by Douglas Wood
The High Cost of Mistakes
Success depends on knowing the aggregate cost of failures within your organization—you cannot fix what is not measured. Even in rough form, the number will drive action. Profitable firms spend a great deal of money on mistakes; fixing them, trying to find them before they happen, avoiding them.
In our experience, we have learned that in a well-run firm, the cost of mistakes is often 5-10 percent of sales. This may sound incredible, but firms that are having problems experience costs as high as 20 percent!
We have seen in firm after firm, that measuring ‘quality costs’ provides the best way to reduce expenses, 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, measurement expenses, and the costs of mistakes? 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 can teach you how to track three areas of cost, culled from your databases. We call it a PAF model, after the core cost components: Prevention, Appraisal, and Failure. The goal is to increase the smaller first two values and reduce the third, larger cost. It is easier said than done, unless you have the key.
Balance Sheet Cause and Effect
Can you pinpoint 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 a quick review of your existing management reports? The PAF model allows your entire team to see issues that cause inefficiencies and offer changes that may eliminate waste with only small investments in prevention.
The Challenges of Driving the Right Behavior
At times, you may 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. We have had years of experience in this arena. To gain the right behavior, you need to give the right motivation. Control means measurement, and others must understand the measure. It can be done! Let us help you accomplish this without imposing a burden in reporting and data collection.
The Long Term View: Working with Leadership Change
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 efforts focus on maintaining strategic process improvement, therefore changes in leadership should not be a stumbling block to ongoing, forward progress. After all, most strategy is done in dollars and cents (or whatever your currency is.)
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