Most companies are acquainted with the "visible" costs of poor quality, both internal and external. But these are just the tip of the iceberg compared to the deeper and more intractable "invisible" costs that lurk below the waterline. Quality control and assurance generate these incurred costs. It behooves companies that value quality leadership and high standards to fully understand and account for these hidden costs or risk losing consumer trust, brand reputation and, ultimately, business value.
Companies that think of quality as only a cost center enforce the incorrect perception that the quality function is a thumbs up or the bearer of bad news. By embracing a comprehensive view of quality management, companies limit the visible and hidden impacts of poor quality and use quality management as a true business optimization tool.
Calculating the true cost of quality
The cost of quality is hard to quantify. The visible costs of poor quality, or COPQ, are just the tip of the iceberg. The easy-to-see and easy-to-measure parts like inspection defects and internal failure rates are the main categories that provide the metrics and data, but the less obvious costs have the biggest impact on quality.
To continue the COPQ iceberg analogy, the hidden costs below the waterline are the ones that drive up the total cost of bad quality. Engineering change orders, noncomformances, customer complaints, lost sales, late delivery, product re-works, supplier incapability, excessive raw material orders, long cycle times, working capital allocations, degraded brand image, lost customer loyalty... these nested costs are a laundry list of failures that are the major contributors to the cost of poor quality.
This concept is nothing new. We discussed the topic at a recent LNS Research-hosted industrial transformation event with quality executives from a variety of industries that I was fortunate to be a part of.
Economists and quality professionals commonly refer to these as the "hidden factory" – costs that are more incremental in nature and come into play when a drifting or "out of control" manufacturing process decreases both the quality and efficiency of a production line. In a perfect world with unlimited time, teams would identify all defects, remove them from the production line, fix them and place them back on the line. We do not live in a perfect world.
One defining characteristic of the hidden factory is that the longer problems exist, the higher the associated costs. There is a consensus that the COPQ can be 15% to 20% of total sales revenue and hidden costs can be as much as four times the visible costs. In fact, noted quality guru Armand Feignbaum believed that every American company had hidden factory operating costs that ranged from anywhere between 20% to 40% of total capacity. If that is the case, the costs that lie beneath the surface drain a significant amount of working capital.
In a traditional manufacturing scenario – one in which a company has yet to automate its quality management process and relies on both the outmoded image of quality as the "bad cop" and archaic working practices – nonconformances or other quality problems risk being lost in a series of disconnected systems.
As a result, corrective actions are delayed, if implemented at all, and the consequences beyond the obvious "above the waterline" issues are well hidden in the short-term. Over time, the "below the waterline" issues have a greater negative impact and require longer, complex and costlier fixes than if the team resolved the issues in near real time.
Recognize the quality bottlenecks
While it is tempting to believe that the siloed approach to traditional defect handling is an anomaly in the manufacturing industry, this type of quality pain point happens on a regular basis and impacts the bottom line.
Expecting a corrective action ticket to be dealt with in seconds is unrealistic, but the failure to address the problem costs the company time, materials, money and, ultimately, a loss of customer satisfaction. In addition, the quality management team is blamed for not responding quickly enough or overreacting which leads to them being labeled as a bad actor by the rest of the company.
However, the quality function is not the problem in most cases. Instead, the other business functions in the company need to recognize that the bottlenecks in the system prevent teams from fixing the issue in a reasonable timeframe and contribute to the less obvious costs of quality.
Companies often disconnect quality from the rest of the organization, and many perceive quality as a cost center as opposed to a business optimization or operational efficiency tool. When a problem occurs, the quality department has to take part in an internal game of "whack-a-mole" and chase quality-related issues that are – by and large – preventable.
The relevant support from IT or management is often lacking, and full integration with other business processes is not always achievable, especially in companies that still rely on paper-based processes and spreadsheets struggle to achieve full integration with other business processes. Business needs and customer demands remain in constant flux, making it clear that the cost of poor quality depends less on the visible costs and relates more to the dangers that lurk beneath the surface.
Effective implementation of quality tools requires the right approach
How do we solve these demonstrated pain points? The obvious answer is to increase investment in prevention costs like quality management systems that identify and fix corrective action notifications with a minimum of fuss. However, that is only part of the solution.
Companies need to get quality management right from day one. The quality department is an integral part of the product lifecycle. These people work on the quality frontline and take responsibility for time-tested tools that drive reliability. The overarching goal for any company that wants to cement its reputation as a quality leader is to maintain a focus on continuous improvement and a culture of quality throughout.
A Plan-Do-Check-Act procedure should be a minimum requirement for any company that is serious about changing its attitude to change. This integration must incorporate a complete corrective action process (that includes a purposeful problem statement), in-depth root cause analysis, an action plan with appropriate scope and an effectiveness check.
Quality leaders must manage change in a coordinated way. These actions include up-to-date procedures and work instructions, ongoing compliance with workforce training requirements and a defined scope and frequency for quality audits. All of these pathways to continuous process improvement form the basic platform on which teams can solve complex quality problems.
These practices will drive the quality culture across the organization and impact all the hidden issues as well as the more visible ones. As an added bonus, it ensures that quality becomes everyone's business ... and not just the "bad cops" that prevent products or projects from progress.
Leadership must instill a culture of quality from the top down and remove the notion that quality management is solely the bearer of bad news.
We live in a connected society where the fulfillment of customer expectations remains the benchmark for success, and quality plays a major role in that effort. Quality matters. Decision makers must give quality the recognition it deserves and close the doors that lead to the hidden factory.
Octave's mantra is that quality creates endless possibilities, and we believe that competitive advantage grows when companies take an agile approach to quality management. These are some of the many reasons why over 550 global companies trust us to secure brand reputation and customer loyalty. Our Octave Reliance SaaS software delivers built-in best practices and powerful flexibility to drive excellence through quality.