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In the previous post, I related the Toyota issue of sticking accelerator to the type of costs incurred. When failure occurs after the product reaches the customer, the associated costs are regarded as External Failure costs. This goes much further upstream than just replacing the defective part or settling a liability issue. Many examples where given in the previous post as well.

Here, I would like to relate this to the type of error. In general, there are 4 scenarios:

1. Your product or service is GOOD and your QC program let it PASS
2. Your product or service is GOOD and your QC program REJECTED it
3. Your product or Service is NO GOOD and your QC program let it PASS
4. Your product or service is NO GOOD and your QC program REJECTED it

Now guess which scenario affected Toyota’s reputation and bottom line!

When QC lets a NO GOOD product go to the customer, that’s a serious type of error (Type II). This is often called “Consumer’s Risk” beacuase the customer is paying a price as well as Toyota (In this case, deaths resulted from failure). The impact of such error for Toyota, primarily because it deals with safety, is huge and most likely will last a long time.

As I proposed in the first post, company X is asking you for help to improve, but where do you start?

Let’s ask this question… In terms of improvement, what does company X need?
Could it be improving customer satisfaction - for example, quality, on-time delivery ?
May be it has something to do with cost reduction?
May be the customer wants lower prices?

Typical solutions might include:
Customer dissatisfaction: give more coupons / deals
Profit margins not there: lay-off employees
Competition / Customer wants lower prices: Use cheaper materials / less qualified workforce

This rush into taking action for a “quick fix” may backfire. Giving discount and coupons to quiet customers about quality may temporarily satisfy the customer but would likely reduce the profit margin. Cutting staff without studying long term effects would also affect quality and customer satisfaction.

The first step for any improvement initiatives should always be evaluating the status quo using meaningful measures. When we do this we should keep in mind the costs of nonconformance and modes of waste. Costs of nonconformance are related to costs incurred as a result of customer’s negative reaction (bad experience) with the company’s product or service. They can also be internally generated for various reasons but related to inadequate processes.

Can you think of examples?