Mario Pagliaro's Newsletter, August 27, 2007:

Measuring quality with money

Summary:
The price of non conformance easily measures quality at work with money, making of quality #1 issue in every successful organization.

For those of you who --like me -- share Bob Pirsig's insight on quality as an event -- the event at which the subject (we) becomes aware of the object (the world) -- claiming that quality at work can -- and should -- be measured with money may even sound blasphemic.

Yet this simple concept advanced by another great American -- Philip B. Crosby -- has shown its power throughout time.

In essence, in fact, it says that quality is free for enlightened organizations. And elightenment was at the very hearth of Prisig's trip recounted in ZAAM.

Price of Nonconformance - PONC

Crosby studied medecine and served in the US Navy in the Corea war. From the new 20^th-century medecine he learned the great lesson that prevention is better than healing. Hence, Crosby explained in financial terms to managers of Martin Marietta and later on of ITT -- i.e., America's élite companies -- that the road to quality goods and services was through prevention, not inspection.

Identifying and eliminating the causes of problems reduces rework, warranty costs, and inspection. In other words, creating quality goods and services does not cost money, it saves money.

Instead of debating on what quality at work actaully was, Crosby understood that it was much more practical to define quality as conformance to work requirements. From that it immediately followed that all work non conforming to said requirements is waste. And waste is measured with money.

Calculating PONC

Crosby coined thus the term "price of nonconformance" (PONC). The price of nonconformance puts a dollar value on all waste and wasted effort caused by a lack of quality. Examples of the price of nonconformance include reprocessing, expediting, unplanned service, computer reruns, inventory, customer complaints, service after service, downtime, reconciliation, and warranty.

In manufacturing, PONC typically falls between 20 to 25 percent of sales, while in service/administrative organizations, PONC averages 30 to 40 percent of operating expenses. This means that a company making $100 million typically will spend $30 to 35 million in nonconformance costs.

This happens because work processes of all too many companies are not made certain. Thus, the resulting products and services continue to be largely defective. Wether in service industries -- where doing things three or four times is more the rule tnan the exception --; or in the manufacturing world where companies continue to market -- and recall -- defective or dangerous products, PONC measures all wasted time and work that must be done to fix problems.

How much money, for instance, has Mattel wasted for commercializing lead-contaminated toys? And, by the same token, how much money is your company wasting for not having an user-friendly wesbite in place of that worthless shopping window?

Using PONC to Drive Change

No concept better than that of PONC is more effective for implementing a successful quality management strategy. That is why we teach the ability to calculate PONC at each of our management courses: a new process skill to identify and measure nonconformance in the workplace; and then focus on how to use PONC as the tool in the quest for quality improvement.

Most organizations, even those with quality programs, spend at least 20 percent of their revenue on PONC. That number can be reduced by 25 percent in a couple of months and by 50 percent within a year.

Pick a few things to focus on. Run those through the PONC process to track them. Once those areas are solved, move on to other areas.

The speed of global business and the enabling technologies have certainly changed since 1979 Crosby's Quality Is Free, but the basic link between quality and business results have not. Each process has to work right the first time. And PONC serves the scope to see quality throughout whatever organization and eliminate problems.

Further Information

The management courses detailing on how companies can find costs, track them, and start corrective actions are offered to senior management, quality professionals, and individuals in Palermo, Italy, or directly at your company. P m/a has also consultants who travel to different companies to calculate PONC and teach quality management.

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