Cost Justification Based Upon Intangibles - Cost of Quality


Richard Hewitt

As the manager of a fledgling QA group in the systems dept. we are being asked to present to senior management a cost justification. So far, in reading through some of the interesting similar experiences posted on this site the common thread seems to be that it is an intangible and the COQ has to be justified in ways other than dollar amounts. Has anyone out there succeeded in presenting to management a similar proposal based on intangibles?
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David Mullins

Cost of Quality is quite tangible. The earlier you determine the costs and benefits of a QMS project, the better the info is going to be. You need to ensure that accounting practices capture the info that you need. This usually means creating additional account codes and reports. If your bean counter is any good they might know more about this than you suspect!
There is a reasonable amount of stuff on the web, as well as "STANDARDS" available on the topic. I have developed quite an archive on cost of quality.
You need to get yourself up to speed, then sit down with you team and do some brainstorming.
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I saw this thread and thought I would add my thoughts. In my experience Quality professionals often look at new tools or investments in a holistic way; that improving quality should obviously be a priority. If I have better tools, I can improve quality, which of course is a solid investment. Kind of like world peace... Unfortunately, your Plant Manager will have ten projects on his desk at any given time and many of them will be easier to justify because the evaluation criteria are clear cut. For example, if I buy a robot for $100 with $20 per year in recurring costs and maintenance, and it replaces two people who cost $60 each per year with burden, my initial payback is 1 year and I save $100 per year each year after that. My annual savings is $120, the ROI after the first year is 83% per year after the robot has paid for itself in the first year. Quality investments, as one contributor pointed out, often appear to be primarily intangible. For example, buying a better measurement device, or a Quality software package to do Control Plans, or collecting dimensional data and providing SPC analysis, QMS software etc., is a harder sell Because these activities can be done now to some extent with the old gauge, Excel and a QE's time. Sure, the software provides a lot of information that you don't get now, and your reaction and problem solving time is improved, but the plant manager will not be able to reduce headcount and he is getting his Excel based scrap report each week now. The Plant Manager doesn't care about world peace, he just wants his bonus and the robot looks a lot better to him. So to "sell" your project, you will have to justify your investment, and hang some numbers on it to the best of your ability to try and make your decision as "tangible" as possible.. The homework associated with this involves trying to determine as best as possible what your current Cost of Quality is, and then identify the areas in which your investment (in my case a quality related software package) would reduce costs. This sounds simple, but I have often found that Quality personnel have a difficult time putting their business case together. A while back I created the attached Excel form, which can be used for software, or a variety of other Quality related investments.. It lists many areas that should help you to organize your data, and then has a final section that allows you to enter in the cost of whatever you are attempting to justify and the form will calculate a payback period and ROI. All savings categories will not apply to every investment, so you can skip the areas that do not apply. You can fill in your scrap rates, your labor rates, etc., to tailor it to your specific operation. You can also of course, add categories that may apply to your situation that are not listed in my form. There is no avoiding that some assumptions must be made in how much what your buying will positively affect these costs, but some base assumptions are usually part of any cost justification. I find the magic is in organizing all the material to present effectively. With a Quality related justification, I believe that the savings usually comes from some level of improvement in several areas, not just one major are of savings, such as a labor reduction in a QE's time. What appears to be a small monthly improvement in multiple areas will often yield surprisingly quick paybacks when considered on an aggregate level. Please provide any additional comments based on your experience. I would also be interested in any additional costs of Quality that can be factored into this type of analysis (such as reduced cost associated with audits? etc.). I hope the attached form is helpful to at least start you thinking of how to calculate your current COQ and how to organize your intangible case into a tangible one...



Quite Involved in Discussions
Sometimes it is easier to approximate costs based on averages, ie the average labor cost of 90 RMAs requiring 80% of two people's time to handle is easier to figure out in hindsight than the labor cost of a specific type of RMA. Often there are not good records to allow specific calculations but there are enough records to calculate an average or total.
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