Need to Prove the Value of Your Process Improvement Project? Try Calculating the Cost of Poor Quality

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Imagine you and many others either on your team or across your organization all complain about a certain process. It’s slow, inefficient, and unnecessarily cumbersome. And because there’s no standard way of performing that process it yields different results which then creates angry customers because of poor or inconsistent quality.

Has the above situation ever happened to you?

It’s frustrating when everyone knows a process needs to change, yet management is hesitant or refuses to approve the funding required to make improvements.

Oftentimes they need to understand the risk, cost, and impact (among other factors) of the proposed process improvement. One way to communicate that is by calculating the cost of poor quality. In other words, what is the financial impact and associated risk of not improving a process?

How Does Poor Quality Show Up?

Poor quality is easy to detect in physical products. Things like defects, missing parts/pieces, and damaged or broken parts/pieces are telltale signs of bad production processes.

Services are certainly not exempt from poor quality. Long wait times, incorrect/wrong/missing information, and inconsistent experiences all indicate a lack of standardization and attention to detail.

Whether you provide a product or service, poor quality will ultimately lead to:

• Bad customer reviews
• High employee turnover
• Failed audits
• Fines and penalties

Left unchecked, any of the above can force your organization to shut down, permanently.

Calculating the Cost of Poor Quality?

There's no doubt about it - money talks.

And when it comes to proving the value of improving broken processes, calculating the actual cost of poor quality might be the fuse you need to ignite change. Cost of poor quality = lost sales = lost revenue = lower profits.

The above image shows a Cost of Poor Quality (COPQ) Calculator. It's a snapshot of a MS Excel spreadsheet that offers the opportunity to cite appraisal, internal failure, and external failure costs. You can learn more about these types of costs in this article from ASQ.

The COPQ is a Lean Six Sigma tool designed to "...quantify the negative outcomes due to waste, inefficiencies and defects in a process." (Source: GoLeanSixSigma.com)

I recommend looking at some of the high-level tasks associated with the broken or wasteful parts of the process you've identified and entering that into the Task column on the spreadsheet. Next steps include:

1. Enter the average time it takes to complete each task.
2. Capture the associated hourly rate of the person who performs that task.
3. Review the auto-calculated cost of each task.
4. Provide the cost of any materials required to perform each task.
5. Review the auto-calculated cost of conformance or non-conformance.?

Below is an example of a COPQ I did many years ago in QI Macros as one of my team members and I analyzed the cost of providing "defective" content. We defined defects as erroneous or missing information, missing images, and grammatical and punctuation errors. Notice tasks #4-11 are corrective in nature.

Although this is an old example, it highlights the annual impact, costs, and risks of distributing defective content. This translated into lost revenue from potential viewers who could convert into customers all from one platform. Imagine the cumulative effect across multiple online platforms.

There's also specific calculations we performed to determine the failures per year. Feel free to message me here on LinkedIn if you're interested in seeing these calculations.

The Cost of Doing Nothing??

Seeing the costs associated with poor quality certainly prompted my team and I to change our internal content management processes. They're now infused with multiple quality checkpoints among other things and we're continuously tweaking and improving those processes every year.

If your manager or influential peers still are not convinced of the value of improving a particular process, then it might be worth reminding them of tragedies like Boeing, Samsung, and more recently, some may argue, the Covid-19 prevention rollout, when the cost of doing nothing (or being slow) to improve, respond to, or prevent glaring issues after receiving internal warnings results in catastrophic loss.

You can download a free COPQ spreadsheet from GoLeanSixSigma.com or, if you want access to even more robust Lean Six Sigma tools, then consider purchasing a software license from Minitab or QI Macros.

If you found the information in this article useful, then subscribe to this weekly newsletter to continue receiving strategies, tips, and tactics to enhance your company's operations.

About the Author

Alicia Butler Pierre is the Founder & CEO of Equilibria, Inc. – an operations management firm specializing in business infrastructure for fast-growing small businesses. She’s a software inventor, author of the two-time Amazon bestseller Behind the Fa?ade: How to Structure Company Operations for Sustainable Success, and host of the top 2% Business Infrastructure podcast.

Alicia’s also an adjunct instructor of Lean Principles at Purdue University and the newly appointed USA Chair of the G100’s Micro, Small, and Medium Enterprises. A chemical engineer turned entrepreneur, she’s advised, designed, and optimized processes for companies including Shell Oil, Coca-Cola, and The Home Depot.