21 Cost of Quality
Sudhanshu Joshi
Learning Objectives:
The Learning objectives of the module are to address the following questions:
1. To understand the meaning and scope of Quality and its cost.
2. To analyze the dimensions of Product Quality
3. To understand how poor quality can be evaluated and can be minimized.
1. Introduction:
Some of these consequences of poor quality include loss of business, liability, decreased productivity, and increased costs. However, good quality has its own costs, including prevention, appraisal, and failure. A recent and more effective approach is discovering ways to prevent problems, instead of trying to fix them once they occur. This will ultimately decrease the cost of good quality in the long run.Quality is defined as the ability of a product or service to consistently meet or exceed customer requirements or expectations. Different customers will have different expectations, so a working definition of quality is customer-dependent. When discussing quality one must consider design, production, and service. In a culmination of efforts, it begins with careful assessment of what the customers want, then translating this information into technical specifications to which goods or services must conform. The specifications guide product and service design, process design, production of goods and delivery of services, and service after the sale or delivery.
2. Dimensions of Quality
2.1 The following dimensions are covered under Product Quality.
a) Performance– main characteristics of the product
b) Aesthetics– appearance, feel, smell, taste
c) Special features– extra characteristics
d) Conformance– how well the product conforms to design specifications
e) Reliability– consistency of performance
f) Durability– the useful life of the product
g) Perceived quality– indirect evaluation of quality
h) Service-ability– handling of complaints or repairs
2.2 The following dimensions are covered under Service Quality.
a) Convenience– the availability and accessibility of the service.
b) Reliability– ability to perform a service dependably, consistently, and accurately.
c) Responsiveness– willingness to help customers in unusual situations and to deal with problems.
d) Time– the speed with which the service is delivered.
e) Assurance– knowledge exhibited by personnel and their ability to convey trust and confidence.
f) Courtesy– the way customers are treated by employees.
g) Tangibles– the physical appearance of facilities, equipment, personnel, and communication materials.
h) Consistency– the ability to provide the same level of good quality repeatedly.
3. Cost of Poor Quality
The term Cost of poor quality (COPQ) is defined as the costs associated with providing poor quality products or services. There are four categories: internal failure costs (costs associated with defects found before the customer receives the product or service), external failure costs (costs associated with defects found after the customer receives the product or service), appraisal costs (costs incurred to determine the degree of conformance to quality requirements) and prevention costs (costs incurred to keep failure and appraisal costs to a minimum).
4. Determinants of Quality
a) Quality of Design – intention of designers to include or exclude features in a product or service. The starting point of producing quality in products begins in the “design phase”. Designing decisions may involve product or service size, shape and location. When making designs, designers must keep in mind customer wants, production or service capabilities, safety and liability, costs, and other similar considerations.
b) Quality of conformance– refers to the degree to which good sand services conform to the intent of the designer. Quality of conformance can easily be affected by factors like: capability of equipment used, skills, training, and motivation of workers, extent to which the design lends itself to production, the monitoring process to assess conformance, and the taking of corrective action.
c) Ease of use – refers to the ease of usage of the product or services for the customers. The term “ease of use” refers to user instructions. Designing a product with “ease of use” increases the chances that the product will be used in its intended design and it will continue to function properly and safely. Without ease of use, companies may lose customers, face sales returns, or legal problems from product injuries. Ease of use also applies to services. Manufacturers must make sure that directions for unpacking, assembling, using, maintaining, and adjusting the product are included. Directions for “What to do when something goes wrong” should also be included. Ease of use makes a consumer very happy and can help retain customers.
d) Services offered to the customer after delivery. There will be times when products may fail or problems with usage may occur. This is when “Service after delivery” is important through recall and repairs of the product, adjustment, replacement or buys back, or re-evaluation of a service.
5. Quality as tool for competitive advantage
Having good quality is a competitive advantage against others who offer similar products or services in the marketplace.
In addition, good quality can:
- Rationalize Premium Prices
- Decrease Liability Costs
- Increase Productivity
- Increase Customer Loyalty
- Increase Customer Satisfaction Consequences include:
- Loss of business and existing market share
- Legal liability
- Lack of productivity
- Increased costs
- Raise Company’s Reputation
6. Consequences of Bad Quality
There are numerous consequences with poor quality products which can affect a business and a customer in many different ways. Whether it is a small or large problem, the magnitude of the problem always affects someone at some point. When a product is designed poorly or lacks in quality, customers recognize that very quickly, and it can quickly lead to a problem for the business. It does not matter whether the company is a product or a service oriented company because poor quality will always, most likely, create negative affects for the firm. Eventually, the low cost input in the R&D department and the using cheaper materials will lead to loss of business. Therefore, due to the cost associated with satisfying the customer, it is best to fix problems in the design phase rather than dealing with it after it’s in the hands of a customer. The sooner the problem with a product or service is identified and remedied, the better.
7. Quality tools and Standards
a) ISO 9000 (which is a set of international standards on quality management and quality assurance, critical to international business)
b) ISO 14000 (a set of international standards for assessing a company’s environmental performance).
c) Total Quality Management
d) Check Sheet
e) Histogram
f) Check Sheet
g) Histogram
h) Pareto Analysis
i) Cause and effect diagram
8. Important contribution in quality
9. Dimension of Quality
10. Total Quality Management
Total quality management (TQM) is a constant pursuit of quality that involves everyone in an organization. The driving force is customer satisfaction; a key philosophy is continuous improvement. The Japanese use the term kaizen to refer to continuous improvement. Training of managers and workers in quality concepts, tools, and procedures is an important aspect of TQM. Teams are an integral part of TQM. Two major aspects of the TQM approach are problem solving and process improvement. Six-sigma programs are a form of TQM. A six-sigma improvement project typically has one or more objectives such as: reducing delivery time, increasing productivity, or improving customer satisfaction. They emphasize the use of statistical and management science tools on selected projects to achieve business results. There are seven basic quality tools that an organization can use for problem solving and process improvements. A flowchart is a visual representation of a process. As a problem-solving tool, a flowchart can help investigators in identifying possible points in a process where problems occur. The diamond shapes in the flowchart represent decision points in the process, and the rectangular shapes represent procedures. They show the direction of “flow” of the steps in the process arrows.
11. Classification of Cost of Quality
Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal and external failure costs.
a) Prevention costs: Prevention costs are incurred to prevent or avoid quality problems.
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:
i. Product or service requirements—establishment of specifications for incoming materials, processes, finished products, and services
ii. Quality planning—creation of plans for quality, reliability, operations, production, and inspection
iii. Quality assurance—creation and maintenance of the quality system
iv. Training—development, preparation, and maintenance of programs
b) Appraisal Cost: Appraisal costs 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:
i. Verification—checking of incoming material, process setup, and products against agreed specifications
ii. Quality audits—confirmation that the quality system is functioning correctly
iii. Supplier rating—assessment and approval of suppliers of products and services
12. Cost of Quality and Organizational Objectives : The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one. These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities. Cost of quality is also an important communication tool. Philip Crosby demonstrated what a powerful tool it could be to raise awareness of the importance of quality. He referred to the measure as the “price of non-conformance” and argued that organizations choose to pay for poor quality.
Many organizations will have true quality-related costs as high as 15 to 20 percent of sales revenue, some going as high as 40 percent of total operations. A general rule of thumb is that costs of poor quality in a thriving company will be about 10 to 15 percent of operations. Effective quality improvement programs can reduce this substantially, thus making a direct contribution to profits.
The quality cost system, once established, should become dynamic and have a positive impact on the achievement of the organization’s mission, goals, and objectives.
Quality costs fall into two categories:
- The cost of achieving good quality, also known as the cost of quality assurance,
- The cost associated with poor-quality products, also referred to as the cost of not conforming to specifications.
Cost of achieving good Quality
The costs of a quality management program are prevention costs and appraisal costs. Prevention costs are the costs of trying to prevent poor-quality products from reaching the customer. Prevention reflects the quality philosophy of “do it right the first time,” the ultimate goal of a quality management program. Examples of prevention costs include the following: Quality planning costs: The costs of developing and implementing the quality management program.
Product design costs: The costs of designing products with quality characteristics. Process costs: The costs expended to make sure the productive process conforms to quality specifications.
Training costs: The costs of developing and putting on quality training programs for employees and management.
Information costs: The costs of acquiring and maintaining (typically on computers) data related to quality, and the development and analysis of reports on quality performance.
Appraisal costs are the costs of measuring, testing, and analyzing materials, parts, products, and the productive process to ensure that product quality specifications are being met. Examples of appraisal costs include the following:
Inspection and testing: The costs of testing and inspecting materials, parts, and the product at various stages and at the end of the process. Test equipment costs: The costs of maintaining equipment used in testing the quality characteristics of products. Operator costs: The costs of the time spent by operators to gather data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality.
In a service organization appraisal costs tend to be higher than in a manufacturing company and, therefore, are a greater proportion of total quality costs. Quality in services is related primarily to the interaction between an employee and a customer, which makes the cost of appraising quality more difficult. Quality appraisal in a manufacturing operation can take place almost exclusively in-house; appraisal of service quality usually requires customer interviews, surveys, questionnaires, and the like.
Internal and external failure costs
Internal failure costs tend to be low for a service, while external failure costs can be quite high. A service organization has little opportunity to examine and correct a defective internal process, usually an employee-customer interaction, before it actually happens. At that point it becomes an external failure. External failures typically result in an increase in service time or inconvenience for the customer. Examples of external failures include a customer waiting to place a catalog phone order; a catalog order that arrives with the wrong item, requiring the customer to repackage and send it back; an error in a charge card billing statement, requiring the customer to make phone calls or write letters to correct it; not sending a customer’s orders or statements to the correct address; or an overnight mail package that does not arrive overnight.
Measuring and reporting Quality Cost
Collecting data on quality costs can be difficult. The costs of lost sales, of responding to customer complaints, of process downtime, of operator testing, of quality information, and of quality planning and product design are all costs that may be difficult to measure. These costs must be estimated by management. Training costs, inspection and testing costs, scrap costs, the cost of product downgrading, product return costs, warranty claims, and liability costs can usually be measured. Many of these costs are collected as part of normal accounting procedures.
Management wants quality costs reported in a manner that can be easily interpreted and is meaningful. One format for reporting quality costs is with index numbers, or indices. Index numbers are ratios that measure quality costs relative to some base value, such as the ratio of quality costs to total sales revenue or the ratio of quality costs to units of final product. These index numbers are used to compare quality management efforts between time periods or between departments or functions. Index numbers themselves do not provide very much information about the effectiveness of a quality management program. They usually will not show directly that a company is producing good- or poor-quality products. These measures are informative only when they are compared to some standard or other index. Some common index measures are:
i. Labor index: The ratio of quality cost to direct labor hours; it has the advantage of being easily computed (from accounting records) and easily understood, but it is not always effective for long-term comparative analysis when technological advances reduce labor usage.
ii. Cost index: The ratio of quality cost to manufacturing cost (direct and indirect cost); it is easy to compute from accounting records and is not affected by technological change.
iii. Sales index: The ratio of quality cost to sales; it is easily computed, but it can be distorted by changes in selling price and costs.
iv. Production index: The ratio of quality cost to units of final product; it is easy to compute from accounting records but is not effective if a number of different products exist.
Quality and Cost relationship
The Japanese first recognized that the costs of poor quality had been traditionally underestimated. These costs did not take into account the customer losses that can be attributed to a reputation for poor quality. Costs of poor quality were hard to quantify, so they were ignored. The Japanese viewed the cost associated with a reputation for poor quality to be quite high. The traditional quality-cost relationship does not reflect the total impact of an effective quality management program on a company’s performance. A General Accounting Office report on companies that were Baldrige Quality Award finalists has shown that corporate-wide quality-improvement programs result in higher worker motivation, improved employee relations, increased productivity, higher customer satisfaction, and increased market share and profitability.Companies committed to TQM believe that the increase in sales and market share resulting from increased consumer confidence in the quality of their products offsets the higher costs of achieving good quality. Further, as a company focuses on good quality, the cost of achieving good quality will be less because of the innovations in technologies, processes, and work methods that will result from the quality-improvement effort. These companies frequently seek to achieve 100 percent quality and zero defects.
Another reason for Japanese success has been their commitment to achieving quality at minimum cost. One way they have done this is to focus more on improving the capabilities and training of employees, getting them more involved in preventing poor quality and focusing less on “engineering” solutions. The Japanese have also concentrated on improving quality at the new product development stage instead of trying to build in quality during the production process for products already developed. This tends to reduce appraisal costs. Finally, the Japanese recognized that if they provided higher-quality products, they could charge higher prices. The traditional view of quality costs implied that a “satisfactory” quality level was optimal because higher levels of quality would require prices higher than the customer would be willing to pay to offset the higher costs. The Japanese showed that this was not the case; in fact, they created a market for higher quality, for which consumers were willing to pay.
Summary
Quality improvement, as initiated by Japanese companies, was not intended to improve profitability but to gain customer focus and be more competitive. Quality management was considered to be a longer-term commitment than simply short-run cost savings and profits. However, quality management has been around now for more than a decade, and researchers have begun to look at it to see if it has been profitable.
Some research studies suggest that quality management does not contribute to the “bottom line.” A survey of 5,000 U.S. firms showed that only a third of the companies’ bottom lines benefited from TQM. A similar study of 100 British companies showed an 80 percent failure rate of TQM based on profitability as a measure of success. However, such results must be observed cautiously. Many companies in these surveys implemented TQM programs without the total commitment required for their success. These studies also take a short-run view of success, failing to recognize that TQM typically results in a decline in profitability in the short run with the promise of greater financial rewards in the long run.
Suggested Readings:
a) Simons (2011): Operations Management: A Modern Approach. Apple Academic Press.
b) Wilson(2014): A Comprehensive Guide to Project Management Schedule and Cost Control: Methods and Models for Managing the Project Lifecycle. Pearson FT Press
c) Sollish and Semanik (2012): The Procurement and Supply Manger’s Desk Reference. Wiley.
d) Schonsleben (2007): Integral Logistics Management: Operations and Supply Chain Management in Comprehensive Value-Added Networks. Auerbach Publications.