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PKF Texas: The Entrepreneur’s Playbook® - Byron Hebert

Byron Hebert

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Byron Hebert, CPA, CTP, demonstrates how a Failure Mode Effect Analysis can help businesses identify risk, then reduce it.

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Byron: Hi, my name is Byron Hebert, and this is a quick Tool Time Update brought to you by PKF Texas and The Entrepreneur's Playbook. What I want to talk to you today about is FMEA, Failure Mode Effect Analysis. And the purpose of this tool is to help you detect risk areas in your processes in your business, and then maybe if you can detect where the risk areas are you can do something to reduce those risks. So let's talk about how we would use this tool.

Say, in a sales process you're going to change your sales process, and what are some of the ways that you could fail in that? Look at what could go wrong. We're looking at the downside. So maybe we lose customers. They'll be several of them. You would want to write down all of them, all of them you can think of. What would the effect of that be? Well, sales down. Potentially, sales down unless you lose the right kind of customers that are not good margin customers, and that's maybe what you want to do.

So in this we want to say what's the severity of that? Well, let's just say, for instance, that we've got some large customers. If we lose those large customers, the severity could be pretty high. It could be an eight out of ten. The occurrence of that, maybe the occurrence isn't so much so we'll give that a five. And would we be able to detect that? Well, the detection on that, we weight that. If it's easy to detect, we're going to give it a low number. If it's hard to detect something, we would give it a higher number. We would probably easily detect that. So we'll give that, say, a three.

So then we want to multiply these across, give you your RPN number, which is your Risk Priority Number. Okay? So eight times five is 40 times three would be 120. Anything over a hundred, I'm concerned about. I want to get that risk factor down to a hundred. So what could we do?

If they're an eight, we want to get that maybe to a six. How could we do that? Well, if we've got one large customer, we probably want to diversify. Maybe we could get a contract in place with that large customer to secure our position with them for the next few years. So we start thinking of some ideas, some things that we could do to get this severity down.

The occurrence? Well, maybe if we're working with several departments within that large organization the effect of that occurrence would go down. Get some ideas how we could reduce the occurrence maybe down to a four. Okay? And then the detection of it. If we did customer surveys, things like that, maybe we could get it down to a two.

So then we've got four times two is four times four, 48. We've gotten that down below a hundred. So Failure Mode Effect Analysis is a good tool for you to use to go through a process, any process within your business to detect risk and maybe reduce the probability of those risks having a negative effect on your business. FMEA, Failure Mode Effect Analysis.

Thank you. My name is Byron Hebert. This has been another quick Tool Time Update brought to you by PKF Texas and the Entrepreneur's Playbook.

For those of you who are listening in on the radio and would like to see the graphic form of this tool being demonstrated, you can go to TheBusinessmakers.com and look for the videos under Entrepreneur's Playbook.

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