Cost of quality
 What are the costs of
prevention, appraisal, and failure?
What are
the costs of doing the job over?
What are the savings to doing the
job right the first time?
What you'll be able to compute:
- The cost of prevention for your company
- The cost of appraisal for your company
- The cost of failure for your company
- The savings of doing the job right the first
time for your company
- The cost of doing the job over for your company
In the US, correction to failure is celebrated as heroism,
while relatively un-dramatic planning is thought of as not doing
work. Savings of doing the job right the first time can be several
hundred times that of the cost of failure. Learn to calculate the
actual savings to your organization!
Reducing waste and rework
Much has been said - in the newspapers, radio, TV, conversations,
everywhere - about the need for reduction in waste and rework, and improvement
in productivity and quality. Global competition makes this more than a
"nice thing to have." It has become essential for our very survival.
Many organizations - business and government alike - have started using
quality tools, building teams, and looked for quality improvement opportunities.
And yet, the most significant opportunities for improvement lie in 2 frequently
untouched areas: the analysis of the flow, or process, of one's work today,
and a concept called the Cost of Quality. It is the latter concept, that
of Cost of Quality, which we will deal with now.
The term, Cost of Quality, implies that producing quality
products cost money. Does quality cost money? Yes! Does that mean the
book entitled Quality is Free is a misnomer? No! Does quality save money?
Yes! How can both of these things be true together? The answer to this
question, if thoroughly understood, will solve for you perhaps the biggest
quality misunderstandings of our time.
You could draw a diagram of Cost of Quality, with Production
costs representing the bottom of a bar chart and the top representing
Cost of Quality. This model would show the true cost of production. This
is the cost of building the product or service, if we were to do it right
the first time with no errors. (This is what our customers are paying
us for.) It turns out that "productivity" is the bottom half
only; all other costs are "unproductive" or wasteful.
The top of the model is the Cost of Quality. Yes, even with
quality of conformance, quality costs money. By changing the way in which
our quality activities are divided, however, there can be a net savings
(right side) compared to the old way of doing business (left side). Therefore
there can be a "return on investment" greater than the investment
itself.
The Cost of Quality part of the bar chart is divided into
3 parts: cost of prevention, cost of appraisal, and cost of failure.
The cost of prevention is any quality activity designed
to help you do the job right the first time. It generally helps the next
project, not the current one. It includes many activities often called
"overhead." These activities are work to developing standards
and procedures, measurement systems, training programs, the cost of a
Quality Assurance group, and process improvement methods and team meetings
related to work improvements.
The cost of appraisal is quality control, or "testing."
It is any activity designed to appraise, test, or check if the product
you produce is defective. In manufacturing, this might be a mock-up or
trial, or individual bench testing of component parts during or after
assembly. In service, this might be a "dry run" or pilot program
of a new service offering. In software, this includes reviews, walkthroughs,
inspections, and computer testing of programs. Cost of appraisal happens
during the current project or production effort rather than the next one.
If cost of prevention is the cost of doing it right the first time, then
this is the cost of doing it right the second time. If there were no defects,
then there would be no need for this testing; however, if defects are
likely, better to find them through testing (internal failure) than deliver
broken products or services to the customer (external failure).
The cost of failure is the worst and generally the biggest.
I call it doing it right at no time. To get to this stage, cost of prevention
must be inadequate to prevent the error, and cost of appraisal is too
inadequate to catch it. This is external failure. Unlike prevention, which
is invested before a project starts, and appraisal, invested during the
operation, failure occurs after the product is finished, usually at the
most embarrassing time - like when your customer is trying to use your
product or service. Examples include rework during development, financial
asset losses, lost time, inconvenience, bad press, loss of good will and
loss of face, loss of market share, backlog and lost opportunity costs
(because we are too busy fixing old problems to take new work in), the
Hubbell telescope, the Chicago Flood, and most man-made catastrophes that
hit the newspapers and embarrass companies, and on, and on.
Increasing testing (appraisal) greatly reduces failure.
However (and this is poorly understood): Increasing prevention drastically
reduces both appraisal and failure. If you look at the right side of the
diagram, you will notice that the appraisal and failure costs are reduced
by more than the amount of increased prevention, resulting in an overall
savings. In other words, this is where we need to put our quality dollars
- quality improvement - prevention.
Strictly speaking, quality is not free - not even for quality
of conformance and associated Cost of Quality. All three Cost of Quality
components are unproductive costs. By changing the investment we make
in each component, however, we can reduce these unproductive costs so
what we are doing is best for the customer. That is why it is free by
comparison: prevention types of quality cost "negative dollars"
compared to cost of failure, so this is why the right kind of quality
is free.
When we get sick, that is failure. Having a doctor cure
us so we don't get worse is appraisal. Engaging in a wellness and fitness
program so we don't get sick in the first place is best, and is prevention.
As a culture, do we focus more on appraisal and failure? Where should
we spend our health care dollars?
When criminals steal, injure, and kill, that is failure.
When they are caught and incarcerated, that is appraisal. Proper day care,
family values, and programs that reduce the tendency for one to turn to
crime are prevention based. Are we spending our quality dollars wisely?
Societies accidentally reward citizens for failure without
meaning to.
- When the plant employee fixes a major failure, she/he is a hero. What
about the employee who develops a product that doesn't even fail in
the first place? Are they rewarded more (one would hope), or less?
- Do we call prevention programs "overhead", simply because
they appear to delay this project although greatly accelerating future
ones?
- Are slogans like "ours is not the reason why" helpful attitudes?
Prevention-based work says "ours is the reason why" and "Monday
morning quarterbacking" is good. Here are some good quality slogans:
"A stitch in time saves nine" and "penny wise and pound
foolish."
- Do beepers sometimes allow us to respond to a failure instead of addressing
the problem? If we took those beepers away, and failures went unresolved,
would we tend to eliminate the root cause of failure instead? Or do
beepers help us to make failure acceptable, keep it efficient, and hide
its true colors and costs? Are beepers costs of failure?
- Many customer service departments find and fix problems. If there
were no problems, would there be any customer service departments of
that type? Are those customer service departments costs of failure?
- Are you asked to pay for a maintenance contract, which therefore rewards
the manufacturer for failure?
Simple idea? A revolution in thought is required of most
people. Perhaps half of your day is spent in Cost of Quality, with much
of it failure. We often maintain massive infrastructures, meetings, and
help desks to make failure acceptable. Should we instead correct or eliminate
these failures through prevention?
The Bottom Line
By looking at how and where we spend our time and
dollars, and even our quality dollars, we can cut unproductive
time, waste, and rework. As a result, we can meet the challenge of
global competitiveness, head-on. By looking at the work, its
progression through the workbench, and the Cost of Quality, we can
make a major individual improvement in quality wherever we are.
Whether or not our organization has embarked on a quality journey,
we can do this action personally - with personal benefits and
pride of workmanship as the natural outcome as well.
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