Quality related Cost reduction
Also known as Cost of Poor Quality (COPQ)
It is not difficult to prove that the cost of poor quality in any organisation is likely to be a minimum of 20% sales turnover for a commercial operation. In the case of a public sector operation the cost will be 20%+ of total income or total budget. In fact, experience indicates that this is a very conservative estimate and in reality, it is more likely to be in the order of 30-40% plus!
Those who are not familiar with these statistics or their basis are likely to be wary of such claims on the grounds that 'if our costs were that high we would know it and have done something about it'.
Such people are simply mistaken and this usually includes the financial profession. The reason being that in the main these costs are hidden.
For example, consider a simple case of the Profit and Loss Account.
There are three main elements of this. Sales, Direct cost of sales and Fixed costs or overheads.
In P&L Account forecasting, the accountant wants to know estimated incoming revenue for the months ahead. In a commercial organisation, this information is obtained from the Sales Department.
The accountant then wants to know the direct cost of these sales in terms of man hours, materials, machines and other equipment requirements, floor space etc. Estimates of these are usually extrapolated for the actual coists from previous months.
Finally he will want to compute Fixed costs or overheads and again he will in the main use extrapolation.
The problem in both the case of Fixed and Variable costs is whilst the total cost of each of these may well be known, what is not generally known is the efficiency of each. These costs are not computed and are therefore well hidden. For instance, supposing that it is estimated that Machine X is required for 35 hours in the next month to produce Y units of product. It will not be known how much of that time is actually 'value added', how much of it is wasted in inefficient set up times, poor scheduling, unexpected breakdowns, running below capacity due to poor quality materials etc.
What also will will not be known is Overall Equipment Efficiency, the impact of labour problems and the usualkly huge cost of delays due to Design Changes, modifications due to difficulties to manufacture and
a myriad of other costs that we take for granted that are present all of the time but never computed.
The fact is that these costs are not a fate. They can be isolated and eliminated by the remorseless use of the Continuous Improvement process using Root Cause Analysis.
From our huge experience in this field we can help you to identify these costs and progressively eliminate them. As you do, you will find that your operation begins to run more smoothly, inventory will decrease, both in terms of so called 'work in progress' and finished goods stocks. Sales will incease because your customers will prefer the growing consistency of your products and the superior back up service that you will be giving.
Alternatively you may wish to invite us to present our course Quality Related Cost Analysis
to your key people as part of your continuous improvement programme.
An explanation of Managerial Breakthrough originated by Dr Juran in the 1950s
Root Cause Analysis,
Organisation of the workforce through:
Six Sigma Black Belt training
Six Sigma Brown Belt training
Six Sigma Green belt Training
Six Sigma Yellow Belt training
Quality Circles training and support
See also David Hutchins new book Hoshin Kanri - The strategic approach to continuous improvement