Written by Katie Farrand of Synergy
You may not have an answer to this question. In that case, maybe a better first question is Do you know what your Cost of Quality is? If the answer is No, then your Cost of Quality is likely creating unpredictable production schedules, variability in your organization’s Cost of Goods Sold and is likely impacting your profitability in a negative manner. Cost of Quality can be broken down into many sources and categories, but from a practical manufacturing standpoint there are three key things that should be captured: Scrap, Rework, and Warranty.
- Scrap is any part, purchased or fabricated, that cannot be used.
- Rework is the cost of any additional labor, material, or service that goes into bringing a nonconforming part, sub-assembly, or finished good back into specification.
- Warranty is the cost incurred to bring any defective product that has already shipped to your customer back into specification, which may include a combination of rework, replacement, or credit. (Warranty should not be confused with Goodwill costs, which are costs incurred to satisfy a customer as it relates to product cost, delivery, or performance.)
These costs must be captured within the ERP System and flow through to the cost accounting system. Why is this so important? Because you need everyone in the company to recognize that these costs as REAL and you need this to happen so you can prioritize company efforts and resources towards reducing them. Nothing is more powerful in achieving this than the realization that this form of waste, when reduced, has an immediate impact on the bottom line profitability of the company. So where do you start? First, setup Inventory Transaction Adjustment Reason Codes tied to the appropriate GL account(s). These should be a list meaningful to the organization, but not too granular, that will let you evaluate the source of the cost – somewhere between 3 to 9 codes related to the three types of Quality Costs and possible broken down by responsibility related to Production, Design Change, and Supplier. From there, Scrap and Warranty adjustments can be captured through an inventory adjustment transaction. Rework and Warranty Rework can seem more elusive, but a tried and true method is to create a Rework Part ID and Work Order, in order to capture only the labor, material, service, and burden related to the specific effort, without negatively impacting the products’ COGS, by receiving and adjusting out the Rework Part ID. In the end, an analysis tool like SmartViews can be used to evaluate these costs and start your organizations focused improvement efforts towards eliminating the causes of the most expensive costs first. With a product like VISUAL Quality, there are even ways to link these costs to your Nonconformance records to capture even more data related to these failures. As you can see, these steps will be instrumental in driving your efforts to reduce your COGS, and therefore increasing your profits. For more information or help setting up your own Cost of Quality capturing process, contact us today!