#2 We need to talk about prevention “costs”

Like Neo and the Matrix, there’s a manufacturing reality senior management isn’t fully aware of—yet. Feigenbaum called this hidden factory “that part of your organization that exists to do bad work—not because you want to do bad work, but because the whole process is such that you are driven to it”.^[1]

The solution he proposed wasn’t more speeches, campaigns and training courses, important though these are.

Feigenbaum wanted every single person to be properly equipped to create a culture of quality. He wanted everyone to have “the tools, the resources, the objectives and the support” needed to avoid being (as he put it) “nickeled and dimed to death by too many pieces of paper”. Or Excel files. Or manual everything.

That was in 1994, long before quality management tools like Quality Management Systems (QMS) were widely available.

And here’s the thing: 28 years later in 2022, a Gartner survey ^{(2022 Gartner Cost of Quality Survey Report) [2]} revealed that one out of every three companies do not use any emerging technologies to manage their cost of quality. Only 18% were using an QMS, one of the prime enablers of a culture of quality. ^[2]

That 2022 survey by Gartner ^[2] underlined what Feigenbaum suspected when he claimed that hidden factories were consuming 20% to 40% of the capacity of many American companies. According to Gartner ^[2], an astounding 46% of a company’s cost of quality is actually the cost of poor quality—the failures spotted onsite (internal failures) and by the customer (external failures).

If we add appraisal costs, the total shoots up to 76%. And as many quality costs regularly go unaccounted for, you can be sure that the hidden factory is consuming significantly more than that.

Applying our conservative estimate of 76% to the average total cost of quality (5.1% of revenue), we can conclude that the average hidden factory may well be consuming 3.4% of total revenue. And will continue doing so unless something is done to stop it.

Over the next three chapters, you’ll learn how to help C-level execs see the waste that you and your team see: the wasted hours, wasted money and wasted opportunities. You’ll scope the full extent of that unacknowledged twin factory, in the language senior management understands: profitability.

In the rest of this chapter, you’ll get to grips with the one “cost” of quality that drives down all the others and dismantles the parasitic factory: effective investments in prevention. Our first task, therefore, is to understand the real nature of prevention “costs”.

When effectively applied, prevention costs prevent costs—including the costly rework, warranty claims and customer dissatisfaction that result from poor quality.

When Gartner ^[2] tracked changes in the cost of poor quality over three years, it discovered that the top 25^th percentile (in terms of their culture of quality) saw their costs of poor quality fall by at least 16%.^[2] Our own experience indicates that manufacturing companies that invest in our QMS see their total cost of quality go down by at least 10%.

Time and money spent on effective prevention are clearly in quite a different category from the other costs of quality (such as appraisal costs and costs of internal and external failure). Prevention “costs” aren’t just another cost of quality. They’re an opportunity to drive down costs and drive up profitability.

The effect of improvements in quality on quality-related costs
(Source: British Standards 6143-2, 1990)

Take this cost-of-quality diagram for example. While it’s evident that rising quality levels are accompanied by decreasing quality costs, it’s easy to forget what’s driving those improvements.

Appraisal costs and the costs of poor quality certainly aren’t.

But if we accept a widely used definition of prevention costs—"the costs of all activities specifically designed to prevent poor quality in products”—it’s obvious that the driver is, in fact, effective prevention operations. Such operations, and the money spent on them, are active agents in driving down all the other costs of quality.

That said, not all prevention operations are effective or efficient. You’re probably all too aware of the improvements your team can’t pursue because prevention tasks that should have been automated years ago, (repetitive manual everything) are still consuming all their time.

The bad factory has prevention costs in the form of wasted time and effort. (Think of all those tedious prevention-related tasks that can, and should, be automated.) We can all agree that these prevention costs are bad.

The legitimate factory has prevention investments in tools that support a culture of quality, drive down the total cost of quality, and dismantle that parasitic twin factory. These investments are powerful enablers of innovation, productivity, profitability and—let’s not forget it—professional fulfilment.

Distinguishing between these two types of prevention costs—and what they represent—is crucial. In the rest of this chapter, you’ll learn how to use this difference to begin building a case for the critical investments in prevention your company needs.

Prevention is a broad concept. There’s a huge array of activities that could fall under this category. If you’re finding it hard to come up with a list, you’re not alone.

To get you thinking about what you already do—and what you could be doing—here’s a rough guide.

There’s a lot to consider so it might be tempting to oversimplify or overcomplicate. While keeping things simple is good (particularly at the beginning—you can always add complexity to your model later), oversimplification can lead to missed costs and trends.

Tip 1:
Don’t lump everything under your total spend for quality assurance personnel.

There are many people involved in prevention and you need to account for those costs as well. Breaking prevention costs down into smaller chunks or groups of activities will help you see and monitor trends.

Tip 2:
Don’t think you have to arrive at a comprehensive list.
Instead of attempting to cover everything, focus on the areas that have the greatest impact on your costs.

We’ve called this a challenge for good reason. Prevention costs are the black box of the quality world: few companies seem to know what theirs are.

While 58% of respondents in Gartner’s survey ^[2] (only) tracked their costs of poor quality, a mere 3% (only) tracked their costs of prevention and appraisal.

We see similar results in our Cost-of-Quality workshops. While it isn’t unusual to find participants who can quantify their costs of poor quality, few have accurate data for their prevention and appraisal costs.

Indeed, one of the biggest barriers to adopting a Total Cost of Quality model can be a company’s concerns about the accuracy of their cost of quality data and the sheer effort of tracking all those costs.

In an ideal world, you’d have all your costs of quality on a dashboard, tracked in real-time by an QMS that’s constantly collecting, updating and quantifying your operations. (Ours already does this and we’re convinced this is what the future of Quality Management looks like.)

To get there, though, you need to develop a business case with what you have. The good news is that this can be enough.

In Managing Quality (Wiley, 2016), the authors claim that “even the most rudimentary attempts at quality costing” can be beneficial—and that “costs are the most effective way of drawing attention to […] situations in ways that other data cannot”.

Our advice echoes this. A ballpark figure is better than none at all. Your numbers don’t need to be perfect. As long as they’re indicative, you already have useful information.

To help you arrive at some estimates, we’ve reduced the range of prevention operations to four key categories, each with their sub-costs. We understand that this type of quantification may seem strange at first so we’ve jotted down things to consider as you go along.

As you work out your estimates, look out for inefficiencies—the prevention “costs” that prevention “investments’ would eliminate or reduce. To take just one example, an inefficiency (or “cost”) that’s often overlooked is the amount of time spent searching for documents in your quality manual. If a user takes one minute to locate the right document in a SharePoint-based solution and you have 100 people in your factory searching for a document every day, that adds up to 20,000 searches per 200-day year. How much would you save if that same search could be done instantaneously? A cool $10K by our calculations. (20,000 minutes = 333 hours or $10K)

In this chapter, you’ve explored the difference between prevention costs and prevention investments—and begun considering where investments in prevention might eliminate or reduce those costs.

To help you make a compelling case for crucial investments in prevention, the next three chapters will introduce the tsunami of costs (appraisal costs and the costs of internal and external failure) that result from inadequately funded prevention.

Look out for the ratio between what you’re spending on prevention (investments and costs) and your costs of internal and external failure.

This ratio can be an eye-opener.

If you’re spending more time and money on correcting poor quality than on preventing it, you’re not (yet) in control of your processes.

The hidden factory is winning.

Don’t let it.