Have you wondered why your improvement projects are not achieving the return on investment (ROI) you would like? Many organizations use the concept of entitlement to guide them when setting project goals. Entitlement may be preventing those organizations from achieving breakthrough results, in turn missing potential savings from improvement projects.
What is Entitlement?Simply put, the concept of entitlement is based on the idea that an organization is “entitled” to better process performance as described by the difference between the current level of performance and the best documented past level of performance. Thinking of this as depicted in Figure 1, the entitlement is the difference between the current average proportion defective (0.268) and the best historical performance (0.150).
This Entitlement calculation is then used to set the improvement project goal. The goal is typically set at 70% to 80% of the entitlement. In the example, the project goal might take the form of, “Reduce percent defective by 70% from 26.8% to 18.5% by the end of the first quarter.” There are two basic problems with this approach:
1. The approach presupposes that the best the process has ever performed is the best it ever can perform.
2. The approach assumes that the best historical performance was acceptable.
This begs the question: Would you be happy with a process that performs with 15% to 18.5% defective? Not many of us would, but that is where the entitlement trap can put us. So is there a better way? One that results in better ROI and superior process performance?
The Difference Between Control and BreakthroughIn his classic management text, “Managerial Breakthrough,” J.M. Juran describes the difference between control and breakthrough:
“Control means staying on course, adherence to standard, prevention of change.”1 [But] “Control can be a cruel hoax, a built-in procedure for avoiding progress”2
Clearly, by this definition, the project goal described in the example above is a control activity and will lead to static process performance at best, never getting better than it has been in the past. This might be a good thing if the past performance is at an acceptable level, but what if, as in the example above, it is not? This is where the idea of breakthrough comes in. Juran further states:
“Breakthrough means change, a dynamic, decisive movement to new, higher levels of performance.”3
The difference is made even clearer by reference to Figure 2, which depicts a process that is in a state of statistical control-a good thing to be sure.
Some questions arise. First, would anyone even recognize the process is in need of improvement? After all, it is stable and stability is what we are after, right? Even if it is recognized that the process performance is not good, what is the entitlement in such a process, the difference between the current average performance and the best historical performance? If that is so, then our project goal would be a reduction in defects of about 4.6%-70% of the 6.5% entitlement. Desirable to be sure, but will the resulting average performance of 12.6% defective meet our process performance goals? Additional information will be needed to answer that question.
Cost of Poor Quality (COPQ) and Its Relationship to BreakthroughCost of poor quality is defined as the cost “that would disappear if every task was continuously performed without deficiency every time. Actual cost - minimum cost = COPQ.”4 The concept is put in graphical form in Figure 3.
So, COPQ defines the cost difference between our current process performance and perfection. If our decision as managers is that the current COPQ is too much, then breakthrough improvement action is required. This is where using the concept of entitlement to set project goals falls short; it does not quantify opportunity for breakthrough improvement. In our earlier example, if we determine that 12.6% defective is not an acceptable level of performance, then the use of COPQ as a measure of the improvement opportunity available gives us the definition of breakthrough that may be achieved. The project goal is then set in terms of a reduction-say 50% to 70%-of COPQ.
To make a simple example, consider the following: The process is currently performing at 26.8% defective, as in Figure 1, and the value of each unit of product is $2.00. The organization sells 500,000 units per year-which means it must make a total of 634,000 units to have enough good ones to sell. The COPQ related to the scrap cost then becomes 134,000 x $2.00 or $268,000 annually. Note that this is only a portion of the total COPQ related to this high defect level because it does not include costs related to inspection and testing or external failure costs, for example. The total COPQ would be substantially higher.
If the organization charters a breakthrough improvement project and sets the project goal at reducing COPQ by 50%, then the project savings is $134,000 annually. Compare this to the first example, Figure 1, which calculated a defect reduction from 26.8% to 18.5% using 70% of the entitlement. The calculation is shown in Table 1.
As can be seen by comparing the two methods for setting goals, even using a rather modest target of 50% reduction in COPQ, the annual savings exceed those realized using the 70% entitlement method by $51,000.
This difference in improvement opportunity can be represented as in Figure 4.
Special Cause or Common Cause?Another clear difference between the entitlement and COPQ approaches to goal setting lies in the difference between special and common causes of variation. Special cause implies that some non-random change in process performance has occurred. This change can be sporadic, as in Figure 3, or continuing, as in Figure 1.
In either case, the root cause of the change in process performance usually can be determined by some basic analysis method. The cause of the change is referred to as “assignable” because it is comparatively easy to determine. Identification and elimination of this special cause variation is the basis for project objectives set using the entitlement approach. Shewhart’s Plan-Do-Check-Act (PDCA) is an example of a methodology useful for identifying and eliminating special causes. This activity is clearly quality control rather than improvement.
In contrast, creating breakthrough improvement generally implies that the current process is stable, meaning free from special causes, but operating at an unacceptable level of COPQ. Breakthrough process change deals with the common causes of variation that define the random, predictable variation of the process-the inherent nature of the process.
When that variation is too great, causing out of specification outputs or when the average performance of the process does not conform to customer or business targets, breakthrough improvement is required to change the very nature of the process performance. Using COPQ rather than entitlement to set project goals supports this type of improvement, which is typically more complex and requires the use of more powerful tools such as statistical analysis. Six Sigma DMAIC is an example of such a methodology. This activity is clearly quality improvement rather than control, though in actual practice it often includes elements of both.
How to Set Project Goals that Drive BreakthroughEntitlement based goals are primarily related to a control or incremental improvement activity. Substantial reduction in COPQ, on the other hand, defines a breakthrough improvement activity. The former seeks to restore the status quo-control-or make incremental changes to it. Breakthrough improvement implies changing the status quo, altering the very nature of the process as defined by common cause variation. Setting project goals based on reduction of COPQ allows organizations to realize the greatest ROI for their improvement projects.
References1. Juran, Joseph M., “Managerial Breakthrough,” Revised Edition, McGraw-Hill 1995, page 1.
2. Juran, page 3.
3. Juran, page 3
4. Juran Institute, Inc., “Lean and Six Sigma,” 2008, page 6.