Monday, January 4, 2010

Total Cost of Quality for the Total Picture

Happy New Year! Here's wishing everyone a healthy, happy 2010. Now on to business.

What is the financial impact of quality on our organization? Is it money well spent? What should we be spending our money on in regards to quality? Is inspection the right place to spend our precious capital or should we invest in automation? To what degree should we inspect for conformance. If any or all of these questions sound familiar to you, read on for the answers.

Enter Total Cost of Quality. Total Cost of Quality (CoQ) is a finanicial model of the costs incurred to operate and maintain the function of quality in a business. The CoQ model takes into account all of the activities that any typical company would perform in the name of providing good products or services to customers. The CoQ model, also known as The Economic Conformance Model, shows us the rising costs associated with proactive management of quality as compared to the decreasing costs associated with improving quality. The graphic below gives a visual representation of the CoQ model.

Before we get into that too much though, lets define the four components of the Cost of Quality model.

The first two categories of cost are associated with putting systems and processes in place to reduce the likelihood of a failure. First is prevention. Prevention is the category for those costs associated with preventing a quality problem from occuring in the first place. Typical costs that are included in this category are; training, procedure writing, ISO related costs, and process or equipment automation.

Appraisal is the next category. Appraisal is where we capture our inspection costs. Any activity we do that inspects the quality of the product or service falls in this category. Typical costs included here are; Calibration, instrumentation, and inspection and test personnel.

Internal Failure is the first of two categories associated with poor quality. Internal Failure are those costs associated with recognizing a poor quality characteristic exists BEFORE the product leaves the factory. The most common cost in this category is scrap, followed closely by rework costs.

External Failure is the worst of all possible situations. External failure is failure of a product or service at the delivery point or usage point of the customer. I say that this is the worst of all possible situations for two reasons. One, the product is fully burdened with cost, including transportation and storage costs. Second, reputation in impacted here. The customer experienced the failure, damaging the company reputation and hindering future sales.

Ok, now that we have that out of the way, lets talk about what this means to us. In the model above the total cost of quality is represented by a bowl shaped curve. The low point of the bowl shaped curve is called the economic conformance point. This point represents the lowest possible cost of quality that a company can expect to see. This point is the balance between the costs associated with preventing a problem from occuring and the costs of dealing with the problems that do occur. So, we might look at that graph and say, great, this is easy, all we have to do is balance costs in the four categories to achieve the economic conformance point, then we're done. Easy! Not quite. The thing to remember is that the economic conformance point can be moved lower and to the right through effort. The graph below shows the traditional view of Cost of Quality in the top left section, and in the lower right section shows the effect of applying an improvement methodology such as Lean or Six Sigma.

In the traditional view, there is a fixed minimum cost associated with the quality function. In a Lean or Six Sigma company, we can lower the costs associated with prevention and appraisal by building higher quality products. Higher quality products with less variation allow us to reduce our inspection routines to ever decreasing sampling strategies. Higher quality products also reduce the need for expensive automation systems and complicated work routines to ensure a mistake is not made. With higher quality comes higher confidence, and higher confidence brings lower costs.

Graphics excerpted from:
Cost of Quality: Not Only Failure Costs
by: Arne Buthman


Rakesh Garg said...

Thanks for clarification

Anonymous said...

"The Economic Conformance Model, shows us the rising costs associated with proactive management of quality as compared to the decreasing costs associated with improving quality".

In the above lines, the rising costs are associated with reactive management and not proactive management.

Falling costs are due to proactive management.