FORMULA FOR THE COST OF POOR QUALITYbigstock-Retro-Desperate-Accountant-Hea-86495951

The amount of time and money that companies invest in tracking and managing nonconformances due to the COST OF POOR QUALITY (COPQ) is staggering. As stated in the article The Absolutes of Quality: The Price of Non-conformance. Management is always interested in these three things: (1) money, (2) making money, and (3) not losing money. So when talking to management about Quality, it helps to express the issue in monetary terms.

The cost and result of non-conformances can range from the most serious which is reputation damage to the brand to having an impact all the way through the various departments in an organization that have to deal with the consequences.  The costs are as high as 15-20% of sales revene and up to 40% of total operations, according to Gagen MacDonald.

Even with the millions of dollars lost due to poor quality, many organizations are unable to accurately pinpoint the COPQ. This is a clear indicator that organizations require integrated quality systems to reduce these costs.

Phil Crosby used the term “the Cost of Quality” to describe the monetary impact of quality issues and activities. He formulated it this way:

Cost of Quality=Prevention Costs+Appraisal Costs +Non-Conformance Costs

Methods for calculating the Price of Non-Conformance (PONC) vary since every industry is unique, however there is always a negative cost involved which ties back to the Operational Cost of as high as 40%. Below are the 5 methods as stated by Gagen MacDonald:

  1. Whole Account – entire category of expenditure related to non-conformance
  2. Whole Person – personnel dealing with non-conformance
  3. Labor Claiming – labor and resources expended on nonconformance
  4. Unit Pricing – counting non-conforming units
  5. Deviation – comparing what is to theoretically what it should be

Non-conformance costs are exacerbated by the fact that many organizations are outsourcing and using multiple domestic suppliers as well as foreign suppliers.  This environment is conducive to quality problems and failures throughout the supply chain that can have a negative performance for many firms.

METRICS MATTER – PRICE OF NON-CONFORMANCE

Automation matters when collecting accurate information and metrics to utilize them to turn data into actionable items.  The impact of accurate metrics is huge when you consider that they will be used by the organizations to do the job right the first time.

As evident as the solution may seem, many companies still have manual collection of data throughout their processes thus making it very difficult to have accuracy and faith that you and your quality team are coming up wth the right solution for the problem. A recent survey by LNS Research indicates that 37% of respondents said they heavily rely on accurate quality metrics to operate efficiently. 29% of manufacturers still rely on manually keyed spreadsheets and 17% did not know how their company collects quality metrics.  Only 5% of those surveyed use an automation solution to generate quality metrics. What is shocking about this previous sentence is that the collection of accurate quality data is still 95% non-automated. The end result is, as stated previously, the costs are as high as 15-20% of sales revene and up to 40% of total operations.

Quality managers primarily needs the flexibility to analyze data in various forms, levels and parameters thus enabling them to improve the process. Without the required accuracy this job becomes extremely difficult and solutions are slow to come by.  The result is an organization that continues to make the same costly mistakes without the ability to fix the problem quickly and eliminate future errors.

COPQ is estimated to be 20% of sales in the average organization.  There are two types of costs:

1- Visible Costs

    1. Loss of Profit
    2. Defective Product
    3. Cost of Inspection Staff
    4. Inefficient Use of Resources

2- Hidden or Unmeasured Costs

    1. Missed Delivery Commitments
    2. Just-in-Case Inventory
    3. Claims Management
    4. Extra Logistics & Expedited Freight
    5. Crisis Management
    6. Loss of Reputation
    7. Loss of Time
    8. Loss of Sales

Taking these costs a step further a study was conducted to analyze several critical costs in addressing quality control issues and it was determined that the AVERAGE LABOR COST PER ORDER for companies is $20,600/ per year.

NON-CONFORMANCE MANAGEMENT

Even when you and your entire team have created the greatest engineered product and process to obtain the highest customer satisfaction ranking, you can be certain that something will go wrong. And it will and when it occurs this is known as a non-conformance.

The next step is to track and manage the non-conformance.

Below are four core elements within a non-conformance management process:

  • Standard Reporting Method: The occurrence of a non-conformance is commonly recorded using a Non-Conformance Report or (NCR).
  • Non-Conformance Review Process: The data from the NCR is then commonly reviewed by a Material Review Board (MRB)
  • Disposition: This is where it’s decided what is to be done about a specific occurrence of an issue.  Examples of disposition types within a manufacturing company include: rework, scrap, recall, Return to Vendor (RTV). products/processes, categories, time periods, and suppliers.
  • Ongoing Analysis: Ongoing analysis of trends in non-conformance data gives an organization the ability to make changes to their process to reduce the occurrence

In order to manage non-conformances effectively, start with the end in mind and use standard reference codes and most of all traceability information.

CORRECTIVE ACTION PLAN

Many organizations struggle with the Corrective Action Plan (CAP) that is required to prevent non-conformance from recurring. More importantly if these CAP’s are ageing due to lack of solution to the problem/error causing the non-conformance, the cost continues to increase until it is resolved.
Having a well written corrective action plan gives companies an advantage and eliminates costs associated with non-conformance.  A strong action plan should contain the following:

  1. Definition of the problem
  2. Measurable solutions for root cause
  3. Required corrective actions (usually legal or regulatory in nature)
  4. Recommended corrective actions
  5. Indviduals accountable for the solution as well as correcting the problem
  6. Set timelines that can be achieved and monitor progress

Having supplier collaboration is also critical for eliminating non-conformance throughout the supply chain. Dedicated communication via a web based tool is key to providing alerts of potential problems early in the process. Having an operational dashboard is also a solution for providing real time view of work flows and increased visibility helps enforce accountability.

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