And another voice:
Subject: Re: Defining "cost of quality" /Pfrang/Kohn
Date: Mon, 7 Jun 1999 11:36:37 -0600
From: ISO Standards Discussion
From: Brian Charles Kohn
Subject: RE: Defining "cost of quality" /Pfrang/Kohn
> From: (Doug Pfrang)
> Can anyone explain to me what precisely is meant by the expression, "Cost of
> Quality?"
There are a lot of perspectives, and even whole books on the subject.
> 1. "Cost of Quality" suggests that "quality" is something separable from
> other activities in the plant, as in "Cost of Labor," "Cost of Electricity,"
> or "Cost of Raw Materials." I do not see how "quality" can be separated
> like this, since it seems to me more an inherent characteristic of
> everything and everyone in the facility.
The way I understand Cost of Quality is in the manner that it can indeed be
separated out. CoQ is typically divided into four aspects:
1) Cost of Appraisal
2) Cost of Prevention
3) Cost of Internal Failure
4) Cost of External Failure
The Cost of Appraisal is the cost of all those activities within your operation strictly devoted to inspecting, measuring or otherwise appraising whether the product or service you produce meets the requirements. Imagine the division between work done: Sometimes you'll be screwing parts together; sometimes you're looking to make sure they were screwed together.
The Cost of Prevention is the costs associated with evaluating and implementing processes and systems to find better, more robust ways of doing things. Think about it this way: Sometimes you have people who are thinking about how to better screw things together so that the folks who are looking to make sure they were screwed together right don't find as many that weren't, and more importantly the customer doesn't find as many that weren't.
The Cost of Internal Failure is the cost associated, typically, with the materials and work that went into building something that you end up having to scrap because it doesn't meet specifications.
The Cost of External Failure are the costs associated with providing warranty or goodwill service, and perhaps even more important, the cost associated with having a customer experience a failure of your product or service.
> The expression "cost of quality"
> suggests that "quality" is something distinct and external to everything
> else, which seems nonsensical.
Quality Professionals, like myself, love to say that, because it keeps myopic managers from focusing on the very measurable costs and ignoring the almost-unmeasureable benefits of quality control, quality assurance and quality improvement. However, the reality is that there are measurable costs associated with these activities, and if the cost is higher than the benefit (which, admittedly, we can't possibly measure accurately in advance) then good business sense would dictate that we re-evaluate the quality program and make it more effective.
> 2. "Cost of Quality" suggests that "quality" has this downside called
> "cost," when it seems to me that "cost" is more likely to result from a
> "lack of quality."
The key word you use here is "seem." What you really need to do is "know." As I've indicated earlier, it is very hard to know that more cost is likely to result from lack of quality *activities*. (Remember, in the case of Cost of Appraisal and Cost of Prevention, we are talking about the cost of activities, not of poor quality.)
> To me, the company first decides what level of
> performance, reliability and capability (i.e., "quality") it is going to
> build into its products, processes and services, and then it decides how its
> facility and processes are going to achieve those goals. Because the firm,
> presumably, incurs whatever expenses result from the initial marketing
> decisions it made regarding the placement of its products, processes and
> services, the resulting expenses are therefore driven by the company's
> strategy, not by "quality." Accordingly, "cost of quality" does not appear
> to have any meaning to me in this context.
Perhaps the words "Cost of Quality" aren't precise, but they have a very valid place in the discussion. Since the words were coined over a decade ago, it is a bit late to try to change them now.
> 3. Now, what might have meaning is when a company is producing a product
> that has a certain level of performance, reliability and capability (i.e.,
> "quality"), and the company decides it wants to increase this level of
> "quality." Perhaps it is going to redesign its product, or buy better
> components and raw materials, or improve its facility with new production
> equipment, or restructure its processes. Of course, these changes cost
> money, but they still do not seem to be a "cost of quality," because they
> are an INVESTMENT (presumably made after some ROI calculation to show that
> they are justified) that the company makes in the hope of achieving some
> greater financial reward in the future (e.g., greater selling price, fewer
> returns, lower warranty costs, etc.). Therefore, "cost of quality" still
> does not seem to have any obvious meaning in this context either -- the
> company is making a short-term investment to achieve a higher long-term
> return.
The question is what is the investment for? If it is to reduce the cost of poor quality (i.e., the Cost of Internal Failure or the Cost of External Failure) then the investment is indeed a Cost of Quality, specifically the Cost of Prevention. Investments are indeed costs of a sort. The ROI calculation you mention is definitely the right way to go.
However, as I mentioned earlier, sometimes the benefits are unquantifiable. How much benefit do you derive from 10% less dissatisfied customers? No matter how much market research you do, you never can really know what the impact will be; heck, sometimes you go into an "investment" like this with only a *forecast* of the physical improvement you expect to yield. There is often a "technology risk" associated with such investments; they sometimes don't pan out at all.
> 4. Another scenario is when a company is operating under a quality control
> scheme (rather than a quality assurance scheme), where it is trying to
> "inspect quality into" its products. To such a company, "increasing
> quality" might mean hiring more inspectors to create more "quality." Of
> course, this costs money, but this is still not a "cost of quality,"
> because, in fact, it is simply a higher cost of labor that has been traded
> off (presumably) for an increase in production or a reduction in the number
> of returns. Again, it is merely a short-term investment to achieve a higher
> long-term return.
Again, you're getting mired in the words. It is surely a Cost of Quality to add more inspectors. It increases the Cost of Appraisal. You're simply pointing out that it is, too, an investment. Fine. You have to break some eggs to make an omelet, but you STILL have to break the eggs, i.e., spend the money--incur the cost.
> 5. Finally, if "cost of quality" is to be quantified in terms of dollars
> and treated as an expense, how does this calculation take into account the
> financial gains that result from the quality initiatives?
This is an accounting question, and where this issue gets really muddy. I won't even attempt to go into it without getting my CPA first... <grin>
> Again, it seems
> absurd to allocate "cost" to something with the ambiguous name of "quality,"
> but then to allocate the revenue somewhere else. Looking at "cost" in
> isolation just seems distorted.
This is almost always what is done. At the companies I've worked with, the costs associated with making the kinds of investments you're talking about are often represented as expenses, increased operating costs, etc. The benefits can only very rarely be directly attributed to specific investments. Sad.
Brian
****************
EDITOR'S NOTE: Shortened url so page does not wrap to far out. Software html error.
[This message has been edited by Marc Smith (edited 20 November 2000).]
Subject: Re: Defining "cost of quality" /Pfrang/Kohn
Date: Mon, 7 Jun 1999 11:36:37 -0600
From: ISO Standards Discussion
From: Brian Charles Kohn
Subject: RE: Defining "cost of quality" /Pfrang/Kohn
> From: (Doug Pfrang)
> Can anyone explain to me what precisely is meant by the expression, "Cost of
> Quality?"
There are a lot of perspectives, and even whole books on the subject.
> 1. "Cost of Quality" suggests that "quality" is something separable from
> other activities in the plant, as in "Cost of Labor," "Cost of Electricity,"
> or "Cost of Raw Materials." I do not see how "quality" can be separated
> like this, since it seems to me more an inherent characteristic of
> everything and everyone in the facility.
The way I understand Cost of Quality is in the manner that it can indeed be
separated out. CoQ is typically divided into four aspects:
1) Cost of Appraisal
2) Cost of Prevention
3) Cost of Internal Failure
4) Cost of External Failure
The Cost of Appraisal is the cost of all those activities within your operation strictly devoted to inspecting, measuring or otherwise appraising whether the product or service you produce meets the requirements. Imagine the division between work done: Sometimes you'll be screwing parts together; sometimes you're looking to make sure they were screwed together.
The Cost of Prevention is the costs associated with evaluating and implementing processes and systems to find better, more robust ways of doing things. Think about it this way: Sometimes you have people who are thinking about how to better screw things together so that the folks who are looking to make sure they were screwed together right don't find as many that weren't, and more importantly the customer doesn't find as many that weren't.
The Cost of Internal Failure is the cost associated, typically, with the materials and work that went into building something that you end up having to scrap because it doesn't meet specifications.
The Cost of External Failure are the costs associated with providing warranty or goodwill service, and perhaps even more important, the cost associated with having a customer experience a failure of your product or service.
> The expression "cost of quality"
> suggests that "quality" is something distinct and external to everything
> else, which seems nonsensical.
Quality Professionals, like myself, love to say that, because it keeps myopic managers from focusing on the very measurable costs and ignoring the almost-unmeasureable benefits of quality control, quality assurance and quality improvement. However, the reality is that there are measurable costs associated with these activities, and if the cost is higher than the benefit (which, admittedly, we can't possibly measure accurately in advance) then good business sense would dictate that we re-evaluate the quality program and make it more effective.
> 2. "Cost of Quality" suggests that "quality" has this downside called
> "cost," when it seems to me that "cost" is more likely to result from a
> "lack of quality."
The key word you use here is "seem." What you really need to do is "know." As I've indicated earlier, it is very hard to know that more cost is likely to result from lack of quality *activities*. (Remember, in the case of Cost of Appraisal and Cost of Prevention, we are talking about the cost of activities, not of poor quality.)
> To me, the company first decides what level of
> performance, reliability and capability (i.e., "quality") it is going to
> build into its products, processes and services, and then it decides how its
> facility and processes are going to achieve those goals. Because the firm,
> presumably, incurs whatever expenses result from the initial marketing
> decisions it made regarding the placement of its products, processes and
> services, the resulting expenses are therefore driven by the company's
> strategy, not by "quality." Accordingly, "cost of quality" does not appear
> to have any meaning to me in this context.
Perhaps the words "Cost of Quality" aren't precise, but they have a very valid place in the discussion. Since the words were coined over a decade ago, it is a bit late to try to change them now.
> 3. Now, what might have meaning is when a company is producing a product
> that has a certain level of performance, reliability and capability (i.e.,
> "quality"), and the company decides it wants to increase this level of
> "quality." Perhaps it is going to redesign its product, or buy better
> components and raw materials, or improve its facility with new production
> equipment, or restructure its processes. Of course, these changes cost
> money, but they still do not seem to be a "cost of quality," because they
> are an INVESTMENT (presumably made after some ROI calculation to show that
> they are justified) that the company makes in the hope of achieving some
> greater financial reward in the future (e.g., greater selling price, fewer
> returns, lower warranty costs, etc.). Therefore, "cost of quality" still
> does not seem to have any obvious meaning in this context either -- the
> company is making a short-term investment to achieve a higher long-term
> return.
The question is what is the investment for? If it is to reduce the cost of poor quality (i.e., the Cost of Internal Failure or the Cost of External Failure) then the investment is indeed a Cost of Quality, specifically the Cost of Prevention. Investments are indeed costs of a sort. The ROI calculation you mention is definitely the right way to go.
However, as I mentioned earlier, sometimes the benefits are unquantifiable. How much benefit do you derive from 10% less dissatisfied customers? No matter how much market research you do, you never can really know what the impact will be; heck, sometimes you go into an "investment" like this with only a *forecast* of the physical improvement you expect to yield. There is often a "technology risk" associated with such investments; they sometimes don't pan out at all.
> 4. Another scenario is when a company is operating under a quality control
> scheme (rather than a quality assurance scheme), where it is trying to
> "inspect quality into" its products. To such a company, "increasing
> quality" might mean hiring more inspectors to create more "quality." Of
> course, this costs money, but this is still not a "cost of quality,"
> because, in fact, it is simply a higher cost of labor that has been traded
> off (presumably) for an increase in production or a reduction in the number
> of returns. Again, it is merely a short-term investment to achieve a higher
> long-term return.
Again, you're getting mired in the words. It is surely a Cost of Quality to add more inspectors. It increases the Cost of Appraisal. You're simply pointing out that it is, too, an investment. Fine. You have to break some eggs to make an omelet, but you STILL have to break the eggs, i.e., spend the money--incur the cost.
> 5. Finally, if "cost of quality" is to be quantified in terms of dollars
> and treated as an expense, how does this calculation take into account the
> financial gains that result from the quality initiatives?
This is an accounting question, and where this issue gets really muddy. I won't even attempt to go into it without getting my CPA first... <grin>
> Again, it seems
> absurd to allocate "cost" to something with the ambiguous name of "quality,"
> but then to allocate the revenue somewhere else. Looking at "cost" in
> isolation just seems distorted.
This is almost always what is done. At the companies I've worked with, the costs associated with making the kinds of investments you're talking about are often represented as expenses, increased operating costs, etc. The benefits can only very rarely be directly attributed to specific investments. Sad.
Brian
****************
EDITOR'S NOTE: Shortened url so page does not wrap to far out. Software html error.
[This message has been edited by Marc Smith (edited 20 November 2000).]