The Cost of Un-Quality quantifies errors,
defects, delays, and other problems that tend to slow operations
or add costs. It measures the loss to the company of not achieving
the planned result. Most people will agree that any loss should be
avoided. The hard part has been ranking identified losses from
different functional areas according to a common standard, one
that should demonstrate the problem's relative impact on the
The Cost of Un-Quality calculation is:
Time to Correct (in hours or dollars) Plus Out-of-Pocket
costs (including material and services) Equals Event
Event Cost-to-fix Times Frequency of Occurrence Equals
Cost of Un-Quality
The frequency a problem occurs multiplied by
the cost to fix it gives us a relative measure of its impact on
Example: If sales of 100,000 pieces of Item A
requires production of 110,000 units (an 11 % reject rate), and
each replacement piece contains $10 labor and $5 material, then
the Cost of Un-Quality equals $150,000. If sales of 10,000 of Item
B requires 11,000 to be made (also an 11% rejection), and each
replacement contains $20 labor and $30 material, its Cost of
Un-Quality equals $50,000.
Though the individual cost is greater to
replace Item B ($50 versus $6), the frequency of Item A problems
creates a larger business impact for it. Even adding an estimate
of substantial indirect costs (management, MRP analysis,
additional paperwork, etc.) may
not shift the priority.
Each of our businesses may be driven by
different prime considerations, so the Cost of Un-Quality should
be expressed in units of measure that are relevent to the
company's operations and that focus improvements along lines that
have immediate impact.
The Cost of Un-Quality formula quantifies two
basic types of loss to business operations (Time and Money):
• Loss of Money—A company that is
traditionally cost- or profit-driven should express problems in
terms of dollars spent, wasted, or lost. This measure shows
effects on net profit, return on investment, and cash flow.
• Loss of Time—A highly competitive
industry requires quick response to orders, changes, new
products, and new technologies. Also, where operating costs or
profits are not widely published, time can be a meaningful
surrogate. Most people can agree that time is money. This format
shows effects on Throughput, Inventory, and Operating Expenses.
Note: For those using the Theory of Constraints
to focus improvements (Bottlenecks versus Non-Bottlenecks), time
is not necessarily money. A deeper analysis of resource
utilization will be required, and added weight must be given to
losses from a Bottleneck.
Two other types of loss are more subjective and
cannot be measured directly with the above formula. Losses here
tend to be caused by the earlier problem events and are additive,
or even multipliers, to their effect.
• Loss of Control—Some business
environments look like a Chinese Fire Drill. It is generally
helpful to get better organized before establishing detailed
measurements. Two types of control problems are measured in this
The first, database integrity, asks questions
like: How many Routings are incorrect? (or) What percentage of all
Routings are incorrect? There is a high cost to correcting the
database. It must be balanced against the actual Cost of
Un-Quality it produces, i.e. making things incorrectly. Correction
should probably be a free-time activity, and be prioritized by the
impact of individual Routings errors, as measured through line
The second control issue is the frequency of
management interventions. A variation of the Cost of Un-Quality
formula should be agreed on in each company. As we drive
decision authority closer to the point where action is taken,
this issue will lessen. The measurement itself, though, is one
of the best motivators to increase delegation.
• Loss of Reputation—Very hard to
objectively quantify, but a critical intangible. Relativity can
be achieved using consensus estimates of event impact and
resources expended. This requires honest, widespread
communication. This kind of measure applies to customers,
vendors, competitors, managers, and the general work-force.
The latest, or loudest, phone call cannot
drive long-term planning, though it might define today's
activities. The potential damage to our reputation increases
as more, and higher-level, external people get involved. A
multi-part (1-5 each) grade might be given to each contact.
Grading could include who the complaint was handled by, how
serious (upset) the complainant was, how many contacts were
required for resolution, how many people (internal and
external) got involved, and how long it took to resolve.
Whether you are concerned with sales,
purchasing, manufacturing, distribution, or any other company
function, the basic goals
of measurement are:
1. To benchmark current operations.
2. To identify opportunities for improvement.
3. To set relative priorities for actions
4. To monitor progress and validate improvement actions.
To be Continued
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