The Cost of Quality – A Statistical Approach

The past few years have seen rapid advancements in quality management technologies and innovation for the manufacturing sector. However, the challenge of achieving managerial buy-off for investment in manufacturing quality tools is a common one faced by manufacturing project leaders in clients large and small alike.

The reasons for the hesitancy in investment are usually centered around 3 main points:

• Quality tools are frequently viewed as ‘non-critical‘ equipment to a manufacturing process as they don’t directly add value/progression to the production sequence
• Decision makers, particularly those sitting in the financial function, lack the technical appreciation of the tools and their power 
• Often, the addition of quality verification equipment into a production sequence adds additional manpower and production time to operate and utilize

The combination of these factors can often lead to investments looking unfavorable – even in some traditional Net Present Value (NPV) justifications.

But why?

Because the perceived costs of poor quality only typically include the direct value added to a product up until the point of scrap or failure – i.e. materials and direct labor & machine time. However, these are only ‘the tip of the iceberg’ when it comes to the TRUE cost of poor quality. Indirect costs, which are significant yet often overlooked, include:

• Material reorder costs – overhead, loss of economic-lot-sizes and expedition costs associated with remaking orders that have been scrapped or require rework
• OEE and manpower efficiency losses – unexpected machine utilization disrupts efficient and lean scheduling of resources
• Greater capital costs – the additional machines and equipment needed to sustain the suboptimal throughput
• Greater inventory holding costs – the uncertainty of quality issues results in a higher level of inventory through a factory – both WIP and finished product and raw material buffers

….not to mention the external customer cost of low quality due to escapes and/or later deliveries, which could include late fines, expedited shipping or even losing the business altogether.

A comparative NPV analysis that KickStage completed for a client looking to invest in new on-board laser probing for a turbine blade grinder showed a NPV of -$27k when direct scrap alone was factored, but +$550k when capital, overhead and expedition costs were factored in, completely revolutionizing the business case.

In order to accurately measure all of these costs and create a solid justification business case, download the FREE KickStage Business Case Justification template! This NPV analysis tool offers an inclusive assessment of all expenses and savings associated with a new capability investment, and includes a step-by-step guide to using the tool in addition to an example case.

We’d love to learn about the quality challenges you have and discuss some of the tools and resources available to you!

Angela.Whiteside@KickStageConsulting.com