Quality cost

Quality cost
See also
Total quality control Zero defects Cost of poor quality Lean manufacturing Overall equipment effectiveness Management by results Quality assurance Cost of good quality Hidden cost

The quality cost is monetary measure which shows how much money organization allocates to achieve quality goals. Quality costs allow assessment of the effectiveness of quality management system in the company. Lack of a sufficient level of quality can cause very high, up to 30% losses in the turnover in the organization.

The concept of quality costs was first presented by Joseph M. Juran in 1951. He defined quality costs as all costs in the organization which will not exist if organization does not have failures. Quality assessment, presented in monetary values, has proved to be an effective tool to assist decision-making by managers and gave information about the functioning of the quality system.

Costs of quality types

Juran divided quality costs into good and bad:

• good quality costs – costs of prevention,
• bad quality costs – costs which could be avoided if the products and processes were perfect.

Quality costs can be divided into four groups:

1. costs associated with the process of manufacture of the product (narrow definition),
2. costs which are incurred by the whole organization,
3. costs which the user incurs,
4. costs which are incurred during the whole product life cycle by all market participants (broad definition).

Prevention, Assessment, Failures model (PAF)

Armand Feigenbaum has shown a link between expenditure on prevention and reduction of assessment costs and costs of defects. This led to the formation of a PAF model - Prevention, Assessment and Failures. The PAF model presented prevention, assessment and internal and external failures as quality costs.

Evolution of PAF approach to quality costs

The most important are prevention cost. In enterprises, for which improve the products quality is a continuous process, pro-quality costs represent the most of total quality costs. Greater attention to product quality already at the stage of design, improvement of production methods, training of employees in quality, leads to a reduction in costs associated with the assessment (tests, control, analysis, certification) and defect of products.

With the increase in spending on prevention (pro-quality) and assessment, the number of internal and external failures are reduced. Internal costs are associated with poor quality as irreparable defects, reclassification of products and external costs are associated with poor quality such as customer complaints and modifications, repairs and exchanges of returned products.

The main measures in PAF model are:

• total quality costs,
• total failures costs,
• costs of control,
• cost of preventive measures.

These costs are related to labour costs, manufacturing, production volume and sales value.

Aggregation of costs at the level of the entire organization facilitates and shortens the analysis, but at the same time finding the reasons for the problems is more difficult – it is the main criticism of PAF model.

Classification based on the PAF model was presented in ISO 9004.

Process Cost Model (PCM)

Philip B. Crosby proposed the division into the costs of compliance and the costs of non-compliance. As a measure of quality in the organization he adopted the level of costs of non-compliance. Based on this approach Process Cost Model (PCM) was developed.

In the PCM model for all components of each process (staff, equipment, materials, environment) costs are identified. Then they are classified as costs of compliance (the lowest possible costs that must be incurred for the effective implementation of the process) or non-compliance (effects of all forms of inefficiency use of resources, processing errors, losses).

Model PCM better than PAF identifies the causes of the problems, facilitates decision-making based on information about the problem and efficiently implements the concept of continuous improvement.

Criticism of this model is the arbitrary classification of costs (PAF model have extensive classification). Also, using a process approach to quality costs, the identification of the costs associated with lost opportunities and damage to the environment and society is much more difficult.

Quality costs in Total Quality Management

Quality costs improvement program (J. Bank, Total Quality Management, 1996)

In the Total Quality Management system quality costs are divided into three groups:

1. compliance costs – costs of preventing errors and manufacturing low-quality products, these costs are created before the occurrence of errors and conformity assessment (costs of prevention, control, inspection and testing),
2. costs of non-compliance – costs of correction of errors and the costs of liquidation of consequences of low-quality products, these costs are created after the occurrence of errors (defective products, repair of internal and external failures, lawsuits),
3. opportunity costs – the costs of securing the future (resulting from the preoccupation of the management problems of the past) and do not pay attention to the connection of the current quality of future profits (lower sales of products with lower-quality and non-use of assets of the production).

Normative solutions on quality costs

Quality costs have also found their expression in the normative solutions. Quality costs in ISO 9000 standards family are considered as one of the economic factors affecting to the quality. These are the costs associated with guaranteeing and ensuring satisfactory quality and also as losses incurred due to failure to achieve satisfactory results.

Most attention was paid to the quality cost in the ISO 9004 standard for quality management. ISO 9004 draws attention to the long-term impact of profit and loss balance. It is important to measure efficiency of functioning quality systems with the financial aspect and placing them in the financial statements. This allows to identify ineffective actions and take internal improvement actions.

User's costs

F.M. Gryna defined the following quality costs incurred by the user (among others):

• repair costs (replacement parts and payroll related),
• the losses on the efficiency of the process (unused work, additional defective products),
• maintenance costs in order to avoid gaps (equipment and materials, wages direct and indirect),
• the cost of the damage caused by the defective items (accidents at work, training new staff),
• lost income (penalties incurred breach of terms of sale),

Social costs

Quality costs created throughout the life cycle of the product. It is from the decision of the extraction of raw materials through the process of its manufacture and use, until its liquidation. The social costs of quality are borne by:

• all manufacturers taking directly or indirectly involved in the production of final consumer goods at different levels of production - the cost of the manufacturer's quality, which bears directly manufacturer,
• all brokers and dealers - the cost-quality trade that are incurred directly by the trade,
• all users and consumers - the cost of quality consumer that are incurred directly by the consumer.

See also:

• Project cost management

Examples of Quality cost

1. Product rework costs: This includes the cost of repairing or replacing faulty products. It might include the cost of labor, materials, and parts needed to fix the product.
2. Warranty costs: These are the costs associated with honoring a product's warranty, such as labor, materials, and parts to repair or replace a faulty product.
3. Scrap costs: These are the costs associated with throwing away products that are either defective or do not meet quality standards.
4. Quality control costs: These are the costs associated with ensuring that products meet quality standards. This can include costs for testing, inspection, and monitoring processes.
5. Training costs: These are the costs associated with training employees on quality standards and processes.
6. Quality assurance costs: These are the costs associated with implementing quality assurance systems, such as software and documentation.

Advantages of Quality cost

Quality cost has several advantages for an organization:

• It helps to assess the effectiveness of the quality management system. Quality cost can be used to compare different quality management systems and identify areas for improvement.
• It enables organizations to measure the impact of quality on the organization's profits. This helps to identify areas where quality improvements can be made to reduce operational costs.
• Quality cost helps organizations to develop quality goals and objectives. This can help organizations to focus their efforts on areas where quality improvements are needed most.
• Quality cost can also help organizations to identify areas where cost reduction can be made without compromising on quality. This can give organizations greater opportunities to reduce costs while maintaining a good quality of products and services.

Limitations of Quality cost

One of the main limitations of quality cost is that it is often difficult to accurately calculate the total cost incurred due to quality-related issues. The following are some of the additional limitations of quality cost:

• Quality cost does not account for intangible costs such as customer satisfaction, brand image and loyalty.
• Quality cost does not include the cost of non-conformance, such as scrap, reworking and re-inspection.
• Quality cost does not always accurately reflect the true cost of quality, since it does not account for all costs, including those associated with process failures, design errors and customer service.
• Quality cost does not take into account the impact of quality on customer satisfaction, which can be difficult to measure.
• Quality cost does not reflect the cost of training and development needed to maintain quality standards.
• Quality cost does not reflect the cost of compliance with industry standards and regulations.

Other approaches related to Quality cost

Introduction: There are other approaches related to Quality cost which are as follows:

• Total Quality Management (TQM) – this approach focuses on the continuous improvement of the quality management system and the overall performance of the organization. It involves the participation of all employees in the process of quality control and improvement.
• Quality Assurance (QA) – this approach involves all activities that are necessary to ensure that the products or services produced by the organization meet the required standards and customer expectations.
• Quality Control (QC) – this approach is focused on the detection and removal of defects in the products or services before they are delivered to the customer.
• Lean Manufacturing – it is a system that is used to eliminate any waste in the production process, thus increasing the efficiency of the company.

Summary: To sum up, Quality cost is an important metric which allows assessment of the effectiveness of quality management system in the company. Other approaches related to Quality cost include Total Quality Management, Quality Assurance, Quality Control, and Lean Manufacturing.

References

• Aoieong R.T., Tang S.L. & Ahmed S.M. (2002), A process approach in measuring quality costs of construction projects: model development, Construction Management and Economics, Volume 20, Issue 2
• Wen-Hsien Tsai, (1998) Quality cost measurement under activity-based costing, International Journal of Quality & Reliability Management, Vol. 15 Iss: 7
• Hwang G.H. & Aspinwall E.M. (1996), Quality cost models and their application: A review, Total Quality Management, Volume 7, Issue 3

Author: Edyta Gołąb, Sławomir Wawak