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QUALITY TUESDAY: The Cost of Quality & The Impact It Has On Your Bottom Line

In ASQ CEO Paul Borawski’s January blog on Measuring the Cost of Quality  he laments that despite the reality that poor quality costs organizations at least 20% and for the service and government sectors over 70% to the bottom line, why no one is lining up to examine their individual organizations.  Why is that?

In our training, Building a Process Improvement Mindset, the cost of poor quality is spelled out in practical, simple terms.  Day in, day out in every organization we are spending money on 3 things:  either value-added activities that improve the product or service directly, value-enabling activities that are required by law, regulation or business necessity and non-value added work or what the Japanese call muda or waste.  Muda is work that is non-essential to meeting customer needs or to producing product.  That waste can either be an internal failure cost (within the organization) or an external failure cost (experienced by the customer).  There are lots of things that are considered failure costs, including some of these that you might not have considered:

o Meetings starting late, with no agendas, outcomes or action-items
o Missed deadlines and milestones
o Rework, rechecking, duplicate effort
o Absenteeism
o Customer complaints; loss of a customer
o Not communicating clearly and completely
o Downtime due to systems or backlogs
o Poor choices in vendors, staffing
o Broken or waste-producing processes; bottlenecks and constraints
o Poor performance that remains uncorrected
o Doing work that doesn’t need to get done
o Lost opportunities

These quality expenses exist in every organization, yet the actual costs are rarely identified and shared on any meaningful level.   So let’s see what that might look like:

If we say that quality costs usually represent about 30-50% of expenses in an organization or department, let’s imagine that we’re a department of nine people with an expense budget of $750,000 per year.  That means that our overall quality costs (value-enabling + non-value added) = between $225,000 to $375,000. Now, of that cost, about 70% represent failure costs, or $157,000 to $262,500.  Divide that now by the nine people and the failure cost per person ranges from $17,444 to $29,166.  At this point, we often say “But let’s imagine that you are the very best of the best, so let’s cut this cost per person in half” – to $8,722 – $14,583.  Now comes the fun part.

Knowing that we average between $8,000 to $15,000 in wasted activity per person, can we find it – and if we find it, can we share in the gain?  Here are the next steps:

1. Train each employee in the department on the Cost of Poor Quality, including how your figures were derived.

2. Invite each employee in the department to go on a scavenger hunt for two weeks looking for where the waste is occurring in the work that they are doing.  Invite them to look for the original 7 wastes (created by Taiichi Ohno):  The video, Kaizen Toast, is great at elaborating on quality wastes in a simple approach.

1 waste in motion including reaching for, looking up, walking
2 waiting time including watching the computer, standing around, having no work because of delays and reviews, equipment downtime and bottlenecks
3 transporting or moving work in process from place to place
4 storage including excess inventory
5 defects including scrap, repairs, wasteful handling, and rework
6 excessive processing time, overproduction by producing earlier or in greater quantities than needed or poorly defined process steps
7 unused employee creativity

3. As employees find the wastes have them write them on post-its that are put on a large high-level process map in the department.  This part encourages the department to move from an individual process to a group process where the entire department is looking for, identifying and posting wasteful activities.  (insert sanofi team picture of putting post-its up on the process flow chart)

4. Once the wastes are identified, sort them according to “low-hanging fruit” and “high impact but hard to do.”  Prioritize the low-hanging fruit and determine an estimated failure cost (labor, materials) for each.

5. Assign them to a “Failure Fixing Team” that will work to eliminate the waste.  Once the waste is reduced, calculate the savings and put the “paper money savings” into a bowl.  This process can go on for months as FFTeams are at work.

6. On the deadline day, empty the paper money savings and add it up in front of every employee in the department.  It’s typical in most gain-sharing environments, for 75% of the savings to be returned to the organization and 25% shared with employees.  Let’s imagine that our team of nine employees was able in 4 months to save $50,000 in failure costs.  That’s $12,500 that can be shared among the nine or $1,388 per person!

Whenever we have used a gain-sharing approach to attack the Cost of Poor Quality and put it at the employee level, we have seen enormous interest and application that continues way past the event.   For example, a research science group addressed mistakes in their notebooks and poor labeling of freezer items; a banking department addressed accuracy and rework issues; a municipal highway department addressed inventory excesses.  All shared in the gain of recovering the cost of poor quality.

ASQ’s Influential Voices:
I’m part of the ASQ Influential Voices program. While I receive an honorarium from ASQ for my commitment, the thoughts and opinions expressed on my blog are my own.

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