As a full time auditor for the past six years for one of the large management system registrars, I start every interview, from production personnel to the CEO, with the question: “Given all of your job responsibilities at this company, what does the word ‘quality’ mean in your work?” Most answers center around the idea of satisfying the customer (both internal and external). To the supervisors/managers, I will then point out that they do not make anything. Most eventually come back to the idea that their job is to ensure the work is done to satisfy the customer. I will then start looking at the metrics that management uses—nearly every scorecard has a quality cost number assigned to the quality department!
In the past six years, I have annually reviewed over sixty-five management systems, and have always been interested in how the company manages the overall business. A few companies have utilized some variant of quality function deployment to derive their key performance indicators (KPI) and most use some sort of Excel spreadsheet to track monthly trends of those metrics. What I see missing in most cases is the use of some traditional form of cost of quality (COQ, also called: cost of poor quality, cost of current quality or quality costs) metric. The numbers are only tracking scrap and the cost of corrective action, which should be part of the internal and/or external failure portion of COQ.
Nearly 70 years after Dr. Feigenbaum identified the hidden factory1, many organizations still either do not know what their quality (other than the quality department) related costs are or have managers who have never learned to understand how the mismanagement of organizations (what Dr. Deming called profound knowledge) leads to these hidden costs that customers end up having to pay in the prices for goods and services.
This lack is not a function of what has been written about quality costs over the years. If you search the Quality Magazine website, you will find over 2,500 references to the topic. Business schools, including accounting departments, may not cover the topic well; however, the idea of quality costs are known, and discussed, for passing the CPA exam2. One research group who studied the use of quality cost came to the conclusion that: “Lack of management support was found to be the most common reason why organizations do not systematically track quality costs”3.
If you are seeing the same trend at your organization, what can you do to utilize quality cost methodologies to impact the bottom line? Could risk to the bottom line be a new angle of discussion with your management team?
The ISO 9001 does not contain the word cost, cost of quality or other related term; however, in section nine – Performance Evaluation, organizations are required to document how risk-based thinking is being applied in their organizations. One obvious output that could be documented is some level of the quality cost. Many managers will counter by saying that they are already tracking quality cost on their scorecards. However, these are most often quality department cost versus the costs from around the entire organization that accounting should be tracking for prevention, appraisal, internal failure and external failures. The work instructions that most operators use has some indication of checking parts as they make them—this should be tracked as part of appraisal costs. But rarely is!
Many managers I talk to acknowledge that risks can be defined in most parts of their organizations, but little is being done to use risk-based thinking in quality cost opportunities. This is especially true when it comes to thinking about their KPIs and how to reduce the overall operational costs. Too many people, when they see the word “quality,” still only think about the department instead of the overall concept.
Other examples of hidden costs that we face include:
- The healthcare industry that seems incapable of billing patients correctly (note: have you ever heard of a patient being under billed—this is no accident)
- The Washington, D.C. political process (I have worked in D.C. and witnessed both parties) where everything becomes a political football and the overall costs are ignored to make political points count
- The local optometrist that has trouble communicating that the glasses have arrived because they mislabel the customers’ communication preferences (i.e. phone call only, text, email, etc.)
- Even management system registrars who seem to have trouble with basic communications with planning site visits for clients
ASQ states that: ‘Cost of quality (COQ) is defined as a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures’4.
The hidden costs of errors and rework by technology or individuals (accidental, systems issues, lack of training, or intentional) is not typically captured by the organization’s management team and thus becomes a loss to society. The simple fact is that there is no international standard or governmental regulation that requires business to utilize ‘quality cost’ methodologies (not even Sarbanes Oxley).
The ISO community has, to date, not created a standard around quality costs:
- For those who are registered or seeking registration to the ISO 9001:2015, the word cost does not appear in the auditable requirements; however, managers are required to understand the risks to the business and ensure that resources are being utilized effectively.
- ISO 31000:2018 Risk management – Guidelines does have the word “cost” in two clause; however, these are general costs versus being specially related to quality costs.
- ISO 14001:2015 - A6.1.4 – When considering its technological options, an organization should consider the use of best-available techniques, where economically viable, cost-effective and judged appropriate.
- ISO 45001:2018 – comments that the cost of PPE and training is to be provided by the company (these could be counted as preventive quality costs)
If you are going to move the needle on quality costs in your organization, you will need to demonstrate to your management team how using risk-based thinking, as it relates to the cost of goods and services in your organization, can actually save money, which is pure profit to the bottom line.
Show the management team some small wins and then engage them in discussions around where else prevention approaches can save money. You will need to talk with your accounting team upfront to get their buy in to help gather the data in a way that can be shown to management:
- Prevention costs are costs incurred to prevent issues or to keep other costs listed below to a minimum.
- Appraisal costs are costs incurred to determine the degree of conformance to specification (internal or external) requirements.
- Internal failure costs are costs associated with nonconformities found before the customer receives the product or service.
- External failure costs are costs associated with nonconforming issues found after the customer receives the product or service.
At each step of the process that you develop, consider asking: “What risks are there in the process that could cause unplanned issues, and thus add cost to the overall product or service?”
Applying the idea of risk-based thinking to quality cost is a natural next step in the evolution of a mature business looking for an edge. Those organizations that actually start utilizing the quality cost methodology will see bottom line improvements in their organizations.
Risk-based Thinking is Not Usually Considered in Costs from a Quality Viewpoint
One large Fortune 500 company I worked with in the late 1980s and early 1990s had a six-year experiment where they hired 120 professionals for a supplier quality improvement (SQI) group. The focus was a Japanese process of applying risk-based thinking to component parts during the design and development phases of the new vehicle cycle. Prior to that, U.S. auto manufacturing applied Supplier Quality Assurance (SQA) personnel to work with suppliers at launch of the product. The new SQI team worked with suppliers from concept to launch and then handed the programs over to the SQA teams. At the end of the six-year experiment, the number of things gone wrong at launch for externally provided components were cut in half while the internal manufacturers of the company who did not utilize the SQI stayed the same. The cost saving was in the many millions of dollars. However, the OEM accountants were complaining about the costs associated with the 120 personnel and the two annual conferences for each program, so the effort was basically closed down and the personnel transferred into the SQA and renamed STA (supplier technical assistance) with the task of working with suppliers from concept to launch, and through the entire production process.
Another outcome of that experiment was that AIAG created the manual on advance product quality planning (APQP). I was allowed to test this practice at a large Tier One automotive group at a plant that was launching 18 new automotive products within an 18 month period. In developing the PFMEA, we ended up with an RPN of 800 (yes, this not a typo—eight hundred) on one key aspect of customer design for the launch. I was criticized within my company as well as by the customer; however, since the customer was design responsible and owned the tools, I was unwilling to subject my company to the cost risk if something did go wrong. Which it did. The potential cost of replacing tools was over $1 million which the customer decided not to do. If they could have pinned the problem to my company (the supplier), then we would have had to spend that money to design around the problem!
Feigenbaum A.V.; Quality Control: Principles, Practice, and Administration – first edition – McGraw Hill 1951 – Chapter 1: section 1.7 What Are the Cost of Quality Control? Pages 16-17
Sower V.E., Quarles R.and Broussard E.: Cost of quality usage and its relationship to quality system maturity, International Journal of Quality & Reliability Management Vol. 24 No. 2, 2007 pp. 121-140