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Continuous Improvement, Problem Solving, Process Improvement

Who’s quantifying the cost of failure?

I’ve been running a series of Demand Management masterclasses for a public sector client and we start the session by discussing what performance data is available for a few of their routine processes. I ask them if they know what the annual cost of running the process is and how many times it is used (No. of cases). Most people can have a good guess at the cost, and the volume of transactions is also usually known. My third question is: what proportion of the cost is associated with rework. Very few people actually know the answer to this but their best guesses typically range from 25% to 75%. That’s no surprise to me, but there are 2 issues for the participants: (a) they don’t know the answer and (b) their guesstimates suggest there is a huge amount of waste in their processes.

CoQ

Cost of Quality

I first learned about the Cost of Quality model in the 1980s when the business I was in implemented a Total Quality Management process. Cost of Quality is the sum of Prevention, Appraisal and Failure costs. Prevention activities are those designed to ensure work is done right the first time. Appraisal is activites that check to see if work has been done right the first time. Failure is anything associated with correcting work that wasn’t done right the first time. These are on top of core, value-adding, activities. In a manufacturing business CoQ is typically 25% of Turnover. In a service business, such as this public sector organisation, CoQ is typically 40% of operating costs. Of that, half is usually failure. For this particular client, the cost of failure (if their organisation fits the typical model) is around £150 million. When we discuss that figure, the opportunity becomes clear. Even if they could only recover half the failure costs, there is the potential to free-up £75 million of resources.

Of course, we go on to discuss the barriers to achieving this, in practice. The main one is the need to invest time and effort into analysing the root causes of failures before implementing more preventative activities. The usual public sector response of adding yet more checking, supervision and auditing, simply makes things worse.

Most of the participants in my workshops are middle managers, so they don’t necessarily have the authority to make major changes to their work processes. They do, however, have the opportunity to adopt the 1% Principle (marginal gains) and chip away at waste in their processes. Last year, one of the managers went back to her team and said: “we’re going to stop sending that letter out”. This simple decision freed-up around half a day each week that could be reallocated to more value-adding activities.

So, although the theme of the workshops is Demand Management, we actually spend a significant amount of time exploring where waste exists currently and practical ways to address it.

It’s a pity the Cost of Quality model isn’t more widely known. If a few more accountants were aware of it, maybe there would be more interest in driving out waste and adopting continuous improvement approaches.

Read my previous blog post on CoQ.

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