Many times, in my career, I have heard knowledgeable people say, “This must be costing us thousands of dollars.” My response would be, “How do you know? Did you measure it? Do you have any data?” Most times the answer is no. My next response would be, “bring me the data and I will help you figure out the costs.
In many cases it is pretty easy to determine the cost of issues. First, you have to determine the type of issue you have. Issues can be grouped as:
Corrective Actions and Failures – These could be warranty issues, customer complaints, compliance or liability claims, rework and defects found during the development of a product.
Appraisal or Audit Activities – This includes product inspection and testing activities as well as any audit activities.
Preventive Actions – This includes anything related to process improvement activities, surveys and training.
Corrective Actions and Failures
For corrective actions and failures, you first want to calculate the total labor cost of a single corrective action by estimating the number of hours to complete the action or fix the failure, obtaining the labor rate and calculating the number of employees.
Total Labor Cost/ Corrective Action = Hours * Labor Rage * # of Employees
Next you need to estimate the cost of any materials used. Then you estimate the number of corrective actions per year.
Estimated Annual Cost = (Total Labor Cost + $ Materials) * # of Corrective Actions
Appraisal or Audit Activities
Appraisal activities are relatively easy to calculate. First you identify the labor category used for the appraisal or audit. Then you estimate or count the number of personnel used, obtain the labor rate and calculate the number of hours used.
Cost of Appraisal = # of Staff * # of Hours * Hourly Rate
If you are using two different labor categories you would calculate each independently then sum the total.
Cost of Appraisal = (# of Staff at Labor Category 1 * # of Hours * Hourly Rate) + (# of Staff at Labor Category 2 * # of Hours * Hourly Rate)
Preventive Actions
For preventive actions you calculate the number of hours and the hourly rage for all the personnel, then add the cost of any corrective actions and failures, as well as any related appraisals or audits.
Estimated Cost = (# of Staff at Labor Category 1 * # of Hours * Hourly Rate) + (# of Staff at Labor Category 2 * # of Hours * Hourly Rate) + …. + (# of Staff at Labor Category n * # of Hours * Hourly Rate) + Cost of Corrective Actions and Failures + Cost of Appraisals or Audits
Its better to be conservative when calculating these figures. Be sure to coordinate your efforts with your Finance organization to make sure they agree with your methodology.