We are, without doubt, in a period of severe austerity. Most organisations have a relentless focus on cost reduction and elimination that is likely to persist for many years. It is all the more remarkable then that something many Lean Six Sigma practitioners consider essential is absent. That is the “COST OF POOR QUALITY” (COPQ). Or, to put it another way, the total cost to your organisation of getting things wrong.
To illustrate what COPQ captures we will consider a product recall by Mattel a few years ago. Mattel identified that there was too much lead in the paint used on some toys produced in China so they instigated a product recall. The COPQ of giving lots of customers their money back and destroying the product are obvious. But what about the damage to Mattel’s reputation? How much more did Mattel spend on advertising to bolster their brand image; how many sales did they lose at Christmas. Harder to measure, but both are very real costs of poor quality.
In their book ‘Six Sigma’, Mikel Harry and Richard Schroeder provide an assessment of the likely levels of COPQ depending on your organisation’s performance based on their experiences with a wide number of organisations.
Many organisations that have not initiated continuous improvement programmes will have processes that perform at a 2 or 3 sigma level. Their costs of poor quality will be very significant and the failures will be commonplace. In fact, things going wrong may well be considered to be the norm. With one insurance client we found that 20% of the submissions to support “no claims bonuses” had missing documents – this was considered the norm and their processes to chase the missing documents were well established. They had done nothing to improve their communications to customers so that a high percentage of the submissions were correct. Expediting processes like this become established practice but are very clearly a COPQ; not to mention processing the submission at least twice.
If your competitors achieve a performance of 5 or 6 sigma across their processes then their COPQ will be significantly lower. They may choose to make more profit or undercut you; if it is the latter you will struggle to survive yet they will still be making money!
Do you know your organisation’s Cost of Poor Quality? If not, don’t you think that you should?