Cost of Poor Quality (COPQ) and Reputation

Manix

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Hi All,

I have been recently reviewing and trying to update our use of the COPQ metrics that we generate each year. In trying to improve how we use this metric I started thinking, that this has implications beyond the financial.

This started me thinking, how could I record the cost of poor quality in terms of reputation. Has anyone tried to do this? I know this may form part of 8.2.1 Customer Satisfaction for you TS companies out there, but how have people put this into measurable metrics?

I was thinking maybe any issue that reaches the customer has a severity rating and shows how the potential reputation of the organisation could have been damaged? Cost to the organisation extends further than immediate short term financial measures.

Any thoughts or examples, greatly appreciated.
 

Jim Wynne

Leader
Admin
Hi All,

I have been recently reviewing and trying to update our use of the COPQ metrics that we generate each year. In trying to improve how we use this metric I started thinking, that this has implications beyond the financial.

This started me thinking, how could I record the cost of poor quality in terms of reputation. Has anyone tried to do this? I know this may form part of 8.2.1 Customer Satisfaction for you TS companies out there, but how have people put this into measurable metrics?

I was thinking maybe any issue that reaches the customer has a severity rating and shows how the potential reputation of the organisation could have been damaged? Cost to the organisation extends further than immediate short term financial measures.

Any thoughts or examples, greatly appreciated.

I don't think there's any way to do it that will be meaningful or remotely accurate. "Reputation" can't be quantified, and its direct correlation to quality costs is impossible to express in numbers.
 
D

David DeLong

I always used a sub-section under the External Failures call "Lost Sales/Goodwill".

All the variable costs under External Failures was totaled and I then used 100% of that value in Lost Sales/Goodwill.

If, during one month, we had $15,000 in External Failures with $2000 as fixed leaving us with $13,000. The Lost Sales/Goodwill would be $13,000 giving us a total value of $28,0000 for the month.
 

Jim Wynne

Leader
Admin
I always used a sub-section under the External Failures call "Lost Sales/Goodwill".

All the variable costs under External Failures was totaled and I then used 100% of that value in Lost Sales/Goodwill.

If, during one month, we had $15,000 in External Failures with $2000 as fixed leaving us with $13,000. The Lost Sales/Goodwill would be $13,000 giving us a total value of $28,0000 for the month.

How do you know that there were any lost sales and/or goodwill? Why try to quantify the unquantifiable?
 
C

Craig H.

I would like to add a word of caution. The use of the word "goodwill" has a very specific meaning to financial people. It is the difference between the book value of a company (total assets' value less depreciation) and its selling price. Though rare, it is possible to have negative goodwill.

Anyway, be careful to make sure there is no confusion. One of the oldest measurement systems is money, and the accountants are the experts for that measurement system.
 

Jim Wynne

Leader
Admin
I would like to add a word of caution. The use of the word "goodwill" has a very specific meaning to financial people. It is the difference between the book value of a company (total assets' value less depreciation) and its selling price. Though rare, it is possible to have negative goodwill.

Anyway, be careful to make sure there is no confusion. One of the oldest measurement systems is money, and the accountants are the experts for that measurement system.

A good point, and of course we can't know the selling price of anything until it's actually been sold.
 

BradM

Leader
Admin
This started me thinking, how could I record the cost of poor quality in terms of reputation. Has anyone tried to do this? I know this may form part of 8.2.1 Customer Satisfaction for you TS companies out there, but how have people put this into measurable metrics?

I was thinking maybe any issue that reaches the customer has a severity rating and shows how the potential reputation of the organisation could have been damaged? Cost to the organisation extends further than immediate short term financial measures.

Any thoughts or examples, greatly appreciated.

Excellent thought. I think quantifying it is exceedingly difficult to do. The only thought I had is possibly find a similar business who has taken a hit, and find out how much market share (should be public knowledge) was lost. Then you might could determine lost sales.

That still has several pitfalls, including comparing the "hit", and controlling for additional factors including product depth, state of economy, # of competitors, etc.

Hopefully your organization has a risk management program, with evaluations similar to the Likert Scale (1-5 or something). Then you can develop a rating to the loss of business, impact, cost, etc. I don't think you could get anyone to agree the loss of business is $1million, $2 dollars, 7 billion, etc. but hopefully you could get them to agree on minor impact/major impact.

I might shy away from reputation, and call it loss of business. Due to limited suppliers, a vendor may not have a very good reputation, but still enjoy decent sales since they are the only game in town.

Just some thoughts.
 
D

David DeLong

How do you know that there were any lost sales and/or goodwill? Why try to quantify the unquantifiable?

The Customer/Goodwill and Lost Sales segment are a part of the ASQ Principles of Quality Costs 2nd edition but the values are vague.

We all know that having Customer complaints could and have lead to reduced orders or even lost Customers. Should we come up with a value for this? It certainly would add weight to the External Failure section costs and would that be important when reviewing our quality scorecard. Having External Failure costs are more important than Internal Failure costs and, in my opinion, the Lost Sales/Goodwill value reflects this.
 

Doug Tropf

Quite Involved in Discussions
I would like to add a word of caution. The use of the word "goodwill" has a very specific meaning to financial people. It is the difference between the book value of a company (total assets' value less depreciation) and its selling price. Though rare, it is possible to have negative goodwill.

Anyway, be careful to make sure there is no confusion. One of the oldest measurement systems is money, and the accountants are the experts for that measurement system.

I believe goodwill, in accounting, would be better defined as
"total asset cost less depreciation taken compared to it's
fair market value".
 

Jen Kirley

Quality and Auditing Expert
Leader
Admin
At issue are behavioral tendencies, which are more difficult to measure and predict than probabilities. But we can make some assumptions for the sake of plotting a curve.

A. The number of times a customer is willing to forgive a failed product or service. This would depend on a number of factors that you might learn by asking what your customers find most important when deciding between you and your competitors. Safety? Availability? Price? Past performance? Referrals from friends? Something else? These can be quantified, and charted as types of failures. Caveat: Price might be chartable only if a noticable drop occurs when a price is raised.

B. The variation between people where brand loyalty is concerned. Since there will be variation, if you want to capture it on a curve you could assign a value based on what you learned when looking at #1. Your marketing team can do this. If your marketing people decide that loyalty is fragile, you could set a probability factor assuming, just for the sake of making a curve, that 50% of the times your product failed in service you would lose the customer.

C. Referral factor. If your marketing team gets a lot of feedback saying your customers strongly respond to friends' referrals, you could factor in that based on Coca Cola (I think it was) finding that an unhappy customer is likely to tell about 7 times as many people as a happy one. Use what your marketing team learns in A. to decide on a number.

D. Cost of getting a customer. See this article for an explanation. Setting your proce for customer acquisition costs

E. Profit per unit sold

Now for the math. For each type of field failure and its satisfaction factor in A, you could run this formula:
(B x C) x (D + E)

Is this scientific? No. Social Science is often said to not be a science at all, because it's almost impossible to completely isolate the independent variables to draw a believable Cause and Effect conclusion.

Other factors will also vary. Marketing costs will vary, as well as brand loyalty and referral factors. Maybe this is why Juran cautioned us not to try to count every dime of COPQ, but to make a consistent type of measurement and use it to chart improvement trends.

I hope this helps! If we had a Voodoo avatar I would stick it here. :D
 
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