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Managing Quality Related Costs
Typically, the 'Cost of Poor Quality' in industry generally is found to be a staggering 20% or more of Sales Revenue. Some find that statistic unbelievable but in practice, the likelihood is that this is a gross understatement and the true figure is more often above 30%.
Experience indicates that it is possible to halve these costs in under three years whilst at the same time increasing market share through Quality Improvements. | |
| The big Q and the small q |
At first view it would seem a paradox to claim that quality can be improved at the same time as reducing costs. This apparent anomoly is caused by a confusion of concepts.
There are two types of Quality related Cost. One is often referred to as the 'small q' and the other the 'big Q'.
The 'small q' represents the quality of the specification. Nobody would deny that a chrystal glass is of a higher quality of specification than a plastic equivalent. The former would also cost much more.
However, if we take the production process for either one of them, or the operation as a whole, this would be called the 'big Q' and is the means to manufacture. In this sense, the better the operation of the manufacturing process, the better and more consistent the final product.
Therefore, by improving the overall operation we can simultaneously improve quality and reduce cost. |
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This concept which is thought to have been inspired by Dr Fiegenbaum in the 1950s indicates that every organisation consists of two sub organisations. One of them only does good work and the other only produces rubbish.
In the latter, how much equipment, apparatus or machinery does it possess? how much floor space does it use? how many people does it employ just to produce rubbish?
What is the ratio of this to the total organisation? |
The hidden company.
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Using Quality Related Costs as a competitive strategy |
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It can be seen from the slide that Company 'A' is far more efficient that Company 'B'. As a consequence its costs are lower. At the same time, because its quality is higher, people prefer to buy its products which it can if it wishes sell at premium prices. The only way that Company 'B' can survive is to keep its prices below that of 'A' in the hopes that there are enough people looking for a possible bargain. However, if Company 'A' chooses to drop its price below the costs of Company 'B' then it is exit from the market place for Company 'B'. Simple really but how to do it?
That is where we can help! |
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Return on investment
Understandably, senior managers are wary of the cost of new initiatives especially when they have had their fingers burned before. However, consider the implications of what we have said already.
Suppose that your sales revenues or income is £100M and Capital Employed in the operation is £50M.
If COPQ is 20% of Sales and we have said that it is likely to be higher, then COPQ will be £20M.
If the organisation is making 10% Profit this will be £10M.
If as we claim, that this can be cut by 50% or more in less than 3 years, there will be a saving of £10M which goes straight to the bottom line which doubles annual profit. Of course there is a cost for achieving this but in our experience this has never been higher than 10% of the saving.
What alternative investment can produce a better yield?
John Young the CEO of Hewlett Packard back in the 1980s when presented with such a result from one of their operations stated 'Quality Improvement is good business to be in'! |
Contact us today and arrange a one day presentation and workshop at your premises or venue of your choice to discuss and work on this crtically important issue
Following the event you will have gained sufficient insight to work on this yourselves but you will get very much more if we can assist you achieve the potential benefits
Our 'in house' one day event would be for a fee of £1000 plus VAT with no limit on the number of participants up to 20 and £50 per person plus VAT for course documentation. |
David Hutchins International (DHI) specialise in assisting organisations across the broad spectrum of industry to identify the Cost of Poor Quality(COPQ) and to put in motion the means to make dramatic reductions.
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