The Challenging Cost of Quality

Abigail Heller's picture

According to the American Society of Quality (ASQ), the cost of quality is the price of not creating a product or service. In other words, the calculation measures the waste or losses associated with producing a poor quality product. Costs rise when rework, retesting, or rebuilding happens, as the extra time spent fixing a product or service increases the associated costs.  

APQC’s Best Practices Study Using Enterprise Quality Measurement to Drive Business Value found that among the 21 study participants, quality measures have:

  • no standard definition,
  • no standard components, and
  • no common calculation. 

Many times, organizations don’t calculate the cost of quality because they are unsure of how to best approach it, and very few have elevated this issue to an enterprise-wide concern. Yet the demand for this type of measure remains high: Organizations want to be able to calculate and benchmark the cost of quality.

Of the groups who participated in this APQC study, 11 had measures to capture the cost of quality for their organizations. The Sample Cost of Quality Calculations offers six of these different calculations. One company focuses on three distinct areas: rework, scrap, and customer quality related returns; another uses nonconformance to guide this process. Still another uses returns and allowances divided by gross sales.

These differences in approach lead to several questions:

  • Why is cost of quality so challenging?
  • What factors are relevant in this calculation? How do you calculate it?
  • What can organizations do to promote calculating the cost of quality?

Weigh in. What are your thoughts?

6 Comments

Anonymous's picture

It is tough and complicated to actually calculate cost of Quality. Leave aside calculate, it is difficult to reach an organizational consensus on what is actually to be considered cost of quality... Will give an example : There is a field issue reported. Now what should be considered cost of quality?

1) Rework labour cost

2) Rework part cost

3) Customer Good will loss

4) Time and efforts to analyze and come to a corretive action.

5) Time and efforts to analyze and come to a preventive action.

6) Cost of decision taking (i.e manhours lost in meetings etc to discuss and decide)

7) Training cost of employees to train them on to techniques to avoid those failures and motivational training of the employees to keep up spirits despite failures.

8) Opportunity loss cost and many more.....

The entire system needs adequate time at the planning and the devlopment stage which most of the organizations fail to invest. and end up capturing just the customer repair and return cost as the Cost of quality.

Abigail Heller's picture

Excellent example that illustrates the difficulty of this calculation. And mentioning the key aspect of starting during planning/development points to the attention these matters deserve.

Anonymous's picture

Thanks for liking the intent

Amit
akmakkar@Gmail.com

Cyrilsunil's picture

Good one !
Measuring cost of quality is difficult. However classifying the cost during Appraisal, Prevention and Failure of product could help to estimate. But practicle issues make it cumbersome and organizationa fail to corelate.

Travis Colton's picture

Cyril…I think you bring up an excellent point about measuring CoQ from more than one point in the product or service value stream. Granularity of analysis, especially with complex measures such as CoQ, has a lot of benefit but comes with a big price tag.  The more information about where CoQ issues are occurring can provide tremendous insight into potential practices or process that can be improved, perhaps even making CoQ a more leading indicator of performance, but the cost of collecting skyrockets. Balancing that is the art of the science.  My hope is that some of the recent work done by an AIA committee on standardizing CoQ will come to light in the next couple of months and we’ll be able to start talking and comparing how we go about defining and using CoQ.

Travis

Anonymous's picture

BS 6143 has two parts for standardizing quality costing. One specifies the PAFF model were the costs of Prevention are increased to reduce the costs of Appraisal, internal Failure and external Failure. The second part specifies the Process Model (after Crosby) where costs are either part of the Cost of Conformity or the Price of Nonconformity (PONC). Phil Crosby defined quality as "Conformity to Customer Requirements" so it could be managed in 1979 (in his book "Quality is Free").

It is easy to reduce PONC to zero. Serve no customers and delivery no product! Therefore, we need notionally to think in terms of the rate at which the system (or its core processes) adds value in $ per millisecond.

We need our management systems to provide us with both metrics so we know where to focus our optimization efforts.