Information & Training. | Quality Assurance. Quality Management.
Cost Analysis and ImprovementMany organizations struggle with the concept of quality costs. Who should measure costs associated with quality? Is there a benefit to measuring such costs? How does an organization go about measuring quality costs, how are the various cost formats identified, how is such information applied towards improving overall performance?
The benefits associated with Cost Analysis and Improvement.In every organization the basic costs associated with the quality effort are regularly costed. These costs normally include salaries of employees within the quality assurance and quality control department(s) and expenses incurred in their day to day performance of departmental related tasks. Other quality costs routinely gathered included costs associated with failure rates, costs of rework, product obsolescence costs, product returns, etc..
While these costs figures can be important, even if effectively managed and optimized, … will they lead to improved customer satisfaction? Will they drive more customers to the organization. Highly unlikely. They will help improve the operating efficiency and therefore profit levels, which in turn will help reward shareholders, however, the longer term benefits to the organization will be constrained by such a limited application of quality cost analysis.
Consider an alternative scenario where quality costs analysis focusses on the opportunity costs associated with customer dis-satisfaction due to poor product reliability, or late delivery, or poor customer service. The opportunity costs may relate to the lost opportunity to achieve a repeat sale to a customer, or a decision by a customer to communicate their poor product experience to other potential customers, who in-turn seek competitors products or services. In these situations, there are clear costs to the business, associated with not achieving potential sales. These lost sales opportunities have the potential to significantly impact the growth and development of the organization.
By not having a comprehensive “cost analysis and improvement” program, an organization runs the risk to restraining their long term potential for growth.
Responsibility for Cost Analysis and Improvement?Activity costing is normally the reserve of the finance department. However, while some costs can be readily easily accounted for, e.g. labour rates, other costs can be more demanding and require technical judgement, understanding of the customer etc.. The optimum approach is for a team based effort. Those individuals tasked with quality costs analysis, need to identify the complete range of costs associated with activities directed towards achieving quality requirements and equally costs associated with failure to deliver expected quality. The costs of quality are often viewed from four perspectives, namely,
i) failure costs,
ii) appraisal costs,
iii) prevention costs, and
iv) opportunity costs.
Failure costs are the costs associated with a product, process or service not meeting desired requirements in the view of the customer.
Appraisal costs are the costs associated with checking products and processes with the objective of ensuring that the next stage and ultimately the final output confirm to expectations.
Prevention costs are costs associated with activities directed towards ensuring that failures do not arise in the first instance and therefore are directed towards driving down the appraisal and failure costs.
Opportunity costs are those costs which are associated with lost opportunity due to time and resources being allocated to the other cost activities, plus revenue losses due to losing customers as a result of poor customer product or service experiences.
Looking at the above in a little more detail, the failure costs will be most widely understood and easy to recognize. In a production process, product which is scrapped, or rejected with a rework requirement, or returned by a customer would all fall into this category. Other examples of failure costs are machine downtime or machine and associated labour time spent on reprocessing previously rejected product. In the service industry, an example would be time spent by an employee filling out a form which was previously completed, but where documentation errors were identified.
Appraisal costs are costs where a business implements checks or inspections or tests in order to identify process or product failures. Incoming raw material inspections are all appraisal costs, in process testing, finished goods checking all go into this category. The more rigorous the appraisal inspections, the higher the level of associated appraisal costs and you could reasonably expect that failure costs would also rise in tandem. However, the greater the level of checking and testing, the lower the probability of a defective product or process proceeding through to a final end user, therefore the failure costs associated with product returns should be expected to fall.
Prevention costs are those costs associated with preventing a failure from arising in the first instance, for example, implementing rigorous capability requirements on new product or process introductions, insisting on very high reliability supply processes, implementing comprehensive employee training would all fit into the prevention category. The objective of preventing failures is that you significantly reduce the possibility of a defective product or inadequate service proceeding onto the end customer. Also, by preventing failures from arising in the first instance and by having a very high confidence in the stability and repeatability of your process, a business can significantly reduce appraisal activity and consequently reduce appraisal costs, similarly failure costs will fall.
Opportunity costs are a somewhat more difficult cost to determine. An example of an opportunity cost would be a customer who purchases say a computer, however, has a poor experience in terms of the quality of the computer and therefore any subsequent purchase could be with a competitor computer manufacturer. Opportunity costs can be very high, however can be invisible. If a supplier of a service, provides a below average service quality offering, how many customer have they lost? What is the loss to the business in terms of repeat buys and potential new customers lost via poor word of mouth testimonials? Clearly, opportunity costs should be calculated and factored into the total costs of quality for a business.
Depending on the category of costs, different individuals and teams will be required to gather the necessary information. The majority of costs will normally be provided by the finance function. However certain costs, especially opportunity costs will require an understanding of the customer experience and the reaction of customers and potential customers to deficiencies in the product and service offering. The often requires input from marketing, sales, research and development staff.
Quality cost relationships are unique to each individual organization.Once the various categories of quality costs are understood, then the relationship between them for a particular organization can be determined. In general, the higher the level of prevention activity, the lower the level of failure, appraisal and opportunity cost. Many organizations, therefore are seeking to increase their prevention activity and use quality cost analysis and trending to determine the optimum level of investment in quality prevention versus quality appraisal.
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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