Quality Control: Overhead or Profit Center?

Quality Control and Profit

I have recently joined Coda’s team of Quality System bloggers.  My professional background is rooted in the development and management of Quality Control Laboratories.  The experience working to create, export, streamline, maintain, improve, and manage QC labs has not only been enjoyable, but has also given rise to many valuable insights and lessons.  With that experience in mind, this month’s blog will discuss a perception within our industry (and perhaps other industries) that unfortunately I see all too often.  What is this perception?  It is that quality control laboratories, as well as quality control, in general, burden profit centers, and QC functions are overhead, as opposed to revenue generating units.  As perception, as we all know, has a way of influencing reality, I would like offer a viewpoint that I feel is more accurate:

Quality functions generate intangible profits, ensuring that only high quality product reaches the market
Throughout my years interfacing with the process of securing annual funding for local and global Quality Control laboratories, it was clear that perception was indeed creating its own reality.  With every year that passed, truthful arguments for securing funding increases for these critical Quality units became less and less effective as the perception that laboratories represented overhead became more widely held.  The industry was beginning to actually categorize the QC units as overhead, since their contributions to the following were not readily visible to stake holders:
  • New product development
  • Sustainable and reliable manufacturing
  • Effective issue resolution
  • Avoidance of back order situations
  • Minimization of intangible effects of the Cost of Poor Quality
This ever increasing view creates many realities, some fortunate and effective, for instance, the expanding use of outsourced analytical services.  In the last decade alone, contracted laboratory services have become a substantial presence in our industry and in others.  As the sole revenue generating service offered by these organizations is the execution of analytical procedures, there can be no argument that they are directly responsible for the revenue stream.
Analytical groups that remain a unit of organizations, whose primary product is a manufactured product, are not often as fortunate and more often rendered ineffective.  The quality control units are frequently perceived as overhead and as such, eventually become targets for cost cutting measures.  It is quite an unfortunate reality indeed, when highly skilled resources, performing very precise evaluations designed to verify the successful end point of the product lifecycle, are referred to as “opportunities for waste elimination.”
Given these realities, the in-house quality control units are more lately than ever in the position of having their funding cut, their head count reduced, and critical technology upgrades delayed, if not eliminated.
With these facts in mind, the objective of this blog is to formulate and present an argument that may successfully alter this perception, and contribute to the creation of a new reality.
Quality Control Laboratories; Revenue Generating Profit Centers
An effective and efficient Analytical Quality Control Group will ensure:
  • A lower risk of poor quality product reaching the market place, minimizing:
    • Adverse Events
    • Customer Complaints
  • A deeper body of knowledge regarding the characteristics of the product – which can lend expertise not only in routine testing, but also to special studies such as:
    • Process improvements and changes
    • Expiry extending stability studies
    • Process capability and trending studies
    • Problem investigations
  • Lower rates of re-work
  • Recognition of changing trends
  • Reduction of regulatory scrutiny
Each and every one of these obvious contributions affect the product lifecycle and the revenue stream in the same way…they improve the product lifestyle.  As with all business units there is an operating cost associated with the staffing, planning, and execution of these services.  The question then becomes, is this investment in services recouped by the value of these contributions?  It seems inarguable, if you consider the cost of manufacturing without these contributions, that these functions are more than self-sustaining. The investment made in manufacturing areas provides a return by producing product and generating profit, and the investment made in the quality control areas provides a return by eliminating potential threats to that end and, therefore, maximizes that profit.
As was discussed in an earlier blog in this series, The Total Cost of Quality, modern definitions of the total Cost of Quality now seek to address the financial impact of the cost of poor quality – the sum of intangible costs associated to lost opportunities for performance improvements, increases in customer satisfaction, and sales and preservation of name recognition and respect.
CoQ = Cost of Conformance + Cost of Non-Conformance + Cost of Lost Opportunity
The 1991 study into intangible costs and their effects carried out by C.D. Heagy identified a number of findings, three of which are of particular relevance to this blog:
  1. One of the biggest dangers associated with the older CoQ model was that it did not incorporate the intangible costs of lost opportunity.  There was “poor decision making with respect to funding Quality Systems.”
  2. It was also determined that, “Companies that are perceived to have a higher quality product are three times more profitable than those that are not.”
  3. A “5% increase in customer retention can increase profits by up to 100%”.
The reduction in losses associated to these intangible costs cannot be achieved without a strong, well-funded, highly integrated Quality Control unit that works collaboratively with the Manufacturing unit.  This collaboration of effective units will ensure that high quality product is consistently supplied to the marketplace.
Such an integrated model will not exist within a culture that views the Quality Control unit as a non-profit generating unit.
It is clear that producing poor quality product or even high quality product inconsistently or at an unnecessarily high unit cost, is bad for business and while consistently producing a high quality product, at the lowest possible cost, yields the opposite effect.
Yet, while these are simple truths, there is another simple truth:  too often, leaders in our field continue to believe that quality control functions are overhead.  Why does this continue to be such a difficult paradigm to shift? This author believes that it is as simple as the phrase that so many of us promoting change hear every day, “we have always done it this way, why should we change it now?”
This perception does have negative effects and it is worth changing.  Until this perception does change, and the needed quality infrastructure investments made quality units within our industry will never realize their full potential.
© Coda Corp USA 2012.  All rights reserved.
Eoin Walsh
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