COST OF QUALITY
Need a Jumpstart?
Using cost of quality can help set innovation efforts in
by Peter Merrill
Many use cost of quality to drive corrective action, which, in turn, drives improvement. Why not use cost of quality to drive innovation? Organizations that I have worked with in Europe and North America have used the simple methods I will describe here to engage this powerful concept.
Many organizations don’t use cost of quality effectively, even though they are fascinated by it. One of the common reasons for failure is they make a simple concept too complex. As quality professionals, we are frequently guilty of creating too much complexity. Paradoxically, cost of quality is a technique for locating problem points in a complex system. As everyone knows, a problem is an opportunity, and innovators thrive on opportunities.
Much of the time, failure or waste occurs in an organization as the result of a poor connection between processes in its management system, which leads to poor communications. As W. Edwards Deming said, "90% of the problems in a process are a result of the system in which the process operates."1
It’s the reworking of your plans, poor communications between departments and wasted time of senior people where your big opportunity cost will be found. These reworkings also can be great opportunities for business model innovation. The discovery that 25% to 35% of your organization’s costs are being wasted is a great attention-getter, as Figure 1 shows. Cost of quality is also a tool for getting senior management’s attention, so keep your message concise.
When you express waste in terms of cold, hard cash, it really focuses attention on opportunities. However, it doesn’t stop there. You can now prioritize which problems to work on by analyzing the cost of waste—in other words, cost of failure. Finally, you can measure your success through continuous collection of cost of waste to show the value of your improvement or innovation activity.
Typical examples of cost of waste that are taken for granted include:
- Reprocessing information.
- Unplanned inventory.
- Handling complaints.
- Labor turnover.
- Overdue accounts.
These are great opportunities not only for improvement, but also for innovation. There has been a long debate about the difference between improvement and innovation. In truth, it’s like the difference between correction and prevention. It is a gradual transition. At the two ends of the continuum, however, we can say that for improvement, we will change a step in the process or clarify a requirement. For innovation, we will create a completely new process.
Whenever information or materials must be reworked, this is a cost of waste. The four hours we wasted rewriting the report, for example, can be translated into anything from $250 to $1,250, depending on whether you’re an accountant or president of the organization.
But take a moment to think about what might have happened had you not checked the report—if things had gone forward and key business decisions had been based on it. The domino effect can be staggering. Joseph M. Juran’s law of 10 demonstrates the consequences when a small error is missed in a design situation.2 For example, if it costs $1 to correct an error at the drawing board or in a report, it can cost:
- $10 in verification.
- $100 in manufacturing.
- $1,000 in assembly.
- $10,000 in commissioning.
- $100,000 in field retrofits.
- $1 million in litigation (ultimately).
If you have been involved in engineering design, you can relate.
When you look deep into an organization, you find between one-quarter and one-third of people’s time is wasted reworking information or materials. Some people can spend 100% of their time correcting errors. For every $10 million in operating costs, your organization can waste $2 million to $4 million.
Table 1 shows how a typical cost of waste calculation is carried out. In general, the greater the cost, the greater the opportunity to innovate. For example, if you found report writing is a companywide problem, you would want to completely change the process by innovating.
Integrating cost of waste and innovation
You use cost of waste to identify which elements of your management system are the main cause of your wasted time and materials. You can do this by conducting a first-cut cost of waste calculation. This is a one or two-day task, which touches each of your managers and supervisors at some point in that time, and can unearth between one-third and one-half of your total cost of waste.
I open a first-cut day by briefing the key managers in a business on the principles of process management and cost of quality. I explain that our organization consists of a series of processes linked together. A process is an activity that changes or adds value to information or materials.
We all are suppliers of material, information or services to someone in the organization. That someone is an internal customer. We also receive material, information and services from people who are our internal suppliers.
To satisfy the external customer, all internal customers and suppliers must link together smoothly. Requirements are characteristics of a product or service that must be agreed to with the customer to satisfy the customer.
Many requirements are not agreed to because there is not clear ownership of processes in an organization, so you don’t know who should agree with whom.
Deep down, we are aware that if our processes don’t deliver "right the first time," it costs us money. So we check things when we’re not sure how effective a process is. The problem with checking is that it is often too late, and the customer’s delivery still suffers.
It certainly is an extra cost that adds no value to what we are delivering to customers. In short, checking implies that you expect the process to fail. There must be a better way. In a successful organization processes operate so rework is avoided.
Checking goods or services after they have been produced always lets some errors slip past. It’s much better to avoid producing the errors in the first place.
Whenever the output requirements do not meet those agreed with the customer, (whether internal or external), you pay a price. You must rework information or materials, and this cost of waste, expressed in dollars, is a major driving force for improvement and innovation. If you apply prevention, the cost of prevention is much less than the cost of waste.
This briefing I have described can take about an hour. I then disperse the managers back to their own departments with four key questions, which they will brainstorm with their respective staffs.
- "Where do you waste time?"
- "What are your biggest hassles?"
- "Where do you get problems dumped on you?"
- "Where do you not know requirements?"
The questions enable the manager and staff to identify the major time-wasters and hassles in the department. This also takes about an hour. While they’re doing this, I spend time with the CFO, going through the accounts to identify items in the ledger that are cost of waste.
After the brainstorming, the departments start to quantify and prioritize the items they have listed. By this time, the CFO and I are ready to start visiting with each of the groups, helping to remove any roadblocks and feeding in any extra items found in the accounts.
That takes us through until lunchtime. After lunch, we start to feed the groups the cost data they now need. By mid-afternoon, smaller organizations would be ready to consolidate each department’s findings. In larger organizations, this would run into the following day. I recommend a maximum scope of a business unit to be around a 250-person headcount. The end result is a number owned by the people who calculated it, and a great desire to get started in quality improvement.
Table 2 is a possible agenda for a one-day cost of quality workshop.
Next, look for systemic issues. Follow a customer order through design to purchasing to operations—much like following an audit trail. Here is the challenge after you have found a systemic problem. Don’t just play with the process—change it completely. That’s what innovators do. It may be just a particular process area you change. It does not have to be an end-to-end process.
So the question is how do we make this radical change? Well, that requires the innovation process itself, which I described in the May 2017 Innovation Imperative column.3 Let me summarize and remind you that this is where traditionalists will go into their five whys, 8D or seven-step in-house problem-solving method. Innovators use creative problem solving
The first step in solving any problem is defining the problem, and we have a tendency to define solutions and not problems. Albert Einstein said, "If I had an hour to save the world, I would spend 55 minutes defining the problem and five minutes finding the solution."4
Connecting to the solution then happens through creative techniques called ideation or idea creation, which unlock the subconscious mind and show you are more creative than you think. There is a popular myth that creative solutions come from the lonely genius such as Thomas Edison. We have learned that the best way of connecting to creative solutions is through collective knowledge, where diversity is a must.
There are several techniques available to harness collective knowledge and the best known is brainstorming. Get 12 to 20 people and loosen up, which is the first step in creating what Edward de Bono calls lateral thinking.5 Ice breaker exercises are used for this.
Have them write down three or four ideas on their own. Each person then turns to the person on their right and shares their ideas to build their list. Next, they turn to the neighbor on their left-hand side and again share their ideas. The ideas of everyone in the room are then captured. The key issue with all of this work is volume.
Linus Pauling said, "The best way to get a good idea is to get lots of ideas."6 Recognize that ideation takes time, whether it is a piece of music or a piece of software. Relaxing between sessions is essential. Often, the epiphany will come unexpectedly. That is why ideation is not a one-off, 20-minute session done once a year.
You also must determine what aspects of your present product or service block the solution. If you look at successful innovations, the organizations have had the courage to do this. They all removed sacred attributes of the status quo.
Combining cost of quality with creative problem solving is a great way to jumpstart innovation.
- Peter Merrill, Do It Right the Second Time, second edition, ASQ Quality Press, 2009.
- Peter Merrill, "Finding Solutions—Creatively," Quality Progress, May 2017, pp. 44-46.
- Albert Einstein, AZ Quotes, www.azquotes.com/quote/811850.
- Edward de Bono, Lateral Thinking: Creativity Step by Step, Harper Colophon, 2015.
- Linus Pauling, BrainyQuote, www.brainyquote.com/quotes/quotes/l/linuspauli163645.html.
Peter Merrill is president of Quest Management Inc., an innovation consultancy based in Burlington, Ontario. Merrill is the author of several ASQ Quality Press books, including Innovation Never Stops (2015), Do It Right the Second Time, second edition (2009), and Innovation Generation (2008). He is a member of ASQ, previous chair of the ASQ Innovation Division and current chair of the ASQ Innovation Think Tank. Merrill is also head of delegation for his country to ISO/TC 279 Innovation Management.