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.

Interrelationship Digraph: PART TWO

In this part of “Interrelationship Digraph: Demystifying Complex Relationships” video I explain how we can use the Interrelationship Matrix to reflect results of the Interrelationship Digraph. I also show how we can construct this matrix using Microsoft Office Excel through Conditional Formatting and the COUNTIF function.

Interrelationship Digraph: PART ONE

Interrelationship Digraph or Relations Diagram is one of the seven Management and Planning Tools that helps us analyze the cause-and-effect relationships among different issues in a complex situation. It also helps us focus on vital few issues with highest priorities which makes this tool echo Pareto principle or the 80/20 rule in concept.

In this part of “Interrelationship Digraph: Demystifying Complex Relationships” video I explain the tool, its uses, and how to construct it using Microsoft Office Visio.

Prioritization Matrix: Objectivity in Decision Making

Prioritization Matrix is a decision making tool and is one of the seven management and planning tools used in Six Sigma and Quality Management in general. It is used to determine the best option to select amongst several ones based on specific criteria using numerical values.

Watch this video to know how to create the Prioritization Matrix with Microsoft Office Excel.

Creating Pareto Chart in Microsoft Office Excel

During the Define step of a Six Sigma project the project team needs to identify the problem or the opportunity that the project is intended to solve. Usually, there would be more than one potential problem that can be addressed in a Six Sigma project; however, not all of them would have significant improvement. So, the project team needs to filter out those problems that if resolved will result in huge improvement and positive impact on the bottom line, and this is what Pareto analysis is used for. 

Watch this video to know more about using Microsoft Office Excel to create a Pareto chart in a Six Sigma project.

Organizational Culture: a Six Sigma success driver

Joyce Wycoff in his book “Transformation Thinking” says:

‘When an organization commits to creating an environment which stimulates the growth of everyone in the organization, amazing things start to happen: ideas pop up everywhere, people start to work together instead of “playing politics”; new opportunities appear; customers begin to notice service and attitude improvements; collections of individuals begin to coalesce into teams’.

It is a prevalent practice in organizations that start Six Sigma initiatives to employ specialist Black Belts (BB) and Green Belts (GB) to manage the improvement process of the organization’s operations. While it is a good practice to adopt, it is not the most efficient and effective. Outside BB and GB individuals are expensive and will yield shorter-term benefits than if Six Sigma culture is instilled in the workforce itself responsible for the process under improvement.

The optimum approach to nurture Six Sigma in an organization is to consider all employees as potential Green Belts then select few to receive advanced training and become Black Belts. Most of employees are capable to be Green Belts. The goal should be to train them in three main areas: problem-solving techniques, continuous improvement models, and interpersonal and team building skills. Black Belts then can be selected and trained on further advanced statistical tools and techniques with more emphasis on team building, conflict resolution, coaching and mentoring skills so that they can guide the rest of employees to achieve their optimum performance.

Motorola proved this concept when it discovered that most of cost savings, process improvement, and higher customer satisfaction came from the direct labor working on the process. Those people are the best to know the process and its areas to improve. They know what impedes achieving excellence, and only by training them on problem-solving and improvement techniques they excel in achieving breakthrough yields and highly capable processes.

Employee involvement is essential in any successful Six Sigma project. Sense of responsibility and accountability by an employee is magnified when he/she is involved in defining the problem, measuring the process, analyzing root causes, and contributing to the selection of best solution to implement. By this the organization will get the one-million-dollar worth jewel of ‘employee Buy-In’.

As Alan Larson mentions in his book ‘Demystifying Six Sigma’, “something magical happens when employees become more experienced and effective with Six Sigma tools and the results come rolling in…you can feel human energy, like static electricity, in the air”.

By infusing six sigma skills throughout the entire organization you will develop a continuous improvement culture in which all employees are involved towards achieving customer satisfaction within the frame of collaborative focus led by the organization executives; this is the concept behind Total Quality Management (TQM). So, if you are thinking to improve your organizational performance, and I am sure everybody is, start by thinking out your strategy to instill the culture of continuous improvement among employees by training and by allowing those savior specialists to emerge from your company instead of paying thousands to acquire external professionals who are ‘foreigners’ to your processes and to your workforce which in turn may reduce the likelihood of your projects’ success. At the end of the day you are optimizing performance on employee as well as process levels and you increase the morale amongst your people.

NB Idea of this blog was inspired by Alan Larson book “Demystifying Six Sigma, A Company-Wide Approach to Continuous Improvement”