Cost of Quality: Why a Compliance-Focused Model Will Ultimately Limit Growth
Denis J. Devos
Process manufacturers commonly consider numerous costs like labor, materials, and manufacturing and impact their bottom line. Often the same companies will overlook or undervalue the cost of quality, assuming that products that fall within specifications also meet quality targets. However, simply relying on conformance without examining the cost of quality can result in a few hidden expenses at best---and at worst, amount to considerable waste, negatively impacting the bottom line and subtracting from brand reputation.
Understanding the overall cost of quality is vital to addressing issues that signal costly or unsustainable variations and the potential for product or process failure. High incidences of failure erode capacity and make it impossible for companies to live up to their full potential. In this blog, we will cover:
What is the Cost of Quality?
The Cost of Good Quality
The Cost of Poor Quality
The Cost Iceberg: What’s Hidden from View
Fighting Non-Conformance
Steps To Improving Cost of Quality
Now, let’s jump in.
What Is the Cost of Quality?
The cost of quality (CoQ) is a method of determining the costs incurred to assure quality. It can help to view quality as the company’s ability to approach the quality target for a product or process. Companies are either moving closer to the target—good quality—and achieving conformance or moving away from the target—poor quality—and into the territory of non-conformance.
It is important to note that moving toward or away from the quality target in terms of cost is not a straight line. The CoQ curve is a good reminder that low quality can feel and look inexpensive concerning the bottom line, especially since customer dissatisfaction is often challenging to quantify. Alternatively, it is possible to overspend attempting to achieve exceptional quality. The most successful companies find a balance between the cost of good quality and the cost of poor quality.
The Cost of Good Quality
No matter how you slice it, the cost of poor quality is detrimental to the bottom line. But there are ways to swing the pendulum the other way. The cost of investing in an effective Quality Management Solution (QMS) to prevent poor quality and produce excellent quality is just a fraction.
Costs of good quality can include the things a business does to ensure that a product or service is of the best possible quality for customers. This includes:
Appraisal costs (internal and external inspection, testing, investing in good labor and materials, maintenance and calibration, and market research)
Prevention costs (ensuring systems are in place from the get-go)
Compliance costs (worker and management training, automation, error-proofing, and overall efficiency within the workplace)
A truly effective, enterprise-wide quality management software solution will help maintain quality at each step of the manufacturing process: supplier quality, non-conformance management, CAPA management, complaint handling – and even support quality with related functions like documentation and SOP handling, employee training, and certification, audits, and change control. Those capabilities will be enhanced through business intelligence tools to identify problems in advance by observing trends, and progress can be measured in real-time.
With such support, the manufacturer can perform root cause analysis to deal with the real root cause of problems, thereby decreasing overhead and labor costs and increasing productivity, process improvement, and ultimately, customer satisfaction.
In the long run, investing in a quality solution for the product lifecycle will generate immeasurable cost savings. Unlike the burdens of poor quality, uncovering the true cost of good quality is worth every cent!
The Cost of Poor Quality and Examples of Poor Quality
Conversely, costs of poor quality, or non-conformance, can appear both within a business and once a product goes out in sub-optimal conditions. Non-conformance costs can include internal failure costs like scraping and reworking substandard products or external failure costs like warranties and time spent resolving client dissatisfaction. Non-compliance forces a company to contend with additional costs that are not always obvious, including:
Internal and external failure costs like excess overtime for fixing problems
Taking the time to correct mistakes for dissatisfied customers
Altering the company’s schedule to go back and redo work
When thinking about the cost of non-conformance, one must consider opportunity cost, or essentially, the cost of making a decision. A poorly-researched choice could represent a significant loss of opportunities that other options might have generated. On a practical level, opportunity cost means that when a product is made and not sold, a business loses the cost of what the product would sell for, not just the cost to make it. For example, if an item costs $1.00 to make but would be sold for $5.00, the loss is actually $5.00 because a business loses the opportunity to sell that item.
Significant non-conformance can result in disaster. Product recalls, in particular, are especially costly. One example of a non-conformance run amok is Takata, the world’s largest automobile airbag manufacturer. In late 2019, after 14 deaths and more than 200 injuries from defective airbags during car crashes, Takata had to recall 42 million cars, resulting in fines, payouts, bankruptcy, and possibly irreparable damage to Takata’s reputation.
The Cost Iceberg: What’s Hidden from View
Even a well-meaning company can aim for the quality target and miss if it is not trying to dig for the hidden causes of cost. Like an iceberg in frigid, dark waters, the danger is not always visible and lurks unseen, ready to tear out the hull of even well-constructed processes. Some factors that contribute to process breakdown and rising costs include:
Excessive or unauthorized overtime
Unbalanced inventory
Unused capacity
Inconsistent paperwork.
Companies can do an excellent job targeting compliance for the product itself and still experience cost leakage by not taking a holistic approach to problem resolution.
Fighting Non-Conformance
It comes as no surprise that non-conformance comes with a high price tag. However, in budgeting, building systems, training, and planning, companies must also consider costs of conformance. There must be a budget to ensure that products and services meet specifications and meet quality targets.
Costs associated with conformance can include prevention costs like design for manufacturing (DFM), failure modes and effects analysis (FMEA), and training at all levels. Appraisal costs can consist of inspections, testing, maintenance, audits, and more. Operators can reduce non-conformance by ensuring that employees and processes align before the product goes out the door.
Auditing the cost of quality is an expense of strong conformance, but companies can also view it and other conformance-promoting actions as investments. All businesses should have an auditing system in place. A recent webinar poll determined that 41% of participants were tracking the cost of quality through a spreadsheet, 25% were using paper or another system, and 34%—more than one-third—were not tracking cost of quality at all. Software companies like SafetyChain can partner with businesses to put in place platforms that automate and integrate CoQ processes and eliminate paperwork or, worse—guesswork.
Creating effective and efficient prevention and appraisal systems can make or break a business’s reputation, not to mention efficiency and morale. But, when adding up the money one saves by eliminating non-conformance costs, a company will see that it actually has extra funds to allocate towards conformance.
Steps To Improving Cost of Quality
In improving a company’s cost of quality, it is essential to address each component individually, depending on the company’s needs. Below are some steps that will help limit your cost of quality:
Identify opportunities for cost reduction. Where can the business be doing better?
Quantify the true costs of the problem. While it may take some digging, a well-researched estimate can give the business the tools it needs to move forward.
Prioritize improvement access. Move the cost of quality to the top of the priority list for all employees.
Actions to improve. What actions can managers address that is specific to the company?
Evaluate success as cost reduction, and consider the money saved and the improvement in opportunities.
Sustain and continuously improve.
While addressing each of these steps may seem overwhelming or costly, this holistic approach is a true long-term investment. Clearly, quality goes far beyond compliance and requires each component to be addressed appropriately.
Conclusion
The cost of poor quality can damage a company beyond repair. If a company is not formally tracking its losses, it should be. Everyone can share in CoQ reporting, placing all operators on the same page regarding expectations. The bottom line tends to look much better when a business eradicates the extra time spent reworking poorly made products, dealing with customer complaints, paying off warranties, lawsuits, and cutting into schedules that way your employees can focus on the KPIs that matter. If your company is still looking at the cost of quality as a compliance issue, then there is much below the surface that can and should be addressed.
