By David H. Hall, OMEP Field Engineer

When most manufacturing businesses go sour, the first excuse made by managers is poor sales or marketing campaign. But this is rarely the case, says Donald Fletcher, in a recent article in Manufacturing News, Tuesday, March 3, 1998.

Having worked with more than 400,000 small and medium-sized companies over the past 73 years, consultant Fletcher has found that the leading cause of a decline in profits is waste in the manufacturing process and making products that are of poor quality.

He has developed a system that allows companies to gauge the impact of their quality operations on profits.  "This may be the most important checklist you'll ever fill out......it could be the difference between profits and loss, or between minimal profits and a great year with bonuses for all."
By adding various quality indicators such as rework, re-inspection and warranty costs, a company can easily determine its cost of poor quality (CPQ) percentage. If this percentage exceeds profits, "your business is in trouble."

Why?  Because every dollar you spend on your CPQ comes right out of your profits.  Every company should determine the real CPQ percentage.

To determine yours, add up items one through twelve below and divide the total by sales revenue. The resulting figure is the cost of poor quality as a percent of revenue.

1. Scrap:  Total cost to produce an item which now must be scrapped.  This cost, which subtracts from profit, cannot be recovered. Do not confuse this with waste!

2. Waste:  Cost of materials that is left over and can't be used,e.g., metal filings from a machining operation or lengths of bar stock that are too short to use.

3. Rework:  Cost of rework is the cost to make the part match the print or specification, e.g., drilling out a hole that is missing.

4. Repair: Cost to make the part usable, although it doesn't have to match the print, e.g., welding shut an oversized hole, then drilling it out to the right size.

5. Re-inspection:  This includes all the administrative costs as well as the direct labor costs of additional inspection.

6. Shipping and repacking costs of returned goods.

7. Warranty:  An accounting technique to reserve funds to replace the junk the firm knows it's going to ship.

8. Claims Adjustments: Adjustments made to accounts receivable to compensate for returned goods.

9. Concessions:  Adjustments made to the price to compensate for quality problems (e.g., "seconds").

10. Replacement:  Replacement material costs as well as inventory carrying costs.

11. Additional Overhead: Additional overhead costs such as purchasing.

12. Good will: The loss of good will due to inferior quality.

Add up these 12 items and divide the total by your company's total sales revenue.  The resulting percentage is the cost of poor quality to sales revenue.

If you find that your totals are unacceptable, Oregon Manufacturing Extension Partnership (OMEP) is available to provide your company the needed assistance in improving your production process and quality system. Dave Hall, OMEP Field Engineer, has completed the Lead Auditor course for the ISO 9000 series of the international standards for quality management systems, from British Standards Institute (BSI).

To take advantage of this Rogue Valley resource for your company, call David Hall at (541) 826-7555. 

OMEP is an affiliated program with NIST/Manufacturing Extension Partnership and Oregon Advanced Technology Consortium (OATC) that is sponsored through Rogue Community College.