With increasing globalization, and pressure from customers, regulatory agencies, and shareholders, manufacturers must produce higher quality products at the lowest possible cost in the market. This elevation in quality is ultimately the best weapon in the fight for a strong brand image as well as customer loyalty, especially considering it takes only one quality issue to potentially lose a customer for life. However, ensuring the products you release meet your customer’s quality needs comes at a cost, and if not properly managed, these costs can be unsustainable over time.
Quantifying the cost of ensuring quality products is usually referred to as Cost of Quality (CoQ), and a general rule of thumb is that CoQ in a successful company will be about 10 to 15 percent of revenue. Many organizations will have true quality-related costs as high as 15 to 20 percent of sales revenue, in extreme cases some going as high as 40 percent. But effective quality management programs can reduce this substantially, thus making a direct contribution to profits. In fact, Best-in-Class manufacturers are not only able to produce products at a higher quality, but are able to do this while spending 38% less annual revenue on their total cost of quality when compared to their peers.
It is significant that Best-in-Class manufacturers can enjoy a lower cost of poor quality. With the scope of manufacturing expanding, it is critical to have visibility within the plant, as well as across the global supply chain. A manufacturer needs to know how they are performing on quality to be able to take action. Effective quality-related decisions should be based on data analysis and information, not speculation or conjecture. That is why you see Best-in-Class companies stressing the proper management and utilization of their quality data.
Successful companies start by automatically collecting their quality data in a standardized system across the entire enterprise. This harmonizes disparate point solutions for quality, reducing errors while collecting information in real time, making quality an integral part of the manufacturing process.
Extending Quality Management into the Supply Chain
Most manufacturers today depend on a global network of suppliers to manufacture their products. Managing these interactions with suppliers is where the Best-in-Class focus. For poor performing companies, suppliers are seen as a necessary speed bump — third parties that can potentially derail an order with one nonconforming or late shipment. For the Best-in-Class, they are viewed as a strategic partner as well as key contributors for delivering superior quality.
Best-in-Class companies are standardizing how they measure their supplier base. However, managing suppliers is more than just measuring performance on items such as on-time delivery or defect rates; supplier responsiveness and visibility into supplier quality processes is becoming crucial to success. This extension of quality into the supply chain is one of the primary reasons that the Best-in-Class are able to achieve a 99% production compliance while reducing their overall cost of quality.
Cost of Quality ultimately allows manufacturers to understand the impact of quality in a financial context. It enables manufacturers to align quality metrics to corporate metrics and allows senior executives to realize the impact of poor quality products or processes on the company’s bottom line. Best-in-Class companies take it a step further by taking a systematic approach to quality that focuses on data management, supplier collaboration, and continuous improvement. This allows them to release compliant products at much lower costs than their peers.
For a deeper dive, check out the full report.