Back in the early days of TQM, the idea of the Cost of Quality was key to identifying opportunities for improvement. It was also known as the Price of Non-conformance (PONC).
In summary, every activity in your organisation can be categorised as one of:
- Prevention – those things done to ensure work is carried out Right First Time (e.g. Training, developing systems standards and specifications)
- Appraisal – those things done to check if work has been done Right First Time (e.g. Auditing, Checking, Inspecting, Supervising). Some of these can add value – e.g. audits; but most simply add cost
- Failure – everything that has to be done because something wasn’t Right First Time (e.g. Re-work, corrections, answering complaints, dealing with enquiries about problems, problem solving)
- Core Work – everything else, done Right First Time to meet a customer’s need
The sum of Prevention, Appraisal and Failure is the Cost of Quality. In service businesses, it often amounts to 40% of operating costs, with Failure and Appraisal accounting for most of that. In production organisations, CoQ is typically 25% of Sales Revenues, again with Failure and Appraisal being the biggest part.
A simple way of using the technique is to list all the activities you see going on, categorise them according to the four types and then measure (or estimate) the amount of time spent on each. Add it up and calculate the total time (and cost) spent on Failure and Appraisal. It’s usually a big enough number to motivate management to want to take some improvement action! Improvement always requires process change and/or increased Prevention activity.
Improvement will require root cause analysis or process analysis. In our experience, it is possible to halve failure costs in less than two years. What would that be worth to your organisation?