The Cost of Quality is a metric that is often referenced in literature, measured by enterprises to benchmark the effectiveness of quality activities, quoted as a justification for being “proactive rather than reactive”, and widely misunderstood across industries. When wielded properly, the Cost of Quality can be a valuable weapon in the arsenal of a quality professional. It has the potential to provide deep insight into the successes and failures of an organization. If misunderstood or misapplied, it can also drive an organization to make short-sided and counter-productive decisions. As with any worthwhile endeavor, before starting to use the Cost of Quality to make better business decisions, generating a solid base of understanding along with robust frameworks for the application of the tools can go a long way to the success of initiatives.
Defining the Cost of Quality
A great resource to start learning about quality in general and the Cost of Quality in particular is ASQ, the American Society for Quality. A good way to think about the Cost of Quality is not just as the cost of producing a quality product but also the cost of not producing a quality product. Sometimes the terms good and poor quality are used, where the cost of good quality is generally associated with the costs of ensuring a quality product is produced and the cost of poor quality is associated with the costs of producing products lacking in the necessary quality. On the ASQ website the following definitions of the Cost of Quality are given. The Total Cost of Quality is the sum of good and poor quality where good and poor qualities are defined as below:
The costs of all activities specifically designed to prevent poor quality in products or services. Examples are the costs of:
The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements. These include the costs of:
Internal Failure Costs:
Failure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples are the costs of:
External Failure Costs:
Failure costs occurring after delivery or shipment of the product — and during or after furnishing of a service — to the customer. Examples are the costs of:
Quality Management Software: The Missing Piece
There is not much to argue with in the above definition, it is widely accepted and used across industries. There is however one notable omission, Quality Management Software. Many Best-in-Class companies make the strategic decision to invest in Quality Management Software. Such an investment can impact the Cost of Quality in multiple ways. First and most obviously it increases the Cost of Good Quality, software costs money. Second, and less obviously, it also reduces the cost of good quality. Quality Management Software automates many of the processes highlighted in the ASQ definition of Prevention and Appraisal costs. Quality Management Software users dedicate fewer resources and spend less time collecting data, reviewing data, ensuring compliance, and making quality management decisions. Finally, Quality Management Software also helps reduce the Cost of Poor quality, by improving visibility into Key Performance Indicators and providing the right quality information to the right decision makers at the right time, errors and defects are caught sooner. Meaning failures are less likely to external and are often orders of magnitude less costly.
Measuring the Cost of Quality
With Quality Management Software properly accounted for in the Cost of Quality equation, it is time to start actually measuring the Cost of Quality. Although, quality professionals are well accustomed to tracking performance many are not as accustomed to measuring their own performance through the Cost of Quality.
In most cases, companies do not have a good idea of what the cost of good quality is and therefore cannot easily benchmark the effectiveness of quality activities or decide how to improve. To start measuring the total cost of quality, it is a good idea for finance and quality to work closely together. This will ensure that all real costs associated with activities in the organization dedicated to preventing defects and assuring quality are defined and counted. Additionally, because information is generally stored in a plethora of places including, the company’s business system, corrective action databases, inspection databases, calibration databases, non-conformance databases among many others, working together will allow that access is available to all information needed. Research shows that Best-in-Class performers have integrated systems such as quality management software systems to be able to gather this data quickly and easily real time, on-demand. Wherever it is stored for your organization, ultimately the key is to store the information so to be able to extract it easily when needed.
With a Total Cost of Quality benchmark established for the organization, now it is time to determine what corrective actions can be instituted to yield a healthy reduction. However, it is not always a straight forward exercise. The reason for this is that the relationships between different costs in the cost of quality equation are not linear. In other words, some companies find that “investing” more on one side of the equation (e.g., good quality) delivers more than enough savings on the other side of the equation (in this example, poor quality) that any further investment will not yield incremental gains that are justified.
What Can Help
The key to making “investments” in quality that have the greatest impact on the Total Cost of Quality is in making changes that actually reduce both the cost of good quality and poor quality at the same time, but many ask how this can be possible? For those companies new to the quality management journey, one way that has been shown successful in many different contexts is investing in automation tools such as Quality Management Software.
Traditional approaches to quality management, without the use of software, revolve around many of the concepts and business processes that are used in Quality Management Software. The difference is that the processes are manual, there is a lot more paperwork, processes take longer, data is used more for compliance and less for improving performance, and collaboration between different groups on quality issues can be very challenging.
As described above, those companies that have invested in Quality Management Software spend less time on managing quality and more time on improving the business. Data is more actionable and available in real-time. This all adds up to companies spending less on manual processes and making decisions quicker, which in turn means quality failures are detected more quickly. Ultimately, this creates fewer failures and those failures that still do occur are more likely to be internal than external.
For those companies that have already invested in Quality Management System, often re-examining how the implementation is performing within the organizations can yield additional Cost of Quality savings. For many companies, when they start with Quality Management Software, they may only implement CAPA or Audit Management capabilities. Today’s Quality Management Software applications are a complete suite of solutions that go well beyond these more traditional pieces of functionality. Statistical Process Control, Risk Management, and KPI dashboard tools can all take Quality Management Software to the next step and improve the speed of decisions and ultimately further reduce the Cost of Quality.
Beyond the Cost of Quality
Reducing the Cost of Quality can have a direct impact on the bottom line for any organization. Depending on the industry, the total Cost of Quality can range from 10% to 40% or more. With numbers in this range even a small change can have a big impact on large organizations. But there are many competing interests in manufacturing organizations and the goals of quality and operations don’t always align. The ability of quality professionals to help different areas of the business hit their goals while also improving quality is a win-win for everyone. Additional beneficiaries of reductions in the Cost of Quality include manufacturing, the supply chain, engineering, compliance, finance, and more. Often when there is a reduction in the Cost of Quality companies also see demonstrable impacts in KPIs as far ranging as: shorter lead times, reduced inventories, fewer late shipments fewer returned materials, fewer compliance related issues, happier customers, and improvements in competitive advantage.
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