Many of the Lean Six Sigma projects that we work on focus on improving efficiency within an organization. To improve efficiency, we must understand what is inefficient. Through Operational Excellence methodologies like Lean and Lean Six Sigma, we can determine how much time each task takes and the cost associated with each step.
When we think about cost, one of the most important factors is people. As the saying going, time is money so it’s our job to determine how much time your employees are spending on a task. What’s the cost of those employees? What’s the cost of the systems they use?
Customers are people in this equation too.
One of the challenges with using this model to calculate the cost of inefficiency is often companies will leave out the customer in the equation. Let’s discuss an example.
Let’s say your billing department sends an invoice to a customer. Unfortunately, the invoice is incorrect. You have already determined that on your end, when an invoice is incorrect, there are all these rework loops that take place. The customer is going to call in. Your company will have people trying to fix the error. They will need to resubmit the invoice.
Companies will often calculate this internal cost by determining the time spent by their billing department and maybe even the customer support team’s time answering the phone.
What this company has inadvertently left out is the external cost.
The external cost is your customer’s time.
For me, as the customer with an incorrect invoice, I must also spend my time to correct the error. I might have to submit a form online or call customer support. It’s taking time out of my schedule to correct the problem that the company created. When you factor this in, you not only see the internal cost of inefficiency, but a holistic view.
Let’s say, for example, that your customer happens to be an attorney that bills $500 an hour. Correcting the invoice took half an hour of her time. That’d be $250 of her time. That’s one way of looking at it.
The true price of inefficiency can include future costs.
But the sheer amount of time your customer must spend isn’t the only factor you should be considering. Perhaps more importantly it is less about the cost of time for your customers, but their frustration levels with inefficient processes. If working with you becomes too painful, they will leave. If a company keeps making continuous errors due to inefficiency, it will frustrate and ultimately lose otherwise loyal customers.
At this point, you have to start thinking about the cost of customer churn and the acquisition of a new customer. This opens up a whole new area of additional cost. Lean Six Sigma makes room for these considerations as well.
When we think about the cost of inefficiency, you want to think about the true cost of inefficiency. Not just the internal cost, but look further to the external cost. What are your customers paying in time and emotional labor? That will give you a clearer picture of the true cost of inefficiency of processes or products that you offer.