Information & Training. | Quality Assurance. Quality Management.
Quality Costs.The application of a “cost of quality” analysis can be one of the most effective methods for the identification and understanding of the costs related to the quality efforts within an organization. Quality activities in place can be critically reviewed to determine their effectiveness, also when new quality improvement programs are introduced the effectiveness of such programs can be analyzed via quality costing to determine the level of original objective achievement.
The cost of quality relates to those costs associated with the delivery of “fit for purpose” products and services. Such costs encompass activities directed towards ensuring customer expectations are delivered upon, include costs related to preventing customer dissatisfaction, and those costs related to correcting instances where customer experiences are below expectations.
The original focus on cost of quality is widely attributed to Dr. Joseph Juran. The widely applied PAF approach, “Prevention, Appraisal, Failure” was developed by Feigenbaum. Quality costs analysis was further developed into the costs associated with “conformance versus non-conformance”, then the opportunity cost model was developed. (Marsh & Ross, Sandoval- Chavez respectively). Further approaches have continued to develop the area of cost of quality analysis.
One of the challenges associated with cost of quality, is the ability within an organization to efficiently capture all relevant data. Data collection itself can be a cost in terms of time and resources collecting the data, plus resources applied in interpreting the data. In theory an analysis and improvement effort based on “cost of quality” can only be effective if all relevant data is applied, however, in reality once the key quality costs are identified and understood significant improvements can be implemented within an organization, a process or a product..
The “cost of quality” can be broker down in three basic categories:
Cost of conformance
Cost of non-conformance
The “cost of conformance” will encompass both prevention and appraisal costs.
Appraisal costs will include activities such as incoming inspection, in-process testing, final test, laboratory analysis, process audits, product audits, the appraisal costs associated with the quality function, … etc…
Prevention costs will include the costs associated with the supplier development, supplier auditing, development of standards, staff training, costs associated with product or process certification, equipment facility maintenance, the preventative element of CAPA activities, …. etc…
There may be a significant level of overlap between prevention and appraisal costs. For example, are the costs associated with a process audit appraisal or preventative. If the audit is seen as verifying that activities conform to expectations, then such costs would seem to relate to appraisal activities. However, if an audit is performed with the intention of ensuring that a process does not deviate out of specification by the identification of relatively minor deviations before they become major non-conformances, then the audit could be classified as a prevention cost. In reality the actual category into which a cost is allocated is not critical, the key focus needs to be to identify the costs category, and consistently allocate and measure going forward.
The “costs of non-conformance” is normally classified into two categories:
Internal failure costs
External failure costs
Internal failure costs will encompass scrap, rework, yields less than 100%, repair, failure investigations, the corrective element of internally related CAPA activities, process equipment repair, ….. etc…
External failure costs will encompass performance of field repairs, costs associated with return, repair and replacement of customer product, correcting and addressing customer concerns related to product or service experiences, product recalls and associated costs of communicating with regulatory agencies or communicating with the wider customer base, …. etc…
In most organizations, especially in manufacturing processes, the costs of conformance and costs of non-conformance can be identified and measured to a relatively high degree of accuracy without the need to expend unnecessary resources in their measurement. In many organizations, the finance function will already be measuring scrap rates, department labour costs, etc.. therefore, from a cost of quality perspective, it may only be necessary to provide the finance personnel with the information on the types of costs to be reported upon on a regular basis in order to commence building a cost of quality analysis process.
The most difficult cost to quantify tends to relate to the “opportunity cost”. If a customer has a poor service experience and consequently decides not a pursue a subsequent product purchase, how can a business identify such a lost sale opportunity? Many customers will not complain, it is often estimated that only one-in-ten customers will make a complaint if they receive a product or service below expectation. Therefore, a business may not know of the levels of customer dissatisfaction which may make it very difficult to estimate lost sale opportunities. Such lost sales arise due to deficient quality delivery and are a clear cost to the organization.
Opportunity costs can also arise internally within an organization. For example, consider a new product introduction. At the design stage, decisions are made regarding the range of features to be included with the product. Decisions to include extra features will probably drive additional manufacturing costs, however, could drive additional sales. Equally, design stage decisions which exclude specific product features, will help reduce design and manufacturing costs, however, a lower product specification level may reduce expected sale levels.
Opportunity costs can be difficult to quantity and consequently many organizations may avoid expending resources in trying to quantity. Is this approach appropriate or is there a danger that the bigger picture will be missed?
For example in many manufacturing organizations, significant resources will be applied in driving improved yield rates throughout the production process. Yields are easy to quantity, the costs associated with a yield improvement of 1% are clear to see, it is easy to demand annual on-going yield increases. Consequently, significant technical staff resources and capital investments may be expended in driving the improved process yields. If however, in parallel, 5% of customers are dissatisfied with the product they receive and consequently there is an estimated 5% loss of sales associated with these customers, and targeted future sales increases are equally modified by 5%, will the overall costs to the organization be greater or less than the costs savings associated with the improved in-process yields?
There is a clear onus on organizations to identify and quantify opportunity costs, and to ensure organizational resources are allocated to those activities with the greatest return potentials.
Information & Training. | Quality Assurance. Quality Management.
- The Principles of Quality Management
- The Quality Manual
- Quality Standards and Specifications
- The Quality Management System
- Revised requirements of ISO 9001: 2015
- Design Quality – Products & Processes
- Good Manufacturing Practice (GMP)
- CAPA – Corrective And Preventative Action
- Calibration Certification
- Change Management and Control
- Quality Management Training
- Product and Process Validation
- Supplier Quality Assurance
- Audits & Auditing
- Ensuring the Quality Management System is Risk based
- Etc. …. Etc. …. Etc. …
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