Has your company ever had to issue a product recall? Tyson Foods recently issued a recall on 11.8 million pounds of frozen, ready-to-eat chicken. When you hear about a recall, do you ever think about the financial impact of that decision? Let me introduce you to the phrase “Cost of Poor Quality (COPQ)”.
When I discuss the concepts of efficiency and process improvement with prospective clients, in many cases, their initial thoughts on the subject is more of a “nice to have”. Cost of poor quality is often the eye opener. COPQ is the calculation of the financial impact to your company for providing subpar goods and services. In terms of the retail environment, it’s not just the lost revenue from returns, but also includes:
» Increased labor costs to restock or dispose of product.
» Loss of customer satisfaction and goodwill.
Methodologies such as Lean Six Sigma, TPS, and ISO are about improving quality standards to avoid increased COPQ. While it’s simpler to calculate in a manufacturing or product-based environment, cost of poor quality also has impacts in a service-based company as well. For example:
A law firm looks to save money by assigning a junior associate to review documents for a major client. The junior associate makes a critical error in reviewing the clients contracts which ultimately costs the client in a business deal they were involved in. The client decides to terminate its relationship with the law firm. The firm sends one of the partners to work with the client and aid them in negotiating new terms in their business deal. The client is appreciative and decides to remain with the firm.
At first glance, one could say that since the client relationship has been saved the costs are minimal if any at all. However, let’s take a closer look at the damage:
» Client is likely not charged the bill rate for the partner, resulting in lost revenue
» Partner is not billing to current clients due to the urgency of this matter, resulting in more lost revenue
» Administrative costs (staff/administrative resources, travel costs, etc.)
» Potential client losses covered by the firm
» If the junior associate is fired, costs associated with hiring
The point of this comes down to quality. What steps is your organization taking to ensure that every customer receives the absolute best product or service that you can provide?