If your business is only measuring your success by your profit, it’s time to revisit your strategy.
With today’s fast-paced, competitive and globalised market, businesses are expected to deliver better results faster, all while complying with industry Standards and customer expectations.
Business 101 tell you that measurement is the key to understanding your company’s performance. If you cannot measure, you are not in control, and therefore cannot improve. However, the fallacy of profit = success needs to be debunked, and in its place, the model of the Cost of Quality implemented.
The True Cost of Quality Model
The True Cost of Quality (TCOQ) is a model used to evaluate the efficiency in which a company meets the expectations of its customers. It is often associated with the utilisation of resources to produce a product or service. That is, the costs incurred that ensure a product or service conforms to standard and is successful.
When evaluating the cost of quality, many organisations focus only on the easy-to-measure and tangible costs (examples of these include repairs, scrap, recalls, and overtime). While organisations should take these factors into consideration, there are also many intangible components to consider. The ‘hidden’ costs that contribute to an unsuccessful organisation or product.
To understand how problems become ‘hidden’, a holistic view of the organisation must be taken. When processes within an organisation miss the mark (either entirely or even by a little bit) they contribute to the COPQ. If these inefficient/unsatisfactory processes throughout the organisation aren’t remedied, they become acceptable practices. If something is deemed acceptable, then it ceases to be viewed as ‘problematic’ and therefore become ‘hidden’.
The model can be broken into two parts: the cost of poor quality, and the cost of quality
The Cost of Poor Quality
The cost of poor quality, or non-conformance costs, is made up of internal failures, and external failures.
Internal failures refer to the costs that are incurred when a defect is found before the customer receives the product or service. Examples include waste, scrap, retesting, repair, or material downgrades.
External failures are the cost incurred when a defect is round after the customer has received the product or service. Examples of these public type of failures include customer returns, customer complaints, product recalls or warranty claims.
The Cost of Quality
The Cost of Quality, or conformance costs, can also be broken down into inspection or appraisal costs, and prevention costs.
Inspection or appraisal costs are those that are incurred to determine the degree of conformance to quality requirements. This includes processes like measuring, evaluating or auditing. In carrying out these processes, organisations should ensure their product or service is regularly inspected, tested, and audited. All measuring and test equipment must be frequently calibrated as well.
Prevention costs are the costs incurred to keep failure and appraisal costs to a minimum by avoiding poor quality. Examples of this include new product reviews, supplier surveys, quality planning, process reviews, education, and training.
All of these components should ideally come together to work in harmony in your organisation’s strategic plan. A good business plan should provide purpose and direction of the organisation.
The Process of Measurement
The business plan should include direction and context, based on the current business environment, accounting for more than just financial decisions, acting as a touchstone for leadership when making strategic decisions, evaluation of business opportunities and risks.
The specifics of an effective strategic business plan should then translate into a successful management system for your organisation. The management system should align with the organisation’s strategic goals and seek ways to empower employees to optimise the organisation.
Competent and engaged employees are essential in enhancing the organisation’s capability and deliver value, as they are the ones executing on the processes every day.
The COQ and the COPQ are interdependent and complement each other in providing an effective and efficient management lens for your organisation.