The recent Covid-19 pandemic reminded me of an opportunity working with a federal government agency where I was asked to train high level scientific professionals on the concepts of Cost of Quality. Since this was a federal agency, the executive requested that I customize my materials not to use dollars as the quantitative measure of improvement priorities. His logic was that saving money was not to his benefit. What he did not spend of his approved budget in one year would cause the next year’s budget to be reduced by that same amount. Our goal was to help his senior professionals manage their research laboratories in such a way as to maximize the use of resources, time, and people to the full potential of the funding provided. We were successful in this effort and shared the updated concept with his executive and laboratory team, who then assessed their resource balancing for optimum effectiveness.
During my adjustment of the Cost of Quality (CoQ) materials, I was delighted to realize that the new message sounded surprisingly like the concepts of Eliyahu Goldratt’s Theory of Constraints. This paper pursues my observations to show how using CoQ with financial tracking at the executive level smoothly transitions into the prioritization scheme of Theory of Constraints (ToC) for breaking down barriers to throughput at the front lines of production and service delivery.
Definition of CoQ/Quality Costs
Quality Costs represent the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products, or defects in their manufacture.i This definition, and its application to the Prevention, Appraisal, and Failure model, can be found in the Principles of Quality Costs textbook 3rd ed, Jack Campanella, editor. I make no attempt at completely describing the details of the Cost of Quality concept. Space will not allow it. ASQ has good material in the ASQ Knowledge Center and offers both face-to-face and virtual training for a deeper knowledge.
Figure 1 illustrates the basis for CoQ. When budgeting for production or service delivery, there are two funding considerations. One is for normal activities and resources. This assumes that all actions will be perfect, and that each product or service is designed to exactly meet the customer need. Since we know reality works imperfectly, no matter how hard we try, the second funding request is to plan for quality cost processes and resources to anticipate errors, audit production and service processes, correct defects, and redesign based on lessons learned. Although the word “cost” is in the subject, dollars are only a result of the resources we choose to maximize.
PAF Model for Quality Cost
The fundamental premise of the Prevention, Appraisal, and Failure (PAF) model is that investing a relatively small amount in Prevention reduces Failure and eventually Appraisal. Quality costs are usually in the ratio of 1:4:9, Prevention: Appraisal: Failure; however, it should be noted that the failure mixes are industry specific.ii Also, losses due to external failures are much higher proportionally compared with internal losses.
Phil Crosby emphasized the terms “conformance costs” and “non-conformance costs.”iii Prevention and Appraisal are considered conformance costs, and Failure costs are non-conformance costs. You might occasionally hear the terms conformance and non-conformance applied to CoQ.
Figure 1 Quality cost activities are budgeted to account for less than perfect execution iv
Some in the industry also speak of “good” and “bad” quality costs. In this instance, prevention costs are considered “good” costs, failure costs are “bad” costs, and appraisal costs, depending on how they are applied, can be either.
Dr. Joseph Juran observed that the costs of poor quality could be huge. His research indicated that 15 – 25% of all work performed consisted of redoing prior work because products and processes were not perfect.v As we become less preventive and more reactive, the cost of making it right goes up immensely in either dollars or reputation. The worst is to err in front of the client or community (external failures). The next is monitoring or appraisal (catch it as it happens) or internal failure (pick out the bad stuff before anybody sees it), the best is to never make the mistake to begin with.
Using the PAF model, high failure rates drive the cost of external and internal failure up with only some Appraisal and Prevention costs. As Prevention and Appraisal costs are increased during CoQ implementation, External Failures are eliminated, and Internal Failures are greatly reduced. While in the implementation phase, Prevention and Appraisal costs may rise, and there is usually an immediate impact to failure results. The net financial impact may also be zero. But at maturity the cost of Failure has significantly decreased, as have the costs of Prevention and Appraisal. The Interim phase suggests why some businesses abandon CoQ efforts after a short initiation. The balance of where the costs are going is not understood.
Early definitions of CoQ, as reflected in Figure 2, sought a break-even perspective for the balance of prevention, appraisal, internal and external failure costs. When the organization is viewed as a series of budget silos within the annual business cycle, this makes some sense. Where each manager seeks to maximize their own budget allocations, there is a sweet spot where everyone uses their own resources to the best advantage. Each manager increasing their total cost of quality unilaterally is not effective.
Total quality costs
Figure 2 Initial thinking on the value of Cost of Quality management vi
Dr. Juran later realized that breaking down the silos of departmental budgets and short-term thinking, as reflected in Figure 3, reduced total outlays to eliminate poor quality while managing total quality costs. Eliyahu Goldratt saw this potential when he described his Theory of Constraints. We have not gotten to the perpetual motion machine, so Murphy’s Laws of what can go wrong are still out there. We may always have some costs or losses due to imperfections, however, the long-term view of the total supply chain, working horizontally across operational silos, is a rosier picture.
Figure 3 Current thinking on the value of Cost of Quality management vii
Figure 3 represents Juran’s later perspective of the value of using Cost of Quality. In the long term, as investments are made in preventive and appraisal activities, failure costs are totally eliminated, leaving total quality costs equal to the investment for prevention and sustaining appraisal.
A summary of the value of Cost of Quality:
Looking at quality from a “dollars and cents” perspective provides organizations with tangible data pertaining to how quality affects the bottom line.
The cost of quality is the best tool you can use to describe the impact poor service or poor product quality has on your organization at the executive level.
It is a methodology that enables an organization to determine the extent to which organizational resources are used to prevent poor quality, appraise the quality of their products and services, and address internal and/or external quality failures.
The cost of quality is sometimes referred to as the cost of poor quality because it describes the true costs associated with delivering quality products and services. An investigation into the cost of poor quality has the potential to reveal areas of concern that are overlooked in a typical cost of quality assessment.
Asking the question: “Where does poor quality come from?” is a different question than “What is it costing us to ensure quality is delivered?” Theory of Constraints is one way to answer the first question.
Theory of Constraints
Theory of Constraints: (ToC) is a lean management philosophy that stresses removal of constraints to increase throughput while decreasing inventory and operating expenses. TOC’s set of tools examines the entire system for continuous improvement.viii
As stated for the Cost of Quality concept, I make no attempt at a deep explanation of the Theory of Constraints in this paper. I share enough to make the point that CoQ and ToC are both driven by the desire to use available resources to the best advantage to meet customer requirements.
To quote Goldratt, ToC … “is not bottlenecks or cutting batches. The message is the same for any aspect of any company from product design and marketing to manufacturing and distribution. ...the actions of marketing are guided by the concept of cost and margins, even more than the actions of production.” ix
Figure 4 illustrates that Goldratt had the same picture of the different components of revenues and expenses as CoQ. It is not all about the assembly floor or service window. The Marketing and Selling functions have barriers to execution just as much as does production. Just as the lean concept applies to the whole value chain, so does ToC.
The ToC approach is based on the Five Steps of Focusing:
- Identify the system’s constraints
- Decide how to exploit the system’s constraints
- Subordinate everything else to the above decision
- Elevate the system’s constraints
- If in the previous steps a constraint has been broken, go back to Step 1, but do not allow inertia to cause a system constraint.
TOC overall focuses on system improvement. A system is defined as a series of interdependent processes. An analogy for a system is the chain: a group of interdependent links working together toward the overall goal. The constraint is a weak link.x
Balancing resources through lean and other operational approaches from the bottom up, meets CoQ from the top down. Eliminating any waste (internal, external failure) and increasing prevention (throughput planning) and stabilizing appraisal minimizes cost per unit. Productivity is the sum of every component – the technology, people, training, organizational structure, decision rights and dozens of other factors.
Figure 4 Goldratt’s Optimum Resource Balancing xi
CoQ and ToC have different audiences
Both CoQ and ToC seek to improve results and use fewer resources to accomplish those results. Both approaches need a way to assure the results are what the customer, either internal or external, wants. The executive function sets policy based on financial goals. As the business operates, financial reports are generated, reflecting the results of operations to meet these goals. These reports are used as lagging indicators to show the level of attainment during an operating cycle.
Priorities are set during strategic planning sessions to attain a set of objectives that are cascaded down through executive to divisional and functional management. The financial goals translate into tactical and operational objectives that are broken down into processes, projects, procedures and finally tasks. These front-line tasks, projects and processes generate leading indicators of the level of daily, weekly, or monthly success.
If your improvement approach tends more toward Joseph Juran, who looked at business strategically, you may start with Cost of Prevention and Appraisal. Or the benefit of initial product, service, or process design to anticipate barriers to effective operation. If your brain focuses first on the details, you may prefer W. Edwards Deming’s approach of looking at the existing data and working from External and Internal Failure, or CAPA; starting with correcting what is holding up productivity and then leveraging that knowledge to employ Preventive action for the next cycle.
Most failures occur at the interfaces where one process or system ends and the next begins. CoQ looks at monetary impact to the business, often after the error occurs. ToC is closer to the action where processes and sub elements pass information or tangible items from one step to another. Use this difference of perspective to create lagging and leading indicators for a feedback loop of continuous improvement
Measures of success are set at both the executive and front-line levels. Figure 5 shows the continuous flow of strategy, to tactics and operations and back up again. Financial measures are set at the corporate level in the form of goals. These goals are conveyed to functional and middle management who must translate the financial goals and associated allocations into resource requirements. At some point the financial language of the annual report must be translated into the internal process and resource language of design, development, and implementation. It is middle management’s responsibility to balance resources to requirements. The customer and executive management set the requirements. The internal business functions meet those requirements.
Figure 5 The Cycle of Leading and Lagging Indicators for Measuring Results xii
Figure 5 illustrates the top down flow of policy deployed from the executive offices through the organization for translation into operational results. Top management is interested in the overall financial health of the business. CoQ provides lagging indicators of results in the form of dollars saved, revenues increased, or profit realized. As the vision and goals move further into the functional levels of the company, they are translated into measurable objectives and finally into tasks with assigned accountability and verifiable measures. The daily measures are tracked as leading indicators that drive adjustments in processes for continuous improvement. This translation is best done at the level where the action is performed, while ToC monitors for any threat to optimal throughput. That is where the intimate knowledge of what it takes to get the job done resides.
Project plans are created at the operational team level and presented to higher levels of management as reflected in figure 5 by the arrow labeled “Action/Dates to Achieve.” Effective strategic and tactical planning is rarely a single cycle process. Usually it is an iterative series of communication from top down for review, verification, and suggested modifications at the operational level. Once operations is clear on their ability to perform effectively against the goals from top management, the project plans are rolled back up to top management for finalization, reporting and tracking.
Measuring (throughput) can be tricky. The metrics need to measure some combination of whether the activity accomplishes alignment with the business, the speed of the service, the error rate, and the cost of service. The lagging indicator measures the completeness of a customer interaction, while the leading indicator measures the total time to complete the interaction.
Both CoQ and ToC are driven by meeting the needs of the customer. The perspective is different. Like lean, CoQ and ToC can be combined to create a sustainable system for the three-legged stool, often described as quality, schedule, cost. Other terms are sometimes used to describe these three dimensions of lean as quoted below.
Some common misconceptions about quality, productivity, and value (ROI) are:
- You can’t have higher quality and lower expenses
- Customer satisfaction is not related to value (Value = Perceived Quality/Price)
- Schedule adherence and on-time delivery are not related to quality
- Quality is the responsibility of the shop floor xiii
By using the top-down and bottom-up cycle of measurement, feedback, analysis, and improvement, organizations can focus scarce resources on their highest priorities.
Data Measurement and Flow Between CoQ and ToC
Figure 6 demonstrates how regularly gathered organizational data support both the CoQ and ToC improvement cycle. The top down approach uses the CoQ to prioritize improvement opportunities based on revenue and expense analysis (business goals, informal estimates). The bottom-up approach begins with CAPA (corrective action, leading to preventive action) at the daily management level, often addressing internal failures, audit findings, and project/process lean opportunities (quality improvement cycle, formal quality tracking system). Both perspectives use targeted metrics. The heart of the new digital platforms and the digital models is data and analytics that enable fluidity and value creation.
Data dashboards enable companies to:
- Respond much more tightly to align the service or product with the direction the business wants. This strategic perspective is driven by financial decision making.
- Measuring productivity and improved use of resources serves to reduce expenses while achieving equal or greater customer satisfaction, loyalty through quality of execution.
The quality cost database is the means to track the benefits of systemic improvement approaches. In a consolidated digital platform, the quality cost database is more a filtering technique, pulling information from the universal data collection system based on specific measures such as those shown in this representation.
Figure 6 Sharing common data across CoQ and ToC monitoring
Figure 7 shows the flow of measures from bottom up of recent Covid-19 federal tracking systems. Since I am not involved in this process directly, I am sharing what all of us have seen on the evening news. Leading indicators are reported bottom up for daily and weekly testing results. When we think of Theory of Constraints, we can certainly draw a parallel with 4-hour waits in the testing line, shortages of PPE, testing reagents, and capacity for contact tracking. Local health centers, hospitals, and even pharmacies are noting these constraints loudly.
As we move up the level of measures, we can see the data being summarized into broader geographic reporting. This consolidation of numbers moves from daily leading indicators, to weekly and monthly lagging indicators. I would not presume to know the Cost of Quality waste involved in poor testing reliability, PPE lost within distribution centers when local hospitals are screaming for the materials, or the impact of aging computer systems on the cycle time for unemployment applications.
The Role of Quality Management in Cost of Quality
As Cost of Quality drives the improvement cycle, managing the impacts to quality helps in several areas. Knowing what needs to be done, in what priority, how the improvement projects or methodologies are progressing, and whether sufficient resources are being applied to prevention are all aspects of the improvement cycle that are addressed by quality impacts.
|Level||Name of entity||KPI|
|United States Federal Gov’t.||Executive Office of Governor Department of Health||Covid-19 infections Total, Deaths for Florida & segmented per county, by CDC criteria|
|County||Department of Health||Covid-19 Infections Total and Deaths county, by CDC criteria|
|City/municipality||Department of Health||Covid-19 Infections Total and Deaths by municipality, by CDC criteria|
|Local (hospital)||General Manager||Infectious Diseases (per section, per type of infection (TBC, Covid-19, STD, ...)|
|Local (school)||Principal||(Reporting all infectious disease to CDC)|
|Public Service organization||Orlando Public Health office||Disease Information Specialist blood draw and infection indicators by CDC criteria|
|Homeless shelter||Infectious Disease totals, Contact tracing|
Figure 7 Covid-19 Federal and Local Response Measurement Flow Example
“The connection between production, local process improvements, engineering, marketing and most importantly finance is now emerging into a totally new, holistic pattern.” “Do not allow inertia to become a system constraint” xiv
From this quote, you can see that Goldratt understood the Cost of Quality concepts before he developed his Theory of Constraints model. Some of the Critical Success Factors for exploiting opportunities to reduce system constraints are:
- Focus on ROI when addressing impacts with strategic management initiatives
- Include all significant quality impacts
- Integrate ROI into management decision-making and problem solving
- Integrate ROI with improvement approaches; do not separate the two
- Use meaningful metrics displayed graphically
- Data must be shared with users closest to activities being monitored – Tie to Theory of Constraints activities
- ROI is used as a bridge between quality initiatives and daily management of resources
Keep looking at the dollars at the executive level. This is what makes up the quarterly and annual reports to stockholders. Use Pareto Charts to stay focused on the highest priority opportunity or corrective action. Cost of Quality, Pareto Charts, Trend Charts, Profit and Loss statements, all get the attention of business leaders. Keep the data in a common location where it can be analyzed and cut in different ways. Executives want to see dollars. Middle managers need to see dollars and resource constraints. Front line managers and teams need to see value stream mapping. What is the balance among cost, schedule, and quality?
The Role of the Jonah in Theory of Constraints
Goldratt names the mentor in his technical novel, The Goal, Jonah. The proponents of ToC offer certification training for the concepts that Jonah teaches to the protagonist in the book. The holders of this certification are known as a “Jonah.” The major characteristics of someone in this role are:
- A senior leader or leadership team from business functions / functional areas of responsibility whose primary business is project-, production-, or inventory-based
- To connect constraint-based decision making to its impact on business performance
- Effective at analyzing current-state realities and defining future-state scenarios
- Uses a combination of logical thinking – causality and necessity – to derive the connections between business function actions and business performance outcomes
It can be seen from the list above that this role requires an individual with excellent leadership skills and a strong sense of system. The Jonah must be an advisor comfortable with working at all levels of the organization.
The basic responsibilities of a Jonah are:
- Express and analyze any contradictions in the measurement system
- Master the terminology and concepts of Throughput
- Expand perspective from in-house flow to distribution and marketing
- Learn to “identify, exploit, and subordinate” for maximum return on investment
- Look beyond operational waste to policy constraints
Employ Total Quality Management and Just in Time to meld effectively with the Quality Management roll up of leading indicators to attain strategic results (lagging indicators)
- Establish firm relationships across the production system to reduce or eliminate resistance
- Maintain a written implementation plan coordinated with CoQ imperatives
The Jonah role is not an entry level position. The Jonah, like the Six Sigma Master Black Belt, must understand systems and interaction of business, technology, and people. The Jonah is an advisor to production who is comfortable working with executive management to address both short- and long-term improvements toward business excellence.
There is rich opportunity for effective continuous improvement or sustainability in partnering the concepts of Cost of Quality and Theory of Constraints. CoQ focuses on financial quantification of value gained for the business because of production and service delivery. This is an external perspective. ToC focuses on the daily amplification of resources, people, and time to exploit bottlenecks that impact the required flow of operations throughout the value chain, from supplier, to process, to customer. ToC begins with an internal, process-based approach and expands to external relationships to further minimize barriers to excellence in execution. Together, CoQ and ToC make a strong, synergistic partnership for performance improvement.
i Jack Campanella, Principles of Quality Costs, Principles, Implementation, and Use, 3rd ed. ASQ Quality press, Milwaukee, Wisconsin, 1999 p 5
ii Douglas C. Wood, Principles of Quality Costs, Financial Measures for Strategic Implementation of Quality Management, 4th ed. ASQ Quality Press, 2013, pp 4, 5
iii Duffy, Grace L. and Furterer, Sandra L., The ASQ Certified Quality Improvement Associate Handbook, 4th ed., ASQE Quality Press, Milwaukee, WI 2020. P 157
iv Cost of Quality course materials, ASQE, Milwaukee, Wisconsin, 2020
v Joseph M. Juran and Joseph A. DeFeo, Juran’s Quality Handbook, 6th ed. McGraw Hill, New York, NY, p. 249
vi Jack Campanella, Principles of Quality Costs, Principles, Implementation, and Use, 3rd ed. ASQ Quality press, Milwaukee, Wisconsin, 1999 p. 10
vii Joseph M, Juran and A. Blanton Godfrey, Juran’s Quality Handbook, 5th ed. McGraw Hill, New York, NY. p 8.22
viii Duffy, Grace L. and Furterer, Sandra L., The ASQ Certified Quality Improvement Associate Handbook, 4th ed. Glossary, ASQE Quality Press, Milwaukee, WI, 2020 p. 311.
ix Eliyahu M. Goldratt, Theory of Constraints, North River Press, Great Barrington, Massachusetts, 1990, p. 3
x Nave, Dave, How to Compare Six Sigma, Lean and the Theory of Constraints, ASQ Quality Progress 2002. Pp 73 - 78
xi Eliyahu M. Goldratt, Theory of Constraints, North River Press, Great Barrington, Massachusetts, 1990, p 44
xii Figure derived from R. Bialek, G. Duffy, and J. Moran, Modular Kaizen, Dealing with Disruptions (Washington, DD: Public Health Foundation, 2011 p.47
xiii Hawley Atkinson, John Hamburg, and Christopher Ittner, Linking Quality to Profits, ASQC Quality Press, Milwaukee, WI, 1994 p. 54
xiv Eliyahu M. Goldratt, The Theory of Constraints, North River Press, Great Barrington, Massachusetts, 1990 p. 85, 6