The Quality Connection
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Cost of quality 

Picture of cogs.What are the costs of prevention, appraisal, and failure? 

What are the costs of doing the job over? 

What are the savings to doing the job right the first time? 

What you'll be able to compute: 

  1. The cost of prevention for your company
  2. The cost of appraisal for your company
  3. The cost of failure for your company
  4. The savings of doing the job right the first time for your company
  5. The cost of doing the job over for your company

In the US, correction to failure is celebrated as heroism, while relatively un-dramatic planning is thought of as not doing work. Savings of doing the job right the first time can be several hundred times that of the cost of failure. Learn to calculate the actual savings to your organization!

Reducing waste and rework

Much has been said - in the newspapers, radio, TV, conversations, everywhere - about the need for reduction in waste and rework, and improvement in productivity and quality. Global competition makes this more than a "nice thing to have." It has become essential for our very survival. Many organizations - business and government alike - have started using quality tools, building teams, and looked for quality improvement opportunities. And yet, the most significant opportunities for improvement lie in 2 frequently untouched areas: the analysis of the flow, or process, of one's work today, and a concept called the Cost of Quality. It is the latter concept, that of Cost of Quality, which we will deal with now.

The term, Cost of Quality, implies that producing quality products cost money. Does quality cost money? Yes! Does that mean the book entitled Quality is Free is a misnomer? No! Does quality save money? Yes! How can both of these things be true together? The answer to this question, if thoroughly understood, will solve for you perhaps the biggest quality misunderstandings of our time.

You could draw a diagram of Cost of Quality, with Production costs representing the bottom of a bar chart and the top representing Cost of Quality. This model would show the true cost of production. This is the cost of building the product or service, if we were to do it right the first time with no errors. (This is what our customers are paying us for.) It turns out that "productivity" is the bottom half only; all other costs are "unproductive" or wasteful.

The top of the model is the Cost of Quality. Yes, even with quality of conformance, quality costs money. By changing the way in which our quality activities are divided, however, there can be a net savings (right side) compared to the old way of doing business (left side). Therefore there can be a "return on investment" greater than the investment itself.

The Cost of Quality part of the bar chart is divided into 3 parts: cost of prevention, cost of appraisal, and cost of failure.

The cost of prevention is any quality activity designed to help you do the job right the first time. It generally helps the next project, not the current one. It includes many activities often called "overhead." These activities are work to developing standards and procedures, measurement systems, training programs, the cost of a Quality Assurance group, and process improvement methods and team meetings related to work improvements.

The cost of appraisal is quality control, or "testing." It is any activity designed to appraise, test, or check if the product you produce is defective. In manufacturing, this might be a mock-up or trial, or individual bench testing of component parts during or after assembly. In service, this might be a "dry run" or pilot program of a new service offering. In software, this includes reviews, walkthroughs, inspections, and computer testing of programs. Cost of appraisal happens during the current project or production effort rather than the next one. If cost of prevention is the cost of doing it right the first time, then this is the cost of doing it right the second time. If there were no defects, then there would be no need for this testing; however, if defects are likely, better to find them through testing (internal failure) than deliver broken products or services to the customer (external failure).

The cost of failure is the worst and generally the biggest. I call it doing it right at no time. To get to this stage, cost of prevention must be inadequate to prevent the error, and cost of appraisal is too inadequate to catch it. This is external failure. Unlike prevention, which is invested before a project starts, and appraisal, invested during the operation, failure occurs after the product is finished, usually at the most embarrassing time - like when your customer is trying to use your product or service. Examples include rework during development, financial asset losses, lost time, inconvenience, bad press, loss of good will and loss of face, loss of market share, backlog and lost opportunity costs (because we are too busy fixing old problems to take new work in), the Hubbell telescope, the Chicago Flood, and most man-made catastrophes that hit the newspapers and embarrass companies, and on, and on.

Increasing testing (appraisal) greatly reduces failure. However (and this is poorly understood): Increasing prevention drastically reduces both appraisal and failure. If you look at the right side of the diagram, you will notice that the appraisal and failure costs are reduced by more than the amount of increased prevention, resulting in an overall savings. In other words, this is where we need to put our quality dollars - quality improvement - prevention.

Strictly speaking, quality is not free - not even for quality of conformance and associated Cost of Quality. All three Cost of Quality components are unproductive costs. By changing the investment we make in each component, however, we can reduce these unproductive costs so what we are doing is best for the customer. That is why it is free by comparison: prevention types of quality cost "negative dollars" compared to cost of failure, so this is why the right kind of quality is free.

When we get sick, that is failure. Having a doctor cure us so we don't get worse is appraisal. Engaging in a wellness and fitness program so we don't get sick in the first place is best, and is prevention. As a culture, do we focus more on appraisal and failure? Where should we spend our health care dollars?

When criminals steal, injure, and kill, that is failure. When they are caught and incarcerated, that is appraisal. Proper day care, family values, and programs that reduce the tendency for one to turn to crime are prevention based. Are we spending our quality dollars wisely?

Societies accidentally reward citizens for failure without meaning to.

  • When the plant employee fixes a major failure, she/he is a hero. What about the employee who develops a product that doesn't even fail in the first place? Are they rewarded more (one would hope), or less?
  • Do we call prevention programs "overhead", simply because they appear to delay this project although greatly accelerating future ones?
  • Are slogans like "ours is not the reason why" helpful attitudes? Prevention-based work says "ours is the reason why" and "Monday morning quarterbacking" is good. Here are some good quality slogans: "A stitch in time saves nine" and "penny wise and pound foolish."
  • Do beepers sometimes allow us to respond to a failure instead of addressing the problem? If we took those beepers away, and failures went unresolved, would we tend to eliminate the root cause of failure instead? Or do beepers help us to make failure acceptable, keep it efficient, and hide its true colors and costs? Are beepers costs of failure?
  • Many customer service departments find and fix problems. If there were no problems, would there be any customer service departments of that type? Are those customer service departments costs of failure?
  • Are you asked to pay for a maintenance contract, which therefore rewards the manufacturer for failure?

Simple idea? A revolution in thought is required of most people. Perhaps half of your day is spent in Cost of Quality, with much of it failure. We often maintain massive infrastructures, meetings, and help desks to make failure acceptable. Should we instead correct or eliminate these failures through prevention?

The Bottom Line

By looking at how and where we spend our time and dollars, and even our quality dollars, we can cut unproductive time, waste, and rework. As a result, we can meet the challenge of global competitiveness, head-on. By looking at the work, its progression through the workbench, and the Cost of Quality, we can make a major individual improvement in quality wherever we are. Whether or not our organization has embarked on a quality journey, we can do this action personally - with personal benefits and pride of workmanship as the natural outcome as well. 

Quality \conn\, To conduct or direct the steering of; the control exercised by one who steers a vessel 

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