7 Steps for Building a Business Case for EQMS Using the Cost of Quality
Reduce the number of internal and external failures before they have a chance to occur.
I’ve written a lot about the growing benefits that Enterprise Quality Management Software (EQMS) can deliver. Indeed, research has shown that companies across industries that have implemented EQMS applications enjoy measurable benefits across many key quality KPIs. And while this may seem like sufficient reason to invest in EQMS software, the current reality of EQMS’ emerging status combined with many quality budget holders’ persistent focus on improving quality at the immediately quantifiable level means that many EQMS implementations that could deliver far beyond ROI never get off the ground.
But it doesn’t have to be this way. In this article, we’ll show through a series of steps how you can use the Cost of Quality (CoQ) formula to your advantage in effectively quantifying and communicating the value of EQMS software to build a solid business case for an investment.
The overall cost of quality can be thought of as the sum of the cost of good quality (CoGQ) and the cost of poor quality (CoPQ).
Broken down further, the CoGQ comprises all the labor, software and equipment costs that are focused on both appraisal and prevention activities.
EQMS is a software category that has so far primarily been thought of as a driver of improvements in CoGQ, with its benefits in shifting resources toward preventive actions.
Defining the Cost of Quality and the Value of a Proactive Approach
The overall cost of quality can be thought of as the sum of the cost of good quality (CoGQ) and the cost of poor quality (CoPQ). Broken down further, the CoGQ comprises all the labor, software and equipment costs that are focused on both appraisal and prevention activities. The CoPQ comprises all the costs caused by internal and external failures, such as scrap and rework costs, as well as returned product, warranty, and product recall costs.
EQMS is a software category that has so far primarily been thought of as a driver of improvements in CoGQ, with its benefits in shifting resources toward preventive actions. Unfortunately, as we alluded to before, these days many manufacturers have far more focus on CoPQ than CoGQ—those highly visible and detrimental scrap and rework costs that need to be taken care of quickly and efficiently.
The following is a seven-step guide to framing EQMS within a context that meets the priorities of quality budget holders today. It also serves as a guide for shifting to a proactive approach to managing quality that helps eliminate the fire-drill approach to quality by reducing the number of internal and external failures before they have a chance to occur.
First, Measure the Cost of Poor Quality:
It’s important to come to an accurate measurement of CoPQ as a baseline, and most companies are already measuring the right metrics: supplier defects, manufacturing scrap and rework, customer complaints, warranty reserves, and more. The work that remains is usually turning these metrics into real dollar costs and reporting this information to others in the company. Once the individual CoPQ components are measured in actual dollar terms they can also be converted into a percent of either revenue or of cost of goods sold (CoGS) for benchmarking purposes. Finally, to ensure the continued successful measurement of the CoPQ it’s also highly recommended for you to establish a cross-functional team that works with finance to verify the measurements, ensure no hidden costs are missed, and review ongoing results for continuous improvement.
Set Cost of Poor Quality improvement goals:
With the CoPQ established, you can now set targets for improvement. While these targets may vary greatly by industry and maturity, research shows that companies typically shoot for 2% to 10% of revenue range, typically set goals in the three to five year timeframe, and look for 25% to 50% improvements. For example, a common improvement goal for a company could be to “Reduce the CoPQ from 5% to 3% of revenue in three years.” For a $1 billion manufacturer these savings would constitute $20 million. The numbers quickly become difficult to ignore.
Conduct a quality process audit:
There are plenty of companies that have done the work of stating improvement goals, but it’s common for there to be a gap in understanding how to actually achieve improvements. That’s why it’s important to understand the maturity of current processes and where any inefficiencies or gaps may be contributing to the CoPQ. Some examples of processes to audit are supplier quality management, failure modes and effects analysis, statistical process control, audit management, corrective and preventive actions, and customer complaints.
Establish future state vision of quality:
With the current state of quality processes established, you can work to develop your future quality vision. This vision should incorporate industry established best practices and work to integrate, harmonize, and automate critical quality processes across the organization to improve collaboration, reduce errors, and improve efficiency.
Clearly align your future state vision of quality to Cost of Poor Quality improvement goals:
In moving toward a future state of quality, the improvements you make in processes should be clearly tied to improving the CoPQ. For example, this would include projected improvements in supplier defects, manufacturing or engineering non-conformances, or customer complaints, as these processes achieve your future quality management capacity. It is critical to be specific here. An example could be: “Our current supplier defect rate is 3%. By implementing a more collaborative process with real-time visibility we expect this failure rate to reach .05%. This reduction will translate into a savings of $1 million annually.”
Establish a plan for EQMS implementation that supports future state vision of quality:
Once you have a future vision for quality processes established that’s based on the projected reductions in the CoPQ, you’ll now be able to create a scope and plan for how EQMS will be able to support this future vision of quality. What you’ve essentially done is given yourself a much more accurate up-front assessment of which processes it makes sense to automate, which systems to integrate, how many users will be needed, and so on.
Quantify costs of EQMS and compare to projected Cost of Poor Quality savings:
With your EQMS plan established and associated with process improvements and projected CoPQ reductions, it now becomes possible to compare these savings to the investment in EQMS. When you make these comparisons and build your business case, it’s important to capture all the software costs as well to use the business case models already adopted within your company. Lastly, don’t build the business case in a vacuum—just as you calculated the CoPQ using a cross-functional team of line-of-business, procurement, IT, and finance managers, so too should you take this approach with EQMS. After all, additional perspective is almost always more helpful.
Sustaining Continuous Improvement Through EQMS
By now it should be clear that an effective business case for EQMS involves a systematic and comprehensive view of quality involving several stakeholders. It’s a case that takes time and effort, but is well worth the reward. The shift to a proactive, cross-functional approach to quality management offers manufacturers the best advantage to achieve sustainable and long-term improvements in quality.