Cost of poor quality

From CEOpedia | Management online
Cost of poor quality
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Efficiency or quality?

According to W. Masing: "Performance and quality do not constitute mutually exclusive goals, contrary to popular belief. In fact, high efficiency can only be achieved through high quality processes. The reason for understanding the relationship between performance and quality as impossible to achieve goals at the same time is the incorrect classification of quality as a product class or category. " Any activity to detect and repair errors is called HIDDEN FACTORY, which often wastes 20%. Detection of errors and mistakes and carrying out corrective actions occurs not only in production halls, but can be found everywhere in the company, starting from the marketing department, through development, planning, services, HR, accounting and fire brigade. The total amount of the resulting low-quality labor costs in German companies is estimated by Masing M at 12-15% of turnover. The experience of these companies indicates that the beginnings of the action aimed at achieving costs associated with low quality are intimidating, because these costs initially increase and as a result of the increase in costs of good quality, and then they decrease (low quality costs decrease). After this expected decline, the cost curve is evened out. However, according to W. Masing, it can not be concluded that quality management is no longer producing any results. "Left alone, low-quality costs would increase again, if only as a result of the introduction of a new product, new production method, new employees, new equipment, etc. It is difficult to calculate this increase (which could take place, but it did not occur) resulting from effective quality management, especially at management level, and whether the system costs continue to yield the desired results.

The cost of lost opportunities

A particular type of quality cost is the cost of lost opportunities introduced by TQM. Their level requires simulation estimates that would indicate how individual variants of decisions relevant to the quality of products would affect the company's financial result. It is a task for the services, economic enterprises. Well-conducted economic analyzes allow companies to reduce the number of errors made and dramatically reduce quality costs, which can have a significant impact on the company's profitability (costs are falling - revenues are increasing).

It is always advisable to assess the effectiveness of the quality management system. Some previously necessary steps may now be unnecessary, on the other hand - some weaknesses may not be treated with due seriousness. Therefore, careful management at least once a year is a must to keep the system at the right level. "

Sample statistics

According to W. Schmitz (TUV Quality Management GmbH):

  • quality costs in the European clothing industry reach approximately 8% -10% of turnover,
  • in the EU machinery industry, quality costs account for 8.5% of production costs or 4% of turnover,
  • the quality costs are usually higher than the average profit in the industrial sector,
  • only 15% of German and 21% of EU companies record costs related to quality and only 9% carry out failure analysis,
  • in Germany, 40% of quality costs are spent on qualitative tests, about 50% internal and external * deficiencies, and 7% on preventive activities; when preventive costs should account for 50% of the total quality costs,
  • administrative staff in European companies spend about 40% of their working time on administrative corrections of defects resulting from non-compliance, the efficiency of these employees could increase rapidly if the quality of work improved,
  • a German car manufacturer claims that one-third of the assembly time is squandered on the introduction of patches in vehicles,
  • According to the French car maker, 50% of the production costs could be saved through production-oriented progress.

According to German consulting companies dealing with quality assurance, the implementation of the ISO 9000 system is an important step towards Total Quality Management. ISO 9000 standards are the basis for all types of companies regardless of size and industry sector and the basis for further systematic development of the company, regardless of whether it will be focused on growth or market-oriented and profit.

W. Schmitz states: "In the case of European manufacturing companies, it has been shown that the investments made in the field of system development and obtaining the ISO 9000 certificate are returned after a period of two to three years." E.g.:

  • The Hungarian manufacturer of electrical equipment after the introduction of the ISO 9000 system and obtaining the TUV Bayern certificate has reduced the number of deficiencies by over 70%
  • Austrian company dealing in metal processing after introducing and receiving a certificate for the quality system reduced production costs by 12%
  • a machine industry company employing 700 employees after implementing the Quality Management System drastically reduced warranty costs, improved production processes, drastically reduced warranty costs, reduced administration, improved work efficiency; all this meant that the investments incurred for the implementation of the System returned within l2 months.

Impact of the quality system on costs

The implementation of the quality system and obtaining a certificate by European companies providing services made it possible to reduce the inefficiency of their employees by as much as 50%; these companies reduced the "unproductive" time to 20-25%, reduced costs by 10-14% with additional costs related to the Quality System 4-6%; and a 5-7% increase in profit.

The well-known computer manufacturer Hewlett Packard stated that when the work meets the quality requirements there are significant opportunities for improvements. Implementation of the "Zero-defects" method, i.e. doing everything right the first time, results in:

  • reducing costs (production, marketing, administration) by 30%,
  • reducing the inventory and costs of the guarantee by 50%,
  • performance increase by 30%,
  • increase in profits by 100%,
  • two-fold increase in the company's development rate.

The implementation of a quality assurance system compliant with the requirements of ISO 9000 standards in German companies resulted in:

  • increasing competitiveness - the ability to verify quality in the whole world,
  • increase of economic efficiency - bigger revenues, income and profits and lower costs,
  • motivation - improved communication,
  • trust - less frequent external controls,
  • security - possible release from accusation of product liability.

From the above information, it appears that the application of the ISO 9000 standard system in Germany has brought enterprises much greater benefits than the costs of implementing this system. quality assurance and management. The quality costs that have arisen in connection with the implementation of ISO 9000 were not a major obstacle to their application, because they led to an increase in profit and the development of the company.