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Experts estimate companies spend approximately 30 percent of their operating budgets correcting poor quality. To find out how quality affects your business, consider conducting a cost of quality audit. (See list of areas to examine on page two.)
The auditor’s first step is to do one-on-one interviews with the CEO and managers (in finance, human resources, management information systems, marketing, etc.). The purpose of the interviews is to identify ways to improve operations, cut costs, and increase revenue, not to hear complaints about certain people or departments. The auditor wants to hear management’s concerns about how work is getting done. He or she will ask management about any chronic process-related problems they’re experiencing and get estimates on how frequently they’re occurring. After the interviews are completed the auditor meets with finance to assign a dollar amount to the items that were discussed. With regard to finance, for example, the auditor may ask: If the process had been done correctly the first time, would a particular charge be necessary? If possible, the auditor will break costs down by activity rather than by department or function. This makes the job of quantifying costs much easier, provides a more accurate picture of the actual costs of poor quality, and alerts you to other potential quality problem areas. Example Consider employee turnover. In addition to direct costs, examine time managers and supervisors spend placing help-wanted notices, interviewing candidates, and training new employees to replace those who left because they were dissatisfied with internal operations. Calculate an hourly rate for all those involved, and multiply that number by the amount of time spent doing these tasks. You may be astonished when you arrive at the total. In one case, an audit of a company with both manufacturing and service operations revealed that the cost of poor quality was more than $7 million, which translated to 12 percent of the firm’s annual revenue of $58.2 million. Make Improvements The next step is to set goals for reducing poor quality. Goals could include, for example, reducing staff turnover 10 percent, computer downtime five percent, rework 15 percent, or customer complaints 20 percent. Develop a step-by-step plan for improvement with those who must carry out the plan. The objective is to eliminate the root cause of poor quality, such as inadequate training or poor documentation of procedures. When the root cause isn’t clear, create a team composed of people connected with the particular process. Have them design a flow chart of the process and conduct brainstorming sessions to identify ways to make the process more time - and cost-efficient. Prevention is Best Solution The more the company spends up front to prevent quality problems, the less it will need to spend to correct them. (See list of prevention activities at right.) Studies estimate that each dollar spent to "do it right the first time" avoids $15 in quality losses. There’s also evidence that the more time and money companies invest in prevention, the lower the employee turnover and the number of information processing errors. Areas Covered by Cost of Quality Audit
Prevention Activities
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| The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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