Management Lessons from Max: Sniffing out the Cost of Quality

My Airedale – Max – often provides inspiration to me as I watch him experience life. As we walk our neighborhood Max’s nose is always active, especially when we get near a waste bin and I get a chuckle as I watch him absorbing all of the “olfactory inputs”. On this note, I want to continue to drive home the important need for business leaders to be on the lookout for all quality issues because it can have a much greater impact on the health of their business than one might think. This article will look at waste as just one element in the broader view of quality but it will lead us to a closer understanding of the high Costs of Quality non-conformance in a typical business. To begin, I want you to ask yourself some questions to set the stage for this discussion:

What are your annual costs and percent of sales for warranty and repair costs?

Would you believe that these costs are just a small portion of the Cost of Quality?

What are the other business costs incurred because of a failure to meet customer expectations?

What is the scale of all these other costs as a percent of sales?

When people think of quality, it is common for them to first think of a product failure or a warranty problem they have personally experienced on an automobile or appliance. In the best of these cases for the consumer, the costs were fully covered by the manufacturer under their warranty program. We would naturally assume that the manufacturer would track these costs from this warranty repair and would categorize them as a quality cost. While these financial line items may accurately reflect specific warranty and repair related costs, these accounts certainly do not represent the total picture of the Cost of Quality at that business.

As an example, let’s discuss less obvious drivers of quality costs. Businesses are aware that any quality issue, and how it is handled, can create long term consequences – good or bad – with respect to customer relations. Therefore, the time spent by customer service and other personnel correcting the problem, plus any credits, coupons, rebates or other financial consideration should also be a cost of quality. Of course, should the issue not be rectified to the customer’s approval, there can also be future lost revenue implications, which is a harder cost to measure but it is truly a cost for the business.

In the larger sense, the true Cost of Quality not only encompasses the costs from past decisions such as warranty and repair costs but is much broader in that it reflects all costs associated with mending customer relationships, the financial fallout of lost sales plus also the costs of preventing future problems. The expenditures by the company in these areas are much greater than the warranty and repair costs mentioned before; in fact they are typically an exponentially larger amount.

In order to highlight the breadth and potential scale of the cost of quality, I will create a summary of those areas of the business where part or all of the department/process should be considered as part of the Cost of Quality for your business.

  • Quality Department:
    • Receiving/Supplier Source Inspection to capture supplier problems.
    • In house inspection or auditing.
    • SPC/SQC Programs
    • Final Inspection.
  • Engineering Department:
    • Product Engineers spend much time and cost assessing failure points to compensate for material and manufacturing issues or customer abuse.
    • Product Engineers spend time assessing field failures and make design revisions, adding costs.
    • Product Engineers design a more robust product thereby adding prime cost.
  • Production Department:
    • Add more labor time to build the more robust product.
    • Processes that are not optimum, and create rejects, will require additional labor and capital costs to improve.
    • Any rejected/reworked products from the production floor or from the field will require repair labor and add those labor costs.
  • Supply Chain Department:
    • Purchasing resources required to insure suppliers are meeting specs and dates.
    • Purchasing resources needed to source and purchase better materials.
    • Materials on hand that are scrapped, need repair or replacement all add more Supply Chain costs to handle credits and replacements.
    • Production control must add production schedules to replace rejected or late units.
  • Packaging and Shipping Departments:
    • Due to potential handling abuse more robust/costly packaging must be used.
    • Due to potential shipping abuse more costly shipping processes must be used.
  • Customer Service Departments:
    • Time spent correcting a bad part, invoice, incorrect or late shipment adds cost.
    • Consideration in the form of credits, coupons, rebates add cost/reduce revenue.
    • Customer goodwill losses, while difficult to measure, will reduce future revenue.
  • Lost Capacity Costs:
    • Responding to a customer complaint, replacing a failed product, repairing a product on the production floor or in the field add cost plus also reduces the capacity to product other revenue.
    • Major quality issues/recalls can steal time from almost all personnel both adding costs and reducing revenues.

When you consider how much extra time and cost is spent in every department to correct their own as well as the mistakes of others, there is no one in the organization that is not influencing, good or bad, the Cost of Quality. Therefore, every employees should be asking the following question:

How many fewer people or processes would be required in a business if every product, decision and action was perfect the first time?

As we consider the true Costs of Quality in a business, the scale of the numbers start to grow up to tenfold over what is typically tracked in warranty and repair costs. Also, when you consider that every department in the business is impacted some way then the scale of the above listed Quality costs become very substantial and these outlays in some businesses could easily add up to 30% or more of total revenues. This is a startling number!

In closing, leaders must be dogged in their efforts to identify and correct losses. Business leaders need to spend time looking at all wastes, especially in material or in personnel time. In addition, do not forget the time and money spent fixing problems and making the customer happy, which if not done right can lead to lost future sales. Track all those costs to monitor progress. Do the job once. Do it right the first time. And your business performance will increase substantially.


Posted in Blog Post, Growing Businesses, Restructuring Businesses and Struggling Businesses


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