It obviously costs money to undertake any type of work or endeavour. And the cost of that work might include the cost of rent for the facilities in which the work is undertaken, the cost of the equipment needed to execute the work, the cost of the materials and the wages and salary costs of the people doing the work.
The ideal outcome of that work is:
- A good job well done and the cost of undertaking a good job well done has been referred to as the “cost of conformance”. (COC)
But not all jobs are done right first time so, another outcome is:
- A job perhaps not so well done. We all know the types of jobs that are not so well done, it’s where things have to be re-worked or done again or where things take longer than expected. This is where time money and resources have been wasted, the reasons may be many and various, the point is it is these jobs that eat into your margin. The cost of undertaking a job not so well is referred to as the cost of non-conformance. (CONC).
As a result of the above we can create an equation where the cost of the work undertaken, sometimes referred to as the cost of quality (COQ), can be detailed as a formula:
- COQ = COC + CONC
And the point, sometimes missed, is that with judicious attention to both the cost of conformance and the cost of non-conformance the overall cost, the cost of quality, can be reduced over time which will result in slicker processes and improved margins.
As some of you may know, when I was younger I used to make diamond tools; I had a team of about 8 people and at the time we were working on the fringe of diamond tooling technology. We were mixing diamonds with powdered clay and then squeezing the mix at high heat and high pressure to make “vitrified” diamond tools. This was cutting edge stuff and we used to get it wrong (a lot). So understandably, I was asked by my MD to get it right more often. But before we did, we worked out our cost of non-conformance. The cost of everything we’d made wrong. This was easy because I’d kept all the scrap (even industrial diamonds are expensive). I gave the scrap to the R&D department who broke down the clay and gave me back the diamonds to use again…But even then, the cost of our production problems were 21.9% of turnover. And we were making a return of about 8%.
Just think about that – the cost of the production problems were nearly 2½ times the margin we were making!
On top of that I had a 4-year growth target of 100% year on year… If we continued scrapping work at the current rate, in a very short time we’d be wasting an incredible amount of time and money.
And I know we’re not alone, I’ve had a couple of recent conversations …
- The MD of one £10m fit out contractor told me “We have been making the same mistakes on projects for the last 30 years we never learn…and it hurts.”
- A director of a larger £40m refrigeration contractor commented “I reckon we regularly spend an additional £150k on each major project we undertake simply because we don’t get the design right at the beginning.”
So what do we do?
There are proven and systematic approaches to reducing the cost of conformance and the cost of non-conformance and these are laid out in detail in the download below, but in summary the steps in the process are:
- Step 1 – Project definition
- Step 2 – “As-Is” process discovery
- Step 3 – Solution generation and investigation
- Step 4 – “To-Be” process design
- Step 5 – Implementation of To-Be process
And any projects undertaken can be driven by wanting to reduce the cost of conformance or the cost of non-conformance.
The focus for your cost of conformance improvement activities should be ensuring that quality is built into your processes in order to avoid mistakes and failure, as such, cost of conformance can be broadly divided into two categories:
1) Prevention costs: the time, effort and money spent on activities, equipment and processes necessary to prevent defects from arising in the first place, this might include:
- Product or service requirements – properly determining customers’ requirements and developing corresponding specifications for materials, processes, finished products and services
- Planning and documentation – the creation of reliable and useful plans, specifications, testing processes and any documentation that sets out what it is that needs to be done to meet the customers’ requirements
- New equipment and servicing and maintenance of existing equipment
- Staff training – the ongoing development and implementation of training programmes for staff, operators, supervisors and managers necessary to achieve the results required
- Quality Assurance activities – the creation and maintenance of the quality management system
- Miscellaneous – clerical, travel, supply, shipping communications and other general office management activities associated with quality
The costs associated with prevention are the costs associated with doing things “right first time”.
2) Appraisal costs — the time, effort and money spent on those activities necessary to check, inspect and root out any problems, issues or defects prior to dispatch in order to ensure they don’t get into the hands of the customer:
- Verification – the checking activities required, this could be to checking of supplied materials, the checking of the 1st off inspection, equally it could be the checking of a report or document. Essentially, all of the testing and inspection activities necessary to ensure the right product or service to be delivered
- Audits – these may be formal or informal or part of an ISO (9001, 14001, 27001, 45001 or other ISO) process or simply an in process or onsite check undertaken to ensure the work is being undertaken as required
- Inspection equipment – the calibration and maintenance of any testing equipment required
- Supply chain and vendor rating – the approval and assessment of suppliers and their products and services
However, as an increasingly serviced based economy whilst much work is undertaken in offices, factories and workshops away from the customers eyes, increasingly, with many companies, the work is undertaken in front of the customer. As a result, if a failure occurs it will happen in front of the customer, so (generally) the more work that can be done on prevention the less likely it will be that there will be an embarrassing problem.
The costs associated with appraisal are the costs of checking “things are right”.
Moving on to the cost of non-conformance, these encompass the time, energy and money that is spent on products, services, processes and issues that do not conform to requirements.
The cost of non-conformance can also be broadly divided into two categories:
1) Internal failure costs — the costs incurred when defects in the deliverables are detected internally (i.e. prior to getting to the customer)
- Scrap – the cost of defective products materials or services that cannot be repaired used or sold
- Rework and rectification – the cost of doing things again that haven’t been done properly in the first place. For a construction company this might be rebuilding a wall or re digging a trench, for an accountant or designer it might mean reworking a report or logo that wasn’t up to scratch
- Re inspection is the cost of rechecking work the above work that wasn’t done properly in the first place
- Failure analysis, the activity required to establish the cause of the problem and to ensure it doesn’t recur
2) External failure costs — these are the costs incurred when problems are found the products and services provided to the customers once they have received them and they are in use (this is the worst kind of quality costs)
- Repair and servicing – ether of returned products or those in the field
- Warranty claims – failed products that need to be replaced under some form of guarantee
- Complaints – all the work associated with handling and servicing of customers complaints
- Returns and recalls the handling and investigation of rejected or recalled products or materials including, potentially, their transport costs
- Loss of goodwill – which could reduce customer satisfaction scores and lead to a loss of customers.
Internal and external failure costs are the costs of “getting things wrong”.
Let’s take an example;
I’m currently in the process of rewriting my book Dragon Slaying: A Better Way To Manage. Which is essentially about debunking some of the myths around management. Since writing the original version we’ve now got considerably more case study material and I want to add these as a series of appendices.
Obviously in re-writing the book, and adding the case studies, a lot of time and effort will be spent on editing and proofreading to ensure all the content is accurate and error-free. The costs associated with these activities are the cost of conformance and include (multiple) reviews by me (the author), the case study clients, external subject matter experts and of course the editors. We will also make advanced copies of the book available to consultants and perhaps potential clients who will be invited to read through the book in order to provide valuable feedback. The book will then be set by the printer, a proof copy will be provided to us for review and approval before being signed off prior to printing. Once set up and on the press, a “first off” inspection will be made before further copies are printed, additional copies will be checked throughout the print run and again at the end of the printing process. All these activities involve considerable time and cost.
However, we could accelerate the delivery of the book by leaving out, some or all of these cost of conformance activities, for instance, once I have finished writing the book it could go directly into printing. Recipients of the book may be initially pleased to be able to receive the book early. But they may later find there are spelling and grammatical errors (as many of you know I am an engineer and I come from Southend (Sarfend to us locals), in both cases it’s (almost) obligatory to be lousy at English). It may be that some of the diagrams are in the wrong place and the content page and/or index contains errors.
Obviously, my book Dragon Slaying is “only” a book about ideas on how to manage. What if the book being printed were student study guide or the annual report and accounts for a listed company. Implications for not undertaking the cost of conformance activities would at best potentially hinder the studies of the student and at worse result in exam failure. For the listed company, errors arising from not properly undertaking the cost of conformance activities could potentially be catastrophic; a collapse confidence in the numbers presented and ultimately the share price.
Clearly, I am painting a bit of a pastiche, but the point is, there are areas where if you think deeply about it, improvements can be made to reduce the cost of conformance without compromising the cost of non-conformance. This is the “trick” the process detailed in the download seeks to help pull off.
How does this fit with our management systems?
Clearly processes are at the heart of any management system including ISO registered management systems like:
- ISO 9000 where the focus is on the operational processes … how the work gets done
- ISO 14000 which focuses on the environmental impacts of the operational processes
- ISO 27000 which is concerned about how information security is managed
- ISO 45000 which focuses on the health and safety aspects of a company or organisation’s operations
Equally clearly, each of the above standards and others, all have an underlining theme of “process improvement” where process or activity has a cost of conformance and a cost of nonconformance… (a horrible term familiar to all who are familiar with IS0 processes) both of which can be reduced.
The bottom line is there is potentially a balance between the activities necessary cost to ensure products and services are delivered minimalizing both the cost of conformance and the cost of non-conformance. An allied idea is that of the Taguchi loss function but that’s a story for a different day.
However, a legitimate question is what kind of impact these can ideas make?
Returning to my old world and diamond tools, we worked hard on making things systematically better and managed to reduce the cost of non-conformance to 10.1%… still a lot, but significantly better than 21.9%!
Additionally, there’s a great guy into this kind of concept called Professor John Oakland and he’s undertaken numerous studies in this area. He has previously put the cost of non-conformance anywhere between 10% and 50% of an organisations turnover. (the percentage will obviously depend on the firm and the sector, and, if I remember rightly, the 50% example was for an airline maintenance activity … and I don’t know about you, but in that example, I’d certainly be grateful of a lot of checking and rechecking!)
Interestingly, service companies are often worse performers than manufacturing companies… I’ve got a hunch that this is because with manufacturing companies scrap piles up in the corner, you can see it, touch it, put your hands on it, with service companies the cost of non-conformance is usually time… which is much less easily identifiable.
Related tools and ideas
- Taguchi loss function
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