How Much Can Poor Quality Cost You?

In the average scenario, at least $300,000 per observation

Operating with poor quality is going to cost your firm. It’s not just the staff hours it takes to respond to a Form 483 or facilitate an FDA inspection, but the total of these “ordinary” costs, plus a variety of less recognized, hidden costs.

Each 483 observation can cost your firm at least $300,000, based on a more-or-less average case detailed by former FDA Investigator Vincent Cafiso. With ordinary costs totaling about $1.5 million, that case involved five subsystems with 483 observations (Figure 1), and took six months to remediate.

But those hidden costs can drive the actual total costs much, much higher.

It’s critical to get ahead of all these potential costs, says Cafiso. “Do you want to cripple your new business with this kind of overhead?” he says. “Or do you want to try to get out in front of it and build your quality culture along the way as you’re building your product?”

Vincent Cafiso stopped by the Redica Systems virtual studios earlier this month to chat with us about the high, high costs of poor quality. With leading quality roles at companies including Becton Dickinson, C.R. Bard, and Smith & Nephew, he’s now director of Creo Consulting, leading quality and regulatory services.

The “Average” Form 483 Scenario

Cafiso estimates both the well-known and hidden costs using an example of a real inspection scenario he encountered himself, and considers average. We’ll simply refer to the company here as Firm 1.

You can find a summary of the Firm 1 scenario below, and estimate the costs for other scenarios simply by altering its variables.

Vincent Cafiso’s Example Inspection Scenario

• Firm 1 receives an announcement that an FDA investigator will visit in three business days
• The inspector is a seasoned professional
• The inspection lasts nine days
• The inspector interviews several subject-matter experts
• The FDA issues a 483 to Firm 1’s most senior official
• The 483 lists five inspectional observations citing the same number of subsystems
  • Complaint Handling and MDR Reportability
  • CAPA
  • Design Controls
  • Process Validation
  • Internal Auditing

As with most situations involving a 483, this scenario required an “all hands on deck approach,” as Cafiso says. So Firm 1’s response required thousands of staff work hours, contracting external 483 response consultants, root-cause investigations, and product containment.

Later, Firm 1 needed to perform corrections (such as a potential product recall), complete corrective actions, a verification of its effectiveness plans, and the completion of an overall FDA 483 response document.

Requirements for a 483 Response Document

• Meet the FDA’s 15-day response deadline
• Provide evidence attachments, numbered and referenced
• Perform lengthy cross-functional technical reviews
• Conduct executive and external consultant reviews
• Compile the entire document package

Finally, after submitting its 483 response, Firm 1 continued following up with the FDA and carrying out its obligations. See a breakdown below of these post-483 response actions, as well as Cafiso’s rundown of additional costs.

Vincent Cafiso’s Post-483 Response Breakdown and Additional Costs

Post-483 Response

• Tracking of weekly actions and project management
• Submit monthly response updates to the FDA
• Tracking until every action item is complete
• Submit final verification of effectiveness evidence

Additional Costs for the Full Scope of Remediation

• Countless change orders
• Personnel training
• Additional personnel
• Process Redesigns
• Process implementations
• New equipment and fixtures

The Obvious Costs

Adding up all the tangible costs, this scenario cost Firm 1 an estimated $1,526,000, says Cafiso.

That estimate includes the cost of staff hours (about $280,000 for subject-matter experts), the cost of expert, ex-FDA consultants (about $120,000); product recalls (about $630,000); and scrapping finished goods (about $216,000 for 120 units of product at $1,800 each).

Equipment and other procurement added up to about $330,000 for Firm 1. That total includes about $180,000 for new production equipment and a process validation package, about $100,000 for a new CAPA software module, as well as a $50,000 recurring annual charge for that module.

What About the Hidden Costs?

Here’s where Cafiso’s analysis gets particularly interesting — adding up the opportunity costs, loss of competitive advantages, and the other, less obvious negatives.

Delayed Revenue

First on the list is delayed revenue. “You’re going to be diverting resources away from really important ‘business-critical activities,” he says. These might include something like a new product launch — revenue that’s never realized.

That could be a lot of money. It could be $100,000, it could be a million.

“I can’t tell you how much that is,” says Cafiso. “But if you have four months or three months worth of delayed revenue, that could be a lot of money. It could be $100,000, it could be a million.”

Also in this category are improvement projects intended to reduce the production of scrap or to reduce mistakes. That’s a hard category to quantify in dollars, too.

Damage to Market Position

A few of Cafiso’s hidden costs relate to a firm’s position in the market.

First among those is damage to a company’s reputation. Again, this is difficult to quantify in dollars, but its effect on potential customers, partners, new hires, and so on is definitely much greater than zero. Other causes of hidden costs can flow partly from this one.

That includes the loss of market share, which can also stem from any absence of the product from the market. “A very small percentage of market share loss can lead to a huge loss of revenue,” says Cafiso.

When adversaries get their hands on a 483, it can be a potent competitive weapon. “It could be a sales rep or service technician or somebody like that,” with an actual copy of the 483, Cafiso says.

“These competitors are going to link a 483 observation directly to the poor product quality that you manufacture — even if they can’t fully connect the dots,” he says. “They’ll [say] do you really want to do business with somebody who gets all these 483s? They must really have bad products, and they must not really care about patient safety.”

In one such case Cafiso knows of, the loss of a contract with a Veterans Administration hospital cost a company $500 million.

Get Ahead of Obvious and Hidden Costs

With Redica Systems, your firm can understand the kinds of observations that weigh down other companies in the industry. Using Redica Systems insights allows you to proactively identify and control risk across your supply chain with insights into any of your key suppliers. Get a demo today!