Process of eliminating losses (PEL) in operations


The PEL comprises all costs incurred by not doing the right things right, the first time and every time. It is said that manufacturing operations commonly have a cost of poor quality at around 20-25% of the turnover and in the case of service Organizations the cost could be as high as 35-40%. We say that the prevention costs are good costs, and cannot be included under PEL, as these are investments that prevent occurrences of fault.

The next costs are appraisal costs. They constitute the cost incurred to segregate the good product and the bad product, e.g. costs related to inspection and segregation. Companies which claim to have internalized the Total Quality Management (TQM) culture as many companies in Japan have done, consider appraisal costs as not necessary, if the process is under control. Hence, these are additional costs that can be avoided, so they form a part of PEL. This may be very easily said, but in reality inspection is still very much a part of the system of management. The ISO series has a special clause on segregation, to ensure that the customers do not get a faulty product. So while we would like to reach the ideal situation, of doing away with inspection, the road to this end result is a very long way off for companies operating in our cultures.

When we are talking about documentation of PEL, and strategizing for the ELQC manual, which forms a basis for a large number of improvement activities ( through PEL), we are really going to focus on what are known as the field failure costs. The field failure costs are further segregated into internal field failure and external field failure costs. These contribute to almost 60-70% of the PEL for an organization. The internal field failures are defined as costs incurred as a result of errors in products and services, which are detected before the output reaches the customer. In other words, it is the costs that the company bears in rectifying an error, before the product or services are accepted by the customer. These costs are incurred because everyone did not do the job right the first time. It includes such areas as in process scrap and rework, retyping letters or resending a fax or e-mail, all kinds of trouble shooting and repairing, down grading of products due to non-conformance to original specifications, holding additional inventory and so on. Almost every manager/ officer / supervisor in the company will be able to identify areas, within their own work area, where redoing, or not doing the job correctly the first time resulted in PEL.

The external field failure represents those costs which are incurred because the external customer is supplied with an unacceptable product or service. It is the cost incurred by the company in the market place, because your system did not detect all errors before the product or service was delivered to the user. These include costs incurred in product liability suits, complaint handling, warranty administration, customer incurred costs, customer dissatisfaction costs, and the most important, loss of reputation for the company which may sometimes result in closure of operations. These are bad costs which no company can afford.

Managers and officers involved in commercial operations such as marketing, market research, finance, stores, purchase and anybody who is remotely connected with commercial operations, can generate PEL cases which have resulted in losses to the company. Many organizations are still very weak in this area and the exercise of going through a data based documentation of PEL, will help the companies keep in closer touch with the customer.

The question is that , while we are aware of these costs, how is it that companies going in for TQM implementation have not tried to document these costs on a companywide basis, to create a platform where implementation becomes meaningful. The process is not as simple as simply collecting PEL cases. It involves a change of mindset within the company, where you actively promote problem generation as a meaningful activity.

The PEL cases are compiled into the form of a manual and various cross functional teams connected with functions mentioned in the PEL work on finding out a solution to eliminate the causes of the loss. Then the PEL is treated as complete. A number of such PEL when solved over a period of time until no further PEL remains then the company is said to have implemented TQM.

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