Cost Of Quality
Because the main managers language is money, the concept of studying Cost Of Quality provided the vocabulary to communicate between the quality staff departments and the company managers.
The Meaning of "Quality Costs "
- The term “quality costs” has different meanings to different people. Some equate “quality costs” with the costs of poor quality (mainly the costs of finding and correcting defective work); others equate the term with the costs to attain quality; others use the term to mean the costs of running the quality department.
In my site, the term "quality costs" means the cost of poor quality.
- The quality-related costs ran in the range of 10 to 30 percent of sales or 25 to 40 percent of operating expenses. Some of these costs were visible, some of them were hidden.
- The Cost Of Quality were not simply the result of factory operation, the support operations were also major contributors.
- While these quality costs were avoidable, there was no clear responsibility for action to reduce them, neither was there any structured approach for doing so.
Tips You Must Know:
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The Language of Money Is Essential.
Money is the basic managers language, without the quality cost figures, the communication of such information to upper managers is slower and less effective.
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Quality Cost Measurement (only) Does Not Solve Quality Problems.
Some organizations publish it in the form of a scoreboard, These efforts have failed
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Scope of Quality Costs Is Not Too Limited.
The measurement of quality cost focuses on the cost of nonconformities,
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An important cost that is not measured is lost sales due to poor quality (this is called a “hidden cost” because it is not easily measured)
Categories Of Cost Of Quality
Cost Of Quality Classification:
These are costs of deficiencies discovered before delivery which are associated with the failure (nonconformities) to meet explicit requirements or implicit needs of external or internal customers.
These are costs that would disappear if no deficiencies existed.
These are costs associated with deficiencies that are found after product is received by the customer.
Also included are lost opportunities for sales revenue.
These are the costs incurred to determine the degree of conformance to quality requirements.
These are costs incurred to keep failure and appraisal costs to a minimum.
The Total Cost Of Quality is the sum of the four categories above.
MAKING THE INITIAL COST STUDY
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1. Review the literature on quality costs. Consult others in similar industries who have had experience with applying quality cost concepts.
2. Select one organizational unit of the company to serve as a pilot site. This unit may be one plant, one large department, one product line, etc.
3. Discuss the objectives of the study with the key people in the organization, particularly those in the accounting function. Two objectives are paramount: determine the size of the quality problem and identify specific projects for improvement.
4. Collect whatever cost data are conveniently available from the accounting system and use this information to gain management support to make a full cost study.
5. Make a proposal to management for a full study. The proposal should provide for a task force of all concerned parties to identify the work activities that contribute to the cost of poor quality. Work records, job descriptions, flowcharts, interviews, and brainstorming can be used to identify the activities.
6. Publish a draft of the categories defining the cost of poor quality. Secure comments and revise.
7. Finalize the definitions and secure management approval.
8. Secure agreement on responsibility for data collection and report preparation.
9. Collect and summarize the data. Ideally, this should be done by Accounting.
10. Present the cost results to management along with the results of a demonstration quality improvement project (if available). Request authorization to proceed with a broader company wide program of measuring the costs and pursuing projects.
Clearly, the sequence must be tailored for each organization.
Data Collection
1. Established accounts: Examples are appraisal activities conducted by an Inspection department and warranty expenses to respond to customer problems.
2. Analysis of ingredients of established accounts: For example, suppose an account called “customer returns” reports the cost of all goods returned. Some of the goods are returned because they are defective. Costs associated with these are properly categorized as “cost of poor quality.” Other goods may be returned because the customer is reducing inventory. To distinguish the quality costs from the others requires a study of the basic return documents.
3. Basic accounting documents: For example, some product inspection is done by Production department employees. By securing their names and the associated payroll data, we can quantify these quality costs.
4. Estimates: Input from knowledgeable personnel is clearly important. In addition, several approaches may be needed like:
a. Temporary records:
For example, some production workers spend part of their time repairing defective product. It may be feasible to arrange with their supervisor to create a temporary record to determine the repair time and thereby the repair cost. This cost can then be projected for the time period to be covered by the study.
b. Work sampling:
Here, random observations of activities
are taken and the percent of time spent in each of a number of predefined categories can then be estimated in one approach, employees are asked to record the observation as prevention, appraisal, failure, or first time work.
c. Allocation of total resources:
For example, in one of the engineering departments, some of the engineers are engaged part-time in making product failure analyses. The department, however, makes no provision for
charging engineering time to multiple accounts. Ask each engineer to make an estimate of time spent on product failure analysis by keeping a temporary activity log for several representative weeks. As the time spent is due to a product failure, the cost is categorized as a failure cost.
d. Unit cost data:
Here, the cost of correcting one error is estimated and multiplied by the number of errors per year. Examples include billing errors
and scrap. Note that the unit cost per error may consist of costs from several departments.
e. Market research data:
Lost sales revenue due to poor quality is part of the cost of poor quality. Although this revenue is difficult to estimate, market research studies on customer satisfaction and loyalty can provide input data on dissatisfied customers and customer defections.
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