Making ISO Certification Painless and Profitable Since 1992

‘Cost of Quality’ Decision Making

You can access the recording by clicking on the image below.

Webinar Topics

How can you collect the right data to help improve your organization’s savings potential while making process improvements?

In this webinar, we discuss an overview of ‘Cost of Quality’ methodology, including:

  • What is ‘cost of quality’?
  • What am I missing if I ignore it? This includes a discussion of internal and external failure costs, and costs to the bottom line and impacts on revenue.
  • How can I implement it? We’ll discuss ‘cost of quality’ implementation approaches as well as appraisal and prevention activities.

Full Webinar Transcript

Jim Moran:

It wasn't until Crosby, Duran, that whole gang got their stuff published and got people thinking about it, and when people started to see the actual return on the investment of preventing problems, first of all, and preventing both internal and external problems, they started to realize that by spending a little bit at of time on cost of quality, you can get a pretty decent return on the investment and make sure that... Again, measuring, if you have good measures, you'll be able to tell how much it's costing you to both avoid problems and correct problems. And you can see why investing in prevention a lot of times you can get much payback. We'll be talking about that for sure.

Jim Moran:

So, the cost of quality isn't just a phrase. It is actually a methodology. Figure out how well you're using your resources, especially to prevent poor quality. Another thing is that it appraises the quality of your products and services that result from internal and external failures. And of course, those of you who are involved with ISO 9001 or any of the relevant other relative standards, AS 9100, I8TF 1690, they all require that you measure your quality. Appraising the quality, if you will. And tracking section nine, 9.1, 9.1.3 in quality. And then if you can do some measurements, create a methodology, do some measurements, determine the savings to be gained by implementing process improvements, again another requirement of all the current standards that are built to the high level structure, of 9001, 14001, 45001.

Jim Moran:

What we can see in a lot of cases, especially from a sales perspective, if often top managements' willing to spend money that can be shown by a skillful salesperson. Spend money to reduce or eliminate expenses, or reduce expenses. But they're often hesitant to convince themselves, or be convinced that there's value in spending money to avoid expenses. So reduction, elimination of expenses is one thing. Avoiding expenses, like we'll be talking about today with preventive actions sometimes isn't as easy a sell. So when we talk about the context-

Rick Herman:

Jim, I'm going to stop you here for a second?

Jim Moran:

Yeah.

Rick Herman:

We got one question about the audio quality. I don't know if there's any way to increase your volume a little bit?

Jim Moran:

There. It's all the way up there. How's that?

Rick Herman:

That's fine. I just want to also share a couple more comments on the-

Jim Moran:

Oh good. Thanks.

Rick Herman:

So, it's the reason why this had came in. Eric says... I'm sorry, Chris says the cost of quality is the means of survival to the quality department in many companies. In other words, the quality department has to justify its existence that way. And that makes perfect sense. Eric says, decision makers are questioning the effort versus the value achieved for quality. So I think there's always skepticism from management that says, hey, do we really have to do this? So I just wanted to share those comments.

Rick Herman:

I'm sorry, Jay Darby also says consistency internationally easier to compare oranges to oranges when you have similar quality management system. And I assume he's also meaning the metrics for cost of quality. So that would probably be part of, part and parcel of the whole evaluation process. So anyway, go on Jim.

Jim Moran:

Thanks very much Rick. And this works both ways. Why not... If you're making purchases for , why not ask them how they measure their cost of quality, or what kind of metrics they're using to measure their outputs. So back to the cost of quality... First we're going to look at the framework, the context. What am I missing if I ignore it? And then the last part, we'll talk a little bit about sort of a somewhat practical approach, the how to part. First of all, as far as the context and framework goes, it is a methodology. It's not just a theory, concepts, ideas. You can do a flowchart for your cost of quality the same way you would do a flowchart for packing a package, or delivering a service. And I'll try to include services today as well, because there are definitely ways to avoid issues with the service as well.

Jim Moran:

So, we'd like you to in the chat box, type in what resources you're using to prevent poor quality. And that's part of this whole equation. Preventing quality, plus the cost of quality. If you're doing something now that you've designed specifically as a resource to prevent poor quality, I'm sure many of you use test plans on entering maybe customer feedback, internal customer. Are you watching things internally as they're being prepared? As the service is being delivered?

Jim Moran:

Anything showing up there Rick? I know you're out there. I can hear you breathing.

Rick Herman:

Okay, I would also add... No, there's nothing showing up right now. I would also add some things like, oh here, now their starting to get some things in here. Hang on a second. Eric says, audits, client feedback, project milestone monitoring, which is good. So the project planning aspect. I was going to add new technologies, like real time data acquisition, would be a good one. Samuel says, risk register, continuous improvement department.

Jim Moran:

Yup. Risk register.

Rick Herman:

Okay, that's more okay. R. Patel says identify the failure points in internal control. Those are good. I mean, when you're talking about failure points and internal controls, I mean, it's a broad area. But I mean, it certainly could have a metric put to it, could it not Jim?

Jim Moran:

Absolutely. And that there's a perfect example of something you'd want to calculate how much it would cost to put it all together, and then see what kind of savings you could accrue over the year by avoiding some issues. Thanks.

Jim Moran:

And the other thing we're kind of interested in too, is spending to measure the quality of your products or services. And if you're not spending enough on preventing nonconformances, you might end up spending too much or more on correction. And the trickiest part for most of us here today, is figuring out how to take these measurements, and especially how to take them accurately. Worst thing that I've seen happen in organizations are measurements that get put into place, that then impact people's behavior. And they need to understand what the measurement is for, rather than just imagining they have to hit the number or they get into trouble.

Jim Moran:

So this is a whole culture that top management has to create in organizations to make people aware that their survival, as was mentioned by one of our participants today, survival depends on producing efficiently and making a profit. I mean, unless we have a nonprofit organization visiting us today, you're all working for a profit. So, you have to balance out this prevention and make sure that it's effective, and make sure that you have really good ways to measure it. Again, if you don't take the time to design targets properly, you'll end up changing people's behavior and get things happening in your organization that you don't want.

Jim Moran:

Improvements will pay, and pay, and pay. Improvements are the best investment you can make in any organization. Again, having people who are actually doing the activity involved in the improvement really helps, because they're the ones that make it or break it. If you have them involved in the improvement, they'll figure out ways to make it work. If improvements get imposed on people they sometimes won't be as enthusiastic. I've said many times, people love variety, but they're not so crazy about change. And I've found out in my time here on earth, that if I decide it's going to be different, I call it variety. And if ONS tells me it's going to be different, I call it change.

Jim Moran:

So, anything where you can communicate, collaborate with people in your organization, you'll get them on board. You'll get them working with you, and you'll all be working together and you have a lot more momentum build up, a lot more power, a lot more collaboration, a lot more energy together. And improvements you're making in your organization need to enhance customer satisfaction. And I'm not just talking external customers, we have to have internal customers satisfied as well. So make sure that these improvements you're making actually do make things better.

Jim Moran:

And we have another poll, Rick. Poll number two. What's your current... And this is a multiple choice. You'll see a little square box. There's square boxes there, you can choose more than one. That's... Let's see. That was the second one Rick, this is the third.

Rick Herman:

Oh, I'm sorry about that. Bad job here. Hang on a second.

Jim Moran:

That's okay. Let's get rid of that guy. And there we go. Thank you.

Rick Herman:

Right. While that's moving along, I've got some more comments. Chris is actually providing sort of an addendum to that equation we showed earlier, he says COQ is the sum of COPQ, Cost Of Poor Quality, and the latent cost of quality in running the business. So I'm kind of curious what might be a latent cost?

Jim Moran:

It could be a follow on cost. And perhaps some of the latency is in your reputation. We'll find out what Chris means maybe a bit more about that when we get to that. We're going to show that exact equation in a bit.

Rick Herman:

Also, Trevor Shaw says, can a case be made that QA can be advertised to engender customer trust and confidence in a brand or product? I tested this one time with a Nova Scotia company producing a health product, who were happy to tell me about their quality control and pointed me to where I can go to see lab test results on a particular batch, showing within tolerable limits prescribed by Health Canada. However, they did not respond to questions about what they'd do if a batch did not meet standards. Batches released before its lab test results received, etc.

Rick Herman:

I think we've even talked... We've got an example we were talking about quarantine and so forth. That's almost the same kind of thing here. It makes a really good point. I mean, we all want to tell good news. But we want to hide the bad news, right?

Jim Moran:

Absolutely. And it's not unusual for large consumers of a production facility. For example, in Sarnia where they have factories making rubber, the the Ford company a few miles away in Southfield, Michigan has live feed from the manufacturer showing the heat rate, production rates, yield, and all that kind of stuff. But I'm not sure if they have a live feed out of the lab with the results from the chemical analysis, but they have everything else. Thanks. I'll just get-

Rick Herman:

I'm going to make another comment too, coming from the marketing side of things. I think a case could be made not just internally, but even to your prospects and so forth. I mean, they don't often do it. But I mean, there are many, many times where quality is ultimately the deciding factor for a consumer or for purchaser. So, it happens a lot. And I think it should happen even more.

Jim Moran:

And that's where top management has to convince all the employees that in this quality isn't just a number that we're going to try to show by fudging the results. We really want to do this well for people. Thanks.

Rick Herman:

So there is also the poll, Jim. Basically, most people use quality metrics, but not an innate kind of organized way. That's the number one answer. And then the second one was, we use minimal resources to prevent nonconformances. So definitely some improvement could come, if you think about it.

Jim Moran:

Yeah, maybe we can convince people today that there are some ways to maybe just kind of beef up what they're doing a little bit, without incurring massive costs and get some kind of good return out of it. So the major types of quality costs include prevention, appraisal, internal failures at cost, and then of course external failure. And the prevention costs would include things like improvements of manufacturing processes, training, quality engineering, statistical process control, system development, engineering, quality training, quality circles. Many of you have heard of those, I'm sure.

Jim Moran:

SPC, supervision of prevention. People preventing nonconformances you need supervisors, if in some cases, in some larger organizations any kind of project you're making things better. Data gathering. Rick mentioned data gathering earlier. If you've got, especially if got high volume machines, you've got some kind of recorders on them. Analysis reporting, there's just audits. Again, auditing, not to see if people are following the procedures, but to see if the procedures as they're implemented are getting the results that you want. And also auditing to see if risks are being managed well.

Jim Moran:

If anybody is using anything out there now to prevent. Let me just back this up, prevention costs. If you can just pop into the chat box, tell us a little bit about what you're using now. And while you're doing that, we'll get on to the other side, appraisal costs. Tests inspection, final production test. Too late here, by the way. If you don't find it till the end... There's this 110, 100 rule. If you find at the front end of the process, think input process output, under the I, input. If you can find the problem at the input stage, you can fix it for $1. If you get to the P, and you don't find an issue till it's in process, you can still fix it, but it'll cost you $10.

Jim Moran:

And for the hundred side, if you don't find the problem till it has been produced or the service has been delivered, you can still fix it, but it will be 100. So I've got input process, output, $1, $10, $100. And of course, for most of you there'd be one or two or three zeros on that, if not more. So some more costs for prevention or appraisal costs. Testing inspection supplies, consumables. You might say, test equipment depreciates. I mean, you have to maintain it. Plant utilities in the inspection area. Field testing and appraisal. Once again, if you wouldn't mind, use the chat box. Tell us what you're using now. Anything showing up there Rick?

Rick Herman:

No, I think a part of the problem is when we breeze by that list, people are having a little trouble reacting to it. So it's up to you, if you want to stick around with that or keep going. I would also mention though, that while these may seem overwhelming, if you think about having to put metrics to each one of these, that's not what we're advocating. We're just saying find your key performance indicators, in a sense, and try to think about the elements that have the largest impacts, particularly if you're trying to make a case to management.

Jim Moran:

Yeah. And again, you would want to do business case, it would cost us X dollars to implement this. And we would save this many dollars from errors. And we're going to take a look at a few of those formulas too.

Jim Moran:

Internal failure, costs associated with internal failures. Scrap, spoilage, rework, re-inspection, disposal, downtime, analysis, retesting, re-entering. Keep in mind as we're going through these lists, and as Rick said, they can certainly be overwhelming, and I apologize for the wall of text on these slides. But the many, many, many costs of quality calculations I've seen, miss a lot of these. And I've got another slide or two as well that will give you some more ideas on what's missing as well. All right. And-

Rick Herman:

By the way Jim, here real quick. R. Patel's mentions one, another sort of mentioning that he's working out, which is contracts with suppliers of services or products. So, a lot of that outsourcing issue. Obviously with a lot of companies and stuff. Some companies are totally outsourced, so they have to change their model entirely.

Jim Moran:

Yep. And working with a company in Toronto that buys rubber from Chinese sources and such. Drop ships straight to the customer, they ever even handle the product. Their entire business is outsourced.

Jim Moran:

So let's see. So now we've got some costs associated with external failure. Goods returned, customer complaints, legal actions, chargebacks, regulatory failures, losing an ISO certificate, FDA license, public relations, reputations, stock market value. I guess you'd call it an external failure when Volkswagen faked their diesel reports custom, $13 billion in three days of company value. So external failures can be pretty tough. And of course, implied there too is your company's reputation, that can really be a hard hit from an external failure perspective.

Jim Moran:

Service failures. Failure demand is a phrase coined by a fellow in the UK by the name of John Seddon, S-E-D-D-O-N. One of his books was back in the 90s, was the case against ISO 9000. And his last 30 years have been spent taking the Toyota Production System, Taiichi Ohno, who some of you have heard of, maybe many of you have. The Toyota Production System, and then he applied it to services. And one of his first areas of expertise was call centers. And some of you may know somebody who has worked in a call center, maybe you've worked there yourself, when you're in university at a summer job, whatever.

Jim Moran:

Oftentimes, one of the measures of efficiency that a call center uses is how long do people spend on calls with their customers who are phoning in with an issue. And if the manager of the call center is uninformed enough to set a limit, or an average, or a target on how long to spend on the call, then that will create invariably this thing that John said and refers to as failure demand. Where you're getting near the end of the call, you start to wrap it up because you know you'll get into trouble if you go too long. You pass it off, or say good luck with that. And then they call back, because you didn't solve the problem the first time.

Jim Moran:

Now, your phone queue is getting bigger, because they're calling back, and more people are starting to drop off. Two other things that often a call center will measure, the drop off rate and the length of time people have to wait in the queue. So, how you measure these things, external issues can have a real impact. Service not meeting expectations, not defined, inconsistent service delivery. That can be an issue if you're trying to be scalable. Unskilled service, back to the cost we noticed earlier of training people. Poor outsourcing control. Rick just mentioned that. Irrelevant, inconsistent or non-existent services... Non existent measurements, not services, but measurements. Irrelevant measurement, inconsistent measurements, or non-existent measurements.

Rick Herman:

Jim, can I chime in here a second too? I just want to make the point that even though we're about to talk a little bit about services, not only are they 80% of the economy, but when you think about it, I mean, we are all providing internal services. I mean, whenever you're providing a service to the production department or top management, essentially you have to think of yourself as service. So all these things I would contend would apply as quality professionals, even though you might be in a manufacturing environment. By the way, R. Patel also asked, would it be possible to reduce external failure using risk management processes as required by the new ISO guidelines? I guess so right?

Jim Moran:

Oh, I would say 100%. Absolutely. I shouldn't say... 99.9. By having a really good risk analysis methodology and keeping reviewing them, continually reviewing the risk, because it can be shifting at times. It would definitely reduce external failures. The other thing to keep in mind with that very point, thanks for bringing that up, is that in clause 10.2, in corrective action, one of the requirements 10.2.1E, is that you review your risk analysis methodology when a non conformance does happen, even if it doesn't get external, if it's still internal. Ask yourselves the question, if we had done a better risk analysis, could we have avoided this problem? That's a great way to avoid finding somebody to blame. And those things that related to risk, risks in the system, they can all help reduce external failures. And of course, that's where your biggest cost is the 110, 100. If it escapes and gets out to the customer, then of course you're damaging your reputation and all the rest that goes along with it.

Jim Moran:

Some stamping companies actually have accepted the fact that all their molds, all their products aren't going to be perfect or shippable. They actually invest in what they call in a business, third party. They actually hire a business to check the stuff coming off the line and only package the good stuff. Needless to say stuff still escapes, so better to prevent than to have to sail it. To capture it and quarantine it. So to avoid service failures, make sure these three things are in place. Competent motivated people, effective processes, and suitable equipment. This applies to everything else too, but sometimes service needed just a little extra model and different way to look at things.

Jim Moran:

So there are missing factors in the typical cost of quality calculations. Fielding the phone call, documentation, back and forth with the customer. The initial investigation, root cause analysis, revisions to, and there's a whole bunch of stuff here. Documentation, revision to processes, revision of measurements, revisions of testing, revisions of purchasing, design, repackaging. All this very, very few times have I ever seen these things on a cost of quality calculation. The first attempt of corrective action, the next attempt to the corrective action, the next attempt of the corrective action, retesting, repackaging, and then of course shipping. So keep these things in mind when you're working on your cost of quality calculation.

Jim Moran:

By the way, I forgot to check with your Rick, did the recording start at the beginning today?

Rick Herman:

Yes.

Jim Moran:

Good. So for those of you who are wishing you had more time to look at this screen, we've got the recording coming to you at the end of the week. Thanks. So we've got another poll. Do you track any of these quality costs, and it's... Let's see, do you track any of these quality cost, prevention, appraisal costs, internal and external failure. Do you track any of these quality costs? External failure, that's...

Rick Herman:

Chris mentions, does the third party, this is kind of back to your stuff, does the third party auditor have the right to review the cost of quality in the oddities' organization data during an audit?

Jim Moran:

If you put into your procedure, if you documented a procedure for it, and it said that you do capture it, then the auditor would certainly want to see evidence that you're, as the saying goes, doing what you said you were going to do. The auditor would want to see evidence that you're following your own procedure. The auditor would not have the right to make or express an opinion on whether he or she thought these were the correct measures. Or if they were falling within a healthy or not healthy framework, because that would be consulting. And as you all know, registers, auditors can't consult.

Rick Herman:

So, as far as the results of the poll, appraisal costs came in at the highest level. Like testing and SPC and so forth. I'm sorry, I was wrong. External failure cost, nonconformances, and so forth. That was the first one. The second one is appraisal costs. Third one was internal failure costs. And then we have our others. Also, again R. Patel says, monitor and measure most of the failures, but not relate with cost due to organizational context. So I mean, and I guess I would have a question back with that. I mean, if you're monitoring and measuring most of the failures, but not relating them with the cost, is that sort of a breakdown in communication? Is that sort of a missed opportunity to communicate your needs, and you're getting resources for top management? I don't know, I'm kind of wondering about that.

Jim Moran:

Well, I think definitely, if you're not relating, you won't be able to improve your risk mitigation process, if you're not relating. You wouldn't be able to decide where to spend more money in appraisal or monitoring to sort of, in the 110, 100 model, catch more things at the 10 stage instead of not seeing them till the 100 stage. So, I agree with you Rick, the communication, it sounds like there could be a really good chance to improve the communication, or get people talking to each other, definitely. And that's when you look at issues inside organizations, there's no question that communication is always, always an issue. Thanks.

Jim Moran:

So, a cost of quality methodology can improve your bottom line, no question about that. And Deborah Kacera, you can see her name there. Regulatory and industry strategist with this company known as Pilgrim Quality Solutions has created a formula. And I think you mentioned Patel had added something to a formula earlier. Her formula is the cost of quality, this thing we're talking about today, is made up of the cost of poor quality, plus the cost of good quality. And I think there were the other term was mentioned was residual, the residual cost.

Rick Herman:

Latent.

Jim Moran:

Oh, thank you. Latent cost. This is where you can find it a little bit more about her approach. It's at pilgrimquality.com. There's a blog post evaluating cost quality simple math. And our name is Simplify ISO, we like to keep things simple. And this is really, really a good way to approach this and keep it. Sort of someplace you could explain in the lunchroom, keep it simple, don't get it too complicated. And Philip Crosby, some of you've probably heard of him. Not Crosby, Stills and Nash, this is Phil Crosby the quality guy. And the case for quality have shown that the cost of quality for an organization can range from three to 25% of a company's revenue.

Jim Moran:

So if you're spending, think of your revenue, if 25% of it is being spent on cost of quality, you definitely want to go back to this formula and find out if it's the cost of poor quality, or the cost of good quality. Is this like 12 and a half, and 12 and a half? Or is it 20% poor quality, costing you 20, and this costing you five. If that's the case, you want to push this five up to six, or seven, or eight, or nine, so you can reduce this. And hopefully, make sure that this money out here that you're spending, 25% of your revenue, is giving you some kind of return on your investment. And you can only tell that through what Rick was just mentioning, communicating all the information throughout the organization so people understand it and speak to it in the same language.

Jim Moran:

So, the cost of poor quality weighed against the cost of good quality is something that you need to, everybody needs to learn how to do. You know how to calculate the cost of poor quality, and then add in the things we've talked about today and make sure that you're spending your money wisely on preventing occurrences. The one thing to keep in mind with the cost of poor quality is that if you have a $1,000 error it costs you 50, you have to develop $50,000 worth of new revenue at a 2% net profit to come up with this $1000 dollars. Even if you're at 5%, you're still a $1,000 mistake over here, the thousand dollar mistake, at 5% you'd still be at $10,000 in revenue. Sorry, 2% at 1,000, 5%, $20,000 in revenue.

Jim Moran:

So a lot of times people just write off or say, oh yeah it costs us a 1000 bucks, no big deal. But when you realize how much more revenue you have to do to make it back up, it might wake up top management if you're not getting the support you need there to improve the effectiveness of your system, this might be a good formula to show him or her.

Jim Moran:

Customer cost of poor quality, it costs seven to 10 times as much to find a new customer, as it does to keep an existing one. And it's possible you may have found some ways, maybe through LinkedIn, through a blog for your own company's site, through a very active Facebook page, or a really good website. You might have found a chance to reduce this a little bit. But still, it costs a lot more in any case to find a new customer.

Rick Herman:

Jim, let me... There's some comments in the chat box. So I'm just going to keep those before they go too far. R. Patel also mentions, after he made that other comment about the breakdown of communication really, I call it big break down in communication. Mentions that we can improve the process, but not agree to present in terms of cost because it may impact human resources and other issues. So, I guess there could be a situation where you didn't want to surface or go too visible these costs of quality metrics. I would think at least initially, at least in terms of internally, the quality department would like to have that. Maybe there's a time and a place to present these that's a little more politically correct, or a little more reasonable. I don't know what you think about that Jim.

Jim Moran:

Yeah, you're talking now about a whole in a whole culture of quality, I think. The idea that you want to be talking about everything related to quality, and people need to be able to bring these points up kind of like whistle blowers, without retribution, without recrimination. You want to be able to talk quality. And the more you talk about it in my view, the more likely everybody is to be talking it in the same language. I think-

Rick Herman:

But, and another thing to think about, I hate to say this, but I mean, sometimes the best time to institute or change a culture is after a major failure, where people could, what went wrong? Blah, blah, blah. Change in management, whatever those kinds of things happen. Also, some other comments Jim. Trevor Shaw mentions, a good checklist of all things of cost of quality, or lack thereof. Much of which leads to a quantum measurement. Reputational effects might be hard to measure but certainly can manifest in loss of market shares as we discussed. He's wondering if there's a soft costs related to employee morale or pride, such as the productivity declines or people leave the organization. Might this be a dimension to the cost of quality that is often overlooked? I think that's a wonderful point. Quite frankly, that's probably one of the most important points. I mean, people tend to measure the hard costs, but over time the degradation, even empires have fallen over that same issue right?

Jim Moran:

Absolutely. And this is often now in root cause analysis workshops, I'll mention that an exact point that Trevor raised. The idea that if people have to continually fix the same problem, if you're not doing a really good root cause analysis and the problem recurs. First of all, it's going to cost you money, but eventually it's going to cost you people. Thanks for bringing that up Trevor, that's a really good point.

Rick Herman:

Couple other comments, sorry. We can use this right here so we can get it up and going. R. Patel also says, we use the language of value versus money. Good idea. Many organizations use the language of money where you can relate cost to measurement. So, I think that's interesting. I'm wondering what would the language of value be? I mean, what would you say if you didn't use sort of these cost of quality metrics? Would you sort of qualitative versus quantitative, is that what we're thinking?

Jim Moran:

Yeah. If quite naturally money would be quantitative, but I like the concept of value, especially if your company uses the language, such language as value stream mapping. Or value add, that kind of thing. Value add's been a pretty popular phrase.

Rick Herman:

There's probably some soft metrics, almost in between metrics kind of that you could use. Eric also mentions, what's the industry average or ratio between the cost of poor versus good quality? That'd be interesting. I mean, you showed that slide other where it ranges from three to 25%. I'm not sure if that's exactly what he's talking about. But yeah, we could almost develop ratios and show, I guess, on your equation Jim, what's the cost of prevention versus remediation, so that's a good thing.

Rick Herman:

And then, Trevor... I'm sorry. J. Darby writes to Trevor, there's a DEFO, that means de facto or soft class to re employ more morale employees lost, just like we just said. I bet it's like mentioned earlier, not wanting to look at the dark underbelly. No cost if we don't look at it. And you know, I agree with all this stuff, the culture wars. And I think that's, we could maybe talk a little bit about the IMSP, the international... Our approach to sort of raising management system professionals sort of value in an organization, to sort of show everybody, show top management in this new age of supposed stakeholder value and worried about corporate responsibility and so forth. These are roles that I think the quality slash management professional could certainly fill and help the organization have sort of a corporate conscience, if you want to think about it that way.

Rick Herman:

Also, Nada says to everyone, I used to bring up these during manager meetings, every manager had to bring their info, that was mine reporting on the metrics. What's the language of value? I think we talked about that. Let's reserve that to the end, maybe we can do that. Also, Chris says, how do you measure the value and justify the bottom line to top management. Again, this is sort of the whole crux of this whole presentation here. And I think maybe we should, again move to the end. And after we get through sort of the metrics part of it, talk about sort of the bigger picture.

Jim Moran:

Excellent. Thanks. Hopefully a couple of can stay after.

Jim Moran:

So when we're talking about driving down the cost of quality, one piece of this puzzle is to improve supplier relationships. So that if you're thinking about the 110, 100 rule, if the inputs are better, it'll drive down the cost of quality focused product development on prevention. Some of you may have heard of Six Sigma. David DeVos's with us today, Six Sigma black belt and every other level there is. Focused product development on prevention, there's a thing called Design For Six Sigma, D-F-S-S. So if you can design your products, and even your service delivery, so that it's difficult to deliver them, either manufacture them badly or impossible to manufacturer it with defects or deliver the service badly, then that will definitely help.

Jim Moran:

Make quality compliance information and metrics visible. We've talked three or four times already this afternoon about sharing information, Nada just mentioned it. And not just visible, I'll add visible and understandable, make sure that you make people aware of what's going on in there. And another way to do it is to leverage technology, and that of course is a perfect segue into our platform.

Jim Moran:

So, we have an example cost of quality calculation. This is huge. It's a massive amount of information on one slide, but it'll give you a taste of what areas you could explore on your own after. This was a facility that makes nickel hydroxide. If they had a typical time period of $500,000 a month to $500,000 in production value. They might have 2% scrap at 10,000, then rework, because they can send it back in if the grains are too large, they can make them smaller. So that recycling would cost them about $2500 or half of a percent. Re-inspection and testing same thing, because every hour they take a liter of the product and take it into the lab and do testing.

Jim Moran:

Internal recycling, just moving the totes and the containers. $1,000 quarantining materials while lot testing. Another .2%, so the total cost typically would come in around 15 or $20,000. So, if they are operating at a 2% net profit, now that they've made this $10,000 error, they're going to have to make up for this at 2%, $850,000 in new revenue to cover this, the error. But, on a percentage basis, the net cost of quality business loss is at 1.4% per month, or 16.8% per year.

Jim Moran:

So, there are many, many, many ways to do cost of quality calculations. This was just one example, an organization that makes a product that's used in other, in this particular case in rechargeable batteries. But maybe this might get you thinking about how, what approach you could be using. And again, if you feel that top management would respond to a numerical or quantitative explanation like this, then this might help you, could help make a case. Again, we're making a case for prevention, preventing issues, investing money and preventing as part of the cost of good quality, as opposed to, and balancing it against the cost of poor quality. You would also do the same thing with external costs. External appraisal costs and costs of good quality, the prevention costs. So, it's a whole package. Again, there's lots of material online if you're interested in exploring a little bit further. One thing, Rick and I have been talking about over the last six months, has been the... See if there's any interest in this thing called the cost of quality calculator.

Jim Moran:

So we've got another poll here Rick, if you'd like to bring this one up. And I think it's poll number five. There we go. It's a multiple choice, so you don't have to pick just one. I guess if you wouldn't use one, if you've picked that one then you can wait till the rest of the results come in.

Rick Herman:

And just to amplify a little bit Jim, I mean, basically this whole presentation has been sort of filled with different types of metrics that you could use. I guess what we're asking to you the quality community is, let's say we created a sort of all encompassing kind of calculator that had a lot of those metrics, not that you couldn't add your own. But I know everybody doesn't necessarily like a checklist, but think of it as a checklist, and you would go through and pick the things that you would want to measure or could measure. And then think about it as sort of a recurring thing, like a monthly report. Might be something that you would present in a quality meeting, or maybe at a management review meeting I think better.

Rick Herman:

Sort of, essentially bridge the gap between the quality language that we use internally, and the managers financial language. Because essentially they are only thinking about it in terms of business metrics, return on investment, revenue, those kinds of things. So I guess what we're asking is, could we help you by developing this tool. That it could be used in a variety of ways, but effectively sort of make it a more systematic or regular review process, that's really our thought process, and it's in offering that. What form that would take, that's really what we're asking right now. I mean, there are different ways to do this, ranging from something that might fit into an MRP system, or fit into your own quality software. To something that could be totally external. We could use an app in a sense, if you wanted to use it on the floor. There's all kinds of ways to skin this cat, but just kind of curious about that.

Rick Herman:

Looks like we're getting pretty good results on the poll, about half the people responded. Looks like again... Doesn't look like anybody wouldn't use one, which is interesting. I think that's a good vote of confidence there.

Jim Moran:

And I guess the other thing too underlying this Rick is, maybe just to kind of fill the picture out a little bit. If you think you could benefit from doing some of these activities, is it possible with a easy to use tool like this, if it'll help? I guess that's our question here.

Rick Herman:

All right. I'm going to end the polling here.

Jim Moran:

Yeah, sure. Other box.

Rick Herman:

So it looks like the most popular feature that they would want is the presets. Being able to go through and check a box, so to speak, put in a number, and then have that be part of the calculation. I think that makes sense. Probably the next biggest one is, they want to be able to create scenarios. Because obviously, you might want to have one scenario where you had a different set of metrics, and another set when you had a different, other set of metrics. And that makes perfect sense. I mean, you might want to have a different set of metrics, or even summary level for management than you do internally.

Rick Herman:

Having an account that you can save these for later updating, again that implies sort of a monthly revisit to this process so that makes sense. Imports important people, these are all about equal importance. Being able to interface to have an API with MRP and quality software. Having a formal report like a PDF, that sort of thing. Oh, and people typically want... Oh that's interesting, people do typically want default values based on production volumes. So in a sense a benchmark between organizations. And we can do that simply by just collecting it from groups of people and sort of keep averaging it. So, that's interesting that people would want that. So great, that gives us some guidance. Thank you.

Jim Moran:

Yeah. Thanks very much. I know there's been a lot of detail in today's presentation. Thanks very much for bearing with us as the saying goes. And we'd certainly like to hear from you in the follow up. You get a weekly on Wednesday, a email for me since you've signed up today. You're on the list, and you'll get the recording on Friday this week. If any of you are certified, I think many of you are. Hopefully your registrar will be offering you virtual audits to keep everybody safe.

Jim Moran:

And the Simplify ISO platform definitely will make your virtual audit a whole bunch easier. Everything's right at your fingertips. You can show forms you've collected, you can do review pages and so on. And the other thing too is, I'll just mention a complimentary lunch and learn, if you'd like anything that you've heard any of our topics, you can go to our website. I'll just back up here, there's a little button here called blog. If you go into the blog button you can see there's probably about 100 topics there. Feel free to get in touch with me at [email protected], and I'd be happy to do a complimentary lunch and learn for you. Anything else at your end Rick? Any questions or comments?

Rick Herman:

Yeah there's a few here that have kind of gone by here. Nada says, as far as feature sets in the calculator, it's mainly something that talks to the ERP minimum amount of data entry. That's an excellent point of view. And Trevor says, not relevant here perhaps there's a whole issue arising in governance and social responsibility regarding stakeholder value of an organization versus cost profit, shareholder value, a centric model. Especially if you want to get serious about things like climate change, sustainable resource consumption, interest. Take a look at events sponsored by Institute for Governance in Victoria forum.

Rick Herman:

I think there, I mean we could talk about the management system professional and maybe that'd be a good thing to get into, because I think it's exactly what Trevor's talking about. The thing that you're starting Jim, that really essentially speaks to the gap that many corporations have in fulfilling those stakeholder responsibilities those larger corporate responsibilities. And we postulate that the quality professional, the quality management system professional is the right one to sort of step up to that task, so we could talk about that.

Rick Herman:

Eric says, in my recent MBA we used WACC calculation, Weighted Average of Cost of Capital to calculate the initial investment sustained costs of the project. Can you relate this to initial implementation of cost of quality system along with running and auditing the system, cost to certify and accredit the system adds on top of that. How do I see my quality systems? That's an example I think of sort of bridging the gap between the quality world and the financial world. And that would certainly be something you would use. I mean, I'm not my own self familiar with weighted cost, average cost of capital. I can infer what that might be. But I think it probably be a great metric. In fact, I think we should investigate more metrics like that.

Jim Moran:

Absolutely. Especially when you think of any organization capital being, we usually think of people being 60, 70%. But you've got the whole infrastructure issue of an organization, and it is declining. It gets depreciated. Nice thing is you can balance it off against your revenue for reducing taxes. But the other thing, related to capital that I'm not sure if he's thinking about, is what's known as opportunity cost. If you spend 20 million on a new building, that's 20 million you don't have to spend on other kinds of infrastructure like forklifts and cracking towers putting scrubbing in on the tower to reduce your emissions, so that's fascinating. Building a water recycler to reduce the need to carry contaminated waste off to the dump. Although you wouldn't carry it off to the dump, you'd have to hire a special service to get rid of it, somebody's licensed in handling dangerous goods. So this capital issue is really, I hadn't thought of that. Thanks for bringing that up.

Rick Herman:

Well I think there's another aspect of it too, if I may comment, and that's back to what you had said earlier about the cost of acquiring a new customer being so much higher. You can expand that to any business operation. I mean, you think about it, the cost of any kind of new venture versus any kind of market expansion, any kind of service expansion, any kind of production expansion, versus cost containment. This could be way easier to make money by just not spending it. I mean, that's way easier less risk. Much more predictable. So, cost containment, cost reductions, that's got to be number one on any business's list, I think.

Rick Herman:

And the other aspect of it is, you have to look at the real reality. I mean, the United States, perhaps in Canada. These are not growth markets anymore. We're not the third world, or China growing at 10, 11, 12% a year. So again, the difficulty of acquiring new markets, accessing new markets, building a business. Much, much harder than just coming in and saying look, we can save 2% a month, or 16% a year, or whatever it is. Those are big numbers. I mean, very few businesses would scoff at saving 16%, that's way past cost of capital.

Jim Moran:

Absolutely. And the other thing about reducing expenses, it can be pretty addictive. Because when you increase revenue by $1, you're only going to add two or three cents in the profit line. When you reduce costs by $1, you add $1 to the profit line. So, cutting costs can be a real appealing approach for companies. Unfortunately, all of us, everyone here today has experienced companies we've dealt with that cut and cut and cut and cut, and finally they have crippled themselves in terms of customer service, or meeting customer requirements. Both needs and... If you think of customer requirements as needs and expectations, they might be able to barely meet the needs, but they start missing out on customer expectations.

Jim Moran:

And when you look at the research that's been done on why customers leave businesses, sort of loyalty studies, it isn't always price. In fact one study that was done by an institute in Washington... It'll come to me in a minute. 9% was the sort of percentage that people gave as how important the actual price was. And the thing itself, the tangible thing if it has to be tangible or service, was seven. You'd think that'd be the main reason. Well, people do business with you because they're assuming you know what you're doing, and they're assuming that the service or product is going to be perfect. So that's not what they're after. They're after you paying attention to them. They're after responsiveness. Are you returning my emails? Are you returning my phone calls? They're after empathy, they want you to really understand what they want, rather than pushing your idea on them.

Jim Moran:

So those are all things that again, somewhat hard to measure, but critical in terms of reducing the cost of quality by reducing internal issues and external issues, internal non-conformance's, external non-conformance's. And you do that by paying attention to people. And don't forget, every time we've said that we're a customer today, we have meant internal customer as well as external customer. And you're absolutely right Rick, on a global scale... I was just talking to a friend last night, back in the 80s, Scott Goodyear a Canadian was second place in the Indianapolis 500. 500 miles. At the end of 500 miles Scott Goodyear was eight feet behind the leader .0043 seconds.

Jim Moran:

But, the race committee did not decide to call it a tie, which tells me that you don't have to win by much. It doesn't take a quantum leap to win. To get those, shaving those little percentages you're talking about that can have a huge difference in a company. So if you can start tracking things, again, making sure that it's really good data, and making good use of it, it can really, it can help. Thanks.

Rick Herman:

Great. Okay well, looks like the comments have kind of trickled off here. Most just thank yous for doing the webinar, which is great. Thank you for the thank yous. I think we're going to wrap it up now. If you guys have any questions, of course, you have Jim's email. And if you have any suggestions for future webinars or even other services like the cost of calculator, please send it to us. And of course if you do need help

on anything like that, Jim's open to consulting and those kinds of things. And I would also remind you that his ISO software, certainly available for free demo if you want to do it. It's really worth trying out, it does help with remote auditing and a bunch of other quality functions. So again, thank you guys for attending. I appreciate it very much.

Jim Moran:

Thanks everybody.