Quality Management
by A. Blanton Godfrey
Cost of Quality-Part 2
There are many ways of looking for cost
opportunities within an organization.
Last month we looked at many limitations of traditional cost of poor quality
studies and suggested one way of looking at true costs and possible opportunities.
There are other ways of looking for cost opportunities that may yield even
clearer pictures of what's possible.
One of the most promising ways involves combining some of the more advanced
methods of quality management, such as benchmarking, customer loyalty and
business process reengineering, to study best-in-class practices. These
methods often uncover the nonvalue-added work and other costs that traditional
studies might miss, as well as missed potential revenues.
Although people often discover greater breakthroughs by looking outside
their own company or industry, the best starting point is usually within
their company. By limiting their first analyses to internal comparisons,
they can avoid the many "we're different" and "it wouldn't
work here" arguments.
Some recent best-in-class studies show how powerful this approach can be.
One health-care company identified tens of millions of dollars of opportunity
by comparing operating room utilization across the entire organization.
Another company, perhaps the leading institution in the country, found almost
30-percent potential cost improvement after comparing lowest-cost treatments
for selected disease-related groups with average costs.
Companies in other industries studying billing operations, distribution
costs, software development, production costs and installation costs have
found similar stunning potential savings. The cost ratios between least
efficient and most efficient processes are often 4-to-1. It's common to
find ratios even as high as 10-to-1.
To carry out such a study, first define carefully the scope of the study
and the terms and measurements to be used. Next, carefully standardize conditions
to create meaningful comparisons. Share the plan for the study throughout
the organization to discover hidden traps, different terminology and differences
in operating conditions.
Then ask a small team of analysts to study a carefully selected sample of
key processes. The team will create standard flowcharts and make critical
measurements of materials, energy, human resources, systems support and
other resources. They will also measure time cycles and output quality,
including objective measures of quality and customer satisfaction.
The results of such studies will show how even at outstanding organizations,
wide variation exists in the performance of different groups. This variation,
which is present in all tasks in all organizations, provides the opportunity
for quick and dramatic bottom-line improvements. If the highest-cost group
can move to performance levels equal to the middle group, significant savings
are possible. No one group is best in performance of all the subprocesses.
Some excel in one area, others excel in another area.
We may wish to proceed in steps, first moving toward the performance level
of the median-costs group and then devising guidelines for achieving results
comparable to the best-in-class subprocesses. This type of study has two
distinct advantages. By showing comparisons of actual performance, it highlights
real, not theoretical possible savings. It also stimulates intellectual
curiosity by forcing the question of what the real differences are between
these processes that create such large differences in costs.
In the past few years, I have reviewed similar studies, including installation
of office partitions, operation of chemical plants, food-production processes,
rental car operations and writing of software code. In each study, the teams
identified considerable opportunities-often exceeding by many times the
companies' previous estimates of costs of poor quality done in more traditional
ways.
What will be no surprise to the readers of this magazine is the finding
that the lowest costs are almost always associated with the highest-quality
outputs. Processes creating goods and services with little wasted time and
almost no rework, nonvalue-added work, repair or other wastes also are the
processes producing the highest-quality goods and services.
About the author
A. Blanton Godfrey is chairman and CEO of Juran Institute Inc., a leading
international research, education, training and consulting firm in quality
management. He is the author of numerous articles and co-author of two books,
Modern Methods for Quality Control and Improvement and Curing Health Care.
Send comments, suggestions or questions about this column either to the
editor or directly to Godfrey at Juran Institute, 11 River Road, Wilton,
CT 06897, by fax (203) 834-9891 or preferably by e-mail to godfrey@netaxis.com.
