2) 1.

Cost of quality definition

2.

Measuring costs of non-quality

3.

Managing cost of quality

1)

4.

Six sigma approach

BTA PLUS 2010

Cost of Quality

ISO 9000

MEASURING COST OF QUALITY WITH ISO 9000 FAMILY

Quality experts estimate that non-quality entails costs that can reach up to 20% of manufacturing sales and 30% of operating cost for service companies. Organizations that measure the cost of non-conform and inefficient activities and that improve in eliminating their causes have achieved cost reductions amounting to 10% or more of revenues.

1.

Cost of quality definition

In the 21st century, the cost of quality of an organization means to measure the cost of complete realization to satisfy customer throughout the business processes. The full quality cost involves: 1) Opportunity quality costs; 2) Investment quality costs; 3) Non-quality costs. 1) The opportunity quality costs are related to the avoided capital cost, opportunity cost of additional volume if supported by sales and operations capacity due to an increased customers orders and improved process efficiency. 2) The investment quality costs are the cost for prevention and appraisal. These costs involve the resources needed to implement and to maintain ISO 9001 system to assure integrity of product realization and service provision. The prevention and appraisal costs involve all processes of quality management system. 3) The full non-quality costs are the costs of internal and external nonconformities, and the costs of ineffective and inefficient activities (non only product non-conformities costs). The costs of internal non-conformities and the costs of inefficient activities occur prior to delivery: administration, information system, marketing, sales, engineering, production, inventory, service provision, purchasing and delivery preparation. The external nonconformity costs occur after delivery to customers: product recalls, customers returns, compensation and replacement under warranties, installation errors, billing errors, cost of lost customers and markets, cost of repairs, time for the correction, waste time resulting of inefficient activities (ISO 9004:2009).

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2. Measuring cost of non-quality

Measure correctly to manage correctly! The measurement of non-quality costs is an extraordinary tool for the management of performance of business processes. Nonquality costs are powerful management indicator for quality improvement and for initiation of preventive and corrective actions. Quantifying the non-quality costs in financial term can be difficult because in majority of the organizations these costs are not measured by the traditional accounting system. Implementation of ISO 9001:2008 system is a good foundation for the cost and efficiency measurement. The cost measurement methodology can be described in a procedure table of management indicators related to the priorities and importance of problems, nonconforming product and process, insufficient resources, customers returns, customer loss or customers claims. Quantifying and reporting these nonconformities in dollars is crucial for the analysis of data related to the customer satisfaction, process performance, supplier delivery and quality of product.

ISO 10014: The financial benefits of cost and efficiency management

Improved profitability Improved revenues Improved budgetary performance Reduced costs Improved cash flow Improved return on investment Increased competitiveness Improved customer retention Improved decision making Effective use of available resources Heightened employee accountability Improved intellectual capital Effective and efficient processes and supply chain Reduced time to market
Table 1

3. Managing cost of quality

The ISO 10014:2006 standard for realization of financial and economic benefits recommends effective management of resources and implementation of applicable processes for improving the overall worth and health of the organization. Financial benefit is the result of organizational improvement expressed in monetary form, and realized by cost-effective management practices within the organization. The table 1 illustrated a list of financial benefit that can be achieved with effective costeffective management. Measurement of cost of non-conformities and inefficient activities with management indicators in dollars is possible and can be integrated in the ISO 9001:2008 quality management system. Such an integration will provides to management review and to management committee relevant data for the performance of processes and efficiency of resources: non-quality cost of product, processes and resources: ineffective time, overtime, waste of resources, excessive inventory, high turnover, frequent employees departures, efficiency of processes and products.

When the costs of non-quality are displayed in financial terms and they are part of management indicators is very helpful for top management to take actions. Analysis of these results can provide opportunities for improvement can facilitate adequate use of resources and can initiate preventive and corrective actions for elimination of roots causes of major problems. It is practical to implement the measurement of quality costs for material, information inventory and business processes of organization. The quality costs management focuses on reduction of nonquality cost and on improvement of process efficiency.

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4. The Six sigma approach

According to the old approaches for costs of quality evaluation, the 4-sigma level was the optimum balance between prevention cost and non-quality cost. 4-sigma quality is quantified, as 6,210 defected parts per million (ppm) and the non-quality can exceed 15%-20% of sales revenue. The companies like Motorola, Honeywell, General Electric, Lockheed Martin, Texas Instruments, Bank of America, Bank of Montreal and many others has proved that the investment in human resources training on quality can be rewarded 100 times better and the maximum level is 6-sigma. Six-sigma quality is quantified as 3.4 ppm and the non-quality costs are less than 4 % of sales. Motorola succeed to reduce cost of non-quality down to 2.5 percent of sales, compared to the averaged 3.1 percent of sales for the manufacturing companies who are recipients of national quality award. Defect rate is only 52 ppm, or 5.38 Sigma. Manufacturing cycle time (book to bill) measure for subscriber equipment decreased from 3.25 days to 2.4 days for 3 years. Employee productivity measured as sales per employee, increased 32 % over the same period of time.

5. Achieve impressive results

The complete quantification of non-quality cost leads to real cost reduction. Organizations that measure nonquality and inefficiency cost and provide strong leadership to eliminate their causes, have achieved cost reduction amounting to 10% and more of revenues and have increased customer satisfaction and retention. This is even more relevant in times of business stress and uncertainty when the speed and the commitment surpass the slowdown, recession and stagnation. In a good time when the solid economic growth is in the horizon, worldclass businesses that measures cost of quality (nonquality is less than 4% from sales) can afford increasing search and development, elevated customers needs, aggressive global competition and market pressure. Cost of quality management is a generator of improvement actions focused to improve the business performance and to reduce waste of resources and departures of best talents. The results are: impressive saving and realization of economies, increased customer satisfaction, improved revenues and better operating margins.

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