At PDA 2010 in Orlando, Genentech’s Theresa Friend (Senior Operational Excellence Manager) and Matt Pearson (Associate Director, Operational Excellence) spoke about their work in implementing a Cost of Quality model at their company.

Pearson began the session with an overview of Cost of Quality principles at Genentech. Cost of Quality is, he noted:

• the process of determining costs associated with quality and poor quality work.
• a measure used to align quality and production goals to drive right first time and engrain quality in operations.
• a systematic approach for identifying, understanding and remedying the financial impact of poor quality.
• More than the cost of the Quality organization. “This is more about providing an activity-based costing model” to drive decision-making, Pearson said. “It’s not an accounting exercise. . . . It’s meant to empower employees to make better quality decisions.”

The focus on poor work is an important part of Cost of Quality, Pearson said. “Defects cost us money . . . and the closer the defect gets to the customer, the more expensive it is. The earlier we address defects, the more cost-efficient and effective we can be as an organization.”

Cost of Quality is defined in four categories, two “conformance” and two “non-conformance”. Conformance costs include:

• Preventive Activities: costs incurred from activities designed to prevent poor quality
• Appraisal Costs: costs of measuring, evaluating, auditing, and so on.

“Non-conformance” costs include:

• Internal Failure Costs: from products not conforming prior to shipment
• External Failure Costs: from products not conforming post-shipment.

“We want to drive these non-conformance costs out of the business,” Pearson said. Genentech’s Cost of Quality’s stated goal is: To quantify and prioritize quality improvement efforts that will lead to operating cost reduction opportunities.

The fundamental strategy can be summarized as follows:

1. Attack failure costs, attempting to drive them to zero.
2. Invest in the “right” prevention activities.
3. Reduce appraisal costs according to results.
4. Continuously evaluate and redirect evaluation efforts.

The Nitty Gritty

Next, Friend spoke about specifics and how Genentech prioritized costs to attack. “We were starting to feel the drive of industry competition and industry consolidation,” she noted for context. “Internally, we discovered we had many opportunities to reduce the cost of quality . . . but we had no clear system for prioritizing them and directing the right resources to solving them.”

Design criteria that were developed at the beginning of the Cost of Quality project included:

• “A focus on the activities we felt had the most impact to the quality of products and services as well as those that could be improved.” The team followed the 80/20 rule, meaning 20% of the activities would garner the greatest attention.
• “We needed to ensure that we placed elements (activities) in the category where most of the activity occurs,” Friend said. “The important thing is not to be perfect, but on the right side of the compliance or non-compliance divide.”
• “This is a living model,” the team told itself. As it gets more experienced, it can improve and refine the model, as well as standard costs.
• Activities would not be included that were considered “the cost of doing business” (e.g., filing regulator audits)

Once the team had developed a list of costs and those that it would focus on, it set out to determine how it was going to measure them. “We determined standard values for activity that incorporated all the people involved in that activity,” Friend stated. In addition, “Everything has to be reviewed and endorsed by finance—they’re one of the key partners in this model along with operations.”

Genentech has approached using the model in two ways:

1. Large Scale Improvement Process. “You collect data on a monthly, quarterly, and yearly basis, and you review that data for trends,” Friend said. “Understand what percentage of your dollars you are spending on poor quality, and then on good quality.” Ultimately, the team must agree upon “root failures” and develop cost of quality reports for each.

2. Smale Scale Improvement Process. On a project-by-project basis, “utilize the standard cost estimate benefit of projects,” Friend said. The team is then able to prioritize them based on which have the largest impact to quality.

The Small Scale Improvement activities have presented operators to participate in the Cost of Quality initiative. “For us at Genentech, this has been grass roots,” Friend said. “And it’s been a way to take this to operations personnel and help them to understand the impact they have on Cost of Quality.”

So What?

Pearson and Friend then discussed the overall benefits of Cost of Quality:

• An improved awareness and activism around the Cost of Quality
• Better awareness of C of Q model drivers
• A right first time mindset. “Process teams are now looking at how they can attack cost of quality without a corporate goal attached to it,” Pearson said. “It generates a lot of attention and activity.”
• C of Q is used to prioritize improvement projects.
• C of Q standard costs are included in project valuation model. “This is the impact to the financial profitability of the corporation,” Pearson stated.

Significant improvements were seen to total C of Q in 2009, Pearson said, from the 2008 baseline through 2009.

Some lessons learned in pursuing the Cost of Quality model:

• Sponsorship is vital at both a Global/Corporate and Site level.
• Education must occur at all levels of the organization.
• Alignment on the purpose of tool must be clearly understood across the organization. “This isn’t just a way to cut your budgets!” Friend has told the team.
• Agreement is needed up front to follow the 80/20 rule.
• Collaboration and partnership between Quality, Operations, and Finance is a must.
• Quality cost measurement and published results don’t solve quality problems. “They are a tool to identify areas where you can then dig down to the root cause,” said Friend.
• The tool is a living model. “As you get more comfortable, elements will fall out and new ones will be added,” Friend said.
• Tackling inefficiencies can be as beneficial as eliminating waste.