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Weekly UpdatesINTRODUCTION
In order to ensure the cost-effective production of specialized products, many companies use calibrated tools. Failure to use the proper calibrated tool can result in scrap and rework. This inefficiency results in events such as audit costs, higher labor costs, and loss of customer trust that translates into lost sales. Further, customers often sue companies that produce defective parts that cause injuries. These events not only produce negative publicity for the companies but may result in costly lawsuit settlements.
Calibrated tools are essential to producing quality products and should be efficiently tracked for optimal labor productivity. However, this practice is not always demonstrated. In this study, the observed company's management attributes financial losses each year to lost or stolen calibrated tools. A stolen tool is considered a lost tool for this analysis. Defective parts from using noncalibrated tools can trigger facility audits by customers as specified in contractual arrangements. Consequently, failed audits may result in a contract fine if an operator is found to be using a noncalibrated tool.
In addition to the quality costs of an operator using a noncalibrated tool in production, there are also the costs of losing calibrated tools. First, there is the cost of the tool itself if the tool is never found. Second, there is the cost of the lost labor time spent searching for the tool. And finally, there is lost production time if the tool is needed immediately in production. We suggest that these latter costs could be alleviated by the use of radio frequency identification (RFID), which can provide real-time tracking of calibrated tools.
RFID can be used in an asset management system, such as those supported by enterprise resource planning (ERP) systems. Asset management systems should locate assets individually, allow for locating the correct assets at the correct time, and provide information about each individual asset and the physical status of the asset (RFID Wizards, Inc., 2003).
These uses are the foundation of RFID systems. A tag is placed on each asset that carries the information of the individual item. These tags contain an antenna, which allows information to be transmitted at the frequency identified by the reader. Readers are located throughout the production facility in coordination with their reading distance abilities. Software is used to capture the information transmitted to the reader. The reader sends the data to the inventory management system, which allows for parts to be tracked and located throughout the production facility (United States Department of Defense, 2004).
PROBLEM STATEMENT
The fundamental question for this study is "Will implementing an RFID-based system reduce some of the cost of poor quality incurred due to lost calibrated tools?" This analysis focuses on the labor costs, audit costs, and management time needed for implementing an RFID system. This article does not address lost quality due to other factors that management felt were not related problems that RFID could solve. These include training, wrong tool usage, and gauge precision. These are valid reasons for loss of quality but not explicitly related to the tracking of lost tools.
This article formulates a cost analysis of implementing an RFID system to track calibrated tools throughout a production facility. By comparing two different scenarios, the best plan of action is defined (Evans, Zhang, and Vogt 2004). The goal of a new system is to save the company money with increased traceability. The RFID system put in place must provide savings greater than the cost to implement and be innovative in nature so as to put the company ahead in the industry (Blanchard, 1992).
BACKGROUND
An armament and technical products manufacturing facility that has no current tracking system in place is analyzed. Increased costs due to audits, rework, and customer dissatisfaction have been identified by management as costs incurred by using the wrong tools or a noncalibrated tool. In order to place more control over the practice of wrong tool usage due to the loss of calibrated tools, the company evaluated an RFID tracking system. The facility has approximately 132,000 square feet and 200 total employees. Management personnel and production personnel costs are respectively about $40/h and $20/h including indirect costs. Approximately 2,000 calibrated tools are utilized in production.
A dedicated staff has the responsibility of calibrating and supplying the tools to the production workers. The communication between the production floor and calibration staff on the location of tools was identified as a problem; there was no effective tool tracking. Therefore, calibrated tools were difficult to find when needed and little feedback was available to production supervisors when production operators were unable to find a tool. This lack of feedback led to operators either looking for the tools or using the incorrect tool. The costs associated with using the incorrect tools including labor, scrap, rework, and failed audits are evaluated in this article.
COST JUSTIFICATION
This study presents two scenarios. The first scenario is the do-nothing option or the company remains status quo. This scenario describes the baseline costs for the study. Scenario two demonstrates the costs and benefits of implementing the RFID system over a 5-year period.
Scenario 1: Baseline
The first option the company has in regards to tracking its calibrated tools is to remain status quo, which we consider the baseline. This suggests that the costs the company is incurring will remain unchanged over the 5-year period considered in this article. In order to show the total cost, each cost is considered separately. These costs include audit costs, rework costs, scrap costs, management costs, and customer service costs.
AUDIT COSTS
External auditors periodically review processes and procedures at the company. These audits include governmental audits and environmental audits. This study focuses on the audits that review the products created from calibrated tools. For each of these auditors who visit the plant, there is a cost to the company. The initial audit is always obligatory; therefore, the cost of the first audit is not considered. However, problems identified during the initial audit can lead to an additional audit for production areas that do not pass inspection. These secondary audit costs create additional company efforts such as management and operator time for communications about failed audits, delayed contracts, and possibly layoffs due to lost contracts.
There may be one or two more secondary audits throughout the year that would not have been needed previously. In order to estimate the cost of an additional audit, conditional probability trees are utilized to assess the probability of the company needing a second, third or fourth audit. The probabilities utilized were established through management interviews. Due to company privacy issues, this study does not display the histograms or show the distributions of the number of occurrences of error. Instead, only the distribution probabilities are shown in Figure 1 as conditional probability trees.
The expected value of the audit cost E([X.sub.i]) is given as a function derived from the decision tree. The following equation will be in this study for the audit cost calculations.
E([X.sub.i]) = [A.sub.1][D.sub.1] + [A.sub.2][B.sub.1][D.sub.2] + [A.sub.2][B.sub.2][C.sub.1][D.sub.3] + [A.sub.2][B.sub.2][C.sub.2]D (1)
[FIGURE 1 OMITTED]
[X.sub.i] is the audit cost of contract i. For the audit cost calculation, an additional penalty is given if the third audit is not passed represented as D4 in Equation (1). The given cost is twice the cost of passing the third audit. This cost was included due to the additional cost of special efforts made by the company when an audit fails three times.
The costs include auditor labor and travel expenses. Each auditor is conservatively estimated to earn $25 per hour with 33% benefits or a total cost of approximately $33 per hour. Each audit takes approximately three days, and the auditors work 8 hours daily. Thus, the average number of hours worked per audit is 24 hours. Overall, the cost for an outside audit team with three members is $2,376 per audit.
In addition to the costs for the auditors, travel expenses were included. Travel expenses include air travel, lodging, and food. Given an audit team of three auditors, the total cost for airline tickets is $900 ($300 per airline ticket). Next, the audit team lodging and food cost were $100 per night for a hotel room and $35 a day for food over three days, such that the cost for three auditors would be $1,215. These costs are summarized in Table 1.
The total cost per extra audit is approximately $4,491. The expected value for an audit with the given probability of failure is estimated to be $5,389.
E([X.sub.1]) = (0.25)($0) + (0.75)(0.5)($4,491) + (0.75)(0.5)(0.9)($8,982) + (0.75)(0.5)(0.1)($17,964) = $5,389 (2)
The current company contracts that were audited the previous year were 27. The possible savings that can be achieved from audit reduction is the product of the expected audit cost and the number of audits. We use a conservative estimate of reducing the cost of 20 audits for a total cost savings for audit of $107,784.
REWORK COSTS
Another cost to consider is rework cost. Through this study, the company analyzed did not have data available to individually measure the different causes of rework specifically due to a missing calibrated tool. Management estimates that 90% of defects were reworked and the other 10% become scrap. The previous year's total defects were 3,800 including defects in the final product and in subassemblies. Given a fraction defective of 0.90 and estimating 10% of this fraction are defects related to the use of calibrated tool, we conservatively estimate that 342 defects were reworked. Rework included such things as retooling in order to fix the defect, complete reworking of a part, or fixing a broken piece. Management interviews support an average of 8 hours per defect reworked. A production worker makes approximately $15 per hour plus 33% benefits, which equates to a total hourly cost of $20. Therefore, with 342 defects per year reworked, 8 hours lost for each defect, at a cost of $20 per hour, the estimate average total rework cost per year is approximately $54,720. These costs are summarized in Table 2.
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