapping inventory at each inspection point and then calculate the current value of scrap attributed to quality. Specifically, the user will need to identify

  • For each inspection point
    • Total Amount of Scrap in the last four quarters
    • % of the Scrap value attributed to Quality (using reason code captured in the scrap transaction)

Step 3: Identify Root Causes of ‘as-is’ Scenario 
This is a key step in identifying why the current process is not delivering the target value for the metrics identified above (that map to best practices or internal targets) and enables the user to pin-point the issues in the current process.

For example, a user might discover that it is hard to determine the supplier-related poor quality issues at two inspection points in the Cleveland plant because the inspection step at machining-plus and molding-2 operations don’t capture the right reason code for poor quality while scrapping material. Without right reason codes captured, it is hard to identify the non-material costs incurred at these two operations due to poor supplier quality. While the new QMS would not address this issue, the user has uncovered that streamlining this process will enable the organization to implement the non-material related cost recovery processes.

User might also discover that the cost recovery process is very manual and as a result there is a lot of leakage in cost recovery. Root cause analysis will determine that

  • There is no one place to manage all open cases and disputes. Chargeback information is scattered in multiple reports, on excel and email. Average chargeback resolution requires 4 reports, 12 emails and reviewing at least 5 spreadsheets
  • 5 cases representing $215K Million have been open for over 8 months - slipped through the cracks
  • It would be hard to scale to cover ¾ of the supply base without hiring 3 additional chargeback administrators. The company is committed to keeping headcount flat for the next 12 months, except in engineering and sales positions.

Step 4: Develop a To-be Scenario 
This step enables you to visualize the ‘to-be’ process flows with the new QMS solution. This step lays the foundation for how the new system will streamline the various processes that drive the primary levers and sub-levers identified in step 1 and how the new system will address the various issues identified in Step 3 ( root-cause analysis of the ‘as-is’ process).

For example, the diagram below enables the user to identify how the QMS system will streamline the information and process flow of the cost recovery process.

The Cost Recovery Process.

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Step 5: Model to-be Metrics 
This is the most critical part of the business case development process. The user determines how the ‘to-be’ scenario will improve the key baseline metrics identified in step 2 for each of the sub-levers and creates assumptions for the new value of the metrics. Since this is the most subjective part of the overall process, it is recommended that the user create two scenarios for identifying improvements to the metrics:

  • Conservative Scenario: User assumes that change management related inertia will slow the improvements identified in step 4 to each of the processes.
  • Most Likely scenario: Use assumes that with strong sponsorship of the management team, the user will be able to achieve the most likely process improvements, factoring in some change management related pushback.

The following example shows the assumptions for new metrics associated with non-material cost recovery sub-lever, with very clear reasons behind these assumptions.

Non-Material Cost Recovery Sub-Lever

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Step 6: Populate ROI Model and Quantify the Benefits 
Once the user has determined the value of metrics in the ‘to-be’ process, the next step is to:

  • Incorporate the assumptions for new metrics for conservative and likely scenarios for every sub-lever into the model
  • Use the new metrics to calculate the annual $$ benefits for both scenarios for each sub-lever as a result of migration to the QMS system. Include only tangible savings. Non-tangible savings such as productivity improvements should not go into the calculation for total savings for the sub-lever from the QMS system.
  • Add the savings from each sub-lever to compute the total $$ savings for the organization
  • Determine a schedule for phased realization of savings from implementing the QMS (e.g. 50% savings realized in year 1, 70% in year 2 and 100% in year 3, 4 and 5)
  • User hurdle rate to compute NPV.

The model for each of the sub-levers listed in step 1 in this paper is displayed in Appendix A and can serve as a guide in building scenario-specific model.

Step 7: Communicate Value 
Once the user has built the model with the new metrics and calculated the NPV, the final step is for the user to develop a management presentation that presents the business case for the QMS system. In this presentation, the user needs to highlight the savings and assumptions for each primary lever. The white paper shows two slides from the ‘cost-recovery’ primary lever.

‘Cost-Recovery’ Primary Lever

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‘Cost-Recovery’ Primary Lever

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We believe that with this seven step process, any user is well on their way to building a business case for a Quality Management System.

Appendix A - The Model

1. Savings from Material and Non-material Cost Recovery

Material and Non-Material Cost Recovery

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2. Savings from reduced Scrap/Inventory

Reduced Scrap/Inventory

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3. Savings from Reduced Line Shutdown and Improved Utilization of Bottleneck-Equipment

Reduced Line Shutdown and Improved Utilization

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4. Savings from reduced expediting, lower warranty and recall costs

Reduced Expediting, Lower Warranty and Recall Costs

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5. Total Savings and NPV Calculations

Savings and NPV Calculations

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