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Measuring Cost of Quality August 29, 2016

Posted by Tim Rodgers in Operations, Process engineering, Quality, Supply chain.
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I’ve always thought “cost of quality” was a great idea in principle. If you could take the costs associated with defects, field failures, returns, and warranty claims, and add the costs of inspection, testing, scrap, and rework, then you could get everyone’s attention.

Quality would no longer be some abstract “nice to have” thing, but a real expense category that could be monitored and managed. With an objective, quantitative model to view how much money is actually being spent because of poor quality and associated practices, you would be able to evaluate proposed improvement programs and measure their performance. You would have something concrete to discuss with design and production teams to compare with estimates of future sales and operating expenses, apples to apples. All of this would lead to informed, balanced, and better decisions.

It sounds great, but it’s a lot harder than it sounds. You may be measuring yields and defects and returns, but now you’ve got to measure costs.

I’m not an accountant, but I’ve spent a fair amount of time with people in finance departments. They seem to spend most of their time managing the spreadsheets and accounts that are necessary to support legal and regulatory reporting requirements, and that’s certainly a priority. They’re the best source for total expenses in established cost categories, like incoming materials, inventory, finished goods, and labor, but they’re not going to be much help in parsing those costs to determine which expenses were attributable to poor quality.

Probably the easiest costs to identify are the labor costs associated with specific jobs: testing, inspection and rework. This is straightforward if there are people who do these jobs full-time, otherwise you’ll have to estimate the percentage of time that people spend on these activities. You’d also like to be able to determine the periodic expenses for the materials, consumables, and tools required for these activities. For example, if the rework team needs to pull parts from a bin used for new production, then the costs of those materials needs to be tracked separately.

You can’t let scrap just disappear into a dumpster. Someone needs to estimate the cost of those used materials, and if production labor was consumed to create that scrap, that needs to be accounted for as well.

Quality costs associated with suppliers also must be measured. This includes production delays, reordering costs, and storage and handling of rejected materials. You’ll need to work with the supply chain management or procurement team to figure these out.

The biggest contributor to cost of quality could be customer returns, field failures, and other warranty-related costs. Unfortunately these costs are also hard to measure. They include the labor and materials for field failure analysis, replacement goods and services, any damages or expenses directly incurred, and possibly lost revenue.

I may be forgetting something, but I think you get the picture. I love the idea of cost of quality, but it’s not easy to set up a network of processes to collect the data on a regular basis. I still think it’s worth it.

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