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When you look at making improvements to your services, one thing that should be on the top of your list is finding ways to provide world-class service at the lowest possible cost. A year ago I posted a blog titled “The Cost of Poor Quality,” which discussed the impact of poor operations on the bottom line.
In process improvement, the excess expenditures that are driven by inefficiencies and process failures are referred to as the cost of poor quality (abbreviated as COPQ). Alone, many of these costs – a few pennies here and there, or a couple of minutes of time - would be too small with which to bother. However, when you multiply these few pennies or few minutes by many, many repetitions over a long period, they add up to large expenses and hours of lost productivity.
I want to revisit cost in a slightly different way, by looking at the various types of waste that can be found in a process, and the costs that are associated with them. In service processes, there are a few different cost types, but we are primarily concerned with 1) labor, 2) equipment and material, and 3) overhead. The cost of labor is based on the wage that you are paying a person, and the amount of time they invest in a task or process. Because there is a time element in this calculation, when you have waste that unnecessarily increases the amount of time a person must spend on a task, you will automatically see an increase in labor cost. The cost of equipment and material is derived from the amount paid for the materials and equipment themselves, and any associated storage and maintenance costs. Overhead is the building, utilities, maintenance expense, etc. that can be allocated to a given process.
Let’s look at some different types of waste and the costs associated with each:
Although not considered a waste, the effort related to finding, fixing, and preventing poor quality in services requires someone to do the work, and may require equipment and materials too. These efforts do not add value to the service; they just help ensure the customer is getting what they need. Because of this, quality checks drive labor, equipment and material costs.
As you look at improving your services or products and work to reduce the expenditures associated with providing them, it helps to know what kinds of costs are generated by the various forms of waste you might encounter. With this knowledge, when you see waste you can quickly identify the extra costs associated with it. This knowledge also works in reverse, so when you see excessive costs in a process, you will be able to backtrack to the waste and eliminate it. As always, I welcome your questions or comments. You can email me at firstname.lastname@example.org.
About the Author:
Clayton Taylor, MBA, is a Management Research Analyst, Pr. and Certified Six Sigma Master Black Belt working in the Office of the Executive Vice President, Treasurer and Chief Financial Officer at Arizona State University. He currently consults with nine diverse Business and Finance operational areas to lower costs, improve operational efficiency and provide the highest quality customer experience to internal and external customers. Mr. Taylor can be reached at email@example.com.