Quality, Business Investments and Continuous Improvement
Quality
Cost of quality and frameworks
Quality is conformance to requirements and fitness for use. Cost of quality has four categories: prevention, appraisal, internal failure (scrap, rework before shipment), and external failure (returns, warranty, recalls - usually the most expensive). As maturity rises, spending shifts left toward prevention.
Frameworks include PDCA, Six Sigma DMAIC, lean, QFD (translating the voice of the customer into design), poka-yoke (error-proofing), and root cause analysis (5 whys, fishbone). ISO 9001 certifies the quality management system, not the product.
Statistical tools
SPC separates common-cause (inherent) from special-cause (assignable) variation. Variable charts (X-bar and R) monitor measured data; attribute charts (p, np, c, u) monitor defectives and defects. Control limits come from the process (typically plus or minus 3 sigma) and are never the customer's specification limits.
Capability: Cp = (USL − LSL) ÷ 6 sigma measures spread only; Cpk = min(USL − mean, mean − LSL) ÷ 3 sigma also penalizes off-centering. Acceptance sampling (AQL, LTPD, OC curves) balances producer's and consumer's risk.
Traps
- Plotting specification limits on a control chart.
- Assuming a capable process is in control, or vice versa.
- Treating one out-of-spec point as the only instability signal - runs, trends, and points beyond limits also signal.
- Quoting Cp when the process is off-center.
Worked example
LSL 8, USL 12, mean 10.5, sigma 0.5. Cpk = min(12 − 10.5, 10.5 − 8) ÷ (3 × 0.5) = min(1.5, 2.5) ÷ 1.5 = 1.0. Rule of thumb: Cpk below 1.33 means improve the process before promising the specification.
Business Investments and Continuous Improvement
Evaluating projects
Capital decisions use discounted cash flow. NPV discounts all incremental cash flows at the hurdle rate (WACC plus a risk premium) and accepts when NPV is above zero. IRR is the discount rate that sets NPV to zero; accept if IRR exceeds the hurdle, but it can mislead with non-conventional cash flows or when comparing projects of different size or life. Payback is simple and ignores the time value of money and everything after payback; discounted payback fixes only the first flaw.
Use incremental cash flows only. Sunk costs are irrelevant; allocated overhead is irrelevant unless it actually changes; depreciation matters only through its tax shield; working capital released is a real cash inflow.
Continuous improvement
Improvement projects are investments. Lean tools include value stream mapping, 5S, SMED setup reduction, TPM, standard work, and kanban. OEE = availability × performance × quality, and the six big losses show where hidden capacity sits. Kaizen delivers incremental gains; BPR redesigns the process. Benchmarking sets the target. Always state benefits in cash against a baseline and include the cost of sustaining the gain.
Traps
- Ranking projects on payback alone.
- Using IRR to choose between a small short project and a large long one.
- Counting savings that never reach the P&L.
- Forgetting inventory reduction is a one-time cash inflow, not an annual saving.
Worked example
$100,000 investment returning $50,000 per year for three years at a 10% hurdle. Annuity factor 2.4869 → PV = $124,343, NPV = +$24,343, so accept; simple payback = 2.0 years. Rule of thumb: when NPV and IRR disagree on mutually exclusive projects, follow NPV.