The Cost of Quality: Above and Below the Surface
Most people, maybe you as well, believe that quality always costs extra money. After reading this article, you will have a somewhat different perspective.
Cost of quality (CoQ) is a hot topic right now. There have even been committees formed in various trade groups to take a closer look at CoQ. You probably have had internal discussions about the CoQ in your company and how those costs compare to other like manufacturers.
With few exceptions, your average customer or prospect doesn’t care about what you spend on quality. They assume they will get the same result from you or your competitors. They only get concerned about quality when there are obvious problems with their parts or if you cannot meet your backlog.
Most companies have a quality manual and/or a quality-management system (QMS) in place. That’s great! But what is disturbing is that many of them maintain and keep their QMS disjointed from the shop floor. Why would you not want to integrate your quality initiatives directly to production-floor processing? This is where you need it the most.
The objective is to have a better idea of how to determine your CoQ and your cost of poor quality (CoPQ). Understand this. It is possible to dramatically reduce your costs, and a fully integrated QMS really is a necessary requirement. Quality is simply a way of managing key components within a business. With a QMS that is integrated directly with shop-floor processing, you should be able to answer “Yes” to every auditor’s question.
- Yes, your equipment was operating according to specifications.
- Yes, the operator was trained and approved to perform that/those operation(s).
- Yes, the correct equipment was used according to the customer’s PPAP (production part approval process).
- Yes, there was a risk analysis completed for the part.
- Yes, the parts were dimensionally accurate.
- Yes, the parts were appropriately heat treated if necessary.
- Yes, the operator did see, acknowledge and follow the CAPA (corrective and preventive action).
- Yes, because we could not have shipped these parts unless the answer was Yes every step along the way so that the processing could continue to the next step.
Question: Does a forge that has a higher CoQ necessarily have better “quality” than a competitor who spends less?
No. It’s like equating someone’s overall health based on how much they spend on healthcare. One person can spend very little on healthcare and be healthier than a person who spends an enormous amount of money.
Historically, business managers have assumed that increased quality is accompanied by increased cost. Higher quality meant higher cost, right?
This concept was questioned by some of the quality pioneers who examined the economics of quality and concluded that the benefits outweighed the costs. They went on to develop and teach the principles that quality is everyone’s job, and, in a true zero-defects approach, there are no unimportant items. Also, keep this in mind. If you just eliminate what is not needed, that is profitable in and of itself.
Question: What is your definition of CoQ?
Cost of quality is an expression that is widely used and widely misunderstood.
The cost of quality isn’t the price of creating a quality product or service. It’s the cost of NOT creating a quality product or service. Every time work is redone, the cost of quality increases. An obvious example would be the reworking of parts or something simpler, such as the replacement (rework) of a food order in a restaurant.
Fig.1. Philip Crosby – quality guru. Dr. Armand Feigenbaum – TQM leader
Quality costs include those incurred in excess of those that would have been incurred if the parts were made exactly right the first time. Costs include not only those that are direct but also those resulting from lost customers, lost market share and many hidden costs and foregone opportunities not identified by most of the modern cost-accounting systems.
Quality is free; low quality (or poor quality) always comes with a price. Philip Crosby (Fig. 1), an icon within the quality disciplines, taught what a powerful tool it could be to raise awareness of the importance of quality. He referred to the measure as the “price of nonconformance” and argued that organizations actually choose to pay for poor quality through the decisions they have made.
CoPQ are costs associated with providing poor-quality products or services. There is some overlap between CoQ and CoPQ. Cost of quality can be considered a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products/services and that result from internal and external failures. Having this information allows a company to determine the potential savings to be gained by implementing process improvements.
CoQ and Organizational Objectives
The costs of doing a quality job, conducting quality improvements and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one. An analysis of the costs of quality should include a means of determining problem areas, opportunities, savings and actionable priorities.
Many organizations will have true quality-related costs as high as 15-20% of sales revenue, with some going as high as 40% of total operations. A general rule of thumb is that costs of poor quality in a thriving company will be about 10-15% of operations. Effective quality-improvement programs can reduce this substantially, thus making a direct contribution to profits.
Fig. 2. Quality-related costs
We can break down quality costs into two broad categories: costs of conformance and costs of nonconformance (Fig. 2). Another way of looking at it is:
Costs of Control + Costs of Failure of Control = Total Quality Cost
Let’s focus on CoPQ and waste for a moment. Remember our friend Philip Crosby and his philosophy of “Do it right the first time”? What he advocates is focusing on prevention and the cost of nonconformance (or CoPQ).
CoPQ is really a more accurate description of what we want to control. It’s much easier for you to identify, within your own business, the services that directly impact your customers. Metrics that you can leverage include (but are not limited to) percentage of rework, delivery performance, customer-satisfaction survey results, damage claims, write-offs, fines, etc. Some use a simplified algorithm to estimate their CoPQ by multiplying the number of defects per period of time by the average unit cost to fix a defect. But this calculation omits the costs of the loss of goodwill, loss of competitiveness and multiple other items, sometimes including legal damages.
The challenge lies in measuring the CoPQ that have indirect customer impact (and also reduce your profits), as well as the waste generated due to extra processing or activities that have been added to an operation or a standard operating procedure (SOP) to handle the unnecessary waste.
Here are some of the more common areas of waste in a production environment.
- Overproduction: Producing more than is needed, faster than needed or before needed.
- Wait time: Idle time that occurs when codependent events are not synchronized.
- Transportation: Any material movement that does not directly support immediate production.
- Redundancy in processing: Redundant effort (production or communication) that adds no value to a product or service.
- Inventory: Any supply in excess of process or demand requirements.
- Human motion: Any movement of people that does not contribute added value to the product or service.
- Defect: Repair or rework of a product or service to fulfill customer requirements.
It has been estimated that the waste within a typical organization might be 15-40% of total company capacity. Think about that – up to 40% of your equipment and personnel is used to staff the handling of waste. That’s wasteful spending!
When your company determines the CoPQ metrics – those measurable items that can generally be pulled from the various silos of data in your disparate legacy applications or ERP system – you will soon realize that’s only the tip of the iceberg (Fig. 3).
It’s easy to measure highly visible things like customer returns, rework activity, testing and inspection costs. These are only some of the costs incurred by a company, and they are described as the visible portion of the iceberg above the surface.
Fig. 3. CoQ/CoPQ iceberg
Many of the costs of quality are hidden and sometimes difficult to identify. The iceberg model illustrates that only a minority of the costs of poor and good quality are obvious and appear above the surface of the water. The larger portion is below the surface and not as easily visible. But, since every business is unique, your iceberg model may be a little different than this one. There is a huge potential for reducing costs under the waterline. Identifying and improving these costs will significantly reduce your cost of quality and overall cost of doing business.
All of the waste-driven tasks and activities for internal detection and rework dramatically reduce capacity and create friction between departments, resulting in frustration among employees. Activities like excessive overtime, billing errors, expediting, reputation damage, excessive customer audits and meetings, compliance failures, loss of customer goodwill, staff morale, excessive employee turnover, extra processing, and loss of potential revenue are all very expensive adders to the CoPQ.
The goal is to invest time and money on defect prevention to eliminate some of these additional costs. Take a look at this sobering video of recognizable events related to CoPQ.
As you probably learned in the video, a viable approach to quality is absolutely necessary. In order to not only effectively track but control your company’s quality, it is imperative to have a QMS (quality management system) that is connected directly to production and maintenance. Any other approach will not have the necessary effectiveness and will never have an ability to provide the automatic, real-time control and monitoring that is needed.
With a production-connected QMS system, you can dramatically reduce your CoPQ. If you reduce your CoPQ from 15% to 10% and everything else remains the same – NO new sales – you have just significantly increased your profit.
We all know how fleeting profit can be, so this is an opportunity to positively impact your profits and should not be overlooked. Reducing your CoPQ can yield more capacity without buying new equipment, without hiring more people, without running more shifts and with less overtime.
Once you have your business processes and tools set up properly and your staff appropriately trained, quality is free (it’s not a gift, but it is free). It’s just the anti-quality things that cost money. And the CoPQ is a better metric for determining your quality level. You can dramatically reduce your CoPQ through a systemic approach using technology designed to marry quoting, quality, production, shipping, invoicing and maintenance.
Conclusion: Highest Quality is Lowest Cost
“Highest quality is lowest cost” is a Japanese manufacturing aphorism based on the premise that the highest-quality manufacturer will earn a reputation that makes buyers prefer (price being reasonably similar) to buy its goods. This means that the company will produce more than its competitors, with higher quality and lower production costs, and outperform competitors.
With quality management (including QA/QC) built in to the necessary key steps that you are performing as a component of a customer’s negotiated PPAP, you will have happier customers and gain the confidence of prospective customers considering your services. You need to show evidence to your customers and prospects that you understand their requirements and are able to consistently provide a reliable and repeatable process that adheres to the agreed-upon guidelines/standards.
The only way to ensure this happens every time on the shop floor is with a fully integrated, extensible MES/QMS system.
You need a system that:
- Holds people accountable and forces them to complete a task the right way or stops their ability to continue down a path of erroneous processing
- Ensures the most current revision of your quality manual and operating policies and procedures are centrally located and easily accessible on the shop floor
- Allows you to easily set up control plans that are attached to a work order that defines the specific quality/processing requirements (e.g., operator instructions, inspection and testing requirements, quality-data collection requirements, equipment and/or personnel qualification checks, etc.)
- Allows you to set up and enforce CAPAs (corrective actions/preventive actions) that can be automatically connected to future orders to remedy a problem; CAPA instructions viewed and acknowledged via electronic signatures
- Allows you to freeze processes to prevent any changes to the approved process when used on a future work order
- Enforces regularly scheduled equipment calibration checks by preventing operators from selecting equipment for quality tests unless a calibration check has been performed recently
- Allows you to view a complete revision history of a process, learn what changed, who made the changes, why the changes were made and what customer orders are connected to a given revision
- Can issue nonconformances that automatically prevent loads from entering the next step in processing
- Includes the creation of certification statements driven by part, process or specifications referenced on the customer order
- Allows you to attach quality-related media (e.g., racking and loading instructions, diagrams, pictures, instructional videos, etc.) to individual work-order processes
- Supports management of industry specifications, such as AIAG, AMS, API, AS, ASME, ASTM, ISO, ITAR/EAR, NADCA, Nadcap, SAE, MedAccred, etc. plus any internal and Prime specifications, ensuring that your staff conforms to the appropriate specification requirements every time
I know this is a tall order, but it is being done with the technology available to you today.
To find out about the four absolutes of quality management and the 10 benchmarks for quality success, use the QR Code or go to www.forgemag.com/4and10.