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Measuring The Cost of Quality: Executive Summary
Measuring The Cost of Quality: Executive Summary
Measuring The Cost of Quality: Executive Summary
E x ecutive s umm a r y
The cost of poor quality in manufacturing companies ranges from 5 percent to 35 percent of your sales dollar. In service organizations, it ranges from 25 percent
to 40 percent. Despite that, measuring a company’s quality costs is difficult. The drive to increase quality to the ultimate level of perfection requires managers to
support an integrated approach to measuring and improving quality.
Executives may be surprised to learn most, companies do not really know success factor for most businesses.
that researchers estimate that the what their quality costs are because of High quality is necessary to survive.
costs of poor quality in manufac- the difficulty in measuring them. Many, • Because some quality costs are
turing companies average around 15 if not most, hidden or intangible, they are difficult
percent, with a range from 5 percent Why are quality costs important? companies to control and, in some instances,
to 35 percent of your sales dollar, Aside from the fact that poor quality do not really could cause a crisis in a company.
depending on product complexity. In may represent a large portion of total know what • The quality concept continues to
service organizations, it averages 30 costs, there are other reasons to be their quality evolve; as a result, the standard by
percent, with a range from 25 percent interested in quality costs. costs are. which we measure quality keeps
to 40 percent. For most managers, changing.
this is significant enough to get their • Quality — along with costs, response • Finally, there are differences between
attention. Unfortunately, many, if not time and flexibility — is a critical product quality and service quality.
14 Industrial Management
As companies increase their mix of to the customer, costs that would story? Identify quality issues early,
product and services, they need to disappear if there were no defects. and eliminate them, even if it takes
differentiate between the two insofar Examples include scrap, rework, failure an invention.
as measuring quality. analysis, scrap and rework supplies, Appraisal costs are costs incurred in
sorting inspection, reinspection and determining the degree of conformance
What are quality costs? retesting, avoidable process losses and Prevention to quality requirements. They include
The American Society of Quality (ASQ) downgrading. costs are incoming inspection and testing,
defines quality costs, or “the cost of In the early 1990s, when a sweeper costs incurred in-process inspection and testing, final
quality,” as follows: manufacturer was implementing in keeping inspection and testing, product quality
businessman and author Phil Crosby’s failure and audits, maintaining accuracy of testing
“The ‘cost of quality’ is a term that’s widely quality improvement process, the appraisal equipment, inspection and testing of
used — and widely misunderstood. It isn’t engineers hit upon a way to detect costs to a materials and services, and evaluation
the price of creating a quality product or and eliminate internal failures. They minimum. of stock (inventory) for degradation.
service. It’s the cost of not creating a quality gave every workstation an air grinder. In the late 1970s, snowmobiles had a
product or service. Any cost that would not Every time engineers heard the air notorious reputation for poor reliability.
have been expended if quality were perfect grinders’ screams, they investigated A major manufacturer decided to
contributes to the cost of quality. Quality and set up a team to eliminate the improve its product line. In addition
costs are the total of the cost incurred by cause. Gradually the screams became to an increase in prototype testing,
investing in the prevention of nonconfor- less frequent; however, it took almost engineers restructured the assembly
mance to requirements, appraising a product a year before the company could quit process completely. This opportunity
or service for conformance to requirements, using the grinders. Because engineers existed because the business was
and failing to meet requirements. The sum of had reduced structural variances, the seasonal, so the plant remained unused
these costs represents the difference between company increased output by half for half of the year. Instead of a serial
the actual cost of a product or service and a sweeper a day with no increase in process, engineers set up subassembly
what the reduced cost would be if there were labor costs. operations with integral inspection
no possibility of substandard service, failure External failure costs are costs operations. Therefore, the engineers
of products or defects in their manufacture.” associated with defects that are found knew that all final line components
after the product is shipped to the were OK before they were installed on a
The Association for Operations customer. These costs include warranty unit. End-of-line failures and warranty
Management dictionary defines quality charges, complaint adjustment, costs were reduced significantly in the
costs as “the overall costs associated returned material and allowances. following year.
with prevention activities and the A major automotive manufacturer Prevention costs are costs incurred
improvement of quality throughout the implemented a reliability improvement: in keeping failure and appraisal costs
firm before, during and after production replacing ignition points with an to a minimum. They include quality
of a product.” electronic module that provided the planning, new product review, process
These definitions suggest quality same function. After approximately control, quality audits, supplier quality
costs can be associated with products six months of production (500,000 evaluation and training.
and services, an area of responsi- vehicles), modules were being returned In the late 1980s, a manufacturer of
bility usually assigned to accounting. under warranty by the dealers, but forestry equipment identified an oppor-
However, being able to define cost they were “nondefective” (They tested tunity to reduce warranty costs and
elements and actually reporting them in OK in the lab.). More importantly, the assembly time dramatically. Forestry
a usable format are two different things. customers’ problems were not fixed. equipment is subjected to one of the
At the same time the vehicles had worst operating environments in the
Tangible quality costs intermittent fuel filter clogging. Both industrial world. After less than six
Both ASQ and APICS classify the failures produced the same symptom: months in operation, an operator could
tangible quality costs as internal The car stops running, but only for not even determine the equipment’s
failure, external failure, appraisal and an hour or so. Then the car operates original color. Engineers implemented
prevention costs. This classification again. To solve everyone’s problems just-in-time practices, reducing the
is widely accepted as the prevention, (customers, dealers and company), need for inventory storage. Engineers
appraisal and failure (PAF) model. engineers invented a tester that had to redesign many of the structural
Internal failure costs are those identified the culprit and provided components, nest the flame-cutting
costs associated with defects testers to 6,000 dealers. This saved patterns based on model needs instead
(nonconformance) that are found significant emotions, bad press and of by part numbers, and only prep and
prior to shipment of the product untold expenses. The moral of the paint subassemblies needed for the
july/august 2010 15
Quality spending accountants loved the engineers. In
addition, workers did not need to work
costs of quality as hard because engineers had reduced
300
most of the variances.
These costs are tangible. However,
250
as described later, they are not always
Total annual costs
200
easily determined.
150
Intangible, or hidden, quality costs
In addition to the tangible prevention,
100 appraisal and failure costs, there are
hidden, or intangible, costs. Conven-
50 tional accounting systems have been
inadequate to report the costs of poor
0 quality accurately. Some of the hidden
1 2 3 4 5 6 7 8 9 10
levels of quality
costs, originally reported in the third
edition of J.M. Juran’s Quality Planning
Internal failure External failure Appraisal Prevention Total
and Analysis, are:
Figure 1. This original cost of quality (COQ) model is adapted from J.M. Juran and Frank
M. Gryna’s 1993 book, Quality Planning and Analysis, Third Edition.
• potential lost sales
• costs of redesign due to quality
reasons
Near perfect • costs of changing manufacturing
costs of quality
processes inadequate to meet
300 quality standards
• costs of software changes due to
250 quality reasons
• costs included in standard costs
Total annual costs
Figure 2. This COQ model shows the total quality cost curve continuing to decrease as Demands on management time also
quality approaches perfection. can be a hidden cost. Problems of any
sort require the time of managers to
resolve, and few, if any, systems record
final line. By clustering all the parts work days instead of the previous best how CEOs spend their time.
needed for a given model, engineers time of 28 work days. Customers also In addition to the hidden costs that
reduced the number of different thick- could receive their complex tractors in may be difficult to dig out of accounting
nesses of steel from nine to four, two weeks instead of two months. systems, other intangible costs are
resulting in additional savings through These improvements required even more difficult to determine. They
smart buying. Because of the size of significant labor flexibility, engineering include costs associated with sales lost
the manufacturer’s orders, it could creativity, organizational revisions when a company’s acceptance in the
buy from the mill instead of from the and commitment by everyone during marketplace may be eroded because of
distributor. Investment velocity was the nearly two years of planning and product recalls or bad publicity from
increased because the company now implementation. The result was that association with suppliers operating
could produce any of its models in eight customers and holding company sweatshops or child labor factories.
16 Industrial Management
Quality revenue total quality cost curve continues
to decrease as quality approaches
perfection. Juran and Frank M. Gyrna
300
call this the COQ curve in emerging
processes. The authors attribute it to
250
the learning process and discovery of
quality costs and profits