What's the Cost of Quality?

What is the “cost of quality” for manufacturers? Is it what you pay to mitigate harm to your brand name and image? Is it the investment you make in your quality management system? Is it paying attention to your manufacturing processes and best practices to prevent defects, waste, scrap, and warranty claims?
 
Or is it a way of looking at your manufacturing operations to quantify what it costs to keep your products flowing out the door without problems, without defects, with the highest quality possible?
 
I think it’s all of this, and more. I think that maintaining quality in manufacturing is two sides of the same coin—a “pay me now or pay me later” effort. That is, if you don’t invest in quality now, you’re likely to pay for it in warranty claims and dissatisfied customers who move to a different supplier.
 
I’d like to discuss the costs of quality in this blog, but I should state the obvious right up front: I’m a bit biased when it comes to quality. For I truly believe that investing in quality is far smarter and less costly than managing warranty claims or recalls that negatively affect your company. Paying attention to quality right now will prove to save enormous amounts of money down the road.
 

Conformance and Non-conformance

According to Philip B. Crosby in his book Quality Is Free, the cost of quality has two main components: the cost of good quality (conformance) and the cost of poor quality (non-conformance).
 
The cost of good quality affects:

• Costs for investing in the prevention of non-conformance to requirements.
• Costs for appraising a product or service for conformance to requirements.

The cost of poor quality affects:

• Internal and external costs resulting from failing to meet requirements.

Crosby describes the cost of quality as a methodology used to “define and measure where and what amount of an organization’s resources are being used for prevention activities and maintaining product quality as opposed to the costs resulting from internal and external failures.”
 
In short, the cost of quality includes “all costs associated with the quality of a product from preventive costs intended to reduce or eliminate failures, the cost of process controls to maintain quality levels, and the costs related to failures both internal and external.” Yeah, that pretty much sums it up.
 
Let’s face it, we’re all on the hook to determine where to allocate resources to improve product quality and the bottom line. It’s up to us. So, how far are you willing to go to ensure quality? Just how important is quality to your organization?

Poor Quality = Internal Failure Costs

As Arne Buthmann says in his article entitled, “Cost of Quality: Not Only Failure Costs,” for iSixSigma: “Internal failure costs are costs that are caused by products or services not conforming to requirements or customer/user needs and are found before delivery of products and services to external customers. They would have otherwise led to the customer not being satisfied. Deficiencies are caused both by errors in products and inefficiencies in processes.”
 
Examples, he says, include the costs for:

• Rework
• Delays
• Re-designing
• Shortages
• Failure analysis
• Re-testing
• Downgrading
• Downtime
• Lack of flexibility and adaptability

Buthmann is concerned with calculating the business case for a Six Sigma project in his article. And rightly so. We all want to use our Six Sigma teams wisely. “Costs do not result from only producing and fixing failures,” he states. “A high amount of costs comes from ensuring that good products are produced.” Pay me now or pay me later.
 

Expect the Inspection

So, how do you fix things when you experience issues? Do you up your inspection game?

Many manufacturers inspect their products after they’re produced and discard the problem items. They catch some issues that can be repaired—as sort of an afterthought. Some can even say that bad products rarely make it into the hands of their customers. Problem solved. But is it?
 
Let’s say we’ve got two inspectors, George and Mark. Both inspect the same finished products. The rationale? Management determined that inspection was necessary to ensure only good products get to customers. So, if one inspector is good, then two must be great.
 
There are problems with this mindset.

• Problem 1: You’re paying two inspectors, doubling the cost of inspection.

• Problem 2: 200% inspection is not more effective than 100% inspection. As the second inspector, what is his mindset? “George is a great guy. I’m sure if he inspected it, and the product was good, then everything must be okay.” What about the first inspector, George? What’s he thinking? "Well, Mark is a great inspector and, if I miss something, Mark will catch it."…but will he?

Adding inspectors is expensive, and worse, it does not address the real issue: If you need inspectors, you have a quality problem.  
 
Here’s the point. If you’ve got a quality problem, there’s no way you’ll solve it with inspections. That’s a band-aid approach. At some point, your problem products will get into the hands of your customers because 100% inspection will never catch all quality issues, and neither will 200% inspection. There’s just no avoiding it. There has to be a better way.

Claiming Good Quality Doesn’t Cost a Thing

In a Quality Magazine article entitled, Probing the Limits: The Claim to Good Quality is Free, author Scott Dalgleish says that “No matter how good or bad a product is, companies get away with claiming high-quality levels on everything. One of the reasons that the quality profession is struggling is because the claim to good quality is free.” So true.
 
He, too, defers to Philip Crosby in his article, stating that the very fact that anyone can claim good quality is the problem. He quotes conversations with CEOs about using quality as a strategic tool…and the problem becomes all too evident. CEOs claim, “Why put resources on quality when quality is a given?"
 
Maybe this is one of those instances of “perception is reality.” Everyone sees quality as a given, claims it as a banner they hold high. Look at our high quality! Balderdash. The obvious problem to me is that the perception that “quality is a given” is not a reality. Quality is not a given, it is earned. If you’re amassing piles of scrap because “it’s the cost of doing business,” then you are not addressing quality. You’re just accepting low quality levels, throwing money away, and missing out on greater profitability.

Sometimes Scrap May Seem Like a Small Price to Pay

Let’s say you work for a company that manufactures consumer electronic devices. You make your products from inexpensive components, sell at a high price, and enjoy fairly decent market share. But your company is not profitable. And the management team is stressed to improve financials.  
 
Visiting the plant floor, you look around and notice trash bins scattered throughout the plant. Watching carefully, you notice that operators and inspectors seem to be throwing away products that have just been made. Speaking with the operators, you find that they test the products as they are being manufactured. If a product does not pass testing, it is tossed in one of many trash bins.
 
Inspectors do the same thing. You are told that everyone is trying to ensure that nothing defective leaves the plant. You also notice that twice a week forklift crews descend on the plant floor to remove the trash bins. They are loaded on tractor trailers and hauled to the local dump. The amazing thing is that almost everyone seems to think that this is natural, so common, so…business as usual. But you are left scratching your head, trying to understand why they don’t gather data on the failures and try to prevent them from occurring.
 
What I have described above is not fiction. In fact, I have witnessed this exact scenario far too many times. The inspectors, the trash bins, the transportation, the dumping of defective products in landfills: all of it is true and wasteful. And all of it can be chalked up to the cost of poor quality.
 
These situations are the result of poor quality manufacturing standards, poor process control, and a lack of leadership by management. The costs of poor quality are not only incredibly expensive, but rarely are they understood. Rarely are the costs of poor quality identified or counted. Worse, because the prevailing attitude is “it’s just the cost of doing business,” quality costs become invisible, a part of the manufacturing landscape that is unquestioned and unchallenged.
 
There is a better way. The most respected companies in the world are usually the ones that create the best, most reliable products with the fewest defects. That is, companies focused on quality. Generally, those companies enjoy larger market shares and greater profitability because of their focus on eliminating the costs of quality.
 

So Where is All this Leading?

Well, for one thing, it’s leading to your organization looking at quality as an opportunity to make the most of your manufacturing processes. In a nutshell, without quality systems in place, and without data to assess quality levels, costs of quality are unknown. As a result, organizations cannot work to reduce costs of quality if they have no information about it. I stated as much in an earlier blog, “Getting a Return from Your Quality System.” In the absence of data, “people resort to opinion and conjecture.” What we really need, though, is unbiased, actionable information that clearly communicates costs of quality.
 
A good quality management system can supply us with that. Oftentimes, manufacturers confide in me that they “really don’t know what’s causing their problems.” Through conversation, we discover together that what they truly need is information from quality data.
 
When they are collecting data from their manufacturing processes, my advice to them is to turn to their quality professionals—Six Sigma teams, managers, engineers (and others).
 
“These are the people who want to aggregate and analyze data at a higher level—and do so on a regular basis. They search for trends and valuable information across machines, plants, regions, or even the entire enterprise. When these professional analysts look at summarized data, they distill the information down to a point at which they can tell where their organizations have the greatest opportunities for improvement. Defects, costs, overruns, overfills, underfills, too much scrap—these are the kinds of insights that come from the data that companies gather, aggregate, and analyze.
 
Generally speaking, the biggest returns on investment are found in summary data, and if your teams don’t stop and analyze lots of data on a regular basis, you are missing out on the biggest opportunities for cost savings and quality improvement.”
 
That’s where all this is leading. Quality isn’t free. And claiming you have quality is not the same as actually using a quality system to measure your quality costs, problems, and opportunities for improvement.
 
In the end, who pays for the lack of quality? Who pays for all the scrap? Why, the consumers, of course. “The costs of poor quality must be added to the price of products sold in the marketplace. Otherwise, organizations may not generate enough profit to continue operations. Consequently, consumers pay for low quality in the form of increased prices, which are needed to cover the operating costs of organizations who find it challenging to control the amount of waste found in their bins.”

The Answer to the Cost of Quality

The answer is in knowing exactly what is going on in your manufacturing processes. Stop the guesswork. “Find out where problem areas exist. Look around for the biggest and most overflowing scrap bins, then ask lots of questions about it. Get the experts involved, formulate a plan for collecting data ASAP.
 
What needs to be collected, you ask? Talk to your operators. Collect the thoughts of your quality professionals and engineers. Then, distill everyone’s collective opinions into a proposed data collection plan.
 
Then, gather the data and involve your plant floor operators, quality operations folks, and stakeholders. Have that team review the data and see what information can be gleaned from it, then put in place statistical process control (SPC) and other process controls to ensure defects are prevented. Repeat where other problems exist. Then start the process over again.
 
When diligently performed, data collection plans should provide actionable information that can be used to dramatically improve quality levels.
 
These activities will help convert art and mystery into facts and science—information that can help transform business performance and generate the return on investment that you need from your quality system.”
 
How far are you willing to go to ensure quality? Rest assured that if you don’t improve quality, your competitors will. InfinityQS quality software products have the answers you need to ensure that your products are produced at the highest quality possible—and it won’t be just you saying that, it will be your customers.
 
 
Take advantage of the technology at your fingertips today: contact one of our account managers (1.800.772.7978 or via our website) for more information.