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The Intangible Costs of Quality
By Michael Donahoe

“Nobody tries to do a bad job. Sometimes we just do.”

There are many ways to measure the cost of quality on your projects. There are the costs of conformance, being preventative costs and appraisal costs. There are also the more well known, being the costs of non-conformance. Non-conforming costs are broken down into internal failure costs and external failure costs. These costs are very well studied and there are many books written about them. I’d like to review them and in doing so provide you with a more hidden value that I call the intangible costs of quality.

First let’s discuss the cost of conformance: preventative and appraisal costs.

    Prevention costs – These are costs incurred by the actions of training, risk assessments, and the creation of process and system controls. These actions all lead to the ever so brilliant mantra of quality, “Do it right the first time and you never have to go back.”

    Everything about prevention costs are relatively intangible to some degree. You are basically guessing, albeit making educated guesses mostly, on how not to make a mistake. We all wish we had a crystal ball to foresee project issues, but unfortunately that doesn’t exist.

    The intangible for prevention is that anything you do here is an overhead cost and making uneducated guesses here is very costly. The best method is to have good feedback from your appraisal systems.

  • Appraisal costs – This is primarily your monitor and control of your project. Appraisal costs are those costs involved with inspections of the project (like checking on product and or labor), they are essentially the cost of your quality department (the analysis performed to determine if quality is being done and followed).

    The intangible cost here is when a company becomes penny smart and dollar stupid by virtue of over-analysis by spending too much on the data collection as opposed to putting actions into place for prevention. The best method here for organizations is to do sampling methods to find out if the analysis performed is worth the time and costs involved. The cost of appraisal should never outweigh that of costs of non-conformance or failures.

The costs of non-conformance are made up of both internal failure costs, and external failure costs.

  • Internal failure costs are typically caused by failures in your process. For instance scrap material due to over-ordering being returned. Rework is the big killer. There is no such thing as a profitable Mulligan in your processes. If you have to redo something to meet the customer’s scope of work then it’s a failure.

    As I said this is one of the more known to the people doing the implementation stage of any project. I would submit to you that in most cases, this is not due to the individuals performing the implementation at a low level, but rather due to one of the following: poor communication, a poor specification on what needs to be done, a problem with time or budget (which is usually the culprit of a poor specification), or inadequate prevention (training, process, etc). The intangibles here are that these are demoralizing to the persons involved with deploying your projects, the blame game ensues, email inboxes explode with fury, departmental silos are created decreasing communication, data for prevention and appraisal become difficult to acquire, and unfavorable momentum is created, all of which adding more and more to the overhead.

    The easy answer here is spend time up front with the prevention stage. But as mentioned earlier it’s not always possible to catch every contingency. The key is to keep a broad view over the project. Understand that there is a snowball effect and unravel that snow ball to get down to the real root cause. Use tools such as the 5 why’s, lessons learned, and apply these to your prevention for better big picture analysis so your “guesses” are more accurate. Doing this will automatically prevent external failure costs.

  • External failure costs do more than affect your bottom line. They diminish your reputation as a company, possibly even as an individual. These are the defects that impact the end result and are provided to you from your customer as complaints. Recalls, warranty work, poor survey results, etc.

    The intangible here is the potential loss of future opportunities you may have gotten due to poor quality. These kinds of costs aren’t on your balance sheet, but they sure enough have an impact on the income statement.

    The best method here is, of course, prevention to keep them from happening. Appraisal: ensuring these problems don’t reach your customer. Reduce your internal failures so as they don’t slip through to be external failures. The primary goal however, if you do have an external failure is to act fast. I read a book once and I can’t recall the author who stated this, but the solving a problem for a customer is the best method of achieving good customer service and customer commitment. It seems odd that this is possible through a mistake, but it’s because of the communication on a one on one basis with that customer. This does have a diminishing return, too many errors, and that opportunity is lost.

In closing we’ve discussed costs of conformance, prevention and appraisal, and costs of non-conformance, internal and external and the intangible costs that occur in each. The intangibles for conformance are caused by doing too much – over analysis, over sampling, as well as sampling without proper data (under analysis). The goal is to watch the reduction of errors vs. the costs of committing time and resources to prevent those errors. The intangibles for non-conformance are decreasing your company’s value by poor reputation, demoralizing your staff, and a massive decrease in efficiency. The cure here is through prevention and smart appraisal by watching the big picture and drilling down to the real root cause in order to prevent future issues. This is done through good communication and process control.

Michael D. Donahoe, PMP, MCTS – TOPSweb, LLC.

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