In business, cost optimization is a continuous state and an enabler for the company’s competitiveness, productivity, and from time to time also continuity of the entire operations. Costs resulting from quality failures are often the most frustrating and at the same time the most traitorous. Costs resulting from poor quality are not only paid as wastage, but they are like obesity that causes various problems to the company’s efficiency and productivity.
Successful quality, on the other hand, is the opposite of all this. Instead of resources being wasted, they can be directed to value-generating activities that strengthen the conditions for increased productivity. And when the company’s operations are on a solid basis, it creates a positive energy that enables previously wasted resources to instead really be productive and instrumental both to the company and its customers.
Quality cost-cutting can be compared to a very personal lifestyle change. The decision to start is usually difficult, as it is hard to give up on old familiar operating models. It takes strong determination to see and accept the facts, as well as persistence to stay on the right path. At the same time, keep in mind that simply losing pounds is not enough for implementing a permanent change. It is very important that you try to change your actions more comprehensively. Increasing resources to ensure continuity is therefore very important, and when you grow stronger, you will more easily endure future challenges.
Costs of poor quality arise from problems related to management and operational activities. The costs can be very high, but despite that there is often no focus on reducing them. It is quite common among the best companies that 10-15 per cent of their results are lost due to poor quality. Companies that are perhaps not the best but still competitive, often end up paying even up to 20-30 per cent of their earnings! (See the link below)
Many consulting companies offer various solutions to the quality problems. These so-called quality methods are based on certain common core theories, which are offered in slightly different packages. In order for you to be successful, it is critical that you first internalize what your particular situation is, and what the right path forward is. It is good to note that what works for someone else may not necessarily work for you, and that even the best method is effective only when it is adapted to your specific company’s situation and needs.
We have collected here below a few important aspects for companies that are planning to improve profitability by reducing costs of poor quality.
- ASSESS: Understand the big picture
Quality costs are like an iceberg. Easily recognizable quality costs are only the tip of the iceberg of all costs. The greater part of the cost is below the surface, difficult to identify. All eyes should be on this hidden part, in order to truly understand how significant the matter is.
When you choose a strategy for permanently cutting quality costs, it is important to understand the complex relationships between both the visible and the hidden costs.
Easily recognizable quality costs are for example: re-making, scrap costs, increased production time, unplanned extra work, overtime, growing inventories.
Difficult to identify quality costs (ancillary) can be: warranty costs, repair costs, returns and recalls, discounts, customer complaints, bad reputation, lost sales and legal costs.
- CLARIFY: Convert quality to money
In order to optimize quality costs, it is important to find out what the cost of quality in the company is, how the cost is formed up and what the total value of poor quality is.
The primary objective of the company is to manage and develop its value. It is essential to find out:
- Are the costs of poor quality visible in the company’s financial figures
- Are the direct costs of poor quality included in the financial figures
- How well has the company accounted for costs that are difficult to identify
- How do these numbers affect the company’s management decisions
The conversion of some of these costs into the company’s financial figures may be easy, especially if they relate to, for example, visible things like the value of scrapped material or the price of extra work. In this situation it is therefore essential to focus primarily on the hidden costs, because their value is often much more significant to the company’s overall image. The conversion of such hidden costs into formal financial figures requires deep expertise in both quality- and financial management, fact-based data as well as a development method that is suited for your particular company.
You will later appreciate the focus in this area, because with a clear starting point based on facts, you can verify your improvements in cost-effectiveness over time.
- DEVELOP: Focus on the root cause of the problem
One of the most common issues in developing quality is to correct errors without understanding where the problems really originate from. It happens too often that we reward ourselves prematurely after correcting an error. If the same error was already corrected earlier, or it repeats again and needs to be corrected again later, we have not been able to correct the root cause of it.
When developing quality costs in a holistic manner, it is important to build a clear view of the entire value chain of the business. In addition to the production processes, it is just as important to understand the entire operating model, because very often the actual root causes can be found somewhere completely else than where it first seems. For example, these areas can be product development, sales, suppliers, business management, IT systems, or simply the level of the company’s know-how.
A very simple but really effective means of identification of the root causes is the “5-Why” method. In simple terms, this means that you ask “Why did the error happen?” so many times, that the reason no longer can be found – it means you have found the real reason, the root cause! Such an approach may at first seem like a little too simplistic solution to a complex problem, but try it out and you will be amazed!
Gradually along the way, you can then focus on the more efficient method of building in continuous quality improvement into the process itself. The quality will keep gradually improving as the process areas are monitoring their activities during the process, aiming to continuously identify the causes of errors. This creates a continuum, where the design, operation, monitoring and correction follow each other continuously in a repeating circle.
- OPERATE: Do the necessary corrections, ensure the results, and learn
Everything does not have to, or even should not, fill a one hundred percent quality level. The most essential thing is to do those specific actions that result in the optimal balance between investment and cost savings. If the problem-solving is not systematic right from the start, you may end up making significant investments without achieving any improvements in your cost efficiency.
To avoid unnecessary investments, it is therefore important to act in a systematic manner right from the start:
- Use analytics and fact-based data
- Ensure that the whole company and its leadership are committed to the common goal
- Choose the right resources and partners for driving the change
When a new and more efficient cost structure has been achieved and verified both through quality metrics and financial figures, it is vital to ensure that the entire organization will internalize how it was done. Successes create more success, and most importantly, you have created an organization that is able to independently pursue the development of efficiency.
Sininen Polku offers you a comprehensive business transformation journey through the above steps, and we always tailor our offering to your business and to your needs – we help you choose the right approach based on our long experience in successfully developing supply chain productivity.
Let’s be in touch!
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