The Cost of Non-Quality: COPQ and Social Responsibility

In his latest blog post, ASQ CEO Paul Borawski asks whether economists have the tools to make a compelling argument for the cost of poor quality at a societal level?  For me, the COPQ Iceberg came immediately to mind. In an article written by Joseph A. DeFeo and published in the May 2011 issue of Quality Progress, quality costs were represented as "Visible" and "Hidden" costs. Visible costs of poor quality include scrap, waste, rework, inspection, disposition, disposal, customer complaints and warranty costs, etc. Hidden costs of poor quality are more difficult to measure and quantify - but often yield the greatest opportunity to positively impact organizational performance - such as lost customers, employee turnover, pricing and billing errors, inventory costs, costs to expedite orders, premium freight, overtime, and many other forms of waste (muda).  According to a report published  in 2005 by the Juran Institute, the Cost of Quality is estimated at 10-40% of sales, depending on the quality level (i.e. "Sigma") of the process.

But COPQ alone is not an adequate measure of Quality and its impact to organizational success. It has been my experience that most measures of COPQ are inward facing (i.e. internally-focused) and often solely process focused. Every organization should also deploy measures of business process speed, employee engagement and customer satisfaction; measures such as value stream cycle time and lead time, factory escapes (defective parts per million), customer complaint resolution time and effectiveness, customer satisfaction, employee engagement pulse surveys, etc.  Organizational speed, agility, flexibility and responsiveness provide critical competitive advantage in today's global economy. For example, a story recently published in the New York Times reveals Apple's decision to manufacture the iPhone outside the United States was based primarily on the need the need for a low cost yet capable, flexible workforce, as well as an agile and responsive manufacturing and supply chain.

On the flip side, a story appearing in a Yahoo finance blog sheds some light on the appalling labor conditions inside Foxconn, Apple's largest overseas contract manufacturer. Indeed, Corporate Social Responsibility (CSR) and Sustainability are two significant - and growing - opportunities for the Quality discipline to help show organizations the way towards profitable organizational performance improvement with minimal loss to society. If, as attributed to Peter Drucker, Tom Peters, Edwards Deming, Lord Kelvin and others, What gets measured, gets done (improved), then how do we measure CSR and Sustainability? I believe the Baldrige Program, with its Criteria, site visits and role model best practices provides an excellent framework for improving the net economic and social value of organizational performance.