COST OF QUALITY
A feature rich product or service that adds more value than competitors (this definition of quality costs more to produce because you have to add more value for the customer in order to sell it). 1 references how the customer values your product relative to your competition.
A defect free product or service (this costs less to produce because there are no defects and rework loops). 2 references your cost to produce, so it is impacting your profit. The customer will only see this if the life of the product is extended or the cost reductions are passed through price reductions to the customer.
Value goes to the customer, and cost refers to the cost to produce. So in this article we will focus on the second definition because we want to talk about the cost of quality to the producer.
Okay now that we have the definition of quality out of the way, let's talk about the Cost of Quality. Since we are talking about the cost to produce something, we want this cost to be minimized. We also want the cost to be stable and predictable, not something that swings wildly from month to month. With these objectives in mind we will affinitize any costs we can think of and bring some order to them. This will give us the opportunity to analyze the costs in groups and take appropriate action to eliminate those that drive our total cost higher.
Philip B. Crosby (another Quality guru) did this for us in his book Quality is Free. Let's start with breaking the cost into two parts. The cost of good quality (what we do to prevent defects from happening), and the cost of poor quality (what we do to fix defects when they happen). The cost of good quality can be broken down into appraisal costs and prevention costs. The cost of poor quality can be broken down into Internal costs and external costs. Now let's arrange them and draw an arrow below it to represent time.
The green boxes are an affinitization of costs and are generally not time related, while the blue arrow represents a flow of a product from design to the customer. This creates an imperfect analogy for several reasons, but the intent of the affinitized order and the arrow is to give a sense of flow of product to the customer and for defect propagation through the development process. As a defect propagates closer to the customer there is a multiple in the cost to fix the defect in the next stage. So if the desire is to minimize the total cost it would be a good idea to work from the most expensive external costs backwards to prevention costs. As we decrease the costs on the right it will increase the costs on the left. More on the subject can be found here.
Now let's list some examples of cost for External, Internal, Appraisal, and Prevention costs. As you review your margins you may be wondering what is soaking up all of the profits. This list will serve as a reminder of where to look.
External costs include:
Warranties
Warranty System
Post Warranty Repair
Service Agreements
Service Penalties
Sales Returns
Sales Allowances
Field Test Equipment
Field Inspection Equipment
Field Service Tracking Equipment
Field Service Labor
Field Testing Time
Field Testing Labor
Field Travel Costs
Field Troubleshooting
Field Waiting Time
Field Resource Coordination
Customer Complaint Handling
Product Recalls
Litigation
Litigation Avoidance
Litigation Losses
Insurance Premiums
Society imposed Penalties and Fines
Additional external costs that are indirectly related to the producer but are directly related to the customer's or society's use of your failing product are:
Loss of Productivity
Backup Inventory
Litigation
Environmental Losses
Internal Costs include:
Scrap
Rework
Repair
Sorting
Review
Troubleshooting
Time Value of Money
Material Downgrading
Additional Inventory
Administration Costs
Scheduling Conflicts
Waiting Time
Design Reviews
Loss of Productivity
Re-inspection
Retesting
Set-ups
Unpredictable P&L
Unpredictable Inventory
Unpredictable Delivery
Additional Internal costs that are indirectly related to the producer are:
Customer dissatisfaction
Loss of Reputation
Appraisal Costs include:
In process Inspection Time & Labor
Field Inspection Time & Labor
Inspection Equipment
Test Time & Labor
Test Planning Time & Labor
Increased Time To Market (Opportunity Costs)
Test Equipment
Test To Failure
Testing Facilities
Calibration of test & measurement equipment
Process Data Collection
Audits
Prevention Costs include:
Design Modeling
Virtual Data Correlation to Actual Results
Collaboration Planning
Collaboration Travel
Collaboration Software
Communication Costs
Collaboration Meetings
Quality Management System
Calibration Plans & Procedures
Measurement System Analysis
Preventative Maintenance Plans
DFMEA
PFMEA
Design Error Prevention Procedures
Capability Analysis
Special Characteristic Identification
Special Characteristic Avoidance
Data Correlation Activities
The costs people most frequently associate with quality are those they see or react to when they have to fix a problem. Like the Quality Management System, Inspection, Warranty, Scrap and Inventory. However when it's one of your suppliers that is having a problem with the quality of their product, you see a whole different set. Like missed delivery dates, scheduling, sorting, troubleshooting, inspecting and waiting. The fact is the cost of quality is full of hidden costs. The iceberg analogy showing what is often seen above the waterline vs. the hidden costs below is frequently used. Purposefully concentrating our efforts on increasing Prevention and Appraisal costs in order to reduce Internal and External costs, will grow the former, but will dramatically shrink the total cost of quality. For a copy of the QVATIS info-graphic on the Total Cost of Quality please join our mailing list at the bottom of the page.
If we analyze the whole list we see the cost of poor quality dominates the total cost of quality dramatically. That's because it requires a reaction. Depending on where and when the reaction is required can create dramatic spikes in the cost of countermeasures. Yet often our supplier choices are heavily weighted toward price quote, or we demand price improvements without regard to the impact on quality.
The focus on supplier price is because our businesses are measured in financial terms, usually short term metrics, and that is where our personal reward lies as well. Companies often give product managers a pat on the back and a bonus check if the project comes in ahead of schedule and under projected cost. If employee personal reward is visible in the supplier selection process, that is a good indication it is part of the company culture, and it is likely to be found in design, verification, validation, and manufacturing as well.
So for a company to get out of this cycle, it needs a cost of quality estimation, and a Cost of Quality metric built into its new product introduction process. This allows for a contrasting view to the low cost supplier, skipped verification process, sidestepped validation and un-investigated manufacturing processes. By reducing or eliminating the actual defects, we reduce or eliminate the reactive countermeasures which drive the lions share of quality costs. Lowering the amplitude of costs due to reactions makes the cost of quality more stable. Both the appraisal and preventative costs of quality are costs within the company's control, and by focusing on them the total cost becomes more predictable. These metrics bring the company to its goal of lowering the total cost of quality while improving the stability and predictability as well.
Without these metrics the company will regularly sacrifice company profit and brand reputation via the cost of poor quality for short term financials during product launch. If you need help determining your cost of poor quality give us a call. We can help.
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