Compliance audit

UNDERSTANDING AUDIT,UNDERSTANDING AUDIT,
REVIEW AND CONTINOUSREVIEW AND CONTINOUS
IMPROVEMENTIMPROVEMENT

WORDS ON MARBLESWORDS ON MARBLES
““It is not the strongest ofIt is not the strongest of
the species that survive,the species that survive,
nor the most intelligent,nor the most intelligent,
but the one mostbut the one most
responsive to change”responsive to change”
Charles DarwinCharles Darwin

WHAT DOES “AUDIT”
MEAN?
Independent review and examinationIndependent review and examination
of records and activities to assess theof records and activities to assess the
adequacy of internal controls, toadequacy of internal controls, to
ensure compliance with establishedensure compliance with established
policies and operational procedures,policies and operational procedures,
and to recommend necessaryand to recommend necessary
changes in controls, policies, orchanges in controls, policies, or
procedures.procedures.

CONT…..
 Examination of financial operations andExamination of financial operations and
workwork
 Review of compliance with applicable lawsReview of compliance with applicable laws
and regulationsand regulations
 Evaluation of economy and efficiency ofEvaluation of economy and efficiency of
operationsoperations
 Evaluation of effectiveness in achievingEvaluation of effectiveness in achieving
program resultsprogram results

PURPOSE OF “AUDIT”
 In the assistance context, itIn the assistance context, it
meansmeans
• A look at the past performance ofA look at the past performance of
an entity, program or function toan entity, program or function to
determine whether funds anddetermine whether funds and
property were properlyproperty were properly
administered and whether theadministered and whether the
projects have met or fallen shortprojects have met or fallen short
of program intent andof program intent and
expectations.expectations.

PREPARING TO BE AUDITED
 This Is NOT a ConfrontationThis Is NOT a Confrontation
 Make Your Self AvailableMake Your Self Available
 Know What The Scope/Objectives AreKnow What The Scope/Objectives Are
 Know What Type of Data Will be CollectedKnow What Type of Data Will be Collected
 Know What Data Shouldn’t be CollectedKnow What Data Shouldn’t be Collected

OBJECTIVES OF AUDIT
Audit
Safeguarding
of Assets
Improved Data
Integrity
Improved
System
Effectiveness
Improved
System
Efficiency

AUDIT PLANNING PROCESS
 Develops annual planDevelops annual plan
 Plan based on:Plan based on:
• Legal requirementsLegal requirements
• knowledge and experienceknowledge and experience
• Requests (Bureaus andRequests (Bureaus and
Congress)Congress)
• Government wide interestGovernment wide interest
 Unanticipated auditsUnanticipated audits

EFFECTIVE AUDIT
 EarlyEarly
involvementinvolvement
 Informal auditsInformal audits
 KnowledgeKnowledge
sharingsharing
 Self-Self-
assessmentsassessments

ELEMENTS OF AUDIT
 Physical and EnvironmentalPhysical and Environmental
 System AdministrationSystem Administration
 Application SoftwareApplication Software
 Application DevelopmentApplication Development
 Network SecurityNetwork Security
 Business ContinuityBusiness Continuity
 Data IntegrityData Integrity

INTERNAL VS EXTERNAL
 Audit function canAudit function can
be performed by;be performed by;
 INTERNALLYINTERNALLY
 EXTERNALLYEXTERNALLY


THE INTERNAL
 Internal audit isInternal audit is anan
independent appraisalindependent appraisal
of operations,of operations,
conducted under theconducted under the
direction ofdirection of
management, tomanagement, to
assess theassess the
effectiveness ofeffectiveness of
internal administrativeinternal administrative
and accountingand accounting
controls and helpcontrols and help
ensure conformanceensure conformance
with managerialwith managerial
policiespolicies

INTERNAL CONTROL
 Internal control is broadly defined as aInternal control is broadly defined as a
process, effected by management andprocess, effected by management and
other personnel,other personnel, designed to providedesigned to provide
reasonable assurance that the objectivesreasonable assurance that the objectives
of the areaof the area are being achieved in theare being achieved in the
following categories:following categories:
• Effectiveness and efficiencyEffectiveness and efficiency of operationsof operations
including the use of the entity’s resources.including the use of the entity’s resources.
• Reliability of financial reportingReliability of financial reporting, including, including
reports on budget execution, financialreports on budget execution, financial
statements, and other reports for internal andstatements, and other reports for internal and
external use.external use.
• ComplianceCompliance with applicable laws andwith applicable laws and
regulations.regulations.
• ControlControl (safeguarding) of assets.(safeguarding) of assets.

BENEFFITS OF INTERNAL CONTROLS
 The plan of organization, methodsThe plan of organization, methods
and procedures adopted byand procedures adopted by
management to ensure that resourcemanagement to ensure that resource
use is consistent with laws, regulations,use is consistent with laws, regulations,
and policies;and policies;
 That resources are safeguarded againstThat resources are safeguarded against
waste, loss and misuse;waste, loss and misuse;
 And that reliable data is obtained,And that reliable data is obtained,
maintained, and fairly disclosed inmaintained, and fairly disclosed in
reports. (General Accounting Office)reports. (General Accounting Office)

ELEMENTS OF INTERNAL CONTROL
 AccountingAccounting
• Cash LedgersCash Ledgers
• Support DocumentsSupport Documents
• Audit trailAudit trail
 Business recordsBusiness records
• BankingBanking
• EmploymentEmployment
• Time SheetsTime Sheets
• ContractsContracts
 Policies andPolicies and
proceduresprocedures
• PositionPosition
DescriptionsDescriptions
• Roles andRoles and
ResponsibilitiesResponsibilities
• Personnel manualPersonnel manual
• Travel ProceduresTravel Procedures
• Training PolicyTraining Policy
• Procurement PolicyProcurement Policy

INTERNAL AUDIT REPORTING STRUCTURE
Non-IT Audit Team
Members
CEO
Board Audit Committee
Head of Audit Dept
Head of Non-IT AuditHead of IT Audit
IT Audit Team Members

DESIGN OF INTERNAL CONTROLS
 A prerequisite to designing good internal controlsA prerequisite to designing good internal controls
used by an organization is to haveused by an organization is to have clear, precise,clear, precise,
and quantifiable objectives in place.and quantifiable objectives in place.
 An excellent place to start when identifyingAn excellent place to start when identifying
objectives is theobjectives is the Strategic Plan and MissionStrategic Plan and Mission
Statement of your areaStatement of your area..
 Objectives are needed in order to determine whatObjectives are needed in order to determine what
are the necessary controls to put in place andare the necessary controls to put in place and
when the controls have been successful.when the controls have been successful.
 When objectives have been established, theWhen objectives have been established, the risksrisks
associated with accomplishing each objectiveassociated with accomplishing each objective cancan
be determined.be determined.
 Only when risks associated with the activitiesOnly when risks associated with the activities
involved in completing objectives are identified caninvolved in completing objectives are identified can
thethe required controls be determined to ensurerequired controls be determined to ensure
successful completion of the objectives.successful completion of the objectives.

AUDIT MONITORING
 The effectiveness of any internalThe effectiveness of any internal
control system must becontrol system must be
monitored to be successful.monitored to be successful.
 Departmental reviews, qualityDepartmental reviews, quality
control auditing, internalcontrol auditing, internal
auditing and external auditingauditing and external auditing
are the primary means ofare the primary means of
monitoring an internal controlmonitoring an internal control
system.system.

THE EXTERNAL
 External AuditExternal Audit
isis an auditan audit
conducted byconducted by
an individual ofan individual of
a firm that isa firm that is
independent ofindependent of
the companythe company
being auditedbeing audited

RISK ASSESSMENT
 Internal control should provide for anInternal control should provide for an
assessment of the risks the area faces fromassessment of the risks the area faces from
both external and internal sources.both external and internal sources.
 A precondition to risk assessment isA precondition to risk assessment is
establishment of clear, consistent areaestablishment of clear, consistent area
objectives.objectives.
 Risk assessment is the identification andRisk assessment is the identification and
analysis of relevant risks associated withanalysis of relevant risks associated with
achieving the objectives, and forming aachieving the objectives, and forming a
basis for determining how risks should bebasis for determining how risks should be
managed.managed.

AUDIT PROCESS
 ObjectivesObjectives
• What are we doing and why?What are we doing and why?
 ScopeScope
• Program, time periodProgram, time period
 MethodologyMethodology
• HowHow
 FindingsFindings
• ResultsResults
UNDERSTANDING CONTROLSUNDERSTANDING CONTROLS
 A top-down approach -used when considering controls.A top-down approach -used when considering controls.

GENERAL AUDIT CONTROLS
AUDIT CONTROLSAUDIT CONTROLSAUDIT CONTROLSAUDIT CONTROLS
GeneralGeneral
ControlsControls
GeneralGeneral
ControlsControls
IT Concerns and
Issues
Disaster Recovery
• Business Resumption Plans
• BRP Testing
• Alternate Processing
Physical Security
• Physical Access
• Fire Protection
• UPS
Backup/Contingency Planning
• Data Backups
• Restore Procedures
• Offsite Storage
Change Management
Program Change Controls
• Tracking
• Change Approvals

AUDIT ROLE
 Advising the Audit Committee andAdvising the Audit Committee and
senior management on internalsenior management on internal
control issuescontrol issues
 Performing Risk AssessmentsPerforming Risk Assessments
 Performing:Performing:
• Institutional Risk Area AuditsInstitutional Risk Area Audits
• General Controls AuditsGeneral Controls Audits
• Application Controls AuditsApplication Controls Audits
• Technical Controls AuditsTechnical Controls Audits
• Internal Controls advisors duringInternal Controls advisors during
systems development and analysissystems development and analysis
activities.activities.

ROLES OF AUDIT TEAM
Entity-Level
Controls
Physical Facility
Network Intra
Operating System
Middleware
Database
Application
Auditor
Information
Systems
Auditor
Support for Financial
Auditors
Financial
Auditor

AUDIT GOVERNANCE
 ……the process for controlling anthe process for controlling an
organization’s resources, includingorganization’s resources, including
information and communicationinformation and communication
systems, and technology.systems, and technology.
 ……using to promote an organization’susing to promote an organization’s
objectives and enable businessobjectives and enable business
processes and to manage andprocesses and to manage and
control related riskscontrol related risks..

UNDERSTANDING CONTROLS
 controlcontrol is a processis a process
that providesthat provides
assurance forassurance for
information andinformation and
information services,information services,
and help to mitigateand help to mitigate
risks associated withrisks associated with
use of …...use of …...

IMPORTANCE OF CONTROLS
 ImplementingImplementing
effective controls willeffective controls will
improve efficiency,improve efficiency,
reliability, andreliability, and
flexibility.flexibility.

BASED ON RISK
 Analyzing RiskAnalyzing Risk
• Identify andIdentify and
prioritize risksprioritize risks
• Consider risk inConsider risk in
determining thedetermining the
adequacy ofadequacy of
controlscontrols
• Define riskDefine risk
mitigationmitigation
strategy –strategy –
accept/mitigate/accept/mitigate/
shareshare

MONITORING
 MonitoringMonitoring
ControlsControls
• OngoingOngoing
monitoring/specialmonitoring/special
review/automatedreview/automated
continuouscontinuous
auditingauditing

STEPS OF AN AUDIT
 Planning PhasePlanning Phase
 Testing PhaseTesting Phase
 ReportingReporting
PhasePhase

PLANNING PHASE
 Entry MeetingEntry Meeting
 Define ScopeDefine Scope
 Learn ControlsLearn Controls
 HistoricalHistorical
IncidentsIncidents
 Past AuditsPast Audits
 Site SurveySite Survey
 Review CurrentReview Current
PoliciesPolicies
 QuestionnairesQuestionnaires
 DefineDefine
ObjectivesObjectives
 Develop AuditDevelop Audit
Plan / ChecklistPlan / Checklist

TESTING PHASE
 Meet With SiteMeet With Site
ManagersManagers
• What data will beWhat data will be
collectedcollected
• How/when will itHow/when will it
be collectedbe collected
• Site employeeSite employee
involvementinvolvement
• Answer questionsAnswer questions
 Data CollectionData Collection
• Based onBased on
scope/objectivesscope/objectives
 Types of DataTypes of Data
• Physical securityPhysical security
• Interview staffInterview staff
• VulnerabilityVulnerability
• Access ControlAccess Control

REPORTING PHASE
 Exit Meeting - ShortExit Meeting - Short
ReportReport
• Immediate problemsImmediate problems
• Questions & answerQuestions & answer
for site managersfor site managers
• Preliminary findingsPreliminary findings
• NOT able to give inNOT able to give in
depth informationdepth information
 Long Report AfterLong Report After
Going Through DataGoing Through Data
• Intro definingIntro defining
objectives/scopeobjectives/scope
• How data wasHow data was
collectedcollected
• Summary ofSummary of
problemsproblems
 Table formatTable format
 Historical data (ifHistorical data (if
available)available)
 RatingsRatings
 FixesFixes
 Page # where inPage # where in
depth description isdepth description is

PHASES OF THE INFORMATION AUDIT
 Systems AuditSystems Audit
 Structure of the FinancialStructure of the Financial
Statement AuditStatement Audit
 Auditing Around the ComputerAuditing Around the Computer
 Auditing With The ComputerAuditing With The Computer

SYSTEMS AUDIT
 Initial review andInitial review and
evaluation of theevaluation of the
area to be audited,area to be audited,
and the audit planand the audit plan
preparationpreparation
 Detailed review andDetailed review and
evaluation ofevaluation of
controlscontrols
 Compliance testingCompliance testing
 Analysis andAnalysis and
reporting of resultsreporting of results

STRUCTURE OF THE FINANCIAL
STATEMENT AUDIT
TransactionsTransactions
Accounting
System
Accounting
System
Financial
Reports
Financial
Reports
Interim Audit
Compliance Testing
Financial Statement
Audit Substantive
Testing

AUDITING AROUND THE SYSTEM
• The auditor ignores computerThe auditor ignores computer
processing. Instead, the auditorprocessing. Instead, the auditor
selects source documents that haveselects source documents that have
been input into the system andbeen input into the system and
summarizes them manually to see ifsummarizes them manually to see if
they match the output of computerthey match the output of computer
processingprocessing..
Processing

AUDITING WITH THE COMPUTER
• The utilization of the computerThe utilization of the computer
by an auditor to perform someby an auditor to perform some
audit work that wouldaudit work that would
otherwise have to be doneotherwise have to be done
manually.manually.

ATTITUDES
VALUES
BELIEFS
BEHAVIOURS
20%
80%

REVIEW
 Know what is sensitive
information required for audit
operation
 Understand that there are
different levels of sensitivity
in audit operation
 Be able to identify the
minimum audit requirements
for each level

REPORT REVIEW
 Do the reports –Do the reports –
• Provide sufficient information?Provide sufficient information?
• Show that adequate progress isShow that adequate progress is
being made?being made?
• Raise red flags?Raise red flags?
• Contain information that is usefulContain information that is useful
for performance measures?for performance measures?

THE DEMMING CYCLETHE DEMMING CYCLE W.Edwards DemmingW.Edwards Demming
PlanPlan
ControlControl
ActAct && DoDo
ImprovementImprovement
CheckCheck

CASE - It can’t be done!CASE - It can’t be done!
““Management wants us to add onManagement wants us to add on
these quality activities to ourthese quality activities to our
regular duties without giving usregular duties without giving us
the additional time [to accomplishthe additional time [to accomplish
them] -- it can’t be done!”them] -- it can’t be done!”
 Discussion - How can it be done?Discussion - How can it be done?
 Has your employer implementedHas your employer implemented
any quality improvementany quality improvement
programs?programs?
 How was it done?How was it done?

QUALITY? - CONVINCING MANAGEMENT
 Loss of productionLoss of production
 Loss of customersLoss of customers
 Loss of businessLoss of business
 Loss of jobsLoss of jobs
 Class - Can you list some moreClass - Can you list some more
reasons?reasons?

Quality? - Convincing Management
 Quality is no longer just aQuality is no longer just a
technical issue, it is a businesstechnical issue, it is a business
issue.issue.
 In order for a quality programIn order for a quality program
to succeed, top managementto succeed, top management
must be involved andmust be involved and
committed to its success.committed to its success.
 A company’s success is directlyA company’s success is directly
related to management’srelated to management’s
commitment to quality.commitment to quality.

QUALITY PROGRESS
Market
research
Custome
r
service
Marketing,
adm
inistrative
support
Inspection
Test
Production
Process
Control
Operations
planning
Specification
Product
developm
ent
and
design
Market
research
Purchasing
Suppliers
Wholesaling
Retailing
Use
Feedback

CONTINUOUS IMPROVEMENT
4848
Represents continual improvement of
process & customer satisfaction which
Involves all operations
& work units

Continuous ImprovementContinuous Improvement
I
Am
Responsible
for Quality
As a
Good Process
Owner or User
I will:
As a
Good
Supplier
I will:
As a
Good
Customer
I will:
1. Agree on and
document my
requirements with my
supplier.
2. Return defective
inputs to my supplier
promptly and tactfully.
3. Feedback input
quality data to my
supplier.
1. Understand my
customer
requirements, and
agree on and
document my
deliverables.
2. Reduce defects
and variations in
my output.
3. Measure my
output quality from
my customer’s
perspective.
1. Learn to apply
the tools of quality -
teach others.
2. Continuously
improve my process
- reduce defects,
cycle time, and
know benchmarks.
3. Document and
display my process,
defect levels, and CI
projects.
Requirements
and feedback
My input
My
supplier
My
customer
Requirements
and feedback
My output

ATTRIBUTE COMPARISON - RADAR GRAPH
0
20
40
60
80
100
120
140
160
180
Safety
Performance
Quality
Field serviceEase of use
Company image
Plant service
Company X Competitor A Competitor B

Maintain Status quo Leverage
competitive
strength
Assign little or no
priority on action.
Add resources to
achieve
improvement
PERFORMANCE - SATISFACTION MAP
20
0
60
40
80
100
17.5 35 52.5 70
Importance
Performance(%satisfied)
Product
Sales
Repairs
Billing

CONVINCING UPPER MANAGEMENT
 Estimate the size of quality relatedEstimate the size of quality related
losses.losses.
 Identify ways of improving quality.Identify ways of improving quality.
 Estimate the savings and otherEstimate the savings and other
benefits.benefits.
 Calculate return on investmentCalculate return on investment
(ROI)(ROI)
 Use a successful case history toUse a successful case history to
justify a broader program.justify a broader program.
 If all else fails, take pictures ofIf all else fails, take pictures of
waste and/or hazardswaste and/or hazards

ARE QUALITY APPROACHES
INFLUENCED BY CULTURE?
Quality Approaches are
Influence by Culture
The US approach
has historically been
command-and-
control oriented.
The Japanese
approach is based on
an ethic of
consistency and
emphasis on
reduction of waste.
The Europeans have
adopted broad
standards that can
be adapted to the
diverse nation states
of the EC.

NATIONAL AND INTERNATIONAL
QUALITY AWARDS
 Malcolm Baldrige NationalMalcolm Baldrige National
Quality AwardQuality Award
 Deming PrizeDeming Prize
 European Quality AwardEuropean Quality Award
 Shingo PrizeShingo Prize
The US
approach has
historically been
command-and-
control oriented.

THE MALCOLM BALDRIGE NATIONAL
QUALITY AWARD
 The President of the United States traditionallyThe President of the United States traditionally
presents the Awards at a special ceremony inpresents the Awards at a special ceremony in
Washington, DC. Awards are made annually toWashington, DC. Awards are made annually to
recognize U.S. organizations for performancerecognize U.S. organizations for performance
excellence. The Award eligibility categories are:excellence. The Award eligibility categories are:
• manufacturing businessesmanufacturing businesses
• service businessesservice businesses
• small businessessmall businesses
• education organizationseducation organizations
• health care organizationshealth care organizations
 Recipients are expected to share information aboutRecipients are expected to share information about
their successful performance strategies with othertheir successful performance strategies with other
U.S. organizations.U.S. organizations.

QUALITY AWARD
 The Award is named for MalcolmThe Award is named for Malcolm
Baldrige, who served as SecretaryBaldrige, who served as Secretary
of Commerce from 1981 until hisof Commerce from 1981 until his
tragic death in a rodeo accident intragic death in a rodeo accident in
1987. His managerial excellence1987. His managerial excellence
contributed to long-termcontributed to long-term
improvement in efficiency andimprovement in efficiency and
effectiveness of government.effectiveness of government.

QUALITY AWARD
Baldrige Award Framework
4
Information and analysis
3
Customer and
market focus
6
Process
management
1
Leadership
7
Business
results
2
Strategic
planning
5
HR develop. &
management
Customer and Market Focused
Strategy and Action Plans

QUALITY IMPROVEMENT: THE JAPANESE WAY
 Deming PrizeDeming Prize
• The Deming Prize for quality wasThe Deming Prize for quality was
established in 1951 by theestablished in 1951 by the
Japanese Union of Scientists andJapanese Union of Scientists and
Engineers (JUSE).Engineers (JUSE).
• The Deming Prize is much moreThe Deming Prize is much more
focused on processes than is thefocused on processes than is the
Baldrige.Baldrige.
The Japanese approach is based
on an ethic of consistency and
emphasis on reduction of waste.

WHAT IS THE DEMING PRIZE?
 The Deming Application PrizeThe Deming Application Prize
Given to companies or divisions of companies that have achievedGiven to companies or divisions of companies that have achieved
distinctive performance improvement through the application ofdistinctive performance improvement through the application of
TQM in a designated year.TQM in a designated year.
 The Deming Prize for IndividualsThe Deming Prize for Individuals
Given to individuals who have made outstanding contributions toGiven to individuals who have made outstanding contributions to
the study of TQM or statistical methods used for TQM, orthe study of TQM or statistical methods used for TQM, or
individuals who have made outstanding contributions in theindividuals who have made outstanding contributions in the
dissemination of TQM.dissemination of TQM.
 The Quality Control Award for OperationsThe Quality Control Award for Operations
Business UnitsBusiness Units
Given to operations business units of a company that haveGiven to operations business units of a company that have
achieved distinctive performance improvement through theachieved distinctive performance improvement through the
application of quality control/management in the pursuit of TQMapplication of quality control/management in the pursuit of TQM
in a designated year.in a designated year.

OTHER JAPANESE CONTRIBUTIONS TO
QUALITY THOUGHT
 Lean Manufacturing (ToyotaLean Manufacturing (Toyota
Production System)Production System)
• Lean is a method of systematicallyLean is a method of systematically
eliminating waste in a production system.eliminating waste in a production system.
• Lean dramatically reduces cycle time.Lean dramatically reduces cycle time.
• Lean focuses on the company’s “valueLean focuses on the company’s “value
stream” to identify wasted movement,stream” to identify wasted movement,
wasted time, wasted inventory, and wastedwasted time, wasted inventory, and wasted
space.space.
• Lean has been adopted by many USLean has been adopted by many US
manufacturers and other firms and has aidedmanufacturers and other firms and has aided
them in achieving dramatic improvements inthem in achieving dramatic improvements in
operationsoperations

OTHER JAPANESE CONTRIBUTIONS TO
QUALITY THOUGHT - 5 S’S
 Other Japanese Contributions to QualityOther Japanese Contributions to Quality
(cont.)(cont.)
• The Five S’s. The five Ss are a sequentialThe Five S’s. The five Ss are a sequential
process that companies follow to literally “cleanprocess that companies follow to literally “clean
up their acts.” The Ss are:up their acts.” The Ss are:
 Seri (Seri (SortSort): organizing by getting rid of the): organizing by getting rid of the
unnecessary.unnecessary.
 Seiton (Seiton (set in orderset in order): neatness that is): neatness that is
achieved by straightening offices and workachieved by straightening offices and work
areas.areas.
 Siso (Siso (ShineShine): cleaning plant and equipment to): cleaning plant and equipment to
eliminate dirtiness that can hide or obscureeliminate dirtiness that can hide or obscure
problems.problems.
 Seiketsu (Seiketsu (StandardizeStandardize): standardizing): standardizing
locations for tools and other materials.locations for tools and other materials.
 Shetsuke (Shetsuke (SustainSustain): discipline in maintaining): discipline in maintaining
the prior fourthe prior four Ss.Ss.

OTHER JAPANESE CONTRIBUTIONS
TO QUALITY THOUGHT
 Other Japanese Contributions toOther Japanese Contributions to
Quality (cont.)Quality (cont.)
• Quality CirclesQuality Circles
 Are natural work teams made up ofAre natural work teams made up of
workers that are empowered to improveworkers that are empowered to improve
processes they use.processes they use.
• Total Productive Maintenance (TPM)Total Productive Maintenance (TPM)
 The idea behind this concept is that theThe idea behind this concept is that the
worst condition a machine should everworst condition a machine should ever
by is on the day you purchase it.by is on the day you purchase it.

SHINGO PRIZE FOR EXCELLENCE
IN MANUFACTURING
 Named for Japanese industrial engineerNamed for Japanese industrial engineer
Shigeo ShingoShigeo Shingo who distinguished himself aswho distinguished himself as
one of the world’s leading experts inone of the world’s leading experts in
improving manufacturing processes.improving manufacturing processes.
 The Prize was established in 1988 toThe Prize was established in 1988 to
promote awareness of Lean manufacturingpromote awareness of Lean manufacturing
conceptsconcepts
 Recognizes companies in the United States,Recognizes companies in the United States,
Canada, and Mexico that achieve world-Canada, and Mexico that achieve world-
class manufacturing status.class manufacturing status.

SHINGO PRIZE FOR EXCELLENCE
IN MANUFACTURING
 The Shingo Prize recognizes organizations andThe Shingo Prize recognizes organizations and
research that is consistent with itsresearch that is consistent with its missionmission
and modeland model with two types of prizes:with two types of prizes:
• Business PrizeBusiness Prize—promotes use of world-—promotes use of world-
class manufacturing strategies andclass manufacturing strategies and
practices to achieve world-class results.practices to achieve world-class results.
• Research PrizeResearch Prize—promotes research and—promotes research and
writing regarding new knowledge andwriting regarding new knowledge and
understanding of manufacturingunderstanding of manufacturing
processes.processes.

Business Week referred to the Shingo Prize asBusiness Week referred to the Shingo Prize as
thethe “Nobel prize of manufacturing,”“Nobel prize of manufacturing,” because itbecause it
establishes the standard for world-classestablishes the standard for world-class
excellence.excellence.

QUALITY IMPROVEMENT: THE
EUROPEAN WAY
 TheThe ISO 14000ISO 14000 family is primarilyfamily is primarily
concerned withconcerned with "environmental"environmental
management"management".. This means what theThis means what the
organization does to:organization does to:
• minimize harmful effects on theminimize harmful effects on the
environment caused by its activities,environment caused by its activities,
and toand to
• achieve continual improvement ofachieve continual improvement of
its environmental performanceits environmental performance..

ISO 9000 and 14000ISO 9000 and 14000
 ISO 9000 and ISO 14000 are known asISO 9000 and ISO 14000 are known as
generic management system standardsgeneric management system standards..
GenericGeneric means that the same standards can be applied tomeans that the same standards can be applied to
any organization, large or small, whatever its product -any organization, large or small, whatever its product -
including whether its "product" is actually a service - in anyincluding whether its "product" is actually a service - in any
sector of activity, and whether it is a business enterprise, asector of activity, and whether it is a business enterprise, a
public administration, or a government department.public administration, or a government department.
 Management systemManagement system refers to what the organization doesrefers to what the organization does
to manage its processes, or activities in order that theto manage its processes, or activities in order that the
products or services that it produces meet the objectives itproducts or services that it produces meet the objectives it
has set itself, such as the following:has set itself, such as the following:
• satisfying thesatisfying the customer's qualitycustomer's quality
requirementsrequirements,,
• complying tocomplying to regulationsregulations, or, or
• meetingmeeting environmental objectivesenvironmental objectives..

EUROPEAN QUALITY AWARD
 European Foundation for QualityEuropean Foundation for Quality
Management (EFQM) was founded in 1988Management (EFQM) was founded in 1988
by the Presidents of 14 major Europeanby the Presidents of 14 major European
companiescompanies
 First European Quality Award issued in 1992First European Quality Award issued in 1992
 Endorsed by the EU CommissionEndorsed by the EU Commission
 Network has more than 700 membersNetwork has more than 700 members
 Formed the European framework for qualityFormed the European framework for quality
improvement along the lines of the Malcolmimprovement along the lines of the Malcolm
Baldrige Model in the USA and the DemingBaldrige Model in the USA and the Deming
Prize in Japan.Prize in Japan.
6868
The Europeans have adopted
broad standards that can be
adapted to the diverse nation
states of the EC.

EUROPEAN QUALITY AWARD
 Prize Winner categories consistPrize Winner categories consist
of :of :
• Leadership and constancy of purposeLeadership and constancy of purpose
• Customer focusCustomer focus
• Corporate social responsibilityCorporate social responsibility
• People development and involvementPeople development and involvement
• Results orientationResults orientation
• Management by processes and factsManagement by processes and facts
• Continuous learning, innovation andContinuous learning, innovation and
improvementimprovement
• Partnership developmentPartnership development

CONTRIBUTIONS OF VARIOUS DISCIPLINES
 FinanceFinance: Measuring the cost of poor: Measuring the cost of poor
qualityquality
 Industrial EngineeringIndustrial Engineering: Design of: Design of
integrated systems, measurement, problemintegrated systems, measurement, problem
solving, work analysissolving, work analysis
 Information TechnologyInformation Technology: Measurement,: Measurement,
analysis, and reporting on qualityanalysis, and reporting on quality
 Marketing ResearchMarketing Research: Competitive: Competitive
standing on quality, understanding customerstanding on quality, understanding customer
desiresdesires
 Operations ManagementOperations Management: Management: Management
of integrated systemsof integrated systems

(CONT’D)
 Operations researchOperations research::
Analyzing product designAnalyzing product design
alternatives for optimizationalternatives for optimization
 Organizational BehaviorOrganizational Behavior::
Understanding quality culture,Understanding quality culture,
making teams effective.making teams effective.
 Organizational EffectivenessOrganizational Effectiveness::
Satisfying the needs of bothSatisfying the needs of both
internal and external customers.internal and external customers.

(CONT’D)
 Strategic PlanningStrategic Planning: Quality as a means of: Quality as a means of
achieving a unique competitive advantage.achieving a unique competitive advantage.
 Systems EngineeringSystems Engineering: Translating: Translating
customer needs into product features andcustomer needs into product features and
process featuresprocess features
 Value EngineeringValue Engineering: Analysis of essential: Analysis of essential
functions needed by customer to find thefunctions needed by customer to find the
lowest cost way of providing these functionslowest cost way of providing these functions
that meet quality, reliability, andthat meet quality, reliability, and
performance requirements.performance requirements.

SYSTEMS DYNAMICS
 Most process improvement efforts rely onMost process improvement efforts rely on
breaking problems down into smaller, morebreaking problems down into smaller, more
manageable, components.manageable, components.
 This “reductionist” approach sometimesThis “reductionist” approach sometimes
fails to recognize that the problem isfails to recognize that the problem is
greater than the sum of its parts.greater than the sum of its parts.
 A “systems thinking” approach to identifyA “systems thinking” approach to identify
interactions between activities and theinteractions between activities and the
unintended consequences that can ariseunintended consequences that can arise
from well-intended corrective actions.from well-intended corrective actions.

HOW SD CAN FACILITATE THE
IMPROVEMENT EFFORTS
 SD provides a visual model ofSD provides a visual model of
the system under study.the system under study.
 Changes to the system can beChanges to the system can be
made easily and quicklymade easily and quickly
analyzedanalyzed
 Repeated iteration of a SDRepeated iteration of a SD
model can optimize the systemmodel can optimize the system
under studyunder study

APPROACH FOR QUALITY
IMPROVEMENT PROJECTS
 Get a championGet a champion
 Prove the needProve the need
 Identify ProjectsIdentify Projects
 Organize teamsOrganize teams
 Perform the studyPerform the study
 Document recommendationsDocument recommendations
 Perform a pilot projectPerform a pilot project
 Document resultsDocument results
 Expand to entire organizationExpand to entire organization

CARRYING OUT THE PROJECT
 Verify project need and missionVerify project need and mission
 Diagnose the causesDiagnose the causes
 Provide a remedy and prove itsProvide a remedy and prove its
effectivenesseffectiveness
 Deal with resistance to changeDeal with resistance to change
 Institute controls to hold theInstitute controls to hold the
gainsgains

INTRO TO SIX SIGMA
 Six Sigma Capability:Six Sigma Capability:
Extremely small variation in theExtremely small variation in the
process mean compared to theprocess mean compared to the
range of the specification limits.range of the specification limits.
 Even if process mean shifts byEven if process mean shifts by
1.5 sigma => no more than 3.41.5 sigma => no more than 3.4
parts per million fall out of theparts per million fall out of the
specification limit.specification limit.
 Key focus: Y=f(XKey focus: Y=f(X11…X…Xnn))

BREAKTHROUGH IMPROVEMENT
 Verify the project need (SixVerify the project need (Six
σ:σ: DefineDefine))
 Diagnose the Causes (SixDiagnose the Causes (Six σ:σ: MeasureMeasure
andand AnalyzeAnalyze))
 Provide a remedy and prove itsProvide a remedy and prove its
effectiveness (Sixeffectiveness (Six σ:σ: ImproveImprove))
 Deal with resistance to Change (SixDeal with resistance to Change (Six
σ:σ: ImproveImprove))
 Institute controls to hold the gainsInstitute controls to hold the gains
(Six(Six σ:σ: ControlControl))

Define
the
Problem
Define
the
Problem
MeasureMeasure
AnalyzeAnalyze
ImproveImprove
ControlControl
End
 A) Identify what the customer wants.
 B) Organize an improvement team.
 C) Create a process flow chart - (SIPOC)
 A) Identify what the customer wants.
 B) Organize an improvement team.
 C) Create a process flow chart - (SIPOC)
 A) Select “Critical to Quality Characteristic” metrics.
 B) Define Performance Standards.
 C) Validate the measurement System.
 D) Establish baseline performance in terms of Sigma
Capability - Defects per Million Opportunities.
 A) Select “Critical to Quality Characteristic” metrics.
 B) Define Performance Standards.
 C) Validate the measurement System.
 D) Establish baseline performance in terms of Sigma
Capability - Defects per Million Opportunities.
 A) Identify significant characteristics and establish process
capability.
 B) Define performance targets for significant
characteristics.
 C) Identify root cause of process variation.
 A) Identify significant characteristics and establish process
capability.
 B) Define performance targets for significant
characteristics.
 C) Identify root cause of process variation. A) Identify and evaluate potential solutions.
 B) Implement short-term countermeasures.
 C) Implement long term corrective actions.
 D) Identify systemic indirect effects and unintended
consequences of improvement ideas.
 E) Establish operating tolerances for new process.
 A) Identify and evaluate potential solutions.
 B) Implement short-term countermeasures.
 C) Implement long term corrective actions.
 D) Identify systemic indirect effects and unintended
consequences of improvement ideas.
 E) Establish operating tolerances for new process.
 A) Verify corrective actions and validate new measurement
systems.
 B) Determine process capability.
 C) Establish and implement control plan.
 A) Verify corrective actions and validate new measurement
systems.
 B) Determine process capability.
 C) Establish and implement control plan.
 Move on to next highest priority process. Move on to next highest priority process.
SIX SIGMA PROCESS

VALUE ENGINEERING
 Value Engineering (VE) is an intensive,Value Engineering (VE) is an intensive,
interdisciplinaryinterdisciplinary problem solving activity thatproblem solving activity that
focuses onfocuses on improving the valueimproving the value of theof the
functions that are required to accomplish thefunctions that are required to accomplish the
goal, or objective of any product, process,goal, or objective of any product, process,
service, or organization.service, or organization.
 VALUE METHODOLOGYVALUE METHODOLOGY
“The systematic application of“The systematic application of recognizedrecognized
techniquestechniques whichwhich identify the functionsidentify the functions of theof the
product or service, establish theproduct or service, establish the worthworth ofof
those functions, and provide the necessarythose functions, and provide the necessary
functions tofunctions to meetmeet the required performancethe required performance
at the lowest overall cost.”at the lowest overall cost.”
**John M. Bryant,John M. Bryant, VM StandardVM Standard, Society of American Value Engineers, Oct. 1998, Society of American Value Engineers, Oct. 1998

VALUE ENGINEERING/VALUE ANALYSIS
- WHY IS IT IMPORTANT?
 Last 3 years, 2.7 million manufacturingLast 3 years, 2.7 million manufacturing
jobs left the U.S.jobs left the U.S.
 The U.S. is loosing the battle to foreignThe U.S. is loosing the battle to foreign
competition.competition.
 Labor costs $12 to $30 per hour in U.S.,Labor costs $12 to $30 per hour in U.S.,
less than $1 elsewhere.less than $1 elsewhere.
 Fewer and fewer people will be requiredFewer and fewer people will be required
to produce the world’s goods.to produce the world’s goods.
 Lean and Six Sigma alone are notLean and Six Sigma alone are not
enough!enough!

COMPETITIVE ADVANTAGE
Quality is defined as
“conformance to specification.”
Value is defined as:
Function
Cost
You can’t have one without the
other!
Competitive Advantage = Quality
+ Value

SIX STEP VALUE ENGINEERING JOB PLAN
8383
Information
Phase
Information
Phase
Creativity
Phase
Creativity
Phase
Evaluation
Phase
Evaluation
Phase
Planning
Phase
Planning
Phase
Reporting
Phase
Reporting
Phase
Implement
ation Phase
Implement
ation Phase
 Clearly identify the problem(s) to be solved,
and gather information on the background,
functions and requirements of the product,
process, or system.
 Clearly identify the problem(s) to be solved,
and gather information on the background,
functions and requirements of the product,
process, or system.
 Brainstorm ideas on how to improve the high
cost, broken, or inadequately performed key
functions.
 Brainstorm ideas on how to improve the high
cost, broken, or inadequately performed key
functions.
 Screen ideas for acceptance, score remaining
ideas on a scale and group ideas into
categories. Develop design scenarios, and
selection criteria. Rate and rank ideas.
 Screen ideas for acceptance, score remaining
ideas on a scale and group ideas into
categories. Develop design scenarios, and
selection criteria. Rate and rank ideas.
 Plan how to sell ideas to management,
identify key recommendations, plan
management presentation.
 Plan how to sell ideas to management,
identify key recommendations, plan
management presentation.
 Give oral presentation to management, or
develop written report.
 Give oral presentation to management, or
develop written report.
 Get management approval for go-ahead,
make management plan, make assignments,
implement, follow-up.
 Get management approval for go-ahead,
make management plan, make assignments,
implement, follow-up.

Mapping VE to 6Mapping VE to 6σσ
Information
Phase
Information
Phase
Creativity
Phase
Creativity
Phase
Evaluation
Phase
Evaluation
Phase
Planning PhasePlanning Phase
Reporting
Phase
Reporting
Phase
Implementation
Phase
Implementation
Phase
Define the
Problem
Define the
Problem
MeasureMeasure
AnalyzeAnalyze
ImproveImprove
ControlControl
VA/VE 6σ

SPORADIC V.S. CHRONIC PROBLEMS
 Sporadic problems are dramaticSporadic problems are dramatic
and require immediate attention.and require immediate attention.
 Chronic problems are notChronic problems are not
dramatic, they occur over a longdramatic, they occur over a long
period of time.period of time.
 Chronic problems are difficult toChronic problems are difficult to
solve.solve.
 Chronic problems are “acceptedChronic problems are “accepted
as inevitable.”as inevitable.”

SPORADIC V.S. CHRONIC PROBLEMS
 Sporadic problems are solved bySporadic problems are solved by
fixing the control process.fixing the control process.
 Chronic problems are solved usingChronic problems are solved using
process improvement techniquesprocess improvement techniques
such as Value Engineering and/or Sixsuch as Value Engineering and/or Six
Sigma.Sigma.
 Value Engineering may be applied toValue Engineering may be applied to
sporadic problems as well, e.g.,sporadic problems as well, e.g.,
Boeing 737/757 elevator feelBoeing 737/757 elevator feel
computer problem.computer problem.

SPORADIC AND CHRONIC QUALITY
PROBLEMS
Lossduetodefects
Time
Sporadic departure
from historic level
Historic level
Improved level
The difference between historic and
improved levels is caused by a
chronic disease that can be
eliminated economically through
process improvement techniques.

FOR MORE INFORMATION
 On the Malcolm Baldridge National Quality Award, visit:
http://www.quality.nist.gov/
 For more information on the Deming Prize
visit:http://www.deming.org/d
 For more information on the Shigo Prize
visit:http://www.shingoprize.org/AboutUs/default.htm
http://www.partnersusu.org/
 For more information on the ISO 9000 and ISO 14000 visit:
http://www.iso.ch/iso/en/iso9000-14000/index.html
 For more information on the European Quality Award visit:
http://www.efqm.org/model_awards/eqa/intro.asp

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