This is a no-revenue generating web site.
The knowledge worker derives her or his value to the business entity by the revenue she or he generates. Thus, it is imperative for the knowledge worker to have a sense (better still, an understanding) on how to translate her or his activity or tasks into monetary values. But first, I would like to present my definition of Quality: Quality is the focus, structure, and discipline to deliver a utility. The associated costs with quality straddle both the structure and discipline elements of my definition. (Reliability becomes a subset of Quality by the following definition: Reliability is the focus, structure, and discipline to deliver a utility that performs its intended purpose for a predetermined period of time.)
The article linked to this page summarizes basic financial definitions the technical person need to be cognizant of – and, it was written by engineers, so the presentation is in a format technologists are accustomed to. This article was published in Quality Progress, the monthly publication of the American Society for Quality, the July 2009 issue. The title of the article is: “All Ears: Translate Quality into a Language that Resonates with Management”, and is authored by P.J. Sherman and J.G. Vono. The article is short, and ends with a case study highlighting how all the terms fit together.
When you read this article you will understand the meaning of:
 | Fixed Costs (same as Direct Costs) |
| Variable Costs |
| Operating Leverage |
| Degree of Operating Leverage (DOL) |
| Cost of Goods Sold (COGS) |
| Operating Income (same as Operating Profit) |
| Waterfall Charts – and what they represent |
| Pricing Flexibility |
| Return on Investment (ROI) as a measure of performance |
| Payback Period |
| Break-even Analysis |
And, finally in the case study, you will understand how these variables measure the financial efficiency of a project or an investment in the business.
Here is the link to the article “All Ears: Translate Quality into a Language that Resonates with Management” on the ASQ web site. The interested reader, in addition, can perform a search on the ASQ web site using the keywords "Cost of Quality". The article is free to all readers. Readers may be asked to register, but once that is completed, readers have online access to any Open Access content on the ASQ web site. ASQ offers at least one Open Access article from each issue of its journals. Another aspect of managing the cost of quality is managing warranties. A nice article appeared in the May 2010 issue of Quality Progress (the monthly publication of the ASQ) entitled: "Discussion Warranted: How a Company Manages Its Product Warranties Can Affect the Bottom Line"; the article is available free of charge to ASQ members, and for a small fee to non-members.
Another pedagogical presentation on cost of quality can be found in i-Six Sigma's web site. There is a wealth of articles on many issues of Quality and Six Sigma topics.
The underlying element of a successful business is understanding and managing Quality. Professor Donald E. Stout of the School of Business of Saint Martin's University in Lacey, Washington, has graciously posted his lecture notes on Quality and Management. On his web site you will find sources on management fundamentals, applied management, and, how these tie into quality.
The onus of reducing fixed costs (at least partly) falls on the shoulders of production managers through improving yield and cost of tool ownership, or Cost of Ownership (COO). COO is highly dependant on wafer throughput of the tool, and wafer throughput dictates cost to production. Production cost is a function of response time, repair time, time to run and inspect a test wafer, tool throughput, yield, and the value of the wafer at that point in the process. One need to be aware that COO increases exponentially with tool downtime.
COO = Total Cost Rate / (Utilization Capability x Throughput)
As the reader may have noticed knowing the correct method to calculate the tool reliability is important to model the different scenarios for the COO sensitivity models. The references: SEMI E35-0304 "Cost of Ownership for Semiconductor Manufacturing Equipment Metrics" and SEMI E35-0305 or SEMI E35-0307 "Guide to Calculate Cost of Ownership (COO) Metrics for Semiconductor Manufacturing Equipment" are contained in the SEMI International Standards, and also, SEMI E10 "Specification for Definition and Measurement of Equipment Reliability, Availability, and Maintainability (RAM)" can be used to model COO. To perform a serious evaluation of the cost of ownership it is highly recommended that these specification be consulted, and they can be obtained from the SEMI standards collection (www.semi.org).
A comprehensive business perspective is gained by reading T. Seidel's Chapter 10 entitled: "Manufacturing and Analytic Methods" of the "Handbook of Multilevel Metallization for Integrated Circuits", Eds. S.R. Wilson, C.J. Haber, and J.L. Freeman Jr. (1994). In addition, the interested reader will found COO modeling ideas at Wright Williams & Kelly's web site.
The manufacturing, process development, and field service engineers will need to appreciate the impact of an off-lined tools on both the fixed and variable costs. The priority given to a tool to be fixed will partly be function of both these costs.
Books I read and recommend are:
- Jack Campanella (Ed.), "Principles of Quality Costs: Principles, Implementation, and Use", 3rd Ed., ASQ Quality Press, 1999.
- K. Berman and J. Knight, “Financial Intelligence: A Manger’s Guide to Knowing What the Numbers Really Mean”, Harvard Business School Publishing, Boston, MA, 2006.
This book covers and explains all aspects of financial statements: the income statement, the balance sheet statement, and cash flow statement. The presentation grasps the reader’s attention.
The figure below is a flow chart for calculating the Return on Investment (ROI):
The following textbooks on Engineering Economy will be helpful when preparing cost-benefit analysis. For example, one day, I found I am in need of developing a plan for cost-benefit analysis, and developing scenarios for calculating the ROI for a metrology tool.
- D.G. Newnan, and B. Johnson, “Engineering Economic Analysis”, 5th Ed., Engineering Press, San Jose, CA 1995.
- E.L. Grant, W.G. Ireson, and R.S. Leavenworth, “Principles of Engineering Economy”, 6th Ed., John Wiley, 1976.
- H.G. Thuesen, W.J. Fabrycky, and G.J. Thuesen, “Engineering Economy”, 5th Ed., Prentice-Hall, Englewood Cliffs, NJ, 1977.
This site was last updated 07/11/10
© 2009 Stephen Hyatt
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