How can project teams better ensure they get the support needed for process improvement initiatives? By support, we’re talking about resources-funding, people, and time. When the performance indicator and its gap aren’t enough, consider including the Cost of Poor Quality. The Cost of Poor Quality (COPQ) represents costs and lost opportunities that would disappear if processes, systems, services and products met requirements, whether they be customer or leadership-driven. Its definition has been expanded from its initial application by Armand V. Feigenbaum in the 1950s to describe the “costs” incurred from the “gap” between the actual and required performance levels. This latter definition is commonly used for organizational and strategic Lean Six Sigma (LSS) projects. Because the COPQ represents the financial consequences of the gap, it’s a valuable tool to use in conjunction with Return on Investment (ROI) when determining the value of an initiative, or the effectiveness of a Lean Six Sigma team.
COPQ is typically classified in the following ways:
- Direct COPQ: Controllable costs to ensure that only acceptable products and services reach the customer. These include inspection and rework.
- Indirect COPQ: Costs which are difficult to measure because of the delayed result of time, effort, and financial costs incurred by the customer. These customer-related costs result in lost sales, referrals, and risk, and do not appear in the organization’s financial statements. These include lost revenue and brand image factors.
- Resultant COPQ: Costs incurred because defective products and services were delivered to the customer because of earlier decisions about how much to invest in the prevention of defects. These include warranty repairs, product returns, and costs incurred by other departments because of the process.
- Intangible COPQ: Costs or impacts which are difficult to measure but can be linked statistically to negative outcomes including economic, environmental, and societal. Examples of these costs include the effects of employee turnover on child safety and caseloads in social services, low employee morale and engagement on productivity, ineffective new-hire onboarding or supervision on employee retention, low customer satisfaction scores and lost revenue, among many others.
The ets Cost of Poor Quality Matrix is used to show the measurable impacts of the improvement project’s “theme” indicator gap on the key stakeholders in the Define step of the DMAIC methodology. For example, lengthy turn-around times can affect customers resulting in dissatisfaction and complaints. They can also result in customer attrition which can reduce revenue for the company and profit for shareholders. They can also result in employee dissatisfaction, turnover, overtime, and other consequences. It is important to define the key stakeholders and the “pain” for each. This will help convey the importance of the project and facilitate leadership buy-in. Gemba walks and applying the popular 8 Wastes Lean tool are effective approaches for uncovering the COPQ in a process.
The figure below shows an abbreviated example of the ets Cost of Poor Quality Matrix:
| Cost of Poor Quality Matrix | ||
| Theme: Reduce Patient Flow Time by 25% (Actual – 80 minutes, Requirement – 60 min.) | ||
| Stakeholders | Negative Impact (Pain) | Cost of Poor Quality (COPQ) |
| Patients | Patients leave without being seen. | Lost referrals valued at $1,000,000 this year. |
| Supplies are received after scheduled arrival times. | Inventory costs have increased $350,000 this year. | |
| Employees | Intake documents must be reviewed multiple times. | Rework has required employees to work $210,000 in overtime this year. |
| Dissatisfied patients have had a negative effect on workforce morale. | Workforce engagement has declined to 55% this year resulting in productivity costs of $400,000. | |
| Shareholders | 10% of patients leave without being seen by a provider. | $1.8 million in lost direct patient revenue this year. |
| Employee turnover has increased hiring and training costs. | $850,000 increase in staffing and training budget this year. | |
As the LSS project progresses through the DMAIC steps, the impact values should be refined. It is common to see the first draft of the COPQ double and even triple as the team learns more with each DMAIC step. Finally, the individual costs are totaled and annualized. This will help the team conduct the expected Return on Investment (ROI) analysis in the Improve step and calculate the actual project ROI in the Control step. The relationship between the COPQ and ROI is straight-forward. The COPQ represents the financial impact of the gap. Therefore, if the gap is reduced by, say, 50%, then so is the COPQ. In fact, by removing all or a portion of the COPQ, a benefit of equal value is created. The benefit’s value is, therefore, used in the ROI calculation along with the costs of the solutions.
Accurate ROI determinations are key to decision-making and can be enhanced by using the Cost of Poor Quality and other Lean Six Sigma tools. The success an improvement team has in converting the Cost of Poor Quality into a benefit, or ROI, can also be used to determine the process improvement team’s effectiveness.
Author: Bob Seemer, COO, ets inc.