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How to find the financial cost of poor quality

Thursday, September 07, 2023

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A challenge I sometimes face is justifying action when quality is falling. It's easy to say, "Our quality has fallen," and more difficult to add, "and it's costing us $X in lost revenue and $Y in lost profit." The latter is quite helpful if you're creating a business case to fix it.

Finding out what "X" and "Y" are can be hard work. I look for these headlines to get a feel for what falling quality is costing.

In the production process, look for items being reworked or discarded. You've got the material cost and the productivity impact of people and machinery touching things twice. Sometimes it can be explicit (people throwing crap in the bin), sometimes tucked away in a process ("I have to do x before y because it comes out the machine wrong.")

Post production costs such as handling customer complaints, recalls and off-target sales can hurt revenues and profits. While correlation != causation, the start of a downward trend can hint at problems. You can "suggest" a financial impact from a decline in sales or an increase in customer contact.

Then there's the management cost. The fact that you have to investigate what's going on, and put it right, has a cost attached. You could also look at whether staff turnover and sickness are worsening (sometimes correlated with falling morale) and whether training needs have increased. Taking someone off the floor for refresher training costs both their time and that of the trainer.

Finally, look at the liability exposure. If it's a regulated product or industry, you could get a feel for the size of any fine or remedial work a regulator might impose. Then there's bad PR if the quality issue becomes a 90,000-unit recall and potential lawsuits. Remember, as well as the money handed over to lawyers or courts, there's also what you have to commit in management time and effort.

Of course, there are many more places to look and more detail to add. Focus on big-ticket and easily quantifiable items as you start digging. You might find it far easier to justify a budget to "go fix" when you realize how much money you're wasting.

My name is Ross Hori

I'm a freelance writer, designer and photographer. By day I create articles, features and reports. At night I take photos and write fiction.

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