All businesses have to make a profit, or they will probably cease to exist, some businesses operate with small margins whilst more successful businesses enjoy greater margins. One thing I am sure of though is that all businesses, no matter how profitable, suffer from the ‘cost of poor quality.’
These costs fall into two categories;
- those that are easily measured and accounted for,
- and those that are not easy to measure, if indeed, they are measured at all.
Those that are not easy to identify and measure make up the ‘Hidden Factory’.
The Hidden Factory
The ‘Hidden Factory’ is literally in our faces every day, but not many of us see it, it hides in many dark corners of all businesses, even the best-managed business can be hampered by the ‘hidden factory’, and worse still, …….. not even realise it.
There is a financial burden for any company, whether service orientated or manufacturing based, due to the cost of poor quality (COPQ). However, no matter what the business orientation, it is astonishing to think that the hidden cost of poor quality could be a much as 20% of a companies’ revenue. Taking into account that the easily measured costs of poor quality make up 5 to 15 % of revenue, then the total encumbrance of the visible and invisible costs could be a staggering 35% of income.
Profit & Loss
I would suggest that many companies are complacent in their measurement and appreciation of the true costs and that a lot of these costs are bundled up into profit and loss nominal accounts, making them hard to recognise and even harder to address. As long as profit margins remain within budgetary constraints and the status-quo is maintained, why would any unsuspecting business owner be anything other than satisfied with an expected performance.
Imagine though, if these hidden costs could be identified, and rigorous steps taken to remove them, the effect on profits would be breathtaking. Eliminating the ‘hidden factory’ and addressing the traditional costs of poor quality is one of the many specialities of a Lean Practitioner. Skilled in concepts, such as Kaizen, (incremental, continuous improvement), Value Stream Mapping and Kanban, (just in time process control), to name but a few, a Lean Practitioner is fully equipped to positively affect the profitability of any business.
How can it happen?
In part, a ‘silo mentality’ could be instrumental in the development of the ‘hidden factory’, e.g.
how do the finance, commercial and operational departments communicate with each other.When was the last time a senior member of the finance department visited the factory floor and questioned excessive inventory levels, process cycle times, process constraints, etc. Likewise, do operational managers question their departments’ performance if they are within ‘budget’, or is it the case that the budget, is the performance measure.
The Silo Mentality as defined by the ‘Business Dictionary’ is a mindset present when certain departments or sectors do not wish to share information with others in the same company. This type of mentality will reduce efficiency in the overall operation, reduce morale, and may contribute to the demise of a productive company culture.
Do the commercial department record lost sales and customer loyalty, do they win sales on price alone? Who do they inform? Who, if anyone, asks the right questions? Are measurements and controls in place? The list goes on.
What to do?
A simple, cost effective method to determine whether or not your business is suffering from the detrimental costs of the ‘hidden factory’ is to benchmark it against another company, (ideally described as best in class or even world class), competing in the same sector or industry as yours. What is it that differentiates their success or performance from your company? If they happen to be a company that actively practises Lean Six Sigma methodology, then maybe they have acted to eradicate their ‘hidden factory’.
All things being equal, there will be reasons for their superiority in the marketplace which will be evident in their stats and KPI’s. Look and learn!
Doing nothing and accepting the norm is not an option, face the ‘hidden factory’ head on and reap extra rewards without having to raise revenue, become Lean and ‘get more for less’ – I do!