What Is Your True Cost of Quality?
‘It costs just as much to make a defect as it does to make a quality product first time’ Dr Edwards Deming
When I ask this question of many manufacturers today, I find it surprising just how many don’t know and how few attempt to calculate their Cost of Quality, or to determine root cause of problems. Frequently, the cost of scrap, rework, etc., gets buried within the company overhead, especially if the problem is found and ‘sorted’ before despatch, before it becomes a batch rejection or product recall.
Scapegoats for a Loss of £250,000
I experienced precisely this problem not long ago with a well-known pharmaceutical manufacturer of indigestion remedies who, due to a batch rejection, had to dump £250,000 of product to landfill as half the batch had been printed with an incorrect date code. The real sadness is that this would have been an easy problem to prevent and, at least, to prevent a recurrence, but the company response was ‘We have solved the problem, as we have sacked the person responsible’. It would have been far better to have said to the person responsible for the failure, ‘I have just invested £250,000 in your education, so what do you suggest we do to ensure this never happens again?’ Even today it is easier to take drastic action to appease instant anger and frustration, even to sack somebody, than to determine root cause and put controls in place to stop a recurrence and even to put ‘the errant culprit’ in charge of the new ‘fool proof solution’. Sadly, that is not what happened. We soon lost contact with the company after this episode as we felt that we could not ‘add true value’ where people were being made scapegoats for genuine mistakes.
A simple integrated or semi-automated solution which, on product changeovers, automatically sets up the date coders would have completely avoided this problem and the consequential huge cost, whilst minimising, if not eliminating the risk of it ever happening again.
But such is the perpetual problem when quality or engineering issues are found, unless a true ‘root cause’ is determined and fixed permanently, the problem will be destined to recur.
Research has shown that only about one in ten complain, the rest just don’t return to buy more product.
The Cost of Quality – Control the Process, Not the Product
But what does this have to do with ‘The Cost of Quality?’ you may well ask. These are a couple of ‘Cost of Quality’ examples. ‘Cost of Quality’ has nothing to do with the cost of running the Quality Assurance department, a necessary requirement of any well-run business. When ineffectual inspection-based Quality Control gave way to process based Quality Assurance, some decades ago, it was seen as a ‘Game Changer’ because it meant eliminating all those inspections for rejects and getting and keeping the process under control so that the risk of ‘defects’ was minimised, from the outset and throughout the production run. This was, and usually still is achieved by statistical sampling to ‘test’ the condition of the process and to only make adjustments when absolutely necessary to provide the best opportunity of the most consistent quality output and minimal rejects, scrap or rework.
So, it is fair to conclude that ‘The Cost of Quality’ and its measurement (should always be a KPI) is the excess cost, the production of everything that is not quality, those unintended consequences, and the costs can be huge, as many companies can confirm. Some quality gurus have even put the cost of quality as high as 35% of turnover.
Much of the food industry already work on tiny profit margins. It is not unusual to see significant turnover of say £40million, with a bottom-line profit of just a few hundred thousand pounds, or even a loss. Following normal accounting principles, the raw materials and direct conversion costs, from goods inwards to despatch, are all that should be included within the ‘Cost of Sales’. In the above example, the Cost of Sales on a £40 million turnover, might be say £33 million, leaving £7 million to be eaten up by overheads, administration and ’hopefully’ at least a modest profit.
Working on the premise that for many ‘Hope is not a Strategy’ it is up to each company to achieve its own ‘change processes’ to ensure that they improve profit margins, remain competitive, protect the brand, jobs and that all important profit margin. OK, but how? There is no need to do this alone.
Turn Your Cost of Sales into Bottom Line Profits
Let’s assume that at least some of those Quality Giants of yesteryear got it wrong about the 35% of turnover wasted, or that they were not as correct as they might have believed, or that recent improvements in technology, working practices, training, etc., have changed all that and in more modern terms let’s imagine that wastage is now more like 10% for most companies.
Also, thinking about where most of that wastage is created (the production conversion process) 10% of Cost of Sales sounds less painful. Let’s also say that, despite our best efforts we can’t save all the unnecessary waste but only half of it. That takes us to a less remarkable 5% of Cost of Sales, or, using our example, that is still 5% of £33million (more than £1.6million), and what makes that saving even more compelling is that such savings go straight to boost bottom line profits, instantly turning a disappointing outcome into something more attractive and sustainable, thus making each company more fit and ready for the next onslaught of price reduction demands from retailers and/or price increases from suppliers.
Catch the Opportunity to Reduce Saveable Waste
So where is all this saveable waste being created? Everywhere, from goods inwards to dispatch but limited to raw materials, packaging and conversion labour. So, how come the manufacturers don’t see this ‘everywhere’ waste? Because they are so used to it. It is always there, it’s part of the culture, we have always done things this way, etc.
Even now, so many are still reluctant to change and we understand that ‘stepping outside the comfort zone’ can seem very scary. These are some of the reasons why all manufacturers should continually question everything they do and enlist some help from people like us, at Harford Control, who have spent more than half a century, thus far, helping manufacturers to become even better than they currently are. In some cases, we have helped companies make savings of 20% and even more. It costs nothing to let us have a look. Get in touch here.
Roy Green Harford Control Ltd. 01225 764461 www.harfordcontrol.com
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