Many businesses are feeling the pinch due to increased competitive forces and on-going pressures to reduce costs, while at the same time facing demands for improved flexibility, superior customer satisfaction and exceptional quality levels. These may seem like conflicting requirements, right? Wrong!
“Surely higher quality levels must result in increased costs and therefore a reduced bottom line profit…or is quality a silver bullet that will cure all issues and drive profits upwards?”
While quality improvements have proven to be beneficial to business results, it can unfortunately not be over simplified. It will therefore make sense to explore the connection between quality and financial performance. Cost of quality or more aptly, cost of non-quality is that very link.
At this point two thoughts might cross your mind:
- Cost of non-quality applies only to production operations and is not applicable elsewhere in the
- Cost of non-quality is not an unfamiliar concept and any good manager will know how it is made up and that it is less than 1% of the total cost of sales – after all, very few managers will admit that quality is out of control in their business.
It is therefore important to set the record straight before we continue to explore the supposedly well–known concept called cost of non-quality. While it is normally easier to measure cost of non-quality in a production environment where things are more easily quantifiable, it can be measured in any part of the business and for any business process.
Furthermore, don’t fool yourself – your cost of non-quality could be in excess of 10 to 15 times of what you think it is unless your company is pushing world class quality limits. Often we find that the cost of non-quality accounts for between 15% and 20% of cost of sales…“No way!” will be a typical reaction at this point, but don’t stop reading now. As much as it may sound like a disaster to have a cost of non-quality equal to 20% of your cost of sales, it is clearly a huge opportunity to improve your company’s financial results.
World class companies can achieve a cost of non-quality as low as 2.5% of cost of sales, so even if you reduce from 20% to 10%, there is still a lot of possibility for further improvement. More importantly, reducing your cost of non-quality from 20% to 10% of cost of sales will push you profit up significantly without you having to increase sales or selling prices.
Now, before you get all excited about all the money you are going to save, you first need to understand what your non-quality is costing you and to understand that, you need to know what the cost of non-quality comprises of.
“Easy, cost of non-quality is the total of scrap, rework and warranty costs, but surely that cannot add up to 20% of the cost of sales?” That is exactly the point – those factors are only the tip of the cost of non-quality iceberg.
Below are a few of those costs of non-quality that we tend to overlook when reporting this indicator – that is, if you do report on it.
Cost of lost time due to duplication of work to correct errors
Whenever quality issues cause us to redo work to correct the errors, it impacts on available time to do other value adding profit generating work. The accountants call this opportunity cost. Unfortunately the time lost due to redoing work caused by poor quality is not restricted to only the people redoing the work – in many cases it can consume significant amounts of management time.
For example, managers may have to approve the expenditure for the rework, be involved in the problem solving process or in managing external stakeholder relations. In some cases the time required to correct errors can cause significant factory downtime or lead to temporary suspension of services.
Other examples include cases where incorrect or late documentation can cause incorrect customer order fulfilment or incorrect invoicing, causing customer frustration, delayed payment and ultimately lost business. Poor quality communication can result in misunderstandings, unnecessary conflict and incorrect execution of instructions.
Quality failures result in dissatisfied customers which impacts on cost of non-quality in a direct and indirect manner. Direct costs can be attributed to the time and costs incurred to deal with consumer affairs, complaint handling and product repairs or replacement.
Indirect costs include damaged reputation, reduced customer loyalty and even lost sales. Loss of reputation is however not only linked to external parties, as people in large corporates will well know – unpredictable profit and loss statements or even unpredictable forecasts can result in tremendous internal pressures from head office when actual results does not match the plan.
Other costs of doing things wrong
It is impossible to foresee all potential issues and resulting cost factors, but when considering measurement and reporting of the cost of non-quality, be sure to include all cost factors related to things going wrong or things not getting done right the first time.
The people side of cost of non-quality
In addition to those costs that we can quantify, admittedly some easier than others, there are those costs that are so difficult to measure due to its intangible nature that we are not even proposing that these be included in the analysis – unless you have reached world class levels.
Excluding these factors from the analysis does not mean that one should ignore their impact. Continuous exposure to unresolved issues or having to redo work caused by mistakes others have made can be hugely frustrating and will cause poor employee morale.
Closing thoughts and lessons learned
- Quality improvement and cost reduction are compatible, but it requires that we do not leave things to chance.
- Understanding your real cost of non-quality is key for identifying improvement opportunities that will impact directly on your bottom line profit.
- Measuring and reporting cost of non-quality will create awareness and provide justification for investing time and money in achieving the improvements.
- Real time measurement and monitoring through Visual Management techniques will make it easier to identify the issues and speed up solutions.
- Continuous improvement, driven by a common sense low cost approach will aid the fight against non-quality. Do however be careful not to get trapped into using increasingly complex tools to deal with this challenge.
- Successful organisations are constantly evolving. They change their products, services and processes and they change those things that contribute unfavourably to the cost of non-quality – this makes managing change a vital skill. When quality works, we take it for granted – it is only when it fails, that we truly realise its value.
How You Can Over-Deliver To Gain The Advantage
Go over and above for the people you serve, and you will enjoy the benefits of an abundant relationship.
Wise, established entrepreneurs know that over-delivering value — which simply means going above and beyond for the people we serve to deliver more satisfaction for our service and thus exceed expectations — is crucial to a business’s survival, growth and future. It represents the core of a company’s foundation. And without a solid foundation, a business is always vulnerable to a person or company that does over-deliver.
To ensure you don’t ever forget the importance of over-delivering value, here are three ways it will give you and your company a distinct competitive advantage:
1. Creates abundance
Success comes most to those who are surrounded by people who want their success to continue. When you over-deliver value, people may be sceptical at first, thinking that you are expecting something in return, but when you are consistent and genuine with your intentions, they begin to trust and appreciate that you are just thinking of them.
You never know the value of the value you are delivering. But I’ve learnt that if you are consistently delivering greater value to people, your value becomes more and more aligned with the immediate needs of the people and companies you are serving — and abundance in the relationship is created. This is what over-delivering value is all about.
2. Earns respect
Entrepreneurs who take the time to over-deliver value are the ones who earn respect. Typically early-stage entrepreneurs tend to find ways to be the recipient of someone else’s value in a search for momentum.
You never know which transactional seed is going to grow, but when adding value to others, this type of seed is never forgotten.
For example, every quarter, I deliver a white paper to clients with the intention to challenge their thinking. My goal is for them to know that regardless of whether I am conducting business with them or not, I am thinking of them and thus strengthening our long-term relationship. And since my white papers focus on predicting future leadership trends and business strategies, when a related topic arises in one of their strategy meetings, they don’t hesitate to call me to discuss an opportunity for us to engage.
3. Enables distinction
Entrepreneurs who add value to others create and sustain a distinction in the minds and hearts of those they are serving. After all, most people are simply doing what they’re told to do inside the box they are given. Entrepreneurs can’t afford to do that.
We are the originators, the innovators and the opportunity seekers. We live our lives constantly in search of ways to add value to make things better. We disrupt the status quo. We are not in the business of fixing the old ways of doing things. We create new ways of doing things. If entrepreneurs are technically the experts at adding value through our products, services and brands, why can’t we add value through the people we depend upon most for our success?
Over-delivering value is the key not only to being a successful entrepreneur but also to the entrepreneurial mindset we must continually cultivate in ourselves and others. No one is successful alone. We must see the value in over-delivering value by being other-directed and connecting dots of opportunity with focus and purpose to become smarter and wiser, while making ourselves invaluable to the people and businesses we serve.
How Netflix Is Now Disrupting The Film Industry By Embracing Short-Term Chaos
One wrong move and Netflix could have been nothing more than a footnote in the history of entertainment. But by staying ahead of the curve and embracing disruption, the company is threatening some very entrenched competitors.
Attendees of the annual Cannes Film Festival are typically not afraid to be vocal in their dislike of a new film — booing and hissing are both surprisingly common — but the recent film Okja possibly set some sort of record. The crowd was booing and jeering before the film had even properly begun. In fact, all it took was the name of the studio behind the film: Netflix.
Why the animosity? Netflix is disrupting the film industry, and the traditionalists aren’t happy. After debuting at Cannes, Okja wasn’t released in cinemas. No, instead it was released right to Netflix, free to stream as long as you have an account.
Of course, few would have guessed a few years ago that Netflix would ever get into the business of making its own television shows and movies. According to industry lore, entrepreneur Reed Hastings launched Netflix because he was annoyed with the exorbitant late fees of video/DVD store Blockbuster.
Instead of having to return a movie once you’ve watched it, he conceived of a business that would ship DVDs right to your door through the mail.
It was a clever idea, but not one that seemed terribly disruptive. The whole process could be a bit of a hassle, and it required you to schedule your entertainment well ahead of time. Blockbuster even had a chance to buy Netflix, but decided that it wasn’t worth it.
The rise of streaming
Even as Netflix was hitting its stride in the early-2000s, the tide was already turning. It was becoming increasingly clear that the Internet was going to be an incredibly disruptive force, but many companies failed to notice. Or, if they did notice, they failed to take adequate action.
By 2007, the potential of streaming TV shows, films, music and books online was clear, but the DVD business was still doing well. However, Netflix decided to prepare for the future (and disrupt its own operations) by launching a streaming service. It did this by going to the traditional movie studios and television networks, and asking to licence their old content.
In the view of these studios and networks, old pieces of entertainment had run their course, so they were pleased with the new revenue stream.
This brings us back to Okja. Netflix has been creating its own content for the last few years because it realised that studios and networks would eventually catch on. At some point, they would understand that they were giving Netflix the ammunition needed to disrupt the industry. Why have Netflix stream your content if you could create your own streaming service?
“The goal is to become HBO faster than HBO can become us,” Hastings said of one of the most popular American cable channels back in 2013.
In a mere 20 years, Netflix has gone from a low-tech operation that sends DVDs through the mail to one that not only streams content online, but is also producing its own content — content from some of the most respected actors, producers and directors in the world. All of this is costing Netflix hundreds of millions of dollars, and it remains to be seen if this strategy will ultimately pay off, but betting against Netflix is risky.
Netflix has shown itself to be uniquely capable in drastically shifting its business model. Here is how Hastings explains it: “Short-term optimisation about being efficient is the death of long-term success and innovation. Building Netflix, we created a company that tolerated some short-term chaos, and we manage right at the edge of chaos. The value of that is keeping and stimulating the amazing thinkers, so when the market shifts, like DVD to streaming, or licence to original content, we have in Netflix all kinds of original thinkers, and that is the long-term optimisation that all of us in organisations want.”
SME Leaders: How You Can Manage Growth
Fresh growth is all around us this Spring – find out how you can powerfully manage growth as you provide leadership to your SME.
In the transition from start-up to scale-up, a critical factor for a growing business is the quality and strength of its leadership team.
Learning to trust and empower staff is a crucial step for SME leaders who wants to grow their business upwards.
As a business grows, one of the biggest challenges for the business founder and leader is the hand-over of an idea from the founder to the people who work there, The brand moves from being one person’s idea to being the professional focus of a whole group of people.
Without effective leadership, small businesses will be held back, more than three-quarters of SMEs provide no leadership development for their staff. What does this mean for you?
If you lead your business with vision and clarity, you set yourself apart from your competition. Here’s how.
Lead the pack
A growing business creates more work than a leader can handle alone.
As the team grows, founders often react by micromanaging the details of their business. In trying to take on everyone else’s job, the founder often leaves the most critical position vacant: strategist and vision-setting.
Learn to trust and empower others in the organisation and you will find you have room to innovate, which is critical for business growth.
Steady the ship
An effective leader will also engage others in the business to embrace and adapt to change as growth continues.
- Vision: First, plot the course for where the business should go in the short term, and the long term.
- Change: Understand what needs to be put in place to grow the business. You might need to source better business operating systems to streamline this growth, or change a few internal business processes, or rethink how you calculate your hourly rates.
- People: Growth equals change, and change equals pain, so if you want growth, budget for pain. Understand that you will need to guide and coach the staff into changing their mindset and adapting to these growth changes.
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