Why you Need to Measure the Cost of Poor Quality in Your Organisation
Have you really identified the true costs of error within your business? What about the hidden costs? Management involvement, and other people's time? What about resources that have been required to do that activity?
It is important that you can identify these key areas and tackle them within your organisation. In this short video, Chris explains how you can do just that.
What is the cost of poor quality?
The cost of poor quality dates back to around the 80's - it was popularized by IBM quality expert H. James Harrington in his 1987 book Poor Quality Costs.
The costs of poor quality could be activities, time, and money, which is spent addressing things that have gone wrong, or addressing areas that need further attention that we're not aware of.
It's a belief that if we invest more in the detection and improvement of these areas, we can reduce the cost that's input to our services and the products that we provide.
All activities and processes that do not meet the agreed performance or do not exceed the expectations of our business have hidden costs within them.
How to identify Hidden Costs?
You have to think, would these costs disappear if we were more efficient and effective in how we run our business?
Let's think about that in a little bit more detail...
The Iceberg Effect
The iceberg that we see, the tip that sits on top of the surface of the water, these are the clear indications that we think have been the costs associated to something that has gone wrong, or something that is not as efficient and effective as we want it to be.
These costs could be associated to:
Dealing with a customer complaint
Dealing with scrap in our production line
Dealing with downtime
Raw material that doesn't arrive on time, or is late
Underneath the sea level, there is a great big structure of an iceberg that we often cannot see. These are the things that really have a greater impact in the costs and times associated to things that go wrong. For example the time management spends involved in dealing with something or costs associated to putting something right.
These ultimately that come down to time, and as we know in our business time is money.
It's important that you analyse errors, mistakes and inefficiencies in greater detail, so that you can identify what the costs are associated to this.
And importantly, what you want to do is, when you recognise what these are, you want to minimize them as much as possible by driving improved quality measures within your organisation.
Examples of Indirect Costs Due to Poor Quality:
Loss of productivity due to product or service downtime
Travel costs and time spent to return defective product
Moving items that are delivered to the wrong location
Replacement product or service to cover failure
Repair costs after warranty period
Reputation impact due to dissatisfied customers
Additional Management Involvement
Measuring the Poor Costs of Quality:
The first priority related to identifying the cost of poor quality is to measure your performance across the business.
Within an organisation, no one's perfect, no one has the perfect business all the time. Of course, there can be human error, process-based errors, technological errors, systematic errors, and simply there can be a culture of errors.
But when you start to communicate and involve more of the workforce, in identifying where things are not as efficient as you would like them to be, this is when you can grasp the opportunity to identify them, and share with others within the business, what costs are associated to this.
Analyzing the Poor Costs of Quality:
When you analyse this, you want to look at the true cost of these errors and failures.
You want to understand:
What time has been spent to resolve it
Whether management has been involved
Whether additional employees are taking longer to do something
Are errors within a process being reworked regularly, and lessons are not being learned?
We often hear about companies that record opportunities for improvement, such as non-conformances, customer complaints, and lessons learned from projects, but what we don't hear as much about is what they do with that data.
It's all well and good recording the information, but ultimately, if you do not do something to improve upon it, then you are just setting a culture of recording information, not measuring, and analysing it.
Involve the Wider Organisation:
To really compare and understand these costs, you have to involve more people within the organisation and try and get them to understand the benefit. Involve them in understanding the times, issues, rework, scrap, and the errors that occur.
Give them a greater picture of what often can go on in the background when something has been sent to a customer incorrectly, when something has been delivered, a service to a client that has not been as effective as you would expect it to be.
When that client wants that mistake corrected, what is involved from your business to be able to do that? What time is invested to correct that?
It's also important to think that this may not be errors that have occurred within your organisation. It could be that your customers are identifying, initially, that you have caused the problem, and you're investing time and effort to investigate and ultimately present to the customer, that the error is not your fault.
Case Study Examples:
In these true case studies, we outline some of the costs associated to poor quality and how we identified the key areas to target, based on data and analysis.
This client clearly thought the root cause of their problems was associated to old equipment and were accepting with that scrap level. The scrap cost was associated to approximately 5% of the organisation's turnover. 5% is quite significant and it associated to around about 17.5k.
When we helped this client and gave them some guidance around how they could start to monitor it, what we very quickly found was that 45% (almost half of that 5% scrap level - remember the value 17.5k was associated to human error) - it was incorrect setup of the equipment.
Ultimately what we found was that the poor old machines were only associating about 15% of the problem to the scrap level. And then you have to think about that 17.5k that was costing that company in scrap, let's think about that in a little bit more detail.
They had not included within that, the time it takes to take that scrap out of the production line, the time it takes to involve the workforce handling the scrap, storing the scrap, ordering more material, adding additional runs to the production line.
When we start to go into the detail, remember the things that happen below the surface of the iceberg, we start to see that there is greater involvement of time to deal with these errors, and ultimately, time is money.
Let's involve the workforce in this situation, this is exactly what happened. They got more engaged, they got more involved, and ultimately, within a short period of time, that scrap level went from 5% to 3.5%.
With huge involvement and a targeted project to work on this, they are continuing this journey and slowly seeing improvements month on month.
In the case of the example of the service organisation, this was an organisation that had relatively large numbers of situations where teams were going to service locations and did not have the material they had requested at the locations on time, and in some cases, the wrong material.
Yes, there were some errors within their own organisation, but ultimately, it came down to their suppliers, their supply chain, not recognizing the impact that it had on the business.
The company started to record this, the lost time, meaning the four guys in the team spending four hours getting to a site to find out, either the wrong part was there, or the part had not arrived, then traveling back.
There was the requirement for the vehicle, the fuel and the costs associated to that vehicle.
There was the time of calling into the office and someone in the office handling that call and then subsequently reporting that to management, and also going to the supplier and chasing up the supplier and the delivery organisation to find out where the material was.
Gathering this data over a six-month period, it was very easy to put costs associated to this and what the impact was on the business. Ultimately, what we got to, was a figure of earned about £28,000 of lost time.
That was in a six-month period, and it was associated to a certain number of jobs, and it came down to approximately about £744 per job. This company was able to communicate this, as they had recorded the data back to their suppliers and outlining to their suppliers the impact that was having on them. Giving non-conformance is to the suppliers and expecting credits and support from them.
Ultimately, what they were doing was driving initiatives to closeout on poor quality down into their critical supply chain. They started getting credit notes associated to these events of a value of about £400 each one. But ultimately, what they found over the next six-month period was the number of events dropped dramatically.
More people were aware of this inefficiency. More people were aware of what went on underneath the surface of the water, the other people in the organisation had to be involved, and the knock on effect, that team that were completing that job, still had to go back out and do it at a later date, and that has a knock on effect on other clients, the reputation of the organisation.
t's important we understand and communicate within our workforce, we gather the data and analyse it, and that gives us the capability to work through these costs of poor quality.
Have you really identified all costs associated to errors and failures?
What about all the hidden costs? Look again!
Are you involving all appropriate persons?
Identify key areas to tackle
Look for suggestions?
Concerns raised from employee engagement?
I hope that's helped a little bit with your understanding of the cost of poor quality. Feel free to use this video as a training tool within your workforce to educate them on the impacts of poor quality.
Please take the opportunity to look at our other videos related to quality:
Why you need a Quality Management System (3 minute video)
Introduction to Quality Management Systems (QMS) with ISO9001:2015 (2 hour video)
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