How Excelling At Cost of Quality Accelerates Company Growth

How Excelling At Cost of Quality Accelerates Company Growth

  • 67% of the executives believe Cost of Quality is essential to excel at if their companies are to stay competitive in an era of rapid globalization (Kaur, 2009).
  • 89% of manufacturers rely on Cost of Quality to improve customer satisfaction, and 84.52%, for ISO 9000 compliance (Kaur, 2009).
  • Major recalls and other non-routine quality events can cost a medical device manufacturer up to 11.7% of their market segment revenue or nearly $300M in less than a year according to a McKinsey.

Extending product quality far beyond the boundaries of compliance is the catalyst that drives increased sales and satisfied customers. Innovations are proliferating across all medical products manufacturing sectors, from 3D printing to WiFi-enabled products capable of real-time data integration. What’s lacking is a corresponding intensity to innovate quality at the same pace and scale.

Accepting The Challenge Of Innovating Quality As Fast As New Products

Medical device manufacturers face the challenge of how to be as innovative at achieving excellent quality levels as they are at inventing new products. The cornerstone of any successful new product is how quickly customers trust, adopt and integrate it into their daily approaches to getting work done. For any new product to achieve its full revenue potential, the product and company offering it have to earn a reputation for quality and trust quickly.

In a recent McKinsey & Company article, Capturing the Value of Good Quality in Medical Devices, estimated the total direct cost of quality at 6.8% to 9.4% of industry sales. McKinsey’s research team found that the pace of quality improvements in medical device manufacturing isn’t keeping pace with patent creation and new product development. Getting beyond just tracking the costs to prevent or detect quality flaws and addressing the indirect and direct quality costs is needed. McKinsey’s study focused on these cost components to gain greater insights into the true Cost of Quality for medical device manufacturers.

How Cost of Quality Drives Revenue

The following are the key takeaways from the McKinsey study on how high product quality drives revenue for medical device manufacturers:

  • The medical device industry’s direct Cost of Quality of approximately 6.8% to 9.4% of industry sales equals $26 billion to $36 billion annually. These estimates are based on the industry’s current annual revenue run rate of approximately $380B. McKinsey found that the direct cost of ensuring good quality is one-third of this total cost, with the remainder resulting from the direct cost of poor quality. The following graphic from the article, Capturing The Value of Good Quality in Medical Devices, provides an analysis of the direct cost of quality in the medical device industry.Direct cost of quality in medical device industry is $26 billion to $36 billion annually
  • Medical device manufacturers who design for quality and manufacturability to the plant floor are more effective at defining and optimizing core set of Critical Quality Attributes (CQA) that deliver lower Cost of Quality. The quicker a medical device manufacturer can define and act on CQAs, the more effective they become at assigning Critical Control Points (CCP) before any products are produced. By concentrating on improving a core set of CQAs, medical device manufacturers improve revenue by reducing costs and increasing customer satisfaction. Excelling at CQAs over time earns customer loyalty and trust and further engrains quality into new products. McKinsey’s findings are illustrated in the graphic below.Quality attributes for medical device manufacturers
  • Four key medical device quality manufacturing factors are driving greater revenues with the product and process controls being most valuable. McKinsey found that the four factors of robust product and process controls, stronger operational maturity relating to people and assets, mature quality systems (especially supplier controls and nonconformance, corrective action/preventative action (CAPA) management), and an analytics-driven quality culture and processes across an organization are critically important.
  • By bringing a greater level of intensity to improving product quality, medical device manufacturers can recover from $6B to $11B a year. There is ample room for medical device manufacturing improvements in quality, with recoverable costs industry-wide ranging from 1.5% to 3% of sales or $6B to $11B a year. The lower figure of 1.5% is base on lower-performing medical device manufacturers reaching an average level of quality, and the 3% reflects best-in-class medical device manufacturing quality.  

References:

Fuhr, T., Silverman, S., Telpis, V., & Makarova, E. (2017, February). Capturing The Value of Good Quality in Medical Devices. Retrieved from http://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/capturing-the-value-of-good-quality-in-medical-devices

Fuhr, T., George, K., Pai, Janice (2013) The Business Case for Medical Device Quality, McKinsey Center for Government.

Garga, E., & Bambale, A. J. A. (2016). The Impact of Service Quality on Customer Patronage: Mediating Effects of Switching Cost and Customer Satisfaction. International Journal of Global Business9(1).

Kaur, P. (2009). Current Cost of Quality Management Practices in India in the Era of Globalization: An Empirical Study of Selected Companies. Decision (0304-0941), 36(1).

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This article was written by
Louis Columbus

Louis is currently serving as Principal, IQMS. Previous positions include Director Product Management at Ingram Cloud, Vice President Marketing at iBASEt, Plex Systems, Senior Analyst at AMR Research (now Gartner), marketing and business development at SaaS start-ups. Mr. Columbus’ academic background includes an MBA from Pepperdine University and the Strategic Marketing Management and Digital Marketing Programs at Stanford University Graduate School of Business. Louis also teaches MBA courses in international business, global competitive strategies, international market research, strategic planning and market research. Mr. Columbus currently is a member of the faculty at Webster University and has taught California State University, Fullerton: University of California, Irvine & Marymount University.