Cost of Poor Quality (COPQ)

Posted by David Hutchins on 18 October 2015 | 0 Comments

Cost of Poor Quality (COPQ)

A personal account by David Hutchins

Sometimes referred to as the hidden cost of poor quality

If the shareholders, stakeholders and Directors of most companies had any idea the real cost of poor quality in their organisations even when they thought they were being professionally run, they would not sleep at night. In general the true figure for the cost of poor quality (COPQ) is so high that even when it is quoted, nobody believes it so they do nothing.

They assume that whilst this might be true for others it cannot be true for them. After all, our accountants would know wouldn’t they? Well actually no they would not. Not at all and if they knew they would have heart attacks. Rubbish you say, our Chief Accountant is a Chartered Accountant, hand picked and the best you can get. If anyone knows the cost of poor quality in our organisation it would be him.

Sorry, wrong again! Consider this scenario Large international Company. Industry: High volume Food preparation and packaging. Head Office staff: all professionally qualified and very carefully selected. Directors: All Professionally qualified, some acquired from the top international Consulting Companies and on high salaries. Problem: Severe price competition from own label brands. Profit margins tight.

We were asked to conduct a three week survey of the three factories and then report back to the assembled management team. We did not need three weeks, we saw everything that we needed to know in just three days. We remarked on this and realised it was a mistake. We were told, ‘clearly you underestimate the complexity of our business, you could not possibly find out what we can do to improve in that time.’ So we took three weeks but nothing changed our original opinion. Report back.

During our presentation we suggested that Quality Related Costs were probably in excess of 30% Sales Revenue. At this point the Finance Director nearly exploded. He said ‘what industries have you worked in Mr Hutchins’? ‘Clearly you have done nothing in the Food Industry before. If we had costs that high we would have poisoned half the population by now and we would be out of business’. I asked him what he thought the cost was. He said 1%. It could possibly be one and a half percent but I wouldn’t go any higher than that. Fortunately, by this time we were contracted in with the company otherwise he would have seen us out of the door at that point!”

Three weeks later I had to see him again. Immediately he saw me he said ‘you were wrong about that 30%’ I cautiously asked him what he thought it was now expecting to hear him defend his original estimate. He said ‘it is more like 35%! With great relief, I found that I had now the most unlikely ally. If you can get the Finance Director onside it is usually battle won! Let us take a look at one of the major issues. In my initial walk around, actually on day one! I was escorted around the Finished Goods Warehouse by the Warehouse Manager.

I had never seen so many cans of food all in one place in my life. They were stacked 3 pallets high in a grid system of storage almost as far as the eye could see in any direction. As we walked through, my attention was drawn to occasional defects. Here and there, a column of cans was slightly proud of the top of the stack. Consequently when two more Pallet loads were put on top, it buckled the cans in that column. There were not many like it but in addition to this there was evidence of fork lift truck damage and also torn labels.

The manager got a bit sensitive about me looking at this. He said ‘It doesnt look too good I know but in fact it is only 2% of the stock’. I asked ‘what is the total value of the stock’? The response was £26M. (I ,made a mental note that I would not mind having 2% of £26M in my back pocket right now, the language of money speaks louder than percentages! How many stock turns a year I asked? The response was 6! I then commented ‘That is an awful lot of stock’! The response was ‘well it looks like that but in our industry we have no choice. We supply the large Supermarkets. If we get a call from any of them for say 100k of tinned chicken soup we are expected to deliver it in 3 days, we cannot produce it in that time so we have to make to stock’. I asked ‘how long does it take to produce say 100k of such product? The response was ‘about three weeks’! It crossed my mind that 3 weeks was a long time to make chicken soup, my wife does it in a few hours.

I later took this up with a group of production managers. Why does it take so long? The response was, well we have about 100 different products in the factory at any one time. It is a scheduling nightmare’. So I said, I see so in addition to all that stock in the warehouse, you also have up to 3 weeks volume of output at various stages of production on the shop classed as being Work on Progress? Response, ‘yes, that is about it’. I then asked ‘do you make roughly equal quantities of each of these products? I predicted the answer before I asked the question. I suspected that the Pareto law would apply, i.e. that about 80% of the output was from about 20% of the total and the converse was also likely to be true.

This was more or less confirmed. I said. Think about this. Supposing the ingredients for one of the high volume products was due to arrive from the docks at say 11.00 am. You knew that so instead of putting them into incoming goods warehouse where they ran the risk of degradation anyway, the first machine in the processing operation was prepared ready and the truck with the ingredients went straight to the machine and off loaded into the hopper! As the product emerged at the rear, the next machine was expecting it and so on, through to completion. In other words what is the actual processing time with no delays? They calculated this and the answer was 7 hours!. I said 7 hours but it takes 3 weeks.

OK think about this. Why do you not print the travel documents of the high volume products in a bright colour and whenever they appear, they must take priority over anything else. Later, you can update the scheduling software to effectively do the same thing but right now, to get started, as a try out see how it goes. I returned one year later. To my surprise, instead of the warehouse containing product, most of the space was taken up with processing plant. I learned that in just one year they had reduced the finished goods stock from £26M to approximately £6M and made a huge reduction in both incoming goods stocks and Work in Progress.

However there was another large saving. Unbeknown to me when I made the original study, they had decided to close one of their plants and move everything to this operation. Whilst I was doing my job they were involved in negotiations to obtain a large plot of land adjacent to the plant in order to build a new factory. I was told that this was estimated to be £120M just for the land. As a consequence of our project, they were able to accommodate all of the plant they needed from the old factory in the space we had saved in the warehouse!

Now I can hear you say. That was a one off, we are not in the high volume food industry, you were lucky etc. No, what is the lesson in this story. Warehouse costs were not seen to be quality related but they are. Even if they had been accounted for they were regarded as a fate that they were stuck with. They assumed just like everyone else that this was also true for all of their competitors. It was until we got them to see things differently!

All non added value is quality related because it impacts on fixed and variable costs, delivery lead times, broken promises and competitiveness. All of these impact on the reputation of the company in its market place, the morale of its staff and all of this can be summed up as Quality with a big Q! What can you do to find the Cost of Poor Quality in your organisation? well you do not need a consultant. You can do it yourself.

Note, the term 'Cost of Quality' is flawed because Quality is Free. It is what you would expect from a perfect process. If there is a cost then it is due to 'Poor Quality'. Do not trust a so called experert who does not know the difference! 

If you sign up some of your staff with David Hutchins International Quality College and they successfully complete the Unit 505 Using quality to improve business performance, here is the deal. By email and phone calls we will teach them how to estimate the cost of poor quality, identify the major problems and use our unique experience to show them how to make big inroads into your costs. Check out the Diploma on our site now or give us a call