Management Debt: Costs of Non-delivery and Non-conformance

The principles of lean have always focused on maximizing the value delivery. In fact, the Japanese term Muda (Arnheiter & Maleyeff, 2005) refers to the seven different types of wastes that one should remove. Expanding on this, practitioners have added the non-utilization of talents introducing the mnemonic or memory aid, DOWNTIME, to capture these eight types of waste an organization or project should closely monitor to increase efficiency. These eight types of wastes are:

1. Defects
2. Over-production
3. Waiting
4. Non-utilized Resources
5. Transportation
6. Inventory
7. Motion
8. Excess Processing

It should be noted that the non-utilization of resources was not part of the original Lean Manufacturing concepts that were formulated based on Toyota Production Systems value chain thinking (Sutherland and Bennett, 2007). However, as the ways of working emerged shifting the focus towards value creation applicable from all levels of the organizational hierarchy such as the open systems thinking (Scott, 1981), non-utilization of resources was added as the eight types of waste! In my opinion, this is applicable in any industry as resources can be both human resources (people's time, skills, talent, experience, competency, etc.) but also non-human resources (facilities, equipment, materials, infrastructure, supplies, etc.)

Often, these eight principles are considered an academic exercise and practitioners have lost connection with these principles. Unless these principles are related in terms of the management language, money, these principles don’t gain the limelight. In this blog article, I would like to synthesize some of these principles in terms of two types of costs as follows that relate to the cost of poor quality. When these two costs are not managed appropriately, it is management debt to the project.

Cost of non-delivery

This principle refers to the “…measure of the costs associated with preventing, testing for, or correcting defective items,” according to Carr (1992, p. 72). The cost of poor quality comes from both the internal and external failure costs where poor-quality costs are associated with rework, redesign, retesting, failure in or shortage of specifications in requirements, bugs arising from poor development practices or myopic understanding of or inaccuracies in requirements or design, or unplanned delays in monitoring the dependencies. All these relate to elements mentioned in the DOWNTIME factors and could lead delivered work that is still not production ready unacceptable for customers. Say, if any of the above factors contributed to a schedule slip of 10% on a project that cost $100,000. At a minimum level, this slip means $10,000 (10% of $100,000) is now an additional cost to the project that could have been effectively controlled.

Cost of non-conformance

Non-conformance means the rules of engagement for a specific development or management methodology are not completely adhered to. For example, not following the integrated change control mechanism to use a tool that is not approved by the organizational policies, not adequately preparing for the specific meetings increasing the cost of a meeting, taking missteps that lead to the escaped defects increasing customer’s bad will, or over-engineering a feature beyond the fitness for use. When these things happen, it often involves more time spent in corrective actions introducing increased testing, executing recalls and incurring expenses on the performing company’s time and money, or attempts at various levels to restore customer satisfaction. The cost of non-conformance retraces its roots to the cost of quality examples on lack of adherence to existing policies.

Summary

Therefore, middle management focusing on delivering products or projects, whether they operate through traditional or agile approaches, should evaluate the cost of non-delivery and cost of non-conformance to ensure that all these waste producing efforts are eliminated. Management is obligated to monitor these patterns that lead to the management debt like the technical debt. Only when this management debt is controlled, does the concept of efficiency grow with the seeds of cost of good quality. 

References

Arnheiter, E.D. and Maleyeff, J. (2005) ‘The integration of lean management and Six Sigma’, The TQM Magazine, 17(1), pp. 5–18. 

Carr, L. P. (1992, Summer). Applying cost of quality to a service business. Sloan Management Review, 33(4), 72.

Scott, R.W. (1981). Organizations: Rational, Natural, and Open Systems. Englewood Cliffs, New Jersey: Prentice Hall.

Sutherland, J., & Bennett, B. (2007). The seven deadly wastes of logistics: applying Toyota Production System principles to create logistics value. White paper, 701, 40-50.