Management of Quality Costs
An excerpt from the Handbook for Quality Management (2000, QA Publishing, LLC) by Thomas Pyzdek
In our discussion of the cost of quality subsystem, we emphasized the importance of not creating a unique accounting system. The same holds true when discussing management of quality costs. Quality cost management should be part of the charter of the senior level cross-functional cost management team. It is one part of the broader business effort to control costs. However, in all likelihood, the business will find that quality cost reduction has greater potential to contribute to the bottom line than the reduction of other costs. This is so because, unlike other costs, quality costs are waste costs (Pyzdek, 1976). As such, quality costs contribute no value to the product or service purchased by the customer. Indeed, quality costs are often indicators of negative customer value. The customer who brings his car in for a covered warranty expense suffers uncompensated inconvenience, the cost of which is not captured by most quality cost systems (although, as discussed above, we recommend that such costs be estimated from time-to-time). All other costs incurred by the firm purchase at least some value.
Effective cost of quality programs consist of taking the following steps (Campanella, 1990, p. 34):
· Establish a quality cost measurement system
· Develop a suitable long-range trend analysis
· Establish annual improvement goals for total quality costs
· Develop short-range trend analyses with individual targets which, when combined, meet the annual improvement goal
· Monitor progress towards the goals and take action when progress falls short of targets
The tools and techniques described in chapter V are useful for managing cost of quality reduction projects.
Quality cost management helps firms establish priorities for corrective action. Without such guidance, it is likely that firms will misallocate their resources, thereby getting less than optimal return on investment. If such experiences are repeated frequently, the organization may even question or abandon their quality cost reduction efforts. The most often-used tool in setting priorities is Pareto analysis (see above). Typically at the outset of the quality cost reduction effort, Pareto analysis is used to evaluate failure costs to identify those “vital few” areas in most need of attention. Documented failure costs, especially external failure costs, almost certainly understate the true cost and they are highly visible to the customer. Pareto analysis is combined with other quality tools, such as control charts and cause-and-effect diagrams, to identify the root causes of quality problems. Of course, the analyst must constantly keep in mind the fact that most costs are hidden. Pareto analysis cannot be effectively performed until the hidden costs have been identified. Analyzing only those data easiest to obtain is an example of the GIGO (garbage-in, garbage-out) approach to analysis.
After the most significant failure costs have been identified and brought under control, appraisal costs are analyzed. Are we spending too much on appraisal in view of the lower levels of failure costs? Here quality cost analysis must be supplemented with risk analysis to assure that failure and appraisal cost levels are in balance. Appraisal cost analysis is also used to justify expenditure in prevention costs.
Prevention costs of quality are investments in the discovery, incorporation, and maintenance of defect prevention disciplines for all operations affecting the quality of product or service (Campanella, 1990). As such, prevention needs to be applied correctly and not evenly across the board. Much improvement has been demonstrated through reallocation of prevention effort from areas having little effect to areas where it really pays off; once again, the Pareto principle in action.
See also: Cost of Quality Overview for links to related topics.