Course: Quality Management

Unit 5: Management Systems

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Table of Contents
5.1. Introduction to ISO Standards ..................................................................................................... 3 5.2. Learning Objectives ....................................................................................................................... 3 5.3. ISO Standards ................................................................................................................................ 4 5.3.1. Evaluating ISO Standards as a Brand....................................................................................... 6 5.3.2. Procedures to Adopt ISO Standards ......................................................................................... 7 5.3.3. How to Manage ISO Systems .................................................................................................. 8 5.3.4. Analysing and Adopting Quality System Audit ....................................................................... 8 5.3.5. Scope of Requirements for ISO 9001..................................................................................... 10 5.4. ISO Standard Certification ......................................................................................................... 10 5.4.1. Advantages of ISO Certification ............................................................................................ 11 5.4.2. ISO Certification Process ....................................................................................................... 11 5.4.3. Steps involved in ISO Certification........................................................................................ 13 5.4.4. Certification Agencies ............................................................................................................ 14 5.5. Business Excellence Models ......................................................................................................... 15 5.5.1. The Malcolm Baldrige Criteria for Performance Excellence ................................................. 16 5.5.2. EFQM Business Excellence Model ........................................................................................ 20 5.6. Cost of Poor Quality (COPQ) ..................................................................................................... 22 5.6.1. Examples of Cost of Poor Quality .......................................................................................... 22 5.6.2. Contributors to Cost of Quality and Cost of Poor Quality ..................................................... 23 5.6.3. Analysing impact of TQM on Cost of Good Quality and Cost of Poor Quality .................... 27 5.6.4. Benefits of Reduction in Cost of Poor Quality....................................................................... 27 5.7. Summary ....................................................................................................................................... 27 5.8. References ..................................................................................................................................... 29

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5.1. Introduction to ISO Standards

ISO 9000 Standards ISO 9000 standards have a philosophy of Document it and do it like you documen t it. If it moves, train it. If not, calibrate it. Exhibit 1 Certification for ISO standards may not represent an order winner, but it is rapidly becoming a universal order qualifier.

Source: Total Quality Management: Text and Cases by K. Shridhara Bhat

Quality management became an important strategic objective and it was decided to achieve standardisation of quality requirements. This led to the establishment of a specialised agency for standardisation called the International Organisation for Standardisation (ISO). ISO agency consisted of representatives from the national standards bodies of 91 countries. A series of written quality standards caked as ISO 9000 standards were adopted in 1987. These standards were revised in 1994. The International Organisation for Standardisation used the ISO prefix while naming the standards. ISO standards are the minimum standards of quality that must be met by industries. These standards are universal in nature and are specific to a particular product, material, or process. ISO standards enable an organisation to implement a structure for meeting the objectives related to quality management or environmental management. There are various ISO standards relating to the different elements such as safety, customer service, usability, and quality-related aspects. ISO standards are applicable to any organisation irrespective of its size, type, or function. These standards could be applied in any scenario such as: Large or Small Organisations Manufacturing or Service Organisations Business or Organisation involved in any type of activity Business Enterprises, Public Administration Entities, or Government Departments

5.2. Learning Objectives

By the end of this unit, you will be able to: Recognise the need of ISO standards and its contributions to total quality management Recall the procedures to adopt ISO standards List the categories of Quality Audits List the various elements in the ISO certification process
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 Recall the steps involved in ISO certification Recognise the need of the various Business Excellence models Recall the impact of TQM on the various costs that contribute to the Cost of Good Quality and Cost of Poor Quality

5.3. ISO Standards

Let us look at two important ISO standards, namely, ISO 9000 and ISO 14000. ISO 9000 Family of Standards The ISO 9000 family of standards is associated with management of quality. ISO 9000 is considered to be an international reference for requirements relating to quality management in the dealings between businesses. ISO 9000 would ensure that an organisation meets the specified standards while considering the following aspects. Quality Requirements of the Customer Regulatory Requirements that are Applicable Enhancement of Customer Satisfaction Achievement of Continued Improvement in Performance

Objectives, Structure, and Elements of ISO Standards The key objectives of ISO standards include: Achieving, maintaining and seeking continuous improvement in product / service quality in relationship to the requirements Improving quality of operations for continuously meeting the stated and implied needs of customers and stakeholders Providing confidence in internal management and other employees regarding fulfillment of quality requirements and occurrence of improvement Providing confidence to customers and other stakeholders regarding achievement of quality requirements in the delivered product Providing confidence regarding fulfillment of quality system requirements
Source:http://www.iso.org/iso/iso_catalogue/management_standards/iso_9000_iso_14000.htm

Figure 5.1 displays the structure of ISO 9000 series.

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ISO 8402 Concept Definition

ISO 9000 Selection and Utilisation of Standards

Contractual Scenarios

Non-contractual Scenarios

ISO 9001, ISO 9002, ISO 9003 Models for Quality Assurance

ISO 9004 Quality Management and Quality System Elements

Figure 5.1 Structure of ISO 9000 Series

ISO 9000:2000 A version of ISO 9000, namely ISO 9000:2000 provides guidance on creating a customer-oriented culture. The guidance is provided for meeting the customer needs instead of prescribing a set of quality control practices to be implemented for achieving compliance. The ISO 9000:2000 standard was closely aligned to the quality management principles established by Philip Crosby. ISO 14000 Family of Standards The ISO 14000 family of standards is associated with management of the environment. ISO 14000 is a standard that facilitates organisations in meeting their environmental challenges.

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ISO 14000 would ensure that an organisation meets the specified standards while considering the following aspects. Minimisation of harmful effects on the environment as a result of the organisations activities Achievement of continued improvement of environmental performance
Source: Total Quality Management Text and Cases, by K. Shridhara Bhat

ISO Standards, its Objectives and TQM ISO Standards and Objectives ISO 9000 has an objective to ensure high quality of the produced product and the maintenance of quality for all productions.

Exhibit - 2

ISO 14000 has an objective to ensure that the environment was protected during the production of the product. ISO 9000 and TQM ISO 9000 is a sub-component of TQM. ISO 9000 is the minimum quality standard that is to be demonstrated by a supplier for receiving the ISO 9000 accreditation, whereas TQM is more comprehensive.
Source: Total Quality Management: Text and Cases, K. Shridhara Bhat

5.3.1. Evaluating ISO Standards as a Brand International standardisation organisations such as ISO are well-known brands. There is a significant impact of the identification of this brand on the adoption of standards. The ISO brand seemed to have a positive impact on the adoption of the standards. The aspect of mentioning to users about conformance to a standard, such as ISO, has greater impact than mentioning a product that has conformance to some specifications. It is also perceived that adoption of the standards could be positively influenced by effectively marketing the standards. ISO needs to treat their brands as an asset from a strategic perspective. Figure 5.2 depicts the impact of issues relating to standardisation for adopting and diffusing standards.

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Funding

Identification of the Brand

Timelines for Development

Adoption and Diffusion of Standards

Intellectual Property Rights

Marketing

Figure 5.2 Impact of issues relating to Standardisation for Adopting and Diffusing Standards
Source: Data-Exchange Standards and International Organisations: Adoption and Diffusion, Josephine Wapakabulo Thomas

5.3.2. Procedures to Adopt ISO Standards The following procedures are involved in the adoption of ISO standards. Establishment of a steering committee consisting of representatives from various functions (such as, purchasing, production, design, quality assurance) Coordination of project tasks by the steering committee (for example, collection of existing procedures, and their review and revision as required) Establishment of a quality policy Development of a corrective action process for monitoring and controlling nonconformances Writing document control procedures Completion of drafts of detailed procedures for each element of ISO and t heir review and approval Consolidation of all procedures in the quality manual Providing training to all employees on the quality policy and audit procedures of the organisation Conducting internal audits Preparing for registration audit The adoption of ISO standards requires the support of the top management in an organisation. Since employees will apply the procedures and take care of the details, they need to be trained well. The employees also need to anticipate questions that might be asked by external auditors.

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5.3.3. How to Manage ISO Systems The following are the key elements involved in the management of ISO-based systems. Planning: The activities that are to be performed need to be planned ahead. It is also required to establish clear responsibility and accountability. All requirements and documents are the base against which quality is measured Performance: Records need to be maintained so that measurement could be done. The people performing the tasks have to be given appropriate tools and the necessary training to complete the job as specified Measurement: The success or failure of an activity needs to be measured against an accepted standard. Some of the tools of measurement are audit, inspection, appraisal, evaluation, and review. Improvement: Based on the measured data, problems need to be corrected and the process has to be improved. 5.3.4. Analysing and Adopting Quality System Audit Categories of Audits Audits could be classified as either Compliance audits or Performance audits. These could be further categorised as given below. 1. System Audits 2. Process Audits 3. Product Audits System Audits The following are the significant aspects of system audits. It audits the system processes and management controls within an organisation It examines an enterprise at the macro level They usually cover many activities and cut across organisation, product, and process boundaries It could include the training system, quality circle system, maintenance system, so on. System audits could be horizontal or vertical. Horizontal System Audit: A horizontal system audit looks at how processes and controls have been applied across various functional groups. It provides an understanding of the manner in which common rules have been implemented across the organisation. A horizontal system audit is useful in analysing consistency.
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 Vertical System Audit: A vertical system audit looks at how various processes and controls have been applied within a single unit. It enables a view of whether the various rules work together effectively and efficiently. It is necessary to have a mix of horizontal and vertical system audits within an organisation. System audits could be done on various elements, examples of which include: Process Areas Functional Departments Quality Systems Customers Specific Projects Audit Categories Figure 5.3 displays the types of audit categories Exhibit - 3 Compliance Audit Looks at consistency implementation of defined system. It helps promote stability Looks at the ability perform according defined processes Looks at the production goods or delivery services according defined requirements Performance Audit Looks at the ability to achieve organisational goals. It helps to promote change Looks at the ability of processes to achieve the desired characteristics Looks at the suitability of goods or services for intended use

System Audit

in a to to to of of to

Process Audit

Product Audit

Figure 5.3. Audit Categories

Source: Quality audits for improved performance by Dennis R. Arter

System compliance audits are usually external audits conducted by third-party agencies. This includes conformity assessments and regulatory audits. The auditors look at the products (goods and/or services) and the processes (operational and management) during their visit to determine the compliance with system requirements.

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Process Audits Process audits are usually internal audits. A process audit examines an activity for verifying that the inputs, actions, and outputs are according to the defined requirements. After a number of short process audits, sufficient information will be available to draw conclusions. However, there could be a one-time series of process audits conducted on the activities of suppliers if they ask for it (which could happen in cases of high degree of customer-supplier relationship). In an ideal scenario, internal audits need to be a mix of 75% process audits and 25% system audits. 5.3.5. Scope of Requirements for ISO 9001 The following are the scope of requirements for ISO 9001. 1. Management Responsibility 2. Quality System 3. Contract Review 4. Design Control 5. Document and Data Control 6. Purchasing 7. Control of Supplied Products 8. Product Identification and Traceability 9. Process Control 10.Inspection and Testing 11.Control of Inspection, Measuring and Test Equipment 12.Inspection and Test Status 13.Control of Non-conforming Products 14.Corrective and Preventive Action 15.Handling, Storage, Packaging, Preservation and Delivery 16.Control of Quality Records 17.Internal Quality Audits 18.Training 19.Servicing 20.Statistical Techniques

5.4. ISO Standard Certification

The International Organisation for Standardisation (ISO) maintains the ISO 9000 standards. It is administered by agencies involved in accreditation and certification. An organisation could be considered to be ISO 9001 certified once it has been independently audited and certified to conform to ISO 9001 standards. ISO 9000 certification provides an assurance to customers that an organisation has designed and managed its processes for delivering a quality product.
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According to ISO 9000 standards, third party audits need to be performed leading to certification of the suppliers. This certification has acceptance by all customers, (thus, eliminating the need to conduct 10 to 20 different audits by many organisations) who are interested in business transactions with a supplier. In the beginning, ISO 9000 standards had the following objectives. To be advisory in nature To be used in contractual scenarios between two parties (customer and supplier) To be used for internal auditing Later, the ISO standards evolved into criteria for organisations intending to certify their quality management or achieve registration through a third party auditor (generally, a registration agency known as registrar). The registrar certifies the company and the certificate is acceptable to all the suppliers customers. This eliminates the need for each customer to audit a supplier for compliance to the standards. 5.4.1. Advantages of ISO Certification The following are some of the advantages of ISO certification. ISO Certification: 1. Provides a set of good common practices for quality assurance systems 2. Helps reinforcement of the stated quality system due to the requirements for periodic audits until the quality system becomes in-built into the organisation 3. Facilitates discovery of problems and improvement of processes 4. Helps to enforce a discipline of control 5. Enables organisations to have a competitive advantage and better marketability of their products / services 6. Helps organisations to meet contractual obligations with their customers 7. Makes the selection process easier if a potential supplier has ISO certification 5.4.2. ISO Certification Process The following are the basic requirements for ISO 9000 certification. Documentation: It is required to develop necessary documentation of procedures for carrying out all activities Performance: The documentation is to be used as a working tool by doing everything that is recorded Verification: It is required to verify that the developed and documented procedures are followed by all the parties concerned and in all cases
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 Filing: It is required to retain a written trace of all procedures. This should be updated and made available to all the persons concerned An independent third party does the certification. The cost towards certification could be quite high, and it could take up to two years to obtain certification. Examiners who are accredited to the national standards setting agency assess the adherence to procedures on an annual basis. Re-certification for ISO standards is required once in three years. Individual departments or divisions have to achieve registration on an individual basis. Figure 5.4 displays the various elements in the ISO certification process.

Figure 5.4. Elements in ISO Certification Process

The details of each of these elements are provided below. Document Review Document review involves review of quality manual or quality system documents by the registrar. Pre-assessment Pre-assessment involves identification of potential non-compliance in the quality system and its documentation. This serves as a final check facilitating correction of last-minute issues. Assessment An assessment of the quality system and its documentation is done by a team of two or three auditors. After the audit, corrective actions need to be taken and re-audit is to be done, if required. After passing the audit, the registrar could certify if ISO standards have been followed. The organisation is
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provided with a letter and a certificate that could be used to announce to the external world about the ISO certification. Surveillance Surveillance is a periodic re-audit for verification of conformance with the practices and systems registered. 5.4.3. Steps involved in ISO Certification Table 5.1 displays the key steps involved in ISO 9001 certification.
Table 5.1 Key Steps involved in ISO 9001 Certification

Step Step 1: Gap Analysis Step 2: Orientation Training Step 3: Documentation of the System Step 4: Implementation of the System Step 5: Organisation-wide Training Step 6: Internal Quality Audits Step 7: Pre-assessment Step 8: Final Assessment

Explanation Gap analysis involves assessment of existing quality management practices against ISO 9001 requirements. Orientation training involves providing training on ISO 9001 requirements and action plans to the Top/Senior Management. It involves preparation of quality manuals and designing quality record formats. Implementation of quality system in the organisation will be according to the quality manual. Organising for training on ISO 9001 clauses, Statistical Quality Control Techniques, Housekeeping (Japanese 5S), and Quality Audit in the entire organisation.is done in this step. Internal Quality Audit is a periodic assessment of quality system implementation and corrective actions. Pre-assessment is an initial audit by the certifying agency, and involves implementation of corrective actions. Final assessment involves certification audit by the certifying agency and providing recommendation for certification.

Source: http://www.globalqualityvillage.com

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Likely Questions during the Assessment The questions that are usually asked by the auditors during the assessment phase of ISO certification include the following. Exhibit - 4 Is there a documented policy on quality? Are management objectives for quality defined? Are the quality policy and objectives transmitted and explained at all levels of the organisation? Is there a documentation of the job descriptions for people who manage or perform work that impacts quality? Are the functions that impact quality described? Has the management designated an individual or group with the authority to prevent non-conformities in products, identify and record quality issues and also recommend solutions? What are the mechanisms used for verification of solutions?

5.4.4. Certification Agencies The ISO does not directly certify organisations. It is required to engage an external organisation that has specialisation in assessing compliance with the standard certification agencies (also called as registrars). These standard certification agencies are usually authorised by accreditation agencies that are set up for accreditation purpose. The certification agencies audit the organisations that apply for ISO compliance certification. The certification agencies charge fees for providing services. The certifications issued by any of the certification agencies are accepted worldwide. The following are some of the factors involved in selecting a certification agency. Credibility of the Certifying Agency: All countries have a body to control the activities of registrars and also to ensure that they have their own quality systems which are equivalent to ISO. Lists of approved registrars are also maintained in most countries. Recognition of Certification: It is better to consider agencies that are recognised in the home country of an organisation. Focus on Specific Industry by Registrar: It may be better to select a registrar who focuses on a specific industry due to better familiarity with the processes generally used in that industry. References: A registrars process needs to be reviewed and references are to be checked to have an idea about the quality of service.
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Costs and Charges: A comparison of the costs and charges involved (like application fees, administrative fees, document assessment fees, fees for annual or semi-annual review of quality process so on) needs to be done. It also needs to be ensured that there are no hidden costs.

Source: Quality Control for Dummies by Larry Webber and Michael Wallace

ISO 9001 Implementation: A Business Case Bank of Boston became the first bank in South America to be awarded ISO 9000 certification. It received ISO 9000 certification for its international safekeeping services (a banking service wherein the bank acts as a foreign investors attorney, liquidator and representative for operations such as securities and stock brokerage.

Exhibit - 5

The Bank is required to ensure that all the local rules and regulations are thoroughly followed. The American Bureau of Shipping issued the ISO 9000 certificate to Bank of Boston. The Chairman of Bank of Boston, Charles K. Gifford expressed that ISO 9000 certification being an internationally standardized process was a good measure of the ability of a company to deliver the highest level of service quality. Charles K. Gifford mentioned that any company, irrespective of the industry needs to meet the same rigorous management requirements for obtaining the certificate. He also added that Bank of Boston actively pursued ISO 9000 certification to demonstrate the commitment of the bank to its existing and potential customers in providing products and services of the highest quality.
Source: http://www.thefreelibrary.com

5.5. Business Excellence Models

The evolution of the Excellence model and its usage has facilitated the development of Total Quality Management (TQM) and Business Excellence within organisations. The management of quality is a continuous process. There are various Business Excellence models and awards that have been instituted for quality management and business excellence. Figure 5.5 displays two of the Business Excellence models.

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Business Excellence Models

Malcolm Baldrige Criteria for Performance Excellence

EFQM Business Excellence Model

Figure 5.5 Two Business Excellence Models

Sources: Measuring Business Excellence by Gopal K. Kanji, Total Quality Management: Text and Cases by K. Shridhara Bhat

5.5.1. The Malcolm Baldrige Criteria for Performance Excellence The following key aspects are the Baldrige criteria for performance excellence. Leadership: The leadership system, values, expectations, and public responsibilities of the organisation Strategic Planning: The effectiveness of strategic planning and its deployment with a focus on customer needs and operational performance requirements Customer and Market Focus: The manner in which an organisation determines the customer needs, market requirements and expectations, enhancement of relationships with customers, and assessment of customer satisfaction Information and Analysis: The level of effectiveness in collecting information and analysing it for supporting customer-driven performance excellence and success in the market Human Resource Focus (Workforce focus): The success of efforts to achieve the entire potential of the employees for creating a high-performing organisation Process Management: The extent of effectiveness of systems and processes to assure the quality of products and services Business Results: Results of performance, trends, and comparison with competitors in key business areas
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Figure 5.6 is the pictorial description of the Baldrige Criteria for Performance Excellence framework.

Figure 5.6 Baldrige Criteria for Performance Excellence Framework

Source: http://www.quality-management-tools.com

Malcolm Baldrige National Quality Award The Malcolm Baldrige National Quality Award was established in the year 1987. It was set up by the US Congress and named after a former secretary of commerce. It could be said to be the American equivalent of Deming prize instituted by the Japanese. The award is administered by the National Institute of Standards and Technology. The key aspects of the Malcolm Baldrige award are as follows. It serves as a strong catalyst for quality Only companies located in the United States (US) are eligible for this award The Criteria for Performance Excellence of this award has a framework to integrate total quality principles and practices in an organisation The award is given to two US companies every year in each of the three categories, namely manufacturing, services, and small business Organisations that are most effective in pursuing and attaining total quality are recognised
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Evaluation Process for Malcolm Baldrige Award A rigorous process is involved in the evaluation of applications for the Malcolm Baldrige award. The seven Baldrige criteria namely, Leadership, Strategic planning, Customer and market focus, Information and analysis, Human resource focus, Process management, and Business results are judged on the following basis. Self-evaluation report provided by an applicant for the award Initial screening of the key evaluation report of applicants Site visit by Baldrige examiners for the applicants who successfully clear the initial screening phase of the key evaluation report Figure 5.7 displays the steps involved in the Malcolm Baldrige award process. Submission of Responses Extensive Review Evaluation of Responses Examination of Strengths

Evaluation of Examined Items

Awarding of Percentage Score

Figure 5.7. Evaluation Steps in Malcolm Baldrige Award Process

The following steps are involved in the Malcolm Baldrige award process. The responses to the seven Baldrige criteria namely, Leadership, Strategic planning, Customer and market focus, Information and analysis, Human resource focus, Process management, and Business results are provided by an applicant for the award. Every application that has been received is reviewed extensively by up to 15 examiners who have been selected from among leading professionals of quality in business, academia, government, and healthcare. The response of applicants to each award criteria is evaluated by examiners. The major strengths and improvement areas related to the criteria are examined. According to the strengths identified, a percentage score in the range of 0 to 100 in increments of 10 is provided to each item. Each of the items examined are evaluated on the following aspects. Approach: This is the method utilised by the organisation for achieving the requirements specified in each category
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Deployment: This is the extent of application of the various approaches to all the relevant areas and activities that are specified and implied in each category Results: This has reference to the effects and outcome in the achievement of objectives specified and implied in each criteria of the award

Benefits of the Malcolm Baldrige National Quality Award Program The following are the benefits for firms applying for the Baldrige award. Self-assessment Tool Baldrige Effect Sharing Information Self-assessment Tool When the categories for the awards are applied to organisational processes, managers and other employees have a better idea about their own operations and the level of success achieved in serving their customers. This aspect of self-assessment provides important insights. Baldrige Effect Though an organisation may not be keen to apply for the Malcolm Baldrige award, its managers may utilise the categories and evaluation process as guidelines for process improvement. Sharing Information All those who win the Baldrige award agree to actively work towards teaching other organisations about quality and their organisational experiences in this regard. This facilitates beneficial exchange of information between organisations. Winner of Malcolm Baldrige Quality Award A Business Case Here is a business case of Ritz-Carlton Hotels, an organization with a focus on customer service and a winner of the Malcolm Baldrige Quality Award on two occasions. The commitment of the organization towards customer satisfaction and guest services is apparent in every aspect of their business. It is the duty of an employee to go above and beyond the call of duty with each and every customer they service.

Exhibit - 6

Ritz-Carlton Hotels won the prestigious Malcolm Baldridge Quality Award twice. The organization has truly taken customer service to a level much above their competition. However, such superior level of service did not simply happen by chance. The Ritz-Carlton Hotels molded their employees into superior service providers with a variety of intensive trainings, merit-based appraisal systems, and continuous reinforcement of the companys
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commitment to these Gold Standards. This commitment by the organization and each and every team member enabled Ritz-Carlton to follow the concept that the customer is always right and evolve it into an ultimate customer service experience. This was the core element of their success. Apart from this, the usage of Total Quality Management (TQM) at Ritz-Carlton Hotel Company enabled them to drive significant and sustainable change. This level of adaptability, while maintaining the highest levels of quality, propelled Ritz-Carlton to the forefront of its industry.
Source: http://www.grin.com/e-book/60430/total-quality-management-a-case-study-of-a-quality-award-winningorganization

5.5.2. EFQM Business Excellence Model The EFQM (European Foundation for Quality Management) Business Excellence Model is a nonprescriptive framework which recognises the existence of many approaches in achieving sustainable excellence. The EFQM Business Excellence model is based on the following aspect. Excellent results with respect to Performance, Customers, People and Society are achieved through Leadership driving Policy and Strategy, People, Partnerships and Resources, and Processes. Figure 5.8 represents the nine aspects of EFQM Business Excellence model. Enablers Results

People

People Results

Policy and Strategy

Customer Results

Partnership and Resources

Society Results

Innovation and Learning

Figure 5.8 EFQM Business Excellence Model

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Key Performance Results

Leadership

Processes

The fundamental concepts that form the essence of the model are: Results Orientation Customer Focus Management by Processes and Facts Leadership and Constancy of Purpose Continuous Learning People Development and Involvement Partnership Development Innovation and Improvement Public Responsibility

According to EFQM, excellence is an outstanding practice in managing the organisation and achieving results based on the fundamental concepts highlighted above. The EFQM Business Excellence Model has the enablers and results criteria, with each of them constituting a total of 50 percentage of the total weight. Enablers Enablers are the set of factors that enable an organisation to achieve model performance. The Enablers are leadership, policy and strategy, people, partnership and resources, and p rocesses. Results Results are basically what an organisation achieves in relation to the criteria established in the results category. They are the outcome of the Enablers. The Results include customer results, people results, society results, and key performance results. There are nine boxes in the EFQM model, which represent the criteria used for assessment of the organisations progress towards excellence. Each of these nine criteria has a definition explaining the high-level meaning of that criterion. Each criterion is supported by sub-criteria. Each of the subcriteria has lists of possible areas to be addressed. EFQM Award The EFQM Award was designed to provide European Community and businesses with an increased awareness of the growing significance of quality to their competitiveness in the global market, and an increased standard of living. The key aspects of the EFQM award are: EFQM award was initiated in 1991 by the European Foundation for Quality Management, and consists of two parts: The European Quality Prize The European Quality Award
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 The European Quality Prize is given to organisations that demonstrate excellence in quality management practice by meeting the criteria for the award The European Quality Award is given to the most successful applicant Evaluation Process for EFQM Award The applicants for the award need to demonstrate that their Total Quality Management approach has significantly contributed towards meeting the expectations of employees, customers, and other stakeholders. The assessment is done on the basis of customer satisfaction, business results, leadership, processes, resources, policy and strategy, employee satisfaction, people management, and impact on society. Results related to customer satisfaction, employee satisfaction, and impact on society constitutes a high percentage of the overall score. The mechanisms by which an organisation approaches its responsibilities of business are called as Enablers. These drive the factors that constitute a high percentage of the total score.

5.6. Cost of Poor Quality (COPQ)

It is said Cost $1 to prevent a problem, $10 to find it, and $100 to fix it
Source: Actionable performance measurement: a key to success by Martin T. Howell

When products or services may not meet specifications or expectations, the materials, labor, and overhead costs that could be attributed to imperfections in the process are called Cost of Poor Quality (COPQ). The imperfections in the process could be in the delivery of products or services. The measure of Cost of Poor Quality helps to specify the impact of poor quality on a business.
Source: Six Sigma for Managers by Greg Brue

5.6.1. Examples of Cost of Poor Quality Some of the examples of Cost of Poor Quality are: Inspection Rework Duplicate Work Rejections Scrap Replacements Refunds
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Customer Complaints Loss of Customers Damage to Reputation Cost of Poor Quality An Example Whenever a rework is carried out, there is an increase in the cost of poor quality.

Exhibit - 7

As an example, correcting a bank statement increases cost of quality. Similarly rework on a service such as processing a transaction again leads to an increase in cost of poor quality.

5.6.2. Contributors to Cost of Quality and Cost of Poor Quality There are various costs that contribute to the Cost of Quality such as Prevention costs, Appraisal costs, and Failure costs. The failure costs contribute to the Cost of Poor Quality. Figure 5.9 is the pictorial depiction of the costs that are considered while assessing the Cost of Quality and Cost of Poor Quality.

Cost of Quality (COQ)

Cost of Good Quality

Cost of Poor Quality (COPQ)

Prevention Costs

Appraisal Costs

Failure Costs

Internal Failure Costs

Figure 5.9 Cost of Quality and Cost of Poor Quality Page 23 of 30

External Failure Costs

The Cost of Poor Quality (COPQ) includes the two types of failure costs, namely, internal failure costs and external failure costs.
Cost of Quality Cost of Good Quality Cost of Poor Quality

where,
Cost of Good Quality Controlled Costs Pr evention Costs Appraisal Costs

Cost of Poor Quality Internal Failure Costs External Failure Costs

We can also say that: Cost of Poor Quality = Actual cost of product or service Reduced cost that would have been possible without failure or defects of products or without poor quality of service Each type of cost that contributes to the Cost of Good Quality is given below. 1. Prevention Costs Prevention cost is the cost incurred to prevent defects (that is, nonconformance to requirements) from occurring. It is the cost involved in minimising failure costs and appraisal costs. It includes cost of those activities that are performed to avoid poor quality in a product or service.

Examples of Preventive Costs are: Quality Planning Training Policies and Procedures Preventive Maintenance

2. Appraisal Costs Appraisal cost is the cost incurred for the detection of defects (that is, to appraise a product or service whether it conforms to requirements). It is the cost involved in determination of the degree of conformance to quality requirements.

Examples of Appraisal Costs are: Testing Inspection Quality Audits

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Each type of cost that contributes to the Cost of Poor Quality is given below. 1. Failure Costs Failure costs could be categorised as either internal failure costs or external failure costs. Internal Failure Costs Internal failure cost is the cost of failure that is incurred before delivering or shipping a product, or providing a service to the customer (that is, cost arising from defects identified before the product or service is received by the customer).

Examples of Internal Failure Costs are: Re-working a Product or Re-doing a Service/Activity Re-inspection/Re-testing Scrap Downtime

External Failure Costs External failure cost is the cost of failure that is incurred after delivering or shipping a product/after providing a service to the customer (that is, defects found after the customer receives the product or service).

Examples of External Failure Costs are: Warranty-Related Claims Returned Material/Items Recalling of Products Customer Complaints Processing Compensation for Defects Damage to Reputation

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Cost of Poor Quality in Organisations Cost of Poor Quality (COPQ) for traditionally managed organisations has been estimated to be in the range of 20% - 40% of the budget. This indicates that an organisation with revenues of $1 million has waste and defects in its systems that cost between $200,000 and $400,000.

Exhibit - 8

According to another estimate by firms, COPQ could cost between 15% and 40% of sales or budget. A focus on cost reduction and quality costs has led to a reduction of COPQ in many organisations to 3% or less. Organisations usually spend more on controlled costs (prevention costs, appraisal costs) to reduce failure costs, especially external failures that lead to major costs.
Source: Actionable performance measurement: a key to success by Martin T. Howell

Estimation of Costs Contributing to Cost of Poor Quality (COPQ) Table 5.2 represents the extent of estimated contribution of the various costs towards Cost of Poor Quality. Exhibit - 9
Table 5.2. Extent of Estimated Contribution of the Various Costs Towards COPQ

COPQ Category Internal Failure Costs External Failure Costs

Estimated Contribution (%) 25% 40% 25% 40%

Source: Actionable performance measurement: a key to success by Martin T. Howell

Prevention Costs and Internal Failure Costs: Real-life Examples Prevention costs According to a statement issued by the Law Society, judges were to receive training for avoiding mistakes that could involve a minimum cost of 10,000 for hearing an appeal to rectify the error.

Exhibit - 10

Internal Failure costs More than 25 million of new 5 notes of Bank of England that was supposed to have been issued one month later had to be discarded and pulped. This was done due to a controversy regarding the portraying of George Stevenson, who was a pioneer in railway engineering. The notes had mentioned that he died in the year 1845 instead of the correct year of 1848.
Source: The Essence of Total Quality Management, John Bank

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5.6.3. Analysing impact of TQM on Cost of Good Quality and Cost of Poor Quality Let us look at the impact of TQM on the various costs that contribute to the Cost of Good Quality and Cost of Poor Quality. Impact on Prevention Costs In the short term, investment is required for planning, processes, systems, and training since it is required to set the base for the future. Hence, prevention costs will increase in the short term Impact on Appraisal Costs As time progresses, it is not required to carry out inspection, verification of the work of others and such tasks. This causes the appraisal costs to gradually decrease. Impact on Internal and External Failure Costs Internal and external failure costs decrease drastically due to the effect of prevention activities undertaken. 5.6.4. Benefits of Reduction in Cost of Poor Quality The benefits through reduction in Cost of Poor Quality are not immediate. Initially, the cost of prevention may increase. However, all the costs contributing to the Cost of Poor Quality could be brought down to half of the original values. There could be further reduction in costs by almost 50% and the process could be repeated again and again. A reduction in the Cost of Poor Quality could lead to an improvement in sales, productivity, revenue, profit, product quality, service quality and the overall results of an organisation.

5.7. Summary
Here is a quick recap of what you have learnt in this unit. ISO standards established by International Organisation for Standardisation are the minimum standards of quality that must be met by industries. These standards are applicable to any organisation irrespective of its size, type, or function. The ISO 9000 family of standards is associated with management of quality, and the ISO 14000 family of standards is associated with management of the environment. The adoption of ISO standards requires the support of the top management in an organisation.

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 The key elements involved in the management of ISO systems are: Planning Performance Measurement Improvement

Audits could be either Compliance audits or Performance audits, and these could be further categorised as System audits, Process audits, and Product audits. ISO 9000 certification provides an assurance to customers that an organisation has designed and managed its processes for delivering a quality product. The various elements in the ISO certification process are: Document review Pre-assessment Assessment Surveillance

It is necessary to engage an external organisation that has specialisation in assessing compliance with the standard. Two of the Business Excellence models include Malcolm Baldrige Criteria for Performance Excellence, and EFQM Business Excellence Model. The Malcolm Baldrige criteria for Performance Excellence include Leadership, Strategic planning, Customer and market focus, Information and analysis, Human resource focus, Process management, and Business results. The EFQM Business Excellence Model has the enablers and results criteria, with each of them constituting a total of 50 percentage of the total weight. Cost of Quality includes prevention cost, appraisal cost, and failure cost. The Cost of Poor Quality (COPQ) includes the failure cost, which are of two types, namely, internal failure costs and external failure costs. A reduction in the Cost of Poor Quality could lead to an improvement in sales, productivity, revenue, profit, product quality, service quality and the overall results of an organisation.

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5.8. References

Book References Gryna, Chua, Defeo, Juran`s Quality Planning & Analysis for Enterprise Quality, 5 th Edition, Tata McGraw Hill, 2008 Kanishka Bedi, Quality Management, 3rd Edition, Oxford University Press, 2006 Debashis Sarkar, Quality in Business, Sage/Response Books, 2003 Debashis Sarkar, Lessons in Six Sigma - 72 Must know truths for managers, Sage/Response Books, 2004

Articles/Information for Additional Reading ISO 9000 Frequently Asked Questions (FAQs), http://bis.org.in/cert/faqmscd.htm EFQM Excellence Model, http://ww1.efqm.org/en/PdfResources/teaser-model170609.pdf Cost of Poor Quality - COPQ, http://www.isixsigma.com/dictionary/Cost_of_Poor_Quality_-_COPQ-63.htm The Cost of Poor Quality How to make better business decisions and positively affect your bottom line, http://www.dnb.co.in/Whitepaper.pdf Cost of Poor Quality http://web2.concordia.ca/Quality/tools/8costofpoorquality.pdf COPQ: The Truth Behind the Hidden Plant, http://www.bestpraxclub.com/pdf/sample.pdf Cost of Poor Quality Worksheet, http://www.quality-improvement-matters.com/support-files/copq-pens.pdf
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Web References

http://www.iso.org http://www.tqmcasestudies.com/baldrige/baldrige.html http://www.efqm.org http://www.asq.org/learn-about-quality/cost-of-quality/overview/overview.html http://www.qimpro.com/Cost_of_Poor_Quality.php

Video References The ISO 9000 family Global management standards http://www.iso.org/iso/pressrelease.htm?refid=Ref1174 www.iso.org/iso/iso14001_video Cost of Quality http://www.youtube.com

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