While it’s unrealistic to expect to eliminate all waste and inefficiencies, even a small recovery of those costs can create a big impact.
Your organization’s expenses can be broken down into two main categories:
- Value-added costs: expenses that are necessary to sustain or grow the enterprise.
- Non-value-added costs: expenses that do not contribute to the bottom line (performance killers).
These non-value-added costs are your Cost of Poor Quality (COPQ).
Here, we’ll look at eight categories of performance killers that should be on your radar.
- Defects & Rework
The cost of doing something more than once. This occurs when materials, products, services, or information are of a lower quality than their set standards. Any costs that went into producing unsalable goods, and any additional costs needed to repair defective goods, are non-value-added costs to the organization.
The following are some recommended areas to evaluate the magnitude of defects and rework:
- Inspection positions
- Needless approvals
- Rework loops
- Warranty work
- Excessive service calls
- Quality issues from preceding work
- Inaccurate or incomplete information
- Duplication of work not done correctly
The cost of spending time and effort doing something that is either unnecessary or could be done a different way. Over-processing occurs when too many resources are used in producing goods and services. This can mean producing items with features that customers will not use, or that are not necessary to produce the item.
The following are some recommended areas to evaluate the extent of over-processing:
- Mis-matched capacity
- Non-user-friendly designs
- Excessive touches / hand-offs
- Data / reports collected and not used
- Producing extra / more than needed
- Adding unnecessary items, features or effort to a task
The cost of having to wait for work, supplies, parts, information, or even for customers to place orders. These activities leave team members idle, as opposed to spending time creating value-added goods and services. Additionally, the cost of observing something when time could be spent on value-added activity.
The following are some recommended areas to evaluate waiting times:
- Not enough equipment
- Unplanned downtime
- Bottlenecks in flows
- Insufficient skill set or material available
- Searching for tools or supplies
- Waiting for instructions
- Interruptions by others
- Leaving the work area to get something
- Non-Utilization of Talent
The cost of not fully utilizing the potential of each employee. When employees feel that their talents are being considered by management, they are more likely to be engaged, which can directly improve their productivity and consequently, the organization’s bottom line.
The following are some recommended areas to consider for talent utilization:
- Being dependent on tribal knowledge
- Lack of employee participation and empowerment
- Ineffective start-up / end of day work practices
- Not utilizing employees to their full capacity
- Unproductive meetings
- Not challenging the status
- Failure to cross-training employees
- Informal on-boarding of new employees
The cost associated with the unnecessary use of resources to move good and services from one place to another. This includes the extra time and money spent moving or handling products, materials, or people. Examples of this include unnecessary transport between storage and sales or from the production line to storage.
The following are some recommended areas to consider for optimizing transportation efficiency:
- Excessive handling of material
- Physical layouts of the facilities
- Geographical barriers
- Poor staging of materials and suppliers
- Not having proper equipment for the job
- Space availability
- Expediting or emergency requests
The cost associated with problems that occur while maintaining inventory and supplies. Inventory waste can occur when too many resources are used to store finished goods and products before they are shipped.
The following are some recommended areas to evaluate when managing inventory:
- Insufficient or shortage of materials
- Excessive materials
- Scrap, spoilage, or write-offs
- Poor staging and retrieval systems
- Difficulty reading labels
- Inaccurate information on material availability
- Quality issues
The cost of not making a decision due to layers or levels of management. If instructions or expectations are not made clear, employees may not be strategically aligned with the organizational needs. It is important that management has an open communication path with their team members to ensure that they are set up for success.
The following are some recommended areas to evaluate management effectiveness:
- Inconsistency in dealing with others
- Lack of discipline
- Fear tactics: controlling or authoritarian approach to leadership
- Poor planning and follow-up
- Expectations are not clear to the team
- Failure to engage with team
- Unclear instructions or assignments
- Expectation Issues
Failure of information to get to a level where it can be acted on. In addition, this can include communication of incomplete or inaccurate information which leads to poor decision making.
The following are some conditions that indicate that expectation issues exist:
- There are no expectations
- There are no performance metrics
- Unclear goals or mission to follow
- Too many / too few measurements
- Employees do not identify with targets
- Team is unaware of how their work impacts the organization’s goals
- Priorities are constantly changing
Non-value-added costs might be hiding within plain sight and masked by complacency.
By identifying the non-value-added costs within your organization, you can maximize efficiency and reduce costs in areas that will improve your margins and, quite often, revenue as well.