Improving Management System Internal Audits

The purpose of internal audits is to continually improve the management system.  When I refer to management system, I mean quality, environmental or your business management system.  In either case the internal audit should be a intricate part of the management system you are utilizing.  Most often the internal audit process or function is under utilized and viewed as a necessary evil in order to meet the requirements of a quality standard.

The time constraints on individuals makes it harder to free employees up to plan, execute, document and follow up an internal audit.  The effort to transition internal audits to improvement based, does not make that issue any easier.  In order to conduct a meaningful, effective audit that promotes and facilitates continual improvement, the auditor must spend an adequate time preparing.  The preparation of the audit dictates how effective it will be.

If we want to improve a process, what is the first step?  In all my years as a quality practitioner, I have heard and deeply believed that the first step to improvement is measuring.  If something is not measured, you should not expect to improve it.  The first step to improving the internal audit process is to measure it.  How do you measure it?  The internal audit process is a ratio that relates the relative importance of the findings or results of the audit.  To keep things easy to understand, let’s break the findings down into three categories and they are not major, minor and opportunity for improvement.  The three categories are effectiveness, improvement and compliance.

Describing these three factors with an equation we have the following:

                       V = (E + 2I)/C

Where V = the audit value, E= the number of findings associated with effectiveness, I= the number of findings associated with improvement and C= the number of compliance related findings.  The resulting equation will yield a value or index you can use as a reference measurement, the higher the index the more improvement focused the audit activity is, the lower the number reflects a focus on standard compliance.

I am not suggesting to disregard compliance to a standard, I am contending the focus of the audit should be improvement, effectiveness and compliance.  Too often compliance is the single biggest focus when conducting audits.  There is not much value in finding out that an employee did not complete a form correctly on a given day.  An isolated one time event is useless as a tool to improve a management system.  The point to remember is that whatever the auditors are focused on is what they will find.  If the focus is on compliance issues, that is what is found.  It’s similar to going bass fishing, you may catch a pike, but for the most part you will tend to catch more bass.

The effectiveness factor relates to those findings associated with improving the effectiveness of the management system.  Effectiveness is the gap between where your current performance lies and where you should be or the expected results.   A company has a expects to have 20 customer complaints per month, based on history.  During an audit, the evidence shows  the last few months have had customer complaints of 35, 48 and 55.  Further investigation uncovers the largest contributor to customer complaints is “poor technical support”.  Therefore, findings associated with improving the technical support will improve the effectiveness of the system as will those findings associated with the lack of effort in analyzing the root cause of customer complaints.   These types of findings are much more beneficial to improving the management system than one that documents one customer complaint out of hundreds, had no follow up activity.

The improvement factor is associated with findings that improve the overall management system.  That seems a bit simplistic but it relates to improving the expectation of the management system.  Using the same example above, lets say the customer complaints have been running at about 20 per month or right around the expectation.   Further analysis of the complaints uncovers the major cause to the complaints is “poor technical support”.  An improvement in technical support results in an improvement in the quality system.

A relatively new management system would experience a larger number of compliance issues as opposed to improvement or effectiveness findings.  If your management system is matured several years and you are still experiencing a large number of compliance findings,  you should evaluate the audit process.   Chances are, the auditors are finding compliance related findings because that is what they were trained to do and it is the easiest thing to find.  If you dig hard enough you can find an instance where a human made a mistake.

The audit value indicator is a measure that can be used to monitor the health and direction of the audit activity.  A continual creep in the audit value could indicate the auditors are focused more on improvement and effectiveness findings or it could mean they have neglected compliance related issues, which is not healthy either.  The audit index is a method to measure the internal audit function, because the first step to improvement is measurement.

  

Drive Decisions with Data

It sounds easy and well understood as best practice, but allowing the data to drive decisions is often times difficult.  Personal agendas, beliefs or past practices can infiltrate the conversation and provide alternative thinking.  Good sound data is the best decision making tool.  Whether related to a personnel decision, business process or outsourcing decision, accurate, valid data is the key.What is good data?  Many managers believe it is that which supports their gut feel and opinion, however, good data is objectively collected, effectively analyzed and acted upon.  Objectively collected data is that which is not contaminated by factors other than pure randomness.  If there are external, assignable causes present within the data you could be directed to false conclusions.  For example, let’s assume we have a transactional process where we are monitoring errors in the number of transactions completed.  We started tracking the data in January 2006 and the data is as follows:                                  

              Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov   Dec
Errors     20    18     21     22    25     25    31    28     35    38     38     37

In reviewing the above data one can easily see a moderate trend upward.  I realize this is basic and I am not questioning your statistical intelligence.  The intent of using data is not the utilization of a Monte Carlo study, design of experiment, multiple regression or response surface methodology.  I am referring to simple, basic statistical tools that can go a long way in driving correct, congruent decisions.  Referring back to the data above, anybody can tell you have an unfavorable upward trend that requires some immediate attention, right?  Not so fast my friend. Before you claim yourself winner of the “Jump to Conclusions” game, consider this, in May, torn documents were added to the list of errors, prior to that they were not counted.  Torn documents average 5 per month.  In September, a customer complaint added another error code to the transaction process.  Timeliness of the transaction was included as an error code in September.  Prior to that it was not counted as an error.  Timeliness or the transaction errors average about 10 per month. 

With the new error codes included the data looks like this:

             Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov   Dec
Errors    35     33    36     37    35     35    41    38     35    38     38     37

That looks a little different.  You may conclude that the increase in transactional errors was caused by the change in the error coding.  There was no change in the transactional errors, there was a change in the measurement method.  There is a difference.  This sounds basic, but often times measurement methods and data integrity are not understood and false indications are recognized.

Once we have ensured the data is objectively collected, now you must analyze it.  Take a look at the data below, which represents rpm’s of a motor:
                                                                     4600      3400
                                                                     3200      4400
                                                                     3400      3600
                                                                     4600      4400
                                                                     4400      4200
                                                                     3400      3400

Looking at the data, not much initially jumps out.  however lets put it into a simple histogram.

                                                                      RPM       Occurences 
                                                                     3200            1
                                                                     3400            4
                                                                     3600            2
                                                                     3800            0
                                                                     4000            0
                                                                     4200            2
                                                                     4400            4
                                                                     4600            1
                  
Hmm, that looks a little different.  Somewhat appears as if there could be two distributions occurring.  A bimodal distribution could be the result of many causes, either way it requires further investigation.  My point is not to insult your statistical intellegence, my objective is to reinforce the power that lies in simple statistical tools.  Basic data analysis can go a long way in discerning fact from fiction when it comes to what the data is telling you. 

There is a place for more advanced statistical tools and they are invaluable, however these basic tools have a distinct advantage when they can be applied.  For one, they are simple to use.  With some initial training, the basic statistical tools can be utilized with good effectiveness.  Number two and most important they are easy to understand.  Top management can understand and grasp average, run charts, histograms, pareato charts and the other basic statistical tools.  Try getting your point across when you’re blabbing on about a two way analysis of variance or an F-test.

When the job you need to complete, entails putting a nail in a 2×4, you don’t need a hydraulic, computerized numerical controlled force application device, a hammer will work fine.           

Transition from Quality Management System to Business Management System

Many organizations develop and maintain a quality management system.  The system was created out of an internal desire, customer requirements or simple need.  The quality management system is an excellent building block for a company to grow from.  The problem with quality managment systems is that they do not evolve and morph into anything different, they remain a quality management system.

The ISO 9000 series of quality management standards is an excellent choice when starting from the ground up implementing a quality management system.  The eight principles of ISO 9000 provide the foundation upon which a solid quality managment system can be developed, deployed and mantained.  When you achieve that where do you go?  Many are left with an empty feeling that ISO 9000 is a bit simplistic for their needs and they require more demanding criteria, such as TQM or Baldrige criteria. 

Both TQM and Baldrige criteria are good directions to choose for advancing management of your business model but your first step should be to move you quality management system to a business management system.   If you are managing a quality system separate from the rest of your business and you are looking at lean, six sigma, kaizan or any of a number of improvement strategies, STOP.  I am not suggesting these other improvement activities can’t help, they most certainly can, but before you embark on them I would suggest you create a business management system. 

A business management system applies all the requirements of your ISO 9000 quality management system to the rest of your business.  I know it is not a requirement of ISO 9001 but are you looking at improving or meeting the minimum requirements?  Incorporate the strategic planning process into your business management system.  The strategic planning process would include strategy development and deployment.  You should have a process for this and a metric that indicates how the process is performing.

The next section of your business to get incorporated within the business management system is the accounting processes.  There are multiple processes occuring within accounting that go uncontrolled, monitored or improved.  If you doubt this, at the next staff meeting try to determine the true costs of some of the products or services you provide.  Then try to assign costs to the transactional activities occurring within your business.  In order to understand the accounting processes you must measure them, be able to predict the output and continually improve them.

The next portion to be included within the business management system is sales and marketing.  You won’t find them mentioned in ISO 9000.  But chances are, you have those processes and activities occuring within your business model.  Again, there must be metrics combined with actions to continually improve the performance.  

Once you align the business activities and processes along with measurements for them you will be able to discern improvement plans.  It will be very clear what areas require activites for improvement and for corrective action. 

Implementing ISO 9000

You may be in a position where your customers are demanding you implement an ISO 9000 quality system or you would like to do it for the benefits it can provide your organization.  You don’t have the resources to hire a consultant to help you.  Can you achieve this task on your own, without the help of a consultant?  Yes.  You can do it with the resources you have.

Will a consultant provide you a better quality system than you can implement yourself?  No.  I say that not as a disrespect to consultants but because quality systems are ever evolving and developing.  It’s not where you start that is important it’s where you’re going and where you end up in a year or two down the road.  A consultant can expedite the process and save you a great deal of time.  What takes you a day to do and figure out, a consultant can do in an hour or two.  Based on this, why would anybody hire a consultant?  The same reason some people hire someone to mow their yard and do their landscaping, they don’t have the time or they want it done quickly.

You’re in a position to implement ISO 9000 but you can’t afford the cost of a consultant, what do you do?  The first thing is to gain information.  You need to become educated in the ISO 9000 standards and what they mean and their intent.  Whether you hire a consultant or are choosing to implement a quality system on your own you need to purchase the following list of standards:        

ISO 9000:2005      Fundamentals and vocabulary
ISO 9001:2000      Requirements
ISO 9004:2000      Guidelines for performance improvements
ISO 19011:2002    Guidelines for systems auditing
ISO 10014:2006    Guidelines for realizing financial benefits

You can obtain these standards from the International Organization of Standardization (ISO), American Society of Quality (ASQ) and the American National Standards Institute (ANSI).Here’s the most important piece of advice I can give you, once you have purchased these standards, READ THEM.  Find yourself a quiet place and read them.  Read them several times.  The reading is dull and the wording is somewhat confusing, it’s alright, read them.  These are international standards, not a John Grisham novel.  You’re not going to be riveted to the reading and hardly waiting to get back to it. You may find yourself more confused after reading them, that is fine, keep reading.

 After a several readings, it will begin to make sense to you.  You will gain a new understanding of what the standards are saying and begin to realize what needs to be done and how to do it.  Now you’re to the point where you understand the standard and what needs to be done.  If you ever question anything or are not quite sure, refer to the standard.  Go back and read it again.  The first thing you need to do is provide an overview for your top management.  If you can’t afford to buy some training, (it’s fairly inexpensive), then provide the training yourself.  Chances are, your top management knows significantly less about ISO 9000 than you do.  That makes you an expert and should you travel greater than 50 miles you’ll be referred to as a consultant.

Your training to top management should answer the following questions, what is ISO?, what is it going to do for us? why are we implementing it? how much is this going to cost us and how long will it take? how are we going to do it?  what role does top management have?  Here’s a starting point for your answers.

What is ISO?  ISO 9000 is an internationally recognized quality management systems standard.  It’s premise is based on knowing customer requirements and continually enhancing customer satisfaction.  This is achieved by developing key business processes, monitoring them with metrics against objectives to ensure effectiveness and putting forth effort to continually improve those processes. What is it going to do for us?  The adoption of an ISO 9000 quality system allows us to consistently provides products and services to our customers that meet there expectations and continually enhance their satisfaction.  Why are we implementing ISO 9000?  Chances are it’s one of two reasons, one is your customers are requesting it or two you are interested in achieving the results in can provide. 

How much will it cost and how long will it take?  If you complete it internally you can plan on it taking about a year (depending on your size and available resources) and it won’t cost you anything other than what you are currently paying people.  You should plan on spending about $1,100 – $1,300 dollars for one person to go to internal auditor training.  That person can then train the rest of your designated internal auditors.  The registration audit will be $5,000 - $6,000 and the surveillance audits run $3,000 per year.  Roughly, you’re looking at a one time cost of $9,000 and annual cost of $3,000.

How are we going to do it?  We will perform a gap analysis to determine our deficiencies and develop an implementation team from that.  We will track the progress of implementation.  What role does top management have in ISO 9000?  Top management has the biggest role.  That group is responsible for the planning, development, maintenance and improvement of the system.  Top management is expected to be actively involved in reviewing the designated process metric data and making decisions based on that data. After you train top management, you must assess where you are now.  There are most likely processes in place that are being done even without documentation.  Write down all of your key business processes, accounting, purchasing, human resources, customer service, etc.   After you get them written down, now you need to flowchart them out to document how they work.  A simple downward flowing flowchart in one column with responsibility in another column and the last column has records. Once you get them documented, now go through the standard and write down any process, clause or section of  the standard that your current process does not address.  These are the gaps in your system.  They are the areas the standard states needs to be addressed that you are not.  Once you have this, put it into a document where you can track the action against who is responsible and time line agreed to.  Similar to this:

           Action                               Responsible                   Date      
Develop internal audit process          Joe  F.                      11-14-06

Train internal auditors                      Tom C                       12-18-06

After you have transferred the actions needed into the above format, you have developed your implementation plan.  Ensure this plan is reviewed and monitored by top management frequently.  They must be kept in the loop.  At some point of the implementation you will want to train the entire workforce on ISO 9000.  Work out a schedule that is flexible.  It does not have to be extremely detailed, but gives them a good understanding of what it is, why you’re doing it, how it impacts them.  Good luck, you can do it.

Outsourcing to China – Avoiding the Hidden Costs

In boardrooms across the country, executives are frenzied about the opportunity provided with outsourcing products from high cost, high overhead manufacturing facilities in the United States to the low cost region of China.  In an effort to contain costs, many organizations are flocking to China to harvest the fields of low cost labor.  When you think that they pay $150.00 per month to an employee working six, 10 hour days you shake your head in disbelief and say “sign me up”.  The outsourcing strategy to China is a sound one and needs to be utilized by anyone who is involved within manufacturing.  The decision to outsource is one that should be analyzed thoroughly and to realize the true savings is to understand the true costs.

There is an unbelievable number of factories in China capable of producing all kinds off different products, with new plants going live everyday.  Past experience has proven that the contract manufacturers in China have a definite niche within manufacturing and there competitive advantage is insurmountable within their niche.  Their niche centers around the mass production of an easy part.  An easy part is the product manufacturing equivalent of a slam dunk in basketball.  An easy part has low complexity, a static design and tolerant to special cause variation.  Tolerance to special cause variation indicates a product produced that is not to design intent will perform as intended without, a significant reduction in reliability and is not noticed by the customer.

The characteristics of a complex part is the basketball equivalent of a three point shot.  The part is complex, has a dynamic design that continues to change and improve and worse yet offers little latitude for process variation.  The fluctuations in process variation and introduction of special cause variation translate into noticeable reductions in performance and reliability.  If your strategy is to outsource a difficult part to China, you can do it successfully, you need to modify you current quality system to ensure success.

As quality systems evolved in the United States, a transformation occurred from a vertically integrated inspection based operation to a systems based core competency operation.  Years ago, the quality initiative was a dedicated group of inspectors who policed a production focused environment where designs were completed in obscurity and tossed to manufacturing at the last minute to meet launch dates.  We have matured to the point where most of the problems are identified and corrected in the design phase by incorporating FMEA’s, Design for Manufacture and the input of all affected functional areas.  We incorporate metrics to monitor our processes and indicate when improvement or corrective action is needed.  Not all US manufacturer’s quality systems are at the same level, but on average the maturity and effectiveness of them has increased over the years.  Subsequently, when dealing with a domestic supplier you have a general understanding of what  you can expect.

A Chinese supplier has a quality system similar to those prevalent in the United States in the 1960’s.  They are extremely production motivated, heavily inspection based with little or no effort focused on process improvement, data driven decisions or process control.  These obstacles are not insurmountable with adaptation of a quality system to counteract these issues.

A system must be in place to monitor the process and product constantly, from design phase through launch and throughout production.  The design phase requires a group to work with the Chinese supplier to gain an understanding of their process capabilities and key features of the design.  At the launch or pilot build, you should have representatives there to monitor the product and process.  Evaluation of process capabilities, test results, data analysis and process improvements is the focus of this team.  Once production is approved, you must execute some level of surveillance that includes periodic visits to review the quality system, data reporting, test results, process change validation and component changes. 

In order to facilitate the successful launch of a difficult product with a Chinese contract manufacturer, you must allocate various resources to their facility to execute the quality activities that would normally be completed at your own facility.  Doing this minimizes your added costs of outsourcing to a Chinese manufacturer.

There will be numerous costs added when doing business with a Chinese supplier.  Cost number one is inventory.  You are not shipping this stuff from two states away, it is literally on a slow boat from China and there will be lots of it.  Cost number 2 is sort and rework.  Depending how well you execute the quality activity mentioned above determines how much cost you absorb here.  If you neglect communicating and interfacing with the Chinese during the design, pilot run and ongoing production and allow their quality system to drive the results, you should budget generously in your sort and rework account.

Cost number 3 is shipping.  Again, this is not coming from across town, are you accounting for that cost or is it buried in your abyss of overhead.  Cost number 4 is obsolescence.  With a dynamic design, the changes are inevitable, however the Chinese are not purchasing components on a small scale and when a change is made they cannot react quickly without obsoleting already purchased components.

Sourcing a difficult part to China can be achieved with the same quality system approach you would utilize at your facility.  You must go over there and see it through.  It will not happen on it’s own and they will not utilize the tools and techniques necessary to ensure a new product launch and ongoing design changes occur without issues.