Cost of Quality

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Cost of Quality

Have you ever sat down and tried to estimate the cost of quality for your business. At first, the categories are fairly obvious. There's warranty claim costs reported every month. There’s scrap and rework that are the result of defects and therefore additional costs.

To estimate these costs, we track down the quality data on the amount of scrap, rework and warranty, and use this information to estimate the material and labor costs associated with this.

But, after you dig for a while it becomes clear that there are many other costs of poor quality that are not readily visible. In the same way that most of an iceberg is invisible below the surface of the water.

cost of quality iceberg

Some costs are easy to while others are less obvious.

Inherently we know that when we produce a lot of defects, the entire length of time required to get completed components through the system increases. This increased cycle time has a cost in terms of additional labor hours to get the work done. There is also the cost of all the inspection and testing that has to be performed to try and catch the defects.

There is the important, but hard to quantify, cost of lost customers and reduced customer loyalty.

What affect these have on a business is difficult to quantify but it certainly isn't a good thing given how hard we have to fight to win orders and try to take market share from competitors.

Cost of Poor Quality Catagories

To help organize your data for cost of quality, use the following four categories:

  • The cost of failure in the field. This includes such costs as warranty claims as well as the cost to service problems.
  • The internal failure costs, the costs in labor and material associated with scrapped parts and rework. This cost also includes the additional inventory that is carried due to longer cycle times, that is, the time it takes to move a product through the process.
  • The costs of appraisal and inspection. These are the material (for samples), test equipment, and labor costs to catch defects before they escape out of our processes. It also includes the costs related to quality audits and monitoring vendors and dealing with their quality problems.
  • The costs related to preventing poor quality including training and process improvement; the cost of equipment to try and better control the process.

Performance Metrics

Once we start considering the vital importance of data, we begin to see the need to establish metrics and a manual and dashboard to standardize the approach and get everybody onto the same wavelength.

For example, one company found that they had five different ways to compute a moving average. They created a metrics manual to define how to calculate key metrics along with standard formats for graphs and standards references to theory.

Your metrics and standard ways of calculating and presenting data can be based upon best practices of other organizations, and the lessons learned within your own company. Cost of quality data should be included within the metrics.

Dashboard Metrics

Just like the instrument panel on an airplane, you need to establish metrics to help you "see" where you are and know whether you're headed in the right direction with respect to quality and customer satisfaction.

As an organization you should gather measures in four broad categories:

  • Customer expectations: These are the measures used to gauge how well we are meeting customer expectations. This will probably vary depending on the business.
  • Process quality: This is the level of defects as measured through data.
  • Cost of quality: This is the dollar value estimate of the total cost of quality.
  • Improvement activities: Although improvement activities are simply a means to an end – namely improved quality – in the early days you need to track a few activity measures. As improvement thinking becomes second nature you can reduce these measures.

From Cost of Quality to Metrics.

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