The Cost Of Quality

The Cost of Quality Report let's everyone see where money is being thrown away

The Cost of Quality Changes the Perceptions

Mr. Philip Crosby’s Cost of Quality report made a fundamental difference in the way Quality Managers spoke to upper management. Prior to the Cost of Quality report, Quality Managers were the keepers of “goodness”. They spoke in terms of reputation and subjective measures that frequently detracted, or appeared to detract from bottom line profitability. It caused much of upper management to “tune out” when the Quality Manager spoke.

The Cost of Quality Report quantifies the impact of both the cost of poor quality and the cost of preventive measures. With this report, Quality Managers were now able to speak upper management’s language of money. Decisions could be made on facts not emotions or corporate politics. It tied in well with Deming’s philosophies of resource allocation and the use of statistical process control.

In 1987, the price of conformance was about 5% of the total Cost of Quality; The price of non-conformance was about 25% of the Cost of Quality; and the cost of doing things right the first time was 70% of the Cost of Quality.

The Parts of the Cost of Quality report

 The Price of Non-conformance in the Cost of Quality Report

The Price of Non-conformance portion of the Cost of Quality report was fairly straight forward. Quite simply “what it cost to do things wrong.” It included:

  • reprocessing,
  • expediting,
  • unplanned service,
  • computer re-runs (remember this is the days of big mainframes and computer reports were requested during the day and run at night),
  • inventory,
  • customer complaints,
  • service after service,
  • downtime,
  • reconciliation,
  • and warranty.

This opened management’s eyes to profit opportunities. They were already spending this money, what if they could eliminate these costs and shift these dollars to the bottom line?

The Price of Conformance in the Cost of Quality

Measuring what was spent to make things correctly was a new concept. It was the cost to get things done right the first time. Inspection, engineering, preventive maintenance were just a cost of doing business. The idea that these needed to be looked at and justified opened the door to a revolution in the way management viewed costs.  The Price of Conformance included:

  • Review
  • Checking (Inspection)
  • Audit
  • Quality education
  • Test
  • Process proving
  • Procedure verification
  • Prevention
  • Inspection

The concept that collecting, reviewing and acting on these cost would lower them over time was revolutionary. By drawing attention to and reviewing these costs, corrective action could be defined and implemented.

How Much the Cost of Quality Report Identified

The first phase of the Cost of Quality would identify 60-70% of the actual costs and be driven from top management down. Once Quality Improvement Processes were implemented 90% of the actual costs would be identified with improvements in accuracy from that point forward. This information would come from the bottom up.The initial proposal had the Finance department issuing the Cost of Quality report. The course work gave detailed lists of data for each department to track and report.

Steps to implementing the Cost of Quality Report

In order to implement the Cost of Quality Report the first step was to educate managers and employees. The second step was to identify the elements by department. The third step was to give complete individual descriptions to the elements so everyone was using the same point of view. The fourth step was to determine a measurement base. The fifth step was to design the report including format, frequency and distribution. The sixth and last step was to develop and implement a strategy to utilize the Cost of Quality Report effectively.

The Purpose of the Cost of Quality Report.

The purpose of the Cost of Quality Report was not to account for every loss but rather to be a management tool that was used to determine areas that needed corrective action and to measure quality improvement. It was a basic communication tool that had everyone speaking the same language – money. So what could a Cost of Quality Report do for your company?