Best in Class Practice

1. OPERATIONS LEADERSHIP EXCHANGE™
Best in Class Cost
of Quality Models
Guiding Principles for Measuring Cost of Quality
Presentation by George Dramowicz, VP of Quality
at Merix Corporation
Q&A and Next Steps
29 October 2009

2. COPIES AND COPYRIGHT
As always, members are welcome to an unlimited number of copies of the materials contained within this handout. Furthermore, members may copy any graphic herein for their own
internal purpose. The Corporate Executive Board Company requests only that members retain the copyright mark on all pages produced. Please contact your Member Support Center
at +1-866-913-6452 for any help we may provide.
The pages herein are the property of The Corporate Executive Board Company. Beyond the membership, no copyrighted materials of The Corporate Executive Board Company may
be reproduced without prior approval.
LEGAL CAVEAT
The Operations Leadership Exchange has worked to ensure the accuracy of the information it provides to its members. This report relies upon data obtained from many sources,
however, and the Operations Leadership Exchange cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the Operations Leadership Exchange is not
engaged in rendering legal, accounting, or other professional services. Its reports should not be construed as professional advice on any particular set of facts or circumstances. Members
requiring such services are advised to consult an appropriate professional. Neither The Corporate Executive Board Company nor its programs are responsible for any claims or losses
that may arise from a) any errors or omissions in their reports, whether caused by the Operations Leadership Exchange or its sources, or b) reliance upon any recommendation made by
the Operations Leadership Exchange.

3. While Quality executives
have some visibility into
IGNORANCE ISN’T ALWAYS BLISS
the cost of quality, they
also believe current Estimated Cost of Poor Quality (COPQ) as a Percentage of Sales
tracking methods capture 2008 Member Meeting; Instant Poll Results
only a fraction of the true
costs.
Discussion Points
■ Members discussed the difference between
31% 31%
the internally reported COPQ numbers
(usually higher and more accurate) and
the accountants COPQ numbers that are
publicly reported. Members agreed that
19% there is a large disparity between the two
often as a result of differences in calculations.
■ Some members brought up the issue of non-
traditional COPQ calculations and reported
including other measures such as future
6% 6% 6% lost sales, lost profit, and estimated brand
damage.
■ All expressed frustration at the lack
of a hard dollar figure for COPQ, citing that
< 1% 1%–5% 5%–10% 10%–20% > 20% We Don’t
Know this information would allow Quality to drive
quality improvements more effectively
in the business.
n = 16.
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
3

4. Examining cost of quality
allows the enterprise
SETTING THE STAGE
to identify, prioritize,
and monitor quality Cost of Quality
improvements. American Society for Quality (ASQ) Definition
■ It gets management Cost of Quality
attention by taking quality The difference between the actual cost of a product or service and what the reduced cost would be if there were no
out of the abstract and into possibility of substandard service, failure of products or defects in their manufacture.
dollar terms.
■ It changes the way
employees think about
nonconformance.
Prevention Appraisal Internal Failure External Failure
■ It enables Quality to identify The costs of all activities The costs associated Failure costs occurring Failure costs occurring
and prioritize areas for specifically designed to with measuring, prior to delivery after delivery or
corrective actions. prevent poor quality in evaluating or auditing or shipment of the shipment of the
products or services. products or services product, or the product—and during
■ It allows Quality to track the to assure conformance furnishing of a service, or after furnishing
effect of corrective actions. to quality standards to the customer. of a service—to the
and performance customer.
requirements.
Includes costs of: Includes costs of: Includes costs of: Includes costs of:
■ New product review ■ Incoming and ■ Scrap ■ Processing customer
■ Supplier capability source inspection of ■ Rework complaints
reviews purchased material ■ Reinspection ■ Customer returns
■ Quality improvement ■ In-process and final ■ Retesting ■ Warranty claims
projects inspection/test ■ Material review ■ Product recalls
■ Product, process or ■ Downgrading
service audits
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
4

5. GUIDING PRINCIPLES FOR MEASURING COST OF QUALITY
Cost of Quality Design Diagnostic Recommended Resources
Yes No
1. Clear Definition of Metrics
a. Is there a standard, enterprise-wide definition for every metric?
The Hidden Costs
b. Was audience feedback sought while defining the metrics to verify relevance to decisions? of Poor Quality
c. Does each metric have a target? Total Cost of Quality
d. Are performance thresholds defined for each metric? Worksheet
e. Does each metric have an “owner” responsible for taking actions when metric goes below target?
2. Simplicity of Presentation
a. Do you have a “one-page” scorecard with the high-level metrics? Cost of Poor Quality
b. Is the scorecard formatted to immediately draw attention to exceptions and key issues? Waterfall
Monthly Cost
c. Do you provide easily accessible drill-downs for metrics included in the high-level scorecard?
of Quality Reporting
3. Tailored to Audience
a. Do you have customized reports for key audiences (e.g., senior management, specific sites)? Total Cost of Quality
b. Are reporting frequencies decided based on audience decision-making needs?
Total Quality
c. Does the level of detail provided enable actionability for audience context/priorities? Opportunity Cost
4. Driver of Quality Improvement
a. Is the model intended to foster improvement rather than just to monitor? 1
Total Cost of Quality
b. Do the metrics change over time as needs change? Optimization
c. Do the metrics provide fast feedback to users and managers?
Cost of Quality Variation
d. Is each metric that is below target accompanied by a concise mention of action taken/status? Management
Assessment: Total “Yes” Answers
11 Effective scorecard design 6–10 Some revision required 5 Potential redesign required
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
5

6. Standard definitions help
to avoid confusion and
1. PROVIDE GUIDANCE ON DEFINING
misallocation of costs. AND QUANTIFYING EACH METRIC
The Hidden Costs of Poor Quality 1
ABB LTD; Sample Categories and Definitions
COPQ Category Description
Margin Slippage ■ The difference between “as sold” and actual costs
■ No netting with orders with positive variance
■ Recommended to measure negative variance from activities
or functions within project scope
Project ■ Recommended to measure negative variance from activities or functions
Contingency Used within project scope
Manufacturing ■ Scrap: All costs to fully reconcile scrap
Scrap and Rework ■ Rework: All costs to fully reconcile rework
Manufacturing ■ Any negative variances from engineered standards or standard costs
Variances ■ Focus on all negative variances; no netting of positive/negative variances
■ Process yield is less than 100%
Engineering ■ All costs to remedy engineering errors
Variances and Wastes ■ All costs to process engineering changes
Engineering Changes ■ Costs to process engineering change notices (ECNs)
Software Errors ■ All costs incurred to remedy software errors
Overtime ■ All costs incurred due to unplanned overtime
Transportation: ■ All premium freight costs incurred (inbound or outbound)
Premium Freight, ■ Air, dedicated truck, and express mail/packages
Cost Overruns ■ Transportation cost overruns
Under Absorption People: All costs associated with having more resources (people)
(People and Expenses) on payroll than billable to customers orders
From the OPERATIONS LEADERSHIP EXCHANGE™ Expenses: Actual expenses are greater than budgeted expenses
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
1 Full case study, including all 29 categories and their definitions are available on the Web site.
6

7. A Quality waterfall
report emphasizes lost
2. FOCUS BEYOND COST TO TOTAL
financial opportunities
due to the poor quality
VALUE CREATION
between receipt of
incoming materials and Cost of Poor Quality Waterfall 1
Kraft Foods, Inc.; Illustrative
purchase of the product
by consumers. “Hidden losses,”
due to give-away,
Supplier/Materials Quality over age, out of spec material
Manufacturing Quality
Percentage of Material Cost
Incoming materials accepted but past expiry date
Supply Chain Quality Retail Quality
Consumer
Materials lost/rejected during production
Quality
Give-away (overweight, under-weight)
Damaged (not rejected) during
All incoming materials = 100%
Incoming materials rejected
Over age during transport/
Incoming materials used
Total sold to consumers
transport/warehousing
Out of spec shipped
Lost in supply chain
Unsaleable returns
Available at retail
Sold over age
Total shipped
Trade returns
warehousing
Hidden losses further
1 Full case study available on Web site.
reduce the amount
of material actually
Source: Kraft Foods, Inc. sold to consumers.
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
7

8. The model enables three
levels of drill downs into
3. REPORT DIFFERENT MEASURES
the reports in order to
track cost of quality in
FOR DIFFERENT AUDIENCES
the most relevant terms
for each stakeholder Total Cost of Quality Scorecard 1
Amgen; Data is for Illustrative Purposes Only
group.
1 Direct Opportunity Total
1. For specific discussions
on operational Unplanned Downtime—Facility Cost Cost Cost
performance, category Total for Facility 1 — — —
elements such as total
Total Facility 2 — — —
unplanned downtime cost Operational
are calculated for each Total Facility 3 — — —
facility. Total Unplanned Downtime Cost — — —
2. Data from different
facilities is added to 2 Quality
calculate the total cost Category Quality Opportunity Quality Total
for each CoQ category Cost Category Elements Direct Cost Cost Cost
element, such as product
4. Ongoing A. Product yield — — —
yield or unplanned
Production B. Unplanned
downtime to enable — — —
Tactical Failure downtime
Amgen-wide trend
analysis. C. Rejected lots
3. Total costs for each (abnormal — — —
CoQ category is then scrap)
presented during D. Corrective
quarterly management — — —
maintenance
reviews for higher-level
executive discussions on 3
quality improvements. Cost Category Quality Cost
1. Complaints —
2. Returned goods —
Strategic
3. Recalls/BPDs —
4. Ongoing production failure —
5. Inventory —
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com 6. Nonconformance investigations —
© 2009 The Corporate Executive Board Company. 7. Rework/reprocess —
All Rights Reserved. OLEX4993609SYN
1 Full case study available on Web site.
8

9. 1
The optimal level of total
quality costs is a balance
4. MEASURE COSTS IN RELATIVE TERMS
between prevention,
appraisal, and failure Total Cost of Quality Optimization 2
costs. Epsilon Company; Illustrative
Failure Costs
2Total Quality
■ In some cases operating at Costs
total cost of quality (TCOQ)
ratios less than one is
preferred due to increased 1 TCOQ Ratio 14 0.07
customer perception of
product quality. 12 0.08
Cost per Good Unit of Product 10 0.10
■ Goal is to drive TCOQ ratio
to one for optimal cost– Estimated Failure Costs
8 0.13
benefit ratio.
6 0.17
Point of Optimum Quality 4 0.25
2 0.50
1
Estimated Preventative and Appraisal Costs
Cost of Prevention and Appraisal
“Of course, the
theoretical goal is
the total elimination
of quality issues seen by the
customer, but realistically you
must find a balance between 100% Defective 100% Good
costs and outcomes.” Quality of Conformance
Director of Quality 1 2
High Technology Company Total Cost Failure Costs
of Quality Total Quality Costs = Cost of Prevention and Appraisal + Failure Costs
=
(TCOQ) Ratio Cost of Prevention and Appraisal
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
1 Pseudonym.
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
2 Full case study available on Web site.
Source: Epsilon Company; Juran, J. and A.B. Godfrey, Juran’s Quality Handbook, 5th Ed.,New York: McGraw-Hill, 1999, p.8.22.
9

10. COST OF QUALITY VARIATION MANAGEMENT
COMPANY SNAPSHOT
Merix Corporation
Industry: Printed Circuit Boards Merix Corporation, a leading seamless global manufacturer
of technologically advanced, highly reliable, printed circuit
2008 Sales: US$287.13 M
boards (PCBs) with facilities in the United States and China.
2008 Employees: 2,950 Merix delivers multilayer PCBs for original equipment
manufacturer customers and their electronic manufacturing
service providers in North America, Europe, and Asia. Merix
also provides product design, engineering, and quick-turn
prototyping services.
QUALITY ORGANIZATION
Structure: Hybrid
Number of Quality
Employees: 200
Head of Quality
Reports To: CEO
KEY METRICS USED TO ASSESS COST OF QUALITY
■ Typical Cost of Quality metric, comprising of prevention, appraisal, internal failure, and external failure costs.
■ Two overarching metrics are used to monitor overall progress: 1) cost of quality (CoQ) as a percentage of sales,
and 2) CoQ as a percentage of cost of goods sold (COGS).
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
10

11. MEMBER PERSPECTIVES ON COST OF QUALITY
An Interview with Merix Corporation
What are some of the factors that influenced your choice of metrics?
Merix just started measuring cost of quality in 2008 when George Dramowicz joined the company. There was a strong interest from the CEO
and the Board of Directors to look at this data. In fact, the request for gathering and monitoring this data was communicated to George
during his first meeting with the CEO, on the first day of his employment with Merix.
How do you calculate cost of quality?
George Dramowicz The cost of quality (CoQ) model at Merix includes prevention, appraisal, internal failure, and external failure costs. It is based on the Certified
Vice President Management Accountant (CMA) cost of quality guidelines. The dollar value of each cost element within the model is pulled from a specified
of Quality cost center value within the existing accounting system. Merix then estimates the percentage of that cost center value that should be
allocated to CoQ. As such, there is minimal dispute across the organization about the validity of the data.
How often and to whom do you report these costs?
CoQ data is collected and reported on a quarterly basis. Quality leadership shares this information with the extended senior management
team and the Board of Directors during quarterly business reviews. During this session, the group reviews the cost of quality as a percentage
of sales and as a percentage of standard unit cost (PCB panel) globally, as well as for each site. Quality also presents the distribution of quality
costs across the four categories and the level of improvement in each category in percentages and absolute savings. The group then analyses
the reasons for cost variation.
What type of decisions do you make based on the data?
Erika Johnston
Cost of quality data analysis enables Quality to monitor cost variation in each of the four categories both at a global and site level. Quality also
Financial Business
analyses each individual site’s dollar and percentage contribution to the cumulative cost of quality. Based on the analysis, each site identifies
Partner, NA
the top two to four issues that have the biggest impact on cost of quality and then focuses on specific initiatives to eliminate the root causes
Manufacturing
of those costs.
Operations
Do you anticipate any future changes or improvements to your cost of quality approach?
The Quality organization is confident that their existing approach is optimal for their current needs. However they do continue to tune up the
model at the end of each quarter based on new trends and their reactions to observed variations. With a mature model in place, Quality plans
to focus more on CoQ reduction projects.
Are there any lessons learned that you’d like to share with other companies?
1. Set up a standard model to enable variation analysis,
2. Launch a pilot program to proof the concept,
Randy Collins 3. Examine variation from a cost of goods sold and a revenue perspective to appreciate the different forces behind observed trends, and
Global QMS Manager 4. Make sure that the Finance team is an integral part of the program.
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
11

12. ROAD MAP FOR THE PRESENTATION
Identifying
Establishing a Cost Collecting and Reporting Cost
Improvement
of Quality Model Analyzing the Data Sources and Impact
Opportunities
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
12

13. The cost of quality model
is based on established
MODEL OVERVIEW
accounting principles,
resulting in fewer Cost of Quality Model
disputes over the data. Merix Corporation
■ The model is based on
Prevention Appraisal Internal Failure External Failure
the Certified Management Category
Accountant (CMA) cost of 34% 33% 28% 6%
quality guidelines.
■ Quality and ■ Quality and ■ Internal Rejects ■ Warranty
■ Quality leadership uses Production Staffing Production Staffing ■ Internal Scrap ■ Customer
this slide to communicate ■ Quality Engineering ■ Continuity Test Accommodations
■ Evaluation and
to senior management the for Value-Add
■ Process ■ Calibration of Rework
extent and dollar impact
Engineering Tools/Equipment ■ RMA Activities
of quality improvement ■ Waivers
initiatives. ■ Reliability Lab ■ Hipot Fixtures ■ Credit and Rebill
■ Cost of Rework
Activities
Elements ■ Analytical Lab— ■ Metallurgical Lab—
■ Quality presents the Process Control Process Control
distribution of quality ■ Quality ■ Incoming
costs across the four
Improvements— Inspection
categories as well as the
Maintenance
level of improvement in each ■ Manufacturing
category in percentages and ■ Produceability Audit
absolute savings. Analysis
■ ISO Documentation
■ These estimates are Control
calculated each quarter ■ ISO Certification
to show ongoing progress
on cost reduction initiatives.
Quarterly
$X $Y M $X $Y M $X $Y M $X $Y M
Cost
Reduction XX% XX% XX% XX%
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
13

14. ROAD MAP FOR THE PRESENTATION
Identifying
Establishing a Cost Collecting and Reporting Cost
Improvement
of Quality Model Analyzing the Data Sources and Impact
Opportunities
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
14

15. A standard site-level
spreadsheet is the basis
QUARTERLY DATA COLLECTION AT EACH SITE
for all cost of quality
data analysis. Site Cost of Quality Data Spreadsheet 1
Merix Corporation; Data Are for Illustrative Purposes Only
■ Each site fills out the
Percentage
standard spreadsheet Owner of Non-Labor Total Cost
Prevention Cost Center Allocated Labor Costs
and submits it to Quality Process Area Costs Center Charges
to CoQ
on a quarterly basis.
Elements within Site employee Related cost Percentage Cost center Cost center Sum of labor
the cost category that is center within of cost center charges related charges not and nonlabor
■ Absolute values of each
responsible for the existing value that to labor related to labor cost center
metric are pulled directly
tracking the accounting should be charges
from the accounting system metric system that allocated to
based on the cost center the dollar value cost of quality
number. comes from
Quality and
■ The most critical step in E.g., John Smith 2110 80% $800,000 $100,000 $900,000
Production Staff
developing this spreadsheet
is establishing the right Quality
E.g., Anna Green 2670 30% $150,000 $50,000 $200,000
percentage of the cost Engineering
center charge that should be Process
allocated to cost of quality. Engineering
Reliability Lab
Process Control—
Analytical Lab
Quality
Improvements—
Maintenance
Produceability
Analysis
ISO Document
Control
ISO 9001
Certificate Fees
From the OPERATIONS LEADERSHIP EXCHANGE™ Site Subtotal $1,100,000
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
1 Available in Project Acceleration Toolkit.
15

16. Quarterly targets set
a quantifiable and
QUARTER-TO-QUARTER COMPARISONS
objective improvement
goal for each site. Cost of Quality Summary Spreadsheet 1
Merix Corporation; Data Are for Illustrative Purposes Only
■ Based on the data submitted
by each site, Quality records Site One F09 Improvement Targets Percentage of current
Last quarter’s total cost of quality
the distribution of costs Baseline $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX Quarter allocated to each category
across the four categories Cost Elements Q4 FY 08 Q1 FY 09 Q2 FY 09 Q3 FY 09 Q4 FY 09 Ratio
for each site and enterprise-
Prevention $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 29%
wide in this spreadsheet.
Appraisal $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 35%
■ The data enable comparative Internal Failure $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 27%
analysis by site, quarter, and External Failure $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 9%
cost category. Total Cost $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 100%
of Quality
■ The data lead to discussions Actual Reduction N/A $XXX,XXX $XXX,XXX $XXX,XXX $XXX,XXX 17%
such as: why did external Current quarter’s reduction
failure costs in one specific as a percentage of previous
facility go up from one quarter’s total cost of quality
quarter to the next?
Site One Only
■ The data also enable Quality
External Failure
to identify correlations in
specific costs across the four Appraisal
categories. For example, Internal Failure
between Quality headcount
Prevention
and customer service levels.
Q4 FY 08 Q1 FY 09 Q2 FY 09 Q3 FY 09 Q4 FY 09
1 Available in Project Acceleration Toolkit
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
16

17. ROAD MAP FOR THE PRESENTATION
Identifying
Establishing a Cost Collecting and Reporting Cost
Improvement
of Quality Model Analyzing the Data Sources and Impact
Opportunities
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
17

18. The analysis helps sites
understand their relative
SITE COMPARISON REPORTS
contribution to the
overall cost of quality
value.
■ Quality compares each Cost of Quality (per Site)— Cost of Quality (per Site)—Current Quarter
site’s current quarter Current Quarter Versus Previous Quarter and Baseline Data Are for Illustrative Purposes Only
distribution of costs to Data Are for Illustrative Purposes Only
the previous quarter and
baseline quarter. This is done 100%
External Failure
to monitor the outcomes 100%
Internal Failure
92%
of cost improvement 90%
initiatives, changes in Quality Appraisal 82%
cultural awareness, and 80%
Prevention
improvements in customer 70%
quality. Any major variation 61%
U.S. Dollars
60%
is analyzed at the lower
cost center level to better 50%
understand the source of
40%
variation.
30%
■ Quality also analyses each 20%
individual site’s dollar and
10%
percentage contribution
Baseline
Q3F09
Q4F09
Baseline
Q3F09
Q4F09
Baseline
Q3F09
Q4F09
Baseline
Q3F09
Q4F09
Baseline
Q3F09
Q4F09
to the cumulative cost of 0%
quality. This allows Quality Site 1 Site 2 Site 3 Site 4
to observe longer term
correlations between actions Cost of Quality Cumulative
Global Site 1 Site 2 Site 3 Site 4 per Site (Q4F09) Percentage
taken and the resulting
outcomes.
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
18

19. The analysis help
sites understand two
COST OF QUALITY RATIO REPORTS
driving forces behind
quarterly trends: 1) actual
demand—based on the Revenue Ratios
revenue, and 2) actual Cost of Quality as a Percentage of Revenue Cost of Quality—Fraction of Revenue
COGS—based on product Data Are for Illustrative Purposes Only Data Are for Illustrative Purposes Only
mix and complexity, and
Revenue Impact in Dollars
Percentage of Revenue
labor efficiencies.
■ Quality conducts two-level
analysis of cost of quality
(CoQ)—as a percentage of
sales and as a percentage of
the cost of a panel (i.e., cost
to create a single unit
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
of product).
■ Quality uses the revenue-
Global USA Site 1 Site 2 Low-Cost Global USA Site 1 Site 2 Low-Cost
based graphs to make it Geographies 1 Geographies
easier for the rest of the Cost of Quality Cost of Quality
organization to understand
the impact of these costs
Cost Ratios
to the top-line.
Cost of Quality as a Percentage of Total COGS (per Panel) Cost of Quality—Fraction of Cost of Panel
■ The cost-based graphs
Data Are for Illustrative Purposes Only Data Are for Illustrative Purposes Only
indicate the difference in
complexity of products
Cost Impact in Dollars
Percentage of Cost
produced across sites. For
example, the low-cost site
produces simpler products
so cost per panel and cost
of quality tend to be lower
than those of the other sites.
This helps to contextualize
differences in performance.
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com Global USA Site 1 Site 2 Low-Cost Global USA Site 1 Site 2 Low-Cost
Geographies Geographies
© 2009 The Corporate Executive Board Company. Cost of Quality per Panel Cost of Quality per Panel
All Rights Reserved. OLEX4993609SYN
1 Individual site performance in low-cost geographies is typically also included,
but omitted in this presentation due to limited space on the page. 19

20. The analysis enables
senior executives to
COST OF QUALITY SUMMARY REPORT
easily understand and
relate to the impact Cost of Quality as a Percentage of Revenue
of quality on top and Merix Corporation; Current Quarter and Previous Two Quarters
bottom line results.
XX%
■ During quarterly business XX%
reviews with senior XX%
XX%
management and the Board XX% XX%
of Directors, Quality reviews
progress on cost reduction
efforts both at enterprise-
wide and site levels. XX% XX%
XX%
■ Typical discussions based XX% XX%
XX%
on the data include analysis Quarter-
and reasoning of last quarter to-quarter
comparisons
variation, go forward plans
related to further reduction
of cost of quality. XX%
XX% XX%
“Cost of Quality along
with a Customer
Quality metric has
become our top-level measuring
stick of the overall effectiveness
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
Q2F09
Q3F09
Q4F09
of our Quality Management
System and its leadership.”
George Dramowicz
Vice President of Quality
Global USA Site 1 Site 2 Low-Cost
Geographies
Cost of quality
Since Q3 FY 09, Cost of Quality as a Percentage
impact on
From the OPERATIONS LEADERSHIP EXCHANGE™
of Revenue dropped by X% = $X Millions in Savings bottom line
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
20

21. ROAD MAP FOR THE PRESENTATION
Identifying
Establishing a Cost Collecting and Reporting Cost
Improvement
of Quality Model Analyzing the Data Sources and Impact
Opportunities
From the OPERATIONS LEADERSHIP EXCHANGE™
www.OperationsLeadershipExchange.com
© 2009 The Corporate Executive Board Company.
All Rights Reserved. OLEX4993609SYN
21