“But don’t begin until you count the cost. For who would begin construction of a building without first calculating the cost to see if there is enough money to finish it?” – Luke 14: 28, New Living Translation
My holiday was abruptly terminated with an invite to a client’s site. The message was catchy; “we require your presence for an urgent chat with MD regarding budget, we will take care of all inconveniences.” So that was all I needed to be in Nigeria on the 29th of December faced with a panel of executives querying me about the Lean Six Sigma consulting and training, I facilitated in 2014 for the company. They wanted me to give insight into the variance between their training budget for 2015 and the actual report for training. At first, I felt ambushed because the company was not truthful about the nature of the meeting but on close inspection of the numbers in the document presented, I immediately saw their challenge and out of relief, I unintentionally burst into laughter.
My first instinct was to increase my hourly rate but I felt that will be insensitive of me after the laughing incidence. So, I did the professional thing and apologize for laughing. I politely asked for a board and immediately stepped into my sweet spot of teaching. The lecture was an easy one for me:
Quality is vital to all industry especially a competitive one. According to the PMBOK Guide 5th Edition quoting ISO 9000, defines quality, as a delivered performance, to be the degree to which a set of inherent characteristics fulfill requirements of the customer. Since “the customer” is regarded as “the king” due to its vital role of sustaining any company, quality is one of the most crucial elements in all companies.
All the cost associated in establishing quality in a company is called Cost of Poor Quality. It is traditionally classified into three:
- Prevention Costs: these are costs that are incurred for activities designed to prevent poor quality in products and services.
- Appraisal Costs: these are the costs that we incur by inspecting, testing, measuring, and auditing products and services to assess whether or not the product or service meets the requirements.
- Failure Costs: these are the costs we incur because the product or service fails to meet the needs of the customer. Failure costs are usually divided:
- Internal failure costs are the failures costs that occur prior to the delivery of the product or service to the customer
- External failure costs are the failure costs that occur after the delivery of the product or service to the customer
The sum of all the cost above is called the total cost of poor quality which represents the difference between the actual cost of products and services and the improved cost that would result from eliminating failure costs.
Every company wants return on their investment including cost of poor quality so I decided to use their own data to explain the good news. I profiled their process items into the cost classification above. Please, see a model date below:
The total annual cost of poor quality is almost 641.3 million Naira. Looking at the costs by classification, we have the following.
Failure cost takes approximately 75% of the total cost of poor quality. The negative variance experienced in the report against the budget for failure was due to the prevention cost which takes a minimum of 9.26% of the total cost of poor quality. There may be a large variance between their training budget and actual report but that should not be their priority. The above table shows that there are lots of opportunities to drive quality improvement by addressing these failure costs.
Although I did not get well paid for this training, the “aha” moment was worth it!
