Cost of Poor Quality: A Silent Killer in the Organization’s Body

Boosting product or service offering with optimized cost is a strategic objective of most manufacturing and service industries in the world. Nevertheless, tactics to achieve this objective range from shortsighted organizational downsizing and payroll cut to farsighted mindset of combating hidden costs. In the latter tactics, management exerts tight control over Cost of Quality (COQ) to achieve more with less while balancing the trilogy of profitability, customer, and employee satisfaction. Moreover, if inflated, COQ becomes a serious silent killer that eats profitability for breakfast. Hence, monitoring and controlling COQ is indispensable to survival.

What COPQ is and how it is related to COQ

Cost of Quality (COQ) and Cost of Poor Quality (COPQ) are sometimes erroneously used as synonyms to each other, whereas COPQ is actually one component of COQ. COQ-sometimes referred to as Total Cost of Quality- is the total costs associated with preventing failures, appraising quality level, and those costs resulting from failures. Hence, COQ comprises two main components; Cost of Good Quality (COGQ) represented by prevention and appraisal costs, and Cost of Poor Quality (COPQ) for failures costs. Failure costs are divided into External Costs (supply chain costs) and Internal Costs (field failure costs). Total COQ can be represented in the  equation below:

A closer look into COQ Components

The key differentiator between Internal and External Failure costs is whether they occur before or after reaching the customer. Internal Failures are those resulting from products or services not conforming to requirements occurring before reaching the customer. Such might take place in any of the Design, Procurement, or Production processes. For instance, a rework-associated cost of a finished product due to design changes is an internal failure taking place before delivery to customer. Similarly, replacing defected raw materials acquired from a supplier is considered an internal failure cost happening during the procurement process.

Internal Failures

On the other hand, External Failure costs are those costs incurred by products or services not conforming to requirements occurring after reaching the customer. 2009 Toyota’s recall of vehicles due to unintended acceleration is a perfect example of external failure that caused 52 deaths, 38 injuries, and a financial loss of USD 5.5 billion. Another tragedy depicting an external failure is the historical 1986 space shuttle Challenger explosion that happened 73 seconds after takeoff leaving 7 deaths and a financial loss of more than USD 1 billion.

External Failures

On the other end of the spectrum exists the good COQ that if leveraged will combat the poor quality costs. Despite being cost, Appraisal and Prevention activities are desirable to a certain extent beyond which the law of diminishing returns dominates. Raw materials receiving inspection, for instance, will decrease the odds of having nonconforming input to the manufacturing process (Appraisal activity). Even better, going the extra mile in reviewing and rating your suppliers regularly would increase the odds of receiving consistent quality items which could even spare you frequent receiving inspection down the road (Prevention activity).

In spite of the fact that Appraisal costs are considered good COQ, they better be used wisely. This is because they are detective rather than preventive activities. For example, inspection of a finished product at the end of the line would probably detect defects, but will never eliminate the root causes; so, defects recur. Hence, Appraisal costs are costs incurred to determine the degree of conformance to quality requirements not to prevent causes of failure. This component of the COQ can take place anywhere during procuring raw materials, producing an item, or could be in activities external to the organization such as inspections, tests, or audits conducted at the site for installation or delivery.

Appraisal Activities

Prevention costs is the other part of the Cost of Good Quality, and it is the best to maximize in the equation as they keep Failure and Appraisal costs to a minimum. They are costs of all activities designed to prevent poor quality in products or services. It has been pointed out that cost to eliminate a failure after delivery is five times that at the development or manufacturing phase. Therefore, prevention activities are best performed at upstream rather than downstream processes. For instance, reviewing a design before release to manufacturing would spare the organization extra costs that might be incurred due to internal or external failures after production. Prevention activities might be deployed anywhere in the value stream starting by Marketing throughout Production.

Prevention Activities

Optimizing Total Cost of Quality (TCOQ)

Going back to the TCOQ formula mentioned above, logically yet still controversial, the TCOQ value cannot be zero. It is rather an optimization problem. Unless operates in a perfect world, any organization can never produce or offer a defect-free product or service without deploying appraisal or prevention measures. Obviously, Cost of Good Quality (COGQ) components, Appraisal and Prevention costs, need to be maximized, whereas Cost of Poor Quality (COPQ), Internal and External Failure costs, are to be minimized so as to reach to the minimum TCOQ value.

TCOQ Optimization Curve

As shown by the figure above, COPQ declines as the Quality Level improves, but this doesn’t occur without exerting some level of prevention efforts. The key question that the TCOQ formula should answer is “to what extent should the organization invest in COGQ so that it reaches the minimum TCOQ with the optimum quality level of the product or service?” And the answer points to where the organization needs to position itself consistently to retain competitiveness or, more bluntly, to survive.

Improving a product or service quality level while keeping profitability at decent levels is not a walk in the park endeavor. However, having a proper grasp of the Cost of Quality concept and methodology coupled with a standardized approach of monitoring and controlling over optimum levels of cost allow the organization to balance the competing demands of profit, customer and employee satisfaction.

Hunting High and Low for Quick Wins Using Kaizen Blitz

Traditional continuous improvement projects are sometimes doomed due to several avoidable reasons. Besides, the ever-increasing pace of change in the business environment necessitates acquiring a new way of thinking. Hence, Kaizen Blitz has become of paramount importance in the process improvement profession.

An environment where people have to think brings with it wisdom, and this wisdom brings with it Kaizen (continuous improvement).– Teruyuki Minoura, former President and CEO of Toyota Motor Manufacturing

Traditional continuous improvement projects are sometimes doomed due to several avoidable reasons. Improvement projects that stretch out over many weeks or months can lead to lack of management support and interest, budget overrun, drainage of resources, and losing momentum by the project team. Besides, the ever-increasing pace of change in the business environment necessitates acquiring a new way of thinking. It requires process leaders to think and respond to change rapidly. It obliges them to switch gears faster than their competitors and be more agile. Hence, Kaizen Blitz has become of paramount importance in the process improvement profession.

Kaizen is the Japanese word for “Continuous Improvement”. It consists of two parts: Kai for “Change” and Zen for “For the better”. Blitz is the German word for “Lighting”. Combining both words in one phrase (Kaizen Blitz) creates the concept of “lighting rapid improvement”. Kaizen Blitz is a focused and short, typically 5-day-long, project to review a process for better performance. Process review, performed by a cross-functional team, aims at identifying and eliminating waste; therefore, achieving noticeable and dramatic, rather than incremental, improvement.

With its short and focused approach, Kaizen Blitz overcomes obstacles encountered in long-term improvement projects. In its one-week-long project span, it uses as much as fractions of the resources, effort and cost of other longer projects. Moreover, since improvement results can come through in a short time, this approach is more likely to win top management support and commitment. It is the approach to reap the fruits of short, yet effective, endeavors that I refer to as Quick Wins when it comes to process improvement.

This Japanese approach helps organizations achieve a competitive edge through eliminating process wastes, and by unleashing the power of creative thinking of employees. The Kaizen team can initiate a quick-win project to target any of the eight types of waste; namely, Defects, Overproduction, Waiting, Neglected Resources, Transportation, Inventory, Motion, and Extra-processing. Kaizen Blitz capitalizes on creative cooperation amongst team members. It applies the principle of team synergy through which it values differences, builds on strengths, and compensates for weaknesses to produce the best solution for the problem, or opportunity, under study.

In order for an organization to reap the desired benefits from deploying this rapid-improvement approach, the following success factors need to be considered:

  • Clear and quantifiable improvement goals. (e.g. Reduce process cycle time by 60%)
  • Sufficient management support for the team and for the project.
  • Sufficient and accurate data to analyze the current state of the process and to identify root causes of the problem.
  • Involvement of all personnel concerned with the process to get their buy-in for the proposed change.
  • Proper training for the cross-functional team on Kaizen and Lean concepts.
  • A clear Control Plan to sustain the new solution after implementation.

Failure to meet the aforementioned factors will result in an abortive project. In other words, the project outcome will fall short of the desired goals, the project team will be demoralized by their poor performance, the allocated resources will be wasted, and the competitive edge will probably be in jeopardy.

Each Kaizen Blitz constitutes a project by itself. It is a temporary endeavor undertaken to produce unique improvement results. The life cycle of a Kaizen Blitz project consists of three phases:

The Preparation Phase

This is a preliminary phase in which the project leader is assigned and the sponsor support is secured. In this phase, the project leader defines the scope of the problem or opportunity to be studied. Also, he defines clear objectives, selects and trains the project team, and sets the project constraints in terms of budget, schedule, risks, and success criteria.

The Blitz Phase

This is the phase where the Blitz event takes place in three to five days. The following five-day schedule shows an example of a Blitz phase:

Day One

On the first day, the project team members get introduced to each other and get trained on Lean concepts and Kaizen Blitz approach. The leader briefs the team on the process under study and on the project definitions and constraints.

Day Two

On the second day, the project team members walk through the process and map the ‘As-Is’ state of it. The actual mapping of the current process allows the team to pinpoint potential improvement opportunities and to start the data collection task.

Day Three

On the third day, team members complete data gathering after interviewing necessary stakeholders. They start analyzing collected data, and they work out potential solutions for the problem.

Day Four

On this day, team members select a viable solution using a proper decision-making tool. Then, they start the implementation process.

Day Five

Finally, team members prepare a summary of the project data, the proposed solution, implementation outcomes, and recommendations. A Control Plan is also outlined to sustain and to institutionalize the solution. After that, the team (leader) presents outcomes and recommendations to key stakeholders of the project.

The Control and Follow-up Phase

This phase is intended to close any open actions and to sustain the new solution. Team members close implementation actions that could not have been completed during the Blitz phase. They ensure the new process is documented and the old one is superseded. Besides, they train the process owners on the changes and hand over the solution to them.

Having said that, the project is not considered closed unless lessons learned have been documented and the financial impact of the change has been measured. Documenting lessons learned is an important step that must be done before project closure. It is a step in which the team stipulates and archives what went well and what went wrong for use in future similar projects. Besides, the project must show, in dollar terms, what benefits have been realized as a result of implementing the new solution. This step helps the team to formalize the change and to get top management buy-in for future improvement ideas.

Quick Wins exist everywhere in any organization; however, they need someone to look for and reap. Walk through the processes in your Accounting Department. You will probably find invoices being checked and reconciled manually. Why do not you map new processes in which people utilize automated tools that cut down on processing time and increase accuracy? Have a gemba walk in your warehouse, and study how inventory is controlled. Is it controlled on paper? Can you think of another inventory management tool that is more efficient and effective? Or observe ergonomics of your operations. Does the workplace fit the workers? Is the layout appropriate enough to spare them potential strains and injuries? Surprisingly, you will discover a bunch of improvement ideas just in a few-minute wander in your workplace!

The business environment is changing at ever-increasing pace, and costs are rocketing while customers are becoming more demanding; therefore, excellence in the workplace is no more optional. The journey towards excellence starts by promoting value-adding processes and eliminating wastes. Kaizen Blitz is an approach that allows you to excel by rethinking your current processes and eliminating non value-adding steps while leveraging the capabilities of your people. It allows you to survive with minimal costs, resources and time, and it opens up a can of Quick Wins for you!

Waste Elimination Using The Seven M’s of Management

Rooting out process or system wastes along with their causes is a key step for effective fat-to-lean transformation endeavor. A handful of Root Cause Analysis (RCA) tools can be used to eliminate wastes. However, institutionalizing a waste elimination culture requires adopting a structured RCA methodology rather than tools. And here where the seven M’s of management can be leveraged to serve as an RCA analytical approach to strip out wastes in any industry or business.

The seven M’s (Man, Method, Machine, Material, Measurement, Mother Nature, and Mindset)-with all their  variations- have been used in business management for so long. Though, in the book Driving Operational Excellence by Ron Crabtree– the seven M’s are leveraged creatively by linking them to the Eight Types of Waste.

Before digging deeper in how the seven M’s can be used in waste elimination, let’s have a quick overview on the definition of each component:

  1. Man refers to the manual and mental skills used by a person to execute an assignment.
  2. Method is the sequence and steps necessary to convert material or information into a product or service.
  3. Machine is a mechanical, electrical or electronically-operated device used to perform a task.
  4. Material is the physical matter or information converted or acted on to create another form with added value.
  5. Measurement refers to an action using a physical device to record a characteristic and compare it to a standard or expected outcome. Notice that Measurement is a possible cause of waste only if the cause is the instrument itself. If the person taking the measurement causes the error, waste is categorized as either Man or Methods.
  6. Mother Nature is the environment and immediate surroundings of the task or process. Examples of Mother Nature are weather, humidity, moisture, temperature, wind, noise, dust, odors, lighting, ground, and vibration.
  7. Mindset refers to the fixed mental attitude about a situation, event or belief. It may be derived from culture, value system, experience, or management directives. Mindset as a cause of waste is characterized by inflexibility, and it does not allow for change or new ideas.

The seven M’s-eight Wastes root cause analysis approach is premised on investigating each type of waste from the perspective of every “M”. Each type of waste is examined as a prospect effect of an M, then analysis is continued until the root cause is caught. The cycle continues for each recognized waste against the 7 M’s. Fishbone Diagram and Mind Mapping are excellent tools to visualize the analysis.

In investigating prospect causes that effect Defect as the first type of waste, the effect is mapped to each one of the 7 M’s as shown in the below mind-map. Then, each M is further probed to dig out a probable root cause. For Man, lack of training or poor skills could lead to producing defected output of a process. Looking through the Machine lens, lack of preventive maintenance or wearing out tools would result in a lower throughput yield. From the perspective of Mindset, a “we’ve always done that” culture is a prime fallacy that accepts defects and elects to maintain the status quo. At the end, all M’s are scrutinized against the selected waste type until root causes are identified.

Mapping Defect as an effected Waste to the Seven M’s

Once root causes are identified efforts are directed towards eliminating them. If high percentage of defects, for instance, is deemed a  consequence of insufficient job training, proper training programs should be compiled to develop the skills of the workforce. And if using raw material with inconsistent quality causes defected products, improvement efforts could be extended to the supplier’s premises rather than manipulating machine parameters to absorb material inconsistencies.

Root cause analysis of Wastes through the lenses of the seven M’s is a creative lean thinking. In one way, it allows lean practitioners to look into causes from different angles. At the same time, it provides a structured methodology that enables standardization across the organization in hunting for root causes without overlooking many of the hidden wastes.

Although it is far from being comprehensive, I have compiled a set of mind-maps each represents associations between one type of the eight wastes with the seven M’s as causes. Each M is then branched out with prospect root causes. You can download the maps file below. Try it in your workplace and share your experience in the comments box.

DOWNTIME: The Eight Types of Waste

The difference between a lean and a fat organization is waste. Lean + Waste = Fat, if you will. Hence, for an organization to transform into a lean state it should trim as much waste as possible. But, what is Waste anyways? and what variant shapes could waste take?

The difference between a lean and a fat organization is waste. Lean + Waste = Fat, if you will. Hence, for an organization to transform into a lean state it should trim as much waste as possible. But, what is Waste anyways? and what variant shapes could waste take?

In my previous post “The State of Being Lean or Fat Is a Matter of your Own Choice” I discussed the Waste Elimination Process which comprises six steps to transform into a lean state. In the second step (Recognize the Wastes), different types of waste are to be identified in the process under study. In particular, the lean transformation practitioner is hunting anything that is characterized by two related attributes which are value and pay.

Waste, muda in Japanese, is anything that does not add value to the product or service, and hence the customer is not willing to pay for. Are you willing to pay an extra USD 20 for a shirt that is priced at USD 50 just because it is packed in a fancy, carton box rather than being wrapped in a plastic cover? Considering identical fabric quality of shirts in both cases, I am confident you won’t. From a different perspective, will moving some raw material from a warehouse to a production line- that is 50 meters far- add any value to the quality of its product? Absolutely not, and the customer will not accept paying for this extra transportation.

In addition to the clear definition of waste, there are eight agreed on types of waste in Lean philosophy that make it even easier to recognize wastes in any setting. Luckily, these eight types can be combined in one word, that is DOWNTIME. Each letter in DOWNTIME represents the first letter of one type of waste.

The Eight Types of Waste

Below is a breakdown of DOWNTIME into the eight types of waste along with their definitions:

Defect is a product or information that does not meet customer expectations. It could be a damaged or improperly-functioning computer screen. In service industry, it could be delivery of a courier shipment to the wrong address or late delivery of a shipment to the consignee.

Overproduction is producing material or information more than required or before being required by the downstream customer. For example, the production of 20 tons of a product for a customer order of 18 tons- maybe to make up for some prospect defected quantity- is a form of overproduction. Make-to-stock, rather than make-to-sell, is another shape of overproduction.

Waiting is for a person or a machine to remain idle due to lack of information or material required to continue operation. Halting production on a machine due to being out of stock of one required raw material is a common form of Waiting waste.

Neglected Resources is neglecting, ignoring, or misusing the best resources available for the application at the time. This represents the underutilization of talents, state-of-the-art equipment, and advanced technology. In my early career days as Improvement Specialist, I developed dozens of Microsoft Office Access and Excel VBA-enabled macros that converted manual accounting processes that had consumed hours to finish into automatic steps finishing in seconds. Failure to leverage existing resources is a prevalent waste in most workplaces.

Transportation is the unnecessary movement of material or information that does not add value to meet the customer’s requirements. For instance, the frequent movement of raw materials from storage areas to the point of production is a widespread, unfavorable practice in the manufacturing industry.

Inventory represents material (raw or finished) or initial information in a queue. Inventory is usually depicted in piles of finished goods in a warehouse made without customers’ orders. And in the shop floor, inventory takes the shape of work-in-progress (WIP) of partially finished goods awaiting processing by a downstream process step.

Motion is unnecessary movement by people in a process. Excessive bending, walking, reaching, or any form of human body movement is considered a wasteful effort in a production process or a service delivery. For that, meticulous facility and workplace planning should be practiced when setting up the layout and sequence of process steps such that motion is minimized.

Extra-processing is committed if more features, information, or work are provided than what is required by the customer. This form of waste is usually exhibited in excessive, unnecessary packaging of products. It can also be incurred when additional, unplanned process steps are performed to meet the requirements. For instance, re-packing old products stored in a warehouse to remove dirt or replace worn out packaging is extra-processing that was unneeded in the first place.

Recognizing the eight types of waste is one critical step in the Lean transformation endeavor. Trimming the fat in any process requires lean professionals to identify each waste type then to measure it as a baseline for improvement. Although critical, recognizing wastes without eliminating their root causes dooms the improvement efforts to failure. Hence, the next critical step in the Waste Elimination Process is identifying and eliminating the root causes of waste. And that will be the subject of one of my future posts.

The State of Being Lean or Fat is a Matter of Your Own Choice

Lean is a culture and way of life rather than being a methodology. And the recipe for a successful transformation hinges on root cause analysis, sustainability, and continuous improvement. At the end, being lean or fat for an organization is an outcome of its own internal practices.

Being lean or fat for an organization is an outcome of its own internal practices. Likewise, the transformation process from one state to the other can be achieved at its own discretion. However, not all fat-lean transformations are healthy. Amongst the three fat-lean transition forms that organizations usually undergo only the fat-to-lean one is the savior leading to survival in turbulent times.

Most organizations which fail transitioning from fat to lean blame on the improvement methodologies they have adopted. Yet, in most cases the fact is not. During my two decades of experience in the manufacturing and service industries I have seen fat businesses embracing lean concepts but would not have trimmed a ‘kilogram’ from their bodies. I.e. they remained fat. And this is the first type of transformation; fat-to-fat.

Fat-to-fat type of organizations usually fail due to ineffectiveness in implementation. For the process of lean transformation to be effective root causes of waste should be eliminated, not the waste itself. For instance, converting defected product to second grade does not trim waste since the root cause remains haunting the manufacturing process, and the waste (defect) will recur. In another scene, clearing the production area from overproduction and stacking it in the warehouse will not do good for your shape as you convert overproduction into inventory, which is another type of waste. Hence, root causes of defects, overproduction, inventory, and other types of waste should be your target in the lean transformation journey.

Lean-to-fat transition is no better than fat-to-fat. It is even worse a case of transition but for a different reason of failure, which is lack of control. People on a weight loss plan must sustain their lean shape when they reach their optimum weight by committing to specific diet and exercises. Otherwise, they will revert to their old state. Similarly, a lean organization ought to deploy rigorous control procedures and standards so that people do not revert to the previous fatty operating model.

The third type of fat-lean transformation, fat-to-lean, is on the other end of the spectrum, and is the ideal transition that secures effectiveness as well as sustainability. Institutionalizing and sustaining a robust transformation process is key to achieving and sustaining a lean state.

This Waste Elimination process embraces the universal concept of process improvement depicted in many other methodologies such as PDCA, DMAIC, and 8-Disciplines. It starts by studying the process under transformation. Then, wastes need to be recognized and measured to form the current state and to have a baseline of improvement. After that, root causes of the wastes need to be identified and eliminated. The last step, which is the most crucial, is sustaining the outcome state of the process through updated procedures, control plans, and standardization.

Waste Elimination Process

Lean is a culture and way of life rather than being a methodology. And the recipe for a successful transformation hinges on root cause analysis, sustainability, and continuous improvement. While it is not a rocket science, the waste elimination process can help you kick start your journey towards a leaner state. Besides, my coming post on the Eight Types of Waste will make your life even easier in recognizing loads of fat in your organization.