Why You Should Care About the Price of Non-Compliance

Written By: Blake Bearden

Most engineers and operators in the manufacturing and production world understand the need for quality in their processes. Usually these metrics are the driving factors for their evaluations (if not their next bonus). The inherent value of “zero-defect” delivery of goods and services to a customer or end user reduces many of the headaches associated with repairs, returns, and reworks. All of these issues point to added time and expense for a supplier, as well as reduced customer satisfaction.

But those having a deeper understanding of the reasons behind these issues and metrics understand that the cost of quality is a factor that cannot be avoided. More than a cost issue of the standard aforementioned items, there is an Iceberg Model of Quality showing the hidden issues that add to a company’s cost of doing business. These issues are inherently difficult to show via standard metrics used to show the obvious issues with an organization’s quality efforts.

The cost of quality associated with the items on top of the iceberg is really seen as the cost associated with minimizing all of these items. Or as some may look at it — if the cost of quality is greater than the cost of accepting all of the items on top of the iceberg then why do it in the first place?

Six Sigma Quality Issues Iceberg

Source: www.isixsigma.com

If the obvious metrics are the only ones used in discerning an organization’s quality efforts, then that organization is viewing quality superficially. Namely, the organization that fully understands the need for quality will understand the concept behind the cost of quality as a percentage of sales. Unless addressed systemically, this cost will be continually absorbed by the organization in its regular business processes and be a drain on its resources. Because these are items that cannot be dealt with electively, they will continue to plague an organization until the organization decides to address quality in a holistic manner. Furthermore, if net sales continue to decrease as a result of unaddressed quality issues, this ratio has nowhere to go but up, further jeopardizing an organization’s survival.

We can exemplify how to approach quality through the Six Sigma method, which is really a statistical approach that uses standard deviations from the mean in terms of number of errors. But what is generally shocking is the cost of quality as a percentage of sales when we jump from a 4-Sigma error rate of 6,000 defects per million (that is, 99.4% successful) to a 6-Sigma error rate of 3.4 defects per million. With this change, the cost drops a whopping 15-25% to less than 1%!

In other words, we can look at this as a price of non-compliance or PONC. When we do, we can see that the PONC for even a 4-Sigma organization is up to 25% of its sales. The only way to drive down the overall PONC for an organization to zero — melt the bottom of the iceberg!

How can we do this? As supply chain consultants, Bastian can design systems that will integrate into your operation and reduce errors that exist on the bottom of your iceberg as well as the top.  This helps you improve your processing and warehousing operations by making your order-to-shipment process quicker, and completing your sales orders more efficiently can make you more effective in meeting your customer’s needs while also reducing your PONC.

I am the Regional Manager for the Western US and oversee business operations for California, Nevada, Hawaii, Washington and Arizona. I enjoy working with our customers to learn more about their operations and help them solve problems.

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