How Tracking Supplier Quality Affects Your Bottom Line
As a quality professional, you’ve got a lot on your plate. So, it can be tempting to cut corners, especially if a cost-of-quality (COQ) system isn’t on your company’s list of priorities. It may be a challenge to find the time and managerial support to track and measure supplier quality, but it’s worth the effort. Doing so helps you deliver consistent quality with fewer recalls and reduced warranty costs, all of which affects your bottom line.
What Is Cost of Poor Quality?
Perhaps the easiest way to understand the concept of cost of poor quality (COPQ) is to imagine an organization in which all systems, processes, and products are perfect. In this case, there would be no COPQ.
The cost of poor quality represents just one part of the cost-of-quality methodology; the other part is the cost of good quality (COGQ). To calculate your overall COQ, add these two costs together:
Cost of Good Quality (COGQ) + Cost of Poor Quality (COPQ) = Cost of Quality (COQ)
If algebra isn’t your thing, try this truism: You have to spend money to make money. No matter how you approach your COQ, your company will pay. Your task is to decide whether to invest in COQ programs up front or pay a lot more later for recalls or warranty costs.
The good news is that you have the power to reduce the cost of poor quality, while increasing quality in your supplier programs.
(If you’re new to the COQ concept, or simply need a refresher, read more about it here.)
Why Is Tracking Cost of Poor Quality in Supplier Management Important?
In the manufacturing and service industries, studies have shown the cost of poor quality averages anywhere from 15-40% of sales. This can translate into millions of dollars over the course of a year, depending on the size of your business, but it always has a significant impact on your bottom line.
According to experts, reducing COPQ to just 10-15% of sales can transform a marginally successful company into a highly profitable one.
Unfortunately, just one in three organizations track COQ, according to an ASQ study. Even more concerning is the fact that many executives incorrectly believe their company’s COPQ is less than 5%. The reason why is clear: Many don’t understand the benefits of tracking their COQ, which leads them to prioritize investing in other areas.
To maximize your organization’s potential, it’s important to know your COPQ. Understanding this cost will help you accurately evaluate the effectiveness of your quality systems, assess the performance of each vendor, and identify problem areas as well as opportunities for improvement. COPQ is thus an important tool for managing and reducing risk.
How to Assess Your Company’s Cost of Quality
Implementing a COQ system will enable you to measure the impact of quality systems on business performance. Here’s how to get started:
- Reframe Your Approach
If managing your suppliers feels like a burden, it’s time to change your approach. (Or it may be time for an attitude adjustment, as your mother might say.) Stop thinking of tracking as a compliance burden, and start thinking of it as an opportunity to improve your supplier quality.
Working collaboratively to create programs relevant to your production standards not only benefits everyone involved but also helps your suppliers be more invested in quality. The result is better, more consistent quality, which keeps your boss, your suppliers, and your customers happy.
- Track and Measure Supplier Performance
Tracking performance can seem difficult and overly complex, especially if you’re doing it all manually in spreadsheets. But it’s important to remember that any COPQ tracking is better than none. So, start with what you have.
Maybe you have some historical data on supplier performance. Great! Aggregate the data and start looking for trends. You’re certain to stumble across something that needs your attention. Pay special attention to effective processes with positive results that you could incorporate into your programs.
If you’re starting from scratch, don’t despair. You have the opportunity to set benchmarks for supplier performance, which enable you to set realistic goals for improvements to your quality programs year after year.
Tracking supplier performance has an important benefit: It allows you to move toward conditional management (where you use your time and effort where it’s needed most) and away from continual management (where you monitor every supplier, all the time). By putting a bit of trust in your rock-star vendors, you’ll free up time and money to train and assist those who need it.
- Motivate Supplier Accountability
It’s normal to trace a certain amount of quality failure to your suppliers. The best way to manage this and reduce its future impact is to encourage accountability.
One way to do so is through a charge-back program. If you find that, due to your suppliers’ failures, product quality is low and recalls or warranties are high, such a program can hold the appropriate suppliers financially responsible. It also creates an incentive for your suppliers to help you identify and fix the root causes of poor quality.
- Create a Closed-Loop System
Inevitably, things fall through the cracks, but you can mitigate human error by creating a closed-loop system. Simple in concept, this involves three easy steps:
- Find the root cause. When tracking down a quality issue, it’s best to approach the task collaboratively. This will involve suppliers in a positive way, strengthening your management position.
- Create a clear plan and initiate CAPA. When you initiate corrective action, it’s key to have a written process to make expectations crystal clear for suppliers and other stakeholders. Once a problem is fixed, make sure to go back and identify a root cause so the same issues don’t happen repeatedly.
- Update your processes. When you’ve identified root causes during your CAPA process, you’ll need to make sure your quality processes and procedures are up to date to reflect your findings. Examples include updating documentation, upgrading the skill set of an employee, training or certifying suppliers, or making physical adjustments for quality and safety at the supplier location.
In a closed-loop system, your processes are documented and clearly communicated, which can help you align on goals and clarify your expectations with your suppliers. Using this system, you’ll find it easier to close gaps and reduce risk or quality issues. Tracking quality improvements might also help your company’s decision makers understand the importance of COQ initiatives and encourage them to spend a little up front to save a lot down the road.
Companies that fail to track and measure supplier quality are missing out on a great deal of useful information — data that can be harnessed to improve your organization’s overall quality and to reduce costly recalls and warranty claims. While implementing a COQ system can be daunting, it’s a worthwhile project that is sure to improve your bottom line.
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