The true costs of Quality

The true costs of Quality

There are few managers in organisations that do not recognise the importance of maintaining and improving quality. One of the perceived barriers to implementing quality processes though is the cost. When it comes to making decisions most managers will speak in terms of money so the ‘cost of quality’ is always an important factor and consideration in the larger scheme of things.

The term “cost of quality” undoubtedly has different meanings to different people. Some equate “cost of quality” with the costs of poor quality due to finding and correcting defective work. Others equate the term with the expense incurred to attain good quality. Others use the term to mean the costs of running the quality department.

According to some studies quality-related costs run in the range of 10 to 30 percent of sales or 25 to 40 percent of operating expenses (Some of these costs are visible and some hidden.) There is no set formula though as every organisation is different. Putting precise costs on quality is therefore no easy task.

Many managers, for example, focus only on the cost of “non-conformities”. Quality costs, though, include other unmeasured costs such as lost sales due to poor quality. This is sometimes termed a ‘hidden cost’ because it cannot be easily measured.
Also, quality cost measurement does not solve quality problems. Some organizations publish these costs in the form of a scoreboard but these efforts generally fail because of a fundamental misunderstanding. It is lack of action that costs, rather than lack of will.

So when we talk about the true costs of quality what do we actually mean? Here are some useful examples:

– Internal Failure Costs
The costs of deficiencies discovered before delivery. i.e. deficiencies or nonconformities with the failure to meet explicit requirements or implicit needs of external or internal customers.

– External Failure Costs
The costs associated with deficiencies found after products are received by customers. These also include lost opportunities for sales revenue.

– Appraisal Costs.
The costs incurred to determine the degree of conformance to quality requirements. For example the cost of ‘inspections’ is an appraisal cost.

– Prevention Costs.
The costs incurred to keep failure and appraisal costs to a minimum. For example product design costs are prevention costs.

The total “cost of quality” in the above example is therefore the sum of the four above categories.

For organisations that would like to create an Initial Quality Cost Study here are a few tips to get them started:
1. Try to review some of the existing literature on quality costs and consult with others in similar industries which have had experience with applying quality cost concepts.
2. Ideally select one organizational unit of the company to serve as a pilot site. This unit may be one division, one large department or one product line etc.
3. Discuss the objectives of the study with the key people within the organization, particularly those in the accounting function. Two objectives will be paramount – determining the size of the quality problem and identifying specific projects or areas for improvement.
4. Collect whatever cost data is already available from the accounting system. Use this information to gain management support to make a full cost of quality study.
5. The proposal should provide for a task force of all concerned parties. The task force will need to identify the work activities that contribute to the cost of poor quality. Make use of work records, job descriptions, flowcharts, interviews, and other relevant documentation and include brainstorming to identify these activities.
6. Publish a first draft of the categories that define the cost of quality and revise as necessary as the initiative develops.
7. Finalize the definitions and secure management approval.
8. Assign responsibility for data collection and report preparation.
9. Collect and summarize the data. (Ideally, this should be done by the accounting function)
10. Present the initial and final quality cost results from the quality improvement project to management. Then request authorization to proceed with a broader company-wide program of measuring the costs and pursuing projects.

Clearly, this suggested sequence must be tailored for each organization but hopefully it provides a useful starting point. Yes – quality costs but at the end of the day the most important question that all organisations must ask themselves is this: “What is the cost of NOT pursuing quality?”

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