Help Your Organization by Accounting for the Cost of Mistakes
The High Cost of Mistakes
Would you like to know the aggregate cost of mistakes at your organization? Even in rough form, the number would drive action. It does not take a genius to figure out that even profitable firms spend a great deal of money on mistakes; fixing them, trying to find them before they happen, avoiding them.
Our experience in this area tells us that in a well run firm, the cost of mistakes is often 5% - 10% of sales. I know this sounds incredible, but in firms that are having problems, these costs can be as high as 20%!
How large do you think your quality costs are? In firm after firm, the measurement of what has been called ‘quality costs’ offers the best way to reduce costs, guide multiple improvement programs, and engage employees.
Think about this: how would it change things for you to be able to see all three: prevention expenses (investments in process control), measurement expenses (appraisal or monitoring), and the cost of mistakes (may we call it waste)? What kind of behavior changes would occur? How could you take charge of change? Would it drive a culture shift at your firm?
Prevention, Appraisal, Failure
We know how to track three areas of cost. We call it a PAF model, after the core components: Prevention, Appraisal, and Failure cost. The plan is to increase the first two cost areas and reduce the third, larger cost. It is simple to say, but hard to do, unless you have the key.
Cause and Effect
Can you see cause and effect in your balance sheet? You know that an ounce of prevention is worth a pound of cure, but can you manage prevention activities from just looking at your existing management reports? The PAF model allows your leadership team to see where they can make changes and eliminate waste with small investments in prevention.
The Challenges of Driving the Right Behavior
Do you feel that managing your team is like herding cats? Perhaps you are not measuring or reporting the costs in a way that everyone can understand. To gain the right behavior, you need to give the right motivation. You really cannot control what you do not measure, and others must understand the measure. It can be done! Believe that this can be done without imposing a burden in reporting and data collecting.
The Long Term View- working with changing leadership
Have you ever seen a change in leadership derail a good improvement program? If your program is based on ‘doing the right thing’ in the minds of your leadership, then a change in leadership is likely to change the program. Cost of quality is how process improvement efforts remain strategic, and changes in leadership will not be a stumbling block to ongoing forward progress. Remember that all strategy is done in money metrics.