Cost of Quality

Quality – delivering customer requirements right first time, every time, comes at a cost. In the days of TQM we used to hear much more than we do now about the “Cost of Quality”.  The concept is better known in manufacturing industries than elsewhere, but it applies to all organisations, manufacturing or service, private or public, large or small. It has three elements, the second and third of which together represent the cost of poor quality.

The first element is “prevention cost”. This represents the investment made in policies, processes, procedures and systems and the continuous improvement of these to ensure that they are, and remain, fit to deliver ‘right first time every time’. It also represents the investment made in recruiting, training and developing the people whose job it is to implement those policies and operate those processes, procedures and systems. Whilst most people would readily agree that this cost is well worth investing and if done consistently well will indeed deliver as close to ‘right first time every time’ as it is humanly possible to do, sadly most organisations do not invest in this as well or to the extent they should. Sometimes existing poor quality, coupled with stakeholder and other pressures, means that rather than investing in prevention, organisations resort to incurring the second element of the cost of quality, “appraisal costs”.

“Appraisal cost”, as the name suggests includes all aspects of inspecting and checking work, either in progress or on completion. Whilst some elements of inspection are required by law or regulations in some industries, for example in those with critical safety aspects such as the nuclear power industry, regrettably “appraisal costs” are often incurred as the ‘norm’.  These “appraisal” costs are incurred largely because of a lack of proper and sustained investment in the “prevention” costs, and often because of pressure to improve in the short term.   With ‘short termism’ the norm in all sectors, and as managers come under increasing pressure to quickly deliver improvement in results, it is not surprising that “appraisal” costs represent a sore that is unlikely to go away soon.  If you doubt this consider how many ‘quality’ departments and professionals there are in the world today….maybe even in your own organisation. Yet the long term consequences are not positive. Financially, “appraisal” does not come cheap, and culturally it can easily lead to a situation where people no longer take personal responsibility for ‘getting it right, first time every time’.  I was until recently involved with a educational establishment where the previous Principal had got rid of the Quality function but had failed to reinvest the savings into true “prevention cost” activities. So not surprisingly quality went down. A new Principal has come in and, under pressure to deliver improved results, has reinstated the quality function! In the short term it may work but long term it does not address the root cause issues.

The final element is “failure cost”. This can be both ‘internal’ and ‘external’. Internal costs are those associated with defects found before the customer receives the product or service, for example scrap, rework, re-inspection, re-testing.  I was astonished some years ago when visiting a well known premium motor manufacturer to discover that a very high percentage of cars coming off the production line of the plant I was in needed re-work of some form or another. Not surprisingly the management of the plant were extremely coy when I asked whether they measured their failure costs and what proportion of their total production costs they represented! External “failure costs” include those incurred after the customer receives the product or service, for example processing customer complaints, customer returns, warranty claims, product recalls. These costs are particularly damaging as, potentially, they have significant negative impact on the organisations brand image, customer loyalty and long term sustainability.

As far as I know there are no reliable figures on the costs of poor quality. Research done some years ago suggested that they (“Appraisal + Failure” costs) could be anything up to 40%, (yes 40%!) of an organisations turnover (income), with 20-30% being quite common.

So lets do our bit to try and ensure that where we invoke quality costs they are of the investment kind, “prevention” ones. This takes belief and patience because investments seldom immediately show a large return, but long term these costs deliver true quality, and thereby a successful and sustainable business.