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Are You Dying to Deliver Quality? Part 3

In our previous posts, we have looked at the first two elements of the Cost of Quality – namely, Failure Costs (the costs you incur by NOT getting things right first time) and Appraisal Costs (the money you spend on inspections which don’t actually fix the root cause of the problem). If you have reached this far, you may be beating your head against a brick wall in frustration at having uncovered huge waste in your organisation, but not knowing how to fix it.

So what is the solution?

Well, let’s start by asking a deceptively simple question: “who is responsible for the quality of everything that goes into your end product?”

The answer, of course, is “the originator”, i.e. whoever manufactured the component and fed it into your process.

And yet, by measuring high failure costs and then spending on appraisal, we are actually admitting that we are taking on the responsibility of guaranteeing the quality of everything we use.

And that’s why it gets so expensive, so quickly, to generate the quality our customers require.

So where we should be spending our money is on what we call Prevention Costs. By this we mean actually investing in programmes by which suppliers are able to guarantee the quality of everything they deliver – whether they are external or internal suppliers.

This may sound trite, but it is a subtle shift in the supplier/consumer relationship. Traditionally (particularly in this country), we spend a lot of time pressurising our external suppliers on price, forgetting perhaps that they are also in business to make money. Internal suppliers are commonly not really regarded as suppliers, but rather as just cogs in the total machine, and hence not really bound to quality criteria.

External suppliers will react initially by bending the knee and reducing price, but will be looking at their own p&l and identifying areas where costs caan be cut. This may result in decisions to use cheaper raw materials, or to reduce the amount of time and effort spent on their own quality control. The more they are hit over the head on price, the more they will cut their own costs to simply keep hold of your business. In the end, though, you lose.

Internally, the more individual cogs are treated as just that, the less they will feel that they need to contribute in effort to what they are doing….the result being rushed work, careless work or sometimes even deliberate sabotage (we have seen all of these in real life, right up to six-inch bolts being deliberately thrown into a hopper to wreck an extremely expensive packaging line).

When we talk about Prevention Costs, we mean programmes by which we work WITH our suppliers to improve the end result of our collective efforts. As an example: we worked some years ago with a drinks manufacturer who was experiencing reduced profitability in their bottling hall. the client’s initial thought was that the losses were being caused by spillage and ullage, but our investigations revealed that the main culprit was actually downtime – machines and employees standing idle while incurring costs all the time.

Root cause analysis revealed that three things were causing 87% of the downtime: bottles exploding, crowns not fitting and labels falling off. When asked why, each respective supplier responded with “we know there is a problem, but at the prices we are paid we simply can’t afford to provide, let alone guarantee, better quality”. So, in effect, a procurement decision to buy based on lowest price and then further pressurise the suppliers was causing failures, which inspection hadn’t managed to correctly rectify.

The cost in lost sales due to this and the concomitant downtime? ZAR1,2 million.

Per week.

Per bottling line (there were 6).

Per client location (at the time they had 14).

So the fix? Invest on Prevention Costs by working with, rather than against, the suppliers to financially incentivise them to measurably reduce our clients downtime by controlling the quality of their goods.

The results? Massively reduced downtime, better factory output, hugely improved profits and, perhaps most significantly, suppliers buying into the success of our client and receiving healthy compensation for their efforts. Win-win.

This is obviously the simplified version – but we at CTS would love to discuss how attacking the Cost of Quality could step-change your business – no matter how small or large you are, talk to us and let’s see how we can help!

Are you dying to deliver quality? Part Two…

So you have finally started to measure your failure costs (all the costs incurred by doing thinks wrong first time), and can now put a monetary value on how much you have to currently spend to generate the quality your customer demands.

And you realise it’s a big, big, number.

How big do we mean? We have worked with organisations where, on first measurement, we discovered the Cost of Quality was sitting at +/- 20% of turnover: effectively, this is 20% of turnover that nobody gets – it just disappears as a “normal cost of doing business”. So, a complete waste. Great organisations, by way of comparison, spend 3% of turnover, and target a reduction every year – we know of one highly successful business that even targeted a 50% reduction EVERY YEAR.

Discovering high Failure Costs through measurement is the moment where, in many organisations, panic sets in. The consequence of panic is often a knee-jerk reaction, and the knee-jerk reaction we see most often is, “we’ve got to inspect everything to make sure it’s right”.

So staff are redeployed and inspection stations set up – goods receiving to inspect incoming raw materials, each workstation to make sure what is received from the previous workstation in line works, pre-final-assembly to make sure all the components function individually, and then pre-dispatch to make sure nothing has gone wrong in final assembly. Sometimes we even see specialist inspectors brought in to supplement the production team.

Let’s take a really prosaic example to see the good sense in doing this.

One of the 200 components in your finished product is a rubber plug that fits into one of the end caps of your product and must stand between 1.18 and 1.22mm proud of the surface when hand-pressed into place. The plugs are delivered in boxes of 2000 on pallets of 400 boxes.

Clearly you can’t measure every single plug to check if it is dimensionally within spec, so you generate a random sample plan and stipulate that if appraisal returns a random sample of more than 2% off-spec, the pallet is rejected (2% is actually very tight control – many sample plans we see accept anything up to 10% off-spec).

Your inspector tests a random sample from a pallet and finds 1.5% of the sample off-spec, so passes the pallet into the stores, to be used in production. It is dutifully noted down that 1.5% of the sample was off-spec so everyone is happy. The inspector has done the job, stores are happily sitting with full shelves, and production knows they will not run out of rubber plugs. Job done, and you can look forward to significant reduction in Failure Costs, and be back home in time for tea and bonuses.

Except…..12,000 faulty rubber plugs have just found their way into your production process.

Bottom line is that inspection, or appraisal, often only generates a statistic. It rarely actually physically finds faults or duff products.

So you pay for the staff, you pay for the time, you pay for the delay in processing inbound goods, you pay for everything and you are still building faults into your products. Simple reason: APPRAISAL ONLY WORKS IF YOU INSPECT ABSOLUTELY EVERYTHING.

The business risk is that you now have the following situation: you started with high failure costs, so you decided to appraise/inspect everything. Appraisal/inspection doesn’t significantly reduce your failures, but you have the added cost of staff, time, reduced uptime, rejected product etc etc etc. In essence, you may have made your financial situation even worse.

So Failure Costs are a no-no, and Appraisal Costs often don’t contribute to the reduction of Failure Costs.

In our next post, then, we will look at the only way to sustainably reduce your Cost of Quality….through Prevention.

Are you dying to deliver quality?

How often have we heard clients say “customer satisfaction comes before everything”? Every time we hear it, we have mixed reactions: on the one hand, the client is absolutely right – dissatisfied customers are the quickest way to kill your business. On the other hand, however, we wonder at what cost to the organisation must customer satisfaction be delivered?

Let me try to explain: the key to a profitable business lies in delivering what the customer wants, when he/she wants it, at a fair price to all….but NOT if the process of this delivery is flawed internally. This is the route to profit erosion, unexplained costs and eventually loss-making sales.

Let’s take an example: a recent client was in the business of making components critical to the mining industry, but was not adept at quality control during the manufacturing process. Mining houses would buy their products and use them in batches of 12-24 at a time, but would keep stock for an average of two months. When the mining houses used the products, they found that, of a batch of 24, on average 6-7 would fail, resulting in stoppages, frustration and return of goods for free replacement.

Our client duly replaced the products and took the loss of revenue on the chin, factoring it into their forward planning as a normal cost of doing business….which is where the problems started.

We refer to these costs as Cost of Quality, i.e. how much money do I spend to deliver the quality my customer stipulates: in this case, the lost revenue could be clearly labelled as a Failure Cost – unnecessary and caused purely by incompetence during the production process. Failure Costs can, however, get really big really quickly – let’s remember that any returned product has to be either scrapped or reworked (a cost), there may be warranties to honour (a cost), the customer may demand compensation for downtime (a big cost), and you will almost certainly have to sweeten subsequent sales to keep the customer happy (more cost).

But here’s the really worrying bit…..the client in question wasn’t even measuring these costs. Hence, they didn’t know they had a problem. Hence they were doing nothing about it….and wondering why their profits were sitting about 30% below expectation based on revenue.

Moral number 1:

  • We don’t know what we don’t know
  • We can’t act on what we don’t know
  • We won’t know until we search
  • We won’t search for what we don’t question
  • We don’t question what we don’t measure
  • Hence, we just don’t know

Next Post: what NOT to do when you discover high failure costs