Determining the Costs of Quality

Drissa Ouedraogo
Faciltator -Trainer-Consultant
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Head of Executive Education Programs

Groupe ISM
0
drissa.ouedraogo@ism.edu.sn
 Background
In a context of cut-throat competition, the survival of any business depends on its taking into
account customers’ needs. More than ever, “the customer is king”.

Customers’ criteria for choosing a good or service include the ones below:

⁍ Cost of ownership (purchase price + all cost-in-use of products)

⁍ Characteristics and performance;
⁍ Timeliness of work;
⁍ Reliability and maintainability;
⁍ User-friendly;
⁍ Non-polluting aspect;
⁍ Advice and service along with the product
⁍ …
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 Background
To get to sell products that meet all the
aforementioned criteria, companies should focus
on, manage and control quality at three levels:

⁍ organizational (process & procedures)

⁍ Technical (conformance to specifications)
⁍ Human (soft and hard skills)
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 Background
Customers and stakeholders (external an external)
expect:

⁍ Product and service conformance

⁍ Effectiveness and efficiency
⁍ Timeliness of work
⁍ Accurate costs
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 COURSE O UTLINE

0. Quality discussed

1. The purpose of determining the COQ

2. Taxonomy of COQ

3. Methodology for assessing the COQ

4. Reducing the COQ

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 Q uality Discussed

Quality: ISO 9001: 2015

” Aptitude of a set of inherent characteristics of

a product, a process or a system to meet the
requirements of customers and other stakeholders”
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 Q uality Discussed
The Quality Triangle

Goods and services meeting

Performance customers’ needs, requirements and
expectations

Goods and services

delivered in a timely
manner : Time Costs
Mindedness

Costs for producing goods and

services should be leveraged for
better efficiency, maintaining
Price/Quality ratio for customers
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 Q uality Discussed

The Value Creation Triangle

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 Q uality Discussed

The faces of Quality

QUALITY OF
LISTENING

QUALITY OF
TECHNICAL SPECIFICATIONS

QUALITY
OF DESIGN

QUALITY
OF PRODUCTION

QUALITY OF SERVICE
DELIVERY
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 Quality Cycle
Q uality Discussed

Customers Companies
Understand customers’ NRE

Expected Market studies Planned

Quality Quality

Measure customer Satisfaction

Measure Internal quality

monitoring
Planning,
Survey

Perceived Achieved
Quality Sales
Quality
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distribution
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 Q uality Discussed

EXTERNAL
REASONS

COMMERCIAL FINANCIAL
REASONS REASONS

WHY QUALITY ?

INTERNAL
TECHNICAL REASONS
REASONS
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 The purpose of determining COQ
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 The purpose of determining the COQ
Several methods can be used to launch a quality initiative in the organization. Among
which

The Identification of COPQ

Customer Satisfaction Survey
This approach is based on the analysis of all
Identification of the unmet the failures of the company in terms of costs
customer expectations, and in order to quantify them.
explicit and implicit needs. The a. How much do my failures cost?
organization converts the results of b. How much do I invest to correct or
the survey into a set of key prevent them?
requirements that should be The analysis may for example identify the
satisfied; and also serves as a functions where the COPQ is the most
template in the conduct of the significant yet easy to reduce. Management
quality system within the will use the results of this analysis to mark
organization. the implementation of quality processes in
the organization
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 The purpose of determining the COQ
“The costs of quality are used in making
decisions about large investments in capital
goods (...). They are taken into account in
business strategies for organizations to maintain
or improve their competitive position”.
FEIGENBAUM
Strategic
Purpose
”Speaking of money to Management... quality is
no longer something abstract, but a reality that
can compete with the concepts of cost and
deadlines“
HARRINGTON
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 The purpose of determining the COQ

“The costs of poor quality

provides a very useful instrument
Organizational for changing the way
Purpose Management and staff perceive
errors”.
HARRINGTON
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 The purpose of determining the COQ
Saves considerable money by reducing
certain direct costs of poor quality

Economic purpose
Reduces shortfalls (opportunity costs)
indirectly generated by poor quality.

Indirect COPQ due to a lack of team spirit

among personnel, poor reception, client
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dissatisfaction, etc.)
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 The purpose of determining the COQ

The study of the COPQ will result in the

report that will input the generation of an
action plan that highlights priority actions
Management tool
enable staff to take action to remove waste

PQ
CO ORT
R EP
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TAXONOMY OF COQ

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 T axonomy of COQ
Standard NF X50 126

👉 Internal Failure Costs (IFC)

👉 External Failure Costs (EFC)

👉 Appraisal Costs (AC)

👉 Prevention Costs (PC)

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 T axonomy of COQ
Internal Failure Costs (IFC) are incurred to remedy defects
discovered before the product or service is delivered to the
customer. These costs occur when the results of work fail to reach
design quality standards and are detected before they are
transferred to the customer. They could include:
👉Waste: performance of unnecessary work or holding of stock as a
result of errors, poor organization, or communication
👉Scrap: defective product or material that cannot be repaired, used,
or sold
👉Rework or rectification: correction of defective material or errors
👉Failure analysis: activity required to establish the causes of internal
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product or service failure

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 T axonomy of COQ
External Failure Costs (EFC) are incurred to remedy defects
discovered by customers. These costs occur when products or
services that fail to reach design quality standards are not detected
until after they are transferred to the customer. They could
include:
👉Repairs and servicing of both returned products and those in the
field
👉Warranty claims: failed products that are replaced or services that
are re-performed under a guarantee
👉Complaints: all work and costs associated with handling and
servicing customers’ complaints.
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👉Returns: handling and investigation of rejected or recalled

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 T axonomy of COQ
Cost of Non Conformity (CNC) = Cost of failures (IFC+EFC)

Dimension Internal failures External failures

Error detected after the

error detected before
product/service is
Definition the product / service is
delivered (detected by
delivered
customers)

Example Rework Complaints

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Adapted from ANAES/Service d’Évaluation Économique/Septembre 1998 21

 T axonomy of COQ
Appraisal Costs (AC) are associated with measuring and
monitoring activities related to quality. These costs are
associated with the suppliers’ and customers’ evaluation of
purchased materials, processes, products, and services to
ensure that they conform to specifications. They could
include:
👉Verification: Checking of incoming material, process setup,
and products against agreed specifications
👉Quality audits: Confirmation that the quality system is
functioning correctly
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👉Supplier rating: Assessment and approval of suppliers of 22

 T axonomy of COQ
Prevention Costs (PC) are incurred to prevent or avoid quality
problems (failures). These costs are associated with the design,
implementation, and maintenance of the quality management system.
They are planned and incurred before actual operation, and they
could include:
👉Product or service requirements: Establishment of specifications
for incoming materials, processes, finished products, and services
👉Quality planning: creation of plans for quality, reliability,
operations, production, and inspection
👉Training: Development, preparation, and maintenance of programs
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 T axonomy of COQ
Costs Of Conformity (COC) = AC+PC

Dimension Prevention Appraisal

Prevent errors and

Error appraisal
Definition build quality in the
Activities
processes

Example Staff training Process audit

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Adapted from ANAES/Service d’Évaluation Économique/September 1998 24

 T axonomy of COQ
NF X50 126

Costs of Obtaining Quality (COQ)

Internal External Appraisal Prevention

Failures + Failure + Costs (AC) + Costs (PC)
Costs (IFC) Costs (EFC)

Costs of Non Conformity (CNC) Costs of Obtaining

Conformity (COC)
Cost of poor Quality (CoPQ)
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Cost of Good Quality

CoGQ) 25
 T axonomy of COQ
Non-Quality generates secondary
or indirect costs which are not
known because they are
supported directly by the
customer and therefore have an
impact on his loyalty.

For example, a missing or

defective small part leads to
searches and wasted time that can
reach several times its value.

So it seems more judicious, to

properly define the Costs of of
Quality, to refer to the elements of
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A.J. HARRINGTON in his book

entitled The Cost of Non-Quality.
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 T axonomy of COQ
Controllable Costs
(Cost of quality Appraisal Costs
Function)
Prevention Costs

Costs resulting
from poor quality

Internal Failure Costs

External Failure Costs

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Cost of equipment
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 T axonomy of COQ

Costs of losing
reputation
Costs of
Costs supported
Customer
by customers
dissatisfaction

Administrative Costs of poor quality

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 T axonomy of COQ
2. Shortfall

Margin Margin
1. Costs of
The standard NF X50-126
failures “Evaluation Guide of the costs
resulting from poor-quality”
Turnover

Company
locates the costs of poor
overall Costs Company quality in both areas of shaded
overall Costs diagram opposite

Before cost After costs

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reduction reduction
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 T axonomy of COQ
Two types of potential gains:

1- reduction of certain costs (direct

costs of poor quality)
Cost of Poor
2- reduction of shortfalls (opportunity
Quality
costs) indirectly generated by poor
quality.

Indirect COPQ due to a lack of team

spirit among personnel, poor
reception, client dissatisfaction, etc.)
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 METHODOLOGY FOR ASSESSING THE COQ
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 M ethodology for assessing the COQ
Next, the choice of a
Example
reference model : two NF X50-126
possibilities
1-Standards « Evaluation Guide of
the Costs resulting
from non quality »

A personalized check-list adapted and

written in the vocabulary of the
organization (jargon).
2-Reference model
(written by the company) Objective :
List of the COPQ through 3 big
functions (administrative and
finance, commercial and technical)
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 M ethodology for assessing the COQ
Set up a group which is representative of all company areas :
Budget control, Accounting, Finance, etc.

Steps in writing the reference model:

1. Write a document
2. Determine the field of action to control costs
3. Split into different sectors of activities
2-The reference model
•Administration-Finance
(written by the company) •Commercial
•Technical
•Etc.
4. For each sector, find out the 4 taxonomy components:
•Prevention
•Appraisal
•Internal Failure
•External Failure
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 M ethodology for assessing the COQ
General accounting
(example : assessment of the expenses accounts
Quantified and of the ledger)
quantifiable sources
Cost accounting)
(example : budgetary control, indirect cost
allocation methods, etc.)

Administrative, technical and commercial

documents
Estimated sources Sample survey (internal or external)
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Estimations by the personnel 34

 M ethodology for assessing the COQ
Costing and cost analysis

An objective costing : Do not underestimate, nor overestimate data

Tools for costing

1- General and cost accounting

Analyze expenses accounts on a yearly basis, if possible the last financial year

2- Estimation
it should be made based on the « zero defect » ; consideration should be given
to what the company could realize if processes were normally organized.
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 M ethodology for assessing the COQ
Costing and cost analysis (example)

Sources of information Costing model

General
COPQ Cost accounting Others Recorded estimated
accounting

Internal failure
-scraps x x
External failure
-complaints x x
Appraisal Cost
-financial audit x x
Prevention Cost
-training x x
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 REDUCING THE COQ
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 R educing the COQ
Three big steps in
the process of
reducing the COQ
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 R educing the COQ
An organization that initiates the implementation of actions for the removal of non-quality
1 (or has no clear policy for their abolition): failures are still important.

Cost of Quality
•investments
•prevention
Cost of failures
•internal
•external
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 R educing the COQ
An organization that is fairly advanced in the implementation of actions for the removal
2 of non-quality: failure costs on one hand, and prevention and appraisal costs on the
other hand, even.

Cost of failures Cost of Quality

•investments
•internal
•prevention
•external
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 R educing theCOQ
An organization that is very advanced in the implementation of actions for the
3 removal of non-quality: investments in prevention and appraisal have enabled to
reduce internal and external failures.

Cost of failures
•internal
•external Cost of Quality
•investments
•prevention
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 R educing the COQ
A good communication and awareness-raising of key actors is
paramount for reducing considerably and sustainably the costs Top Management
of poor conformity 200 ProductionCosts
195
190 Unit Price

llars
185
180 Profits

Do
175

Millionsof
170
165
160
155

As a decision- making body, top management should be

150
1990 1991 1992

aware of the reduction of costs of poor quality. It is important

to use relevant ratios to communicate and draw management’s
attention (see slide 45).

The personnel should be highly involved in reducing costs, it is

therefore important that they be informed and aware of the
necessity of reducing costs
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 R educing the COQ
Use pertinent ratios depending on the message you want to convey

Enables to see the rate of non conformity against the COQ and assess
CNC/COQ the quality system

PC/COC
Enables to know whether the organization has a prevention
AC/COC policy or a correction policy in handling failures

to assess:
CNC/SF
The shortfall due to non conformity over the SF.
COQ/SF The weight of COQ on the SF

CNC/ To mobilize staff so that they change the way they perceive
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Workforce errors
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 R educing the COQ
COQ= IFC+EFC+AC+PC

yet IFC + EFC = CNC

and AC+ PC = COC ==> COPQ = COC + CNC

Best case scenario: COPQ = COC ==> CNC= 0

The objective is to reach the ZERO DEFECT as advocated by Crosby

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