In our current era of inflation, 74% of CFOs say the biggest risk from higher prices is lowered profitability to their organizations. What the CFO worries about, of course, cascades down to what we within supply chains care about.
Across the supply chain, we’re pursuing multiple avenues to reduce cost and aid our organizations in improving margins. Quality is one of the places we’re seeing supply chains focus more on to improve margins. No, it’s not reducing the level of product/service quality through cheaper inputs, rather it’s through reducing waste from poor quality. Let’s explore what that means below.
Tackle Cost of Poor Quality to Save Millions
On average, companies are losing $260 million for every $10 billion in revenue due to the cost of poor quality (COPQ). Cost of poor quality programs have allowed organizations to cut costs and reduce risk from product/service quality. Some organizations have seen their cost of poor quality decrease by double-digit percentage points. This represents millions of dollars in savings. This could also lead to improved customer service levels, forecast accuracy and inventory to name a few results.
Cost of Quality is an Improvement Tool
Many mistake cost of quality as simply a metric. However, cost of quality is a powerful management tool that increases the transparency of costly quality issues and allows supply chains to identify and prioritize the biggest improvement opportunities.
Here are the two most common models: cost of poor quality and total cost of quality. Let’s focus on the cost of poor quality for this discussion.
The cost of poor quality model consists of internal failure costs and external failure costs. Internal failure costs are costs we incur before the product goes out the door (e.g. scrap, rework). External failure costs are costs we incur after the product goes to the customer (e.g. returns, warranty). These failure costs represent money we do not want to waste.
How Supply Chain Leaders Use It
To save the millions of dollars that we lose due to cost of poor quality, supply chain leaders should not only measure cost of poor quality but manage it as an improvement program. Leaders should figure out the most relevant cost categories, isolate the top cost drivers by business group, root cause the top cost drivers and put in place process improvements.
Don’t Do It Alone
Cost of poor quality cannot be managed by supply chain alone. The organizations who’ve seen the largest savings have had cross-functional teams. Partner with your quality and finance leaders to figure out what they’re doing already. Stop burning cash and start saving.
Please click here to participate in our 2022 Cost of Quality Survey. The benchmark covers multiple aspects of cost of quality models, including metrics, reporting, effectiveness and adoption. Survey closes on 31 August 2022.
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