Sunday, March 4, 2012

The Enemy Within

Early in my career, we used to talk about the costs associated with poor quality as a hidden factory. Now I refer to it as an internal competitor. It's a competitor who has sapped you of important resources, diverting them from increasing your business value.

Here's a simple, everyday experience.

Suppose your accounts payable person is spending an hour a day finding and fixing mistakes. That person is chasing down receipt errors on expense reports. Incorrect quantities found when product or materials are received have to be validated before the invoice is fixed. Granted, this person may not be fixing or finding whether it's a mistake, but he/she has had to call the procurement department to change the PO or contact the supplier to find out whether the extra is going to be invoiced or not, or if the shortage is going to shipped. This is time well spent to maintain accuracy of accounts and moneys spent, but it's not helping to increase the value of your company.

Now suppose you receive 510 units when you ordered 500 units. You've only been invoiced for 500. Do you have an accounting person change the cost of the inventory on your system to show a 2% reduction in cost? If you don't, are you making poor decisions about pricing and product costs that lead you to promoting the wrong product? Two percent on one component won't do that but if the variance is compounded repeatedly, it could lead you down the wrong path. You may think falsely that you have a pricing advantage over your competition when you don't, or think you don't when you do.

What if the variance is your doing? You shipped more or less than what your customer expected by a bit. Your analysis could be wrong with regard to margin contribution.

What if you don't chase down late payments fast enough? You're extending terms which increases your accounts receivable (A/R) and causes you to lose enterprise value. Do you have people find out the reasons for customers paying late, and what's caused discrepancies from their view? If you don't find and fix these reasons, you may be giving away something to your competition.

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