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How to estimate Intangible Cost of Quality

Discussion in 'Other Quality and Business Related Topics' started by bert-1, Nov 22, 2015.

  1. bert-1

    bert-1 New Member

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    Hi

    I'm looking for some references on how intangible cost of quality can be estimated

    Mostly these intangible costs are listed under:
    •Delays and stoppages caused by defectives
    •Customer good will
    •Loss in morale due to friction between departments​

    For some of the business decisions on scrap, recall, etc. some manufacturers use calculations to represent all quality costs. Example: factor multiplied by the average cost per unit in the warranty period.

    Can someone help me with some guidance on what is being used in the automotive and industrial vehicle busisess?
    I assume there are variables at play as brand positioning, impact of the particular failure, etc.

    Thanks in advance!
     
  2. Andy Nichols

    Andy Nichols Moderator Staff Member

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    We'd need a bit more info, frankly. Delays at a class 1 assembly plant are in the $tens of thousands/hour. "Customer good will" is an outcome and doing things right. Not achieving it is a practical impossibility to calculate. Morale can be determined from lateness, unplanned absenteeism and so on.
     
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  3. Jennifer Kirley

    Jennifer Kirley Moderator Staff Member

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    Hi bert-1,

    If cost of loss of customer good will was easy to measure, I suspect we might not have seen the recent blowup over Volkswagen emissions programming fraud, on the basis that being more easily found out would provide a greater deterrent. There is no model yet available for that debacle, but I suspect there may be at some point - the case is sure to make its way into the textbooks.

    So the loss to Volkswagen is not yet quantified, but the loss to BP following the Gulf oil well blowout was substantial - people mounted a social media campaign to change spending habit, and it worked for some time.

    Meanwhile, let me please guide you to a web article titled 18 Interesting Stats to Get You Rethinking Your Customer Service Process.
     
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  4. bert-1

    bert-1 New Member

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    Thanks Andy and Jennifer for your replies.

    Let me try to clarify my question...

    I was made aware that some companies use some rules of thumb as:

    - If the component standard cost multiplied by a factor x is bigger than the base warranty cost related to that component, then the decission is to scrap the component and implement the updated solution emediately.
    - If however the component standard cost multiplied by a factor x is smaller than the base warranty cost related to that component than let's consume the balance of stock and phase in the updated solution later.

    That factor x is related to the so-called intangible cost of quality
    It is usually a range of values within a predeifined interval depending on the commercial impact of the issue...

    I know it is an oversimplification but it can be used as a guideline do take quick business decisions.
    I am looking for some reference factors as a benchmark.

    Best regards
    Bert
     
  5. Bev D

    Bev D Moderator Staff Member

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    I'm not aware of that factor. In general the factor would be at best delusional. It could work for awhile in a monopoly or regulated business until true competition occurs. The dilemma is that COST to the supplier has direct relationship to the effect on the Customer. A failure of a 50 cent part can have the same effect on the Customer as the failure of a $500 part. I look at whether or not the daiure will be annoying, cause a workflow interuption that interferes with the Customer's ability to do their job, or will create a safety hazard or misdiagnosis. You are better served looking at the effect on the Customer's ability to use your product as intended as a measure of the urgency of implementing solutions to Quality problems.
     
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  6. BradM

    BradM Moderator Staff Member

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    By research I have seen, those "hard to measure" costs can be quite great.

    A rhetorical question here: Why are your intangible costs "intangible"? Can you make them more tangible?

    Possibly approach your costing differently. Develop per unit pricing for things. It may be an estimation; and your estimates will be challenged. But... that's OK; that will only help you.

    Bev's caution above is very sound. I would avoid using some multiplier for which there is no basis and no way to defend it. Have real numbers.

    To be honest, it's really impossible to do something about people who either don't buy your product; or was buying it and then stopped, in my opinion. However, you do have external failure cost indicators in terms of replacement parts/components, additional shipping costs incurred by your company, etc.

    If I were in your shoes, I'd buy some pizza, get all the relevant folks around a table, and develop good process mapping/flowcharts. Then, just ask people how much time they spend on each activity; keep it in 1/4 hours time increments. Make sure all relevant people (shipping/ AR/ AP, quality, marketing, etc.) review the flowcharts. You want everything included.

    Look at points on the process chart where metrics are kept, can easily be kept, or really need to be kept. If you can (with the team) identify existing metrics that are relevant, that's good! You have a good history to rely on, and no additional work is being created.

    Once you have that, ask your Human Resources for a middle of the road hourly charge. You can then determine how much each activity costs in the company.

    Yes... this is a lot of work. However, my experience is that most organizations are quite surprised with how much activities actually cost internally; it's not cheap. Coupled with the cost of in-process or finished goods/material, you will get management's attention quick.

    Too, you can now turn in some Lean initiatives, by reviewing the process maps and removing non-value added activities.
     
  7. Jennifer Kirley

    Jennifer Kirley Moderator Staff Member

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    I remember that Dr. Juran has written that cost of poor quality is between 15% and 20% of sales. That is an aggregate estimate and alarming, but not actionable.

    Lost $ from slow downs could be measured in sales or cost to produce plus overhead. Cost of defectives need to also register their treatment to fix, or replacement. These vary wildly based on product and process complexity, labor costs, cost of raw materials and the time to replace the raw materials (lead time?).

    There is no formula because of the variation in complexity, cost to manufacture, and sensitivity of the public which might launch a social network campaign. I did once read of a long-ago study (I think by Coca-Cola, I wish I could find it for you) that determined for every $1 spent to get a new customer, it cost $7 to get the customer back once dissatisfied. Another study found that people were about 7 times more likely to complain than compliment, and about 7 times more likely to just shop elsewhere than complain.

    Cost of lost morale could be felt in absenteeism and turnover, also lost productivity from "presenteeism." But there are no certainties of direct correlation in these causes and effects, because of so many other factors that influence employee behavior.

    Making a model could be a good project for a 4th year Industrial Engineering major. But Dr. Juran (I think it was) also said it is less important to try to measure every dime, than to measure consistently and find trended improvements.
     

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