Managing Cost of Quality Essay Example for Free

Managing Cost of Quality EssayArticle Reference Schiffauerova, A. and Thomson, V., Managing monetary value of role Insight into industry practice, The TQM Magazine, 2006 Abstract This paper reports on the study of the feeling be practices at four large conquestful transnational companies. All four companies employment systematic type initiatives however, a semi-formal follow of fictitious character (CoQ) systemology was precisely employed at one of them. This is in agreement with the literature findings arguing that a CoQ approach is non utilized in most spirit management broadcasts. The article discusses and comp ars the tonicity programs of all four companies and explains the benefits of the eventual adoption of a CoQ approach in each case. The analysis provides a clean insight into comp some(prenominal) practice, useful not tho for academic seek, but also for use by industry. Keywords Cost of type, CoQ, flavour comprise, industrial practice Introduction a stir(p) calibre is considered by m any(prenominal) to be the best way to enhance customer satisfaction, to visit manufacturing be and to increase productivity.Any serious attempt to mend calibre must take into account the be associated with achieving timber, since nowadays it does not suffice to meet customer commandments, it must be done at the final possible toll as well. This can only happen by reducing the be required to hit attribute, and the reduction of these cost is only possible if they be identified and heedful. The identification itself is not squ atomic number 18(a) because there is no general agreement on a single broad definition of gauge cost. However, gibe to Dale and Plunkett (1995), it is now widely accepted that quality be argon the cost incurred in the design, implementation, carrying into action and maintenance of a quality management system, the cost of resources committed to perpetual advancement, the cost of system, product and servicin g troubles, and all other necessary costs and non-value added activities required to achieve a quality product or service.Measuring and reporting these costs should be considered a critical issue for any manager who aims to achieve competitiveness in todays markets. There are several methods that can be utilize to collect, categorize and saloon quality costs. The traditional P-A-F method proposeed by Juran (1951) and Feigenbaum (1956) classifies quality costs into prevention, idea and blow costs. Prevention costs are associated with actions taken to ensure that a run provides quality products and services, appraisal costs are associated with measuring the level of quality attained by the process, and ill luck costs are incurred to square up quality in products and services before (internal) or after (external) deliin truth to the customer. The cost categories of Crosbys clay sculpture (Crosby, 1979) are similar to the P-A-F scheme. Crosby sees quality as ad retributoryance to requirements, and therefore, defines the cost of quality as the sum of scathe of accord and price of nonconformance (Crosby, 1979).The price of conformance is the cost involved in making plastered that things are done right the first time and the price of non-conformance is the money wasted when work fails to conform to customer requirements. Another formal quality cost approach is the process cost mould, which was developed by Ross (1977) and first used for quality be by Marsh (1989) it represents quality cost systems that focus on process rather than products or services. Several references propose CoQ models that embroil the additional category of intangible costs. These are costs that can be only estimated such as profits not earned because of preoccupied customers and reduction in revenue owing to non-conformance. The importance of opportunity and intangible costs for quality be has been recently emphasized in the literature. Dale and Plunkett (1999) describe a less formal method base on collecting quality costs by department. Another recently proposed CoQ methodology is a method base on a team approach, in which the aim is to identify the costs associated with things that clear gone upon in a process (Robison, 1997).No matter which quality costing approach is used, the main conceit behind the CoQ analysis is the linking of improvement activities with associated costs and customer expectations, thus surrendering leveled action for reducing quality costs and increasing quality improvement benefits. Therefore, a realistic estimate of CoQ, which is the permit tradeoff between the levels of conformance and non-conformance costs, should be considered an essential element of any quality initiative and a crucial issue for any manager. A number of organizations are now seeking both theoretical advice and practical evidence closely quality related costs and the implementation of quality costing systems. A reasonable descend of dilate informa tion on various methods of categorization, collection and step of quality costs can be launch in the literature (Plunkett and Dale, 1987 Williams et al., 1999 Schiffauerova and Thomson, 2004). However, there are only a few published, practical examples from industry that supply specifics almost the costs that are included or excluded in quality costing and about how the costs are practically collected and measured.More detailed descriptions of CoQ systems from industry can be found in Whitehall (1986), Hesford and Dale (1991) and Purgslove and Dale (1996). This paper intends to contribute to this welkin by providing an analysis of the quality costing practices of four successful companies. explore Intent and Methodology The physical object of this look into was to encounter and analyze data concerning the practices of successful companies in the area of quality management. Specifically, the main interest was to investigate if these companies collect, measure and monitor qua lity costs, which kinds of costs were considered in the enumerations, and whether any formal CoQ approach was used.The analysis provided a tender insight into company practice, useful not only for academic research, but also for use by industry. Four companies were selected to participate in the research. The main accusatory of the selection was to identify the organizations with well established quality programs belonging to the several(predicate) industrial sectors. Companies serving the identical market could have been reluctant to share details concerning their quality practices with competition. This paper keeps the company names privy and refers to them as mellow society A, B, C and D.A benchmarking session took place at McGill University. The quality management programs streamlet at the four companies were described by company representatives. The organizations utilized this occasion as an occasion to obtain new information on the practices used at other companies an d to mutually compare their experiences, efforts and successes. Summary of the Benchmarking academic session This section summarizes the initiatives in the field of CoQ for the four participants. A comparative analysis of their quality strategies and final remarks follow. participation A partnership A is a telecommunication company. It has very conglomerate products, and therefore, the number of opportunities for spots per unit is very high (45,000 defect opportunities per assembly). However, familiarity As customers expect zero defects. Quality initiatives therefore get an important role in the companys product management. Company As model for cost of quality measurement and calculation follow the P-A-F model, where CoQ = (P + A + F (internal + external) + other costs)/cost of goods sold.Company A is well aware of formal cost of quality methods and it has clearly determined its CoQ definitions. It knows exactly what are its conformance and non-conformance costs however, it s truggles to find out the shape of its CoQ curves, and hence, an optimum CoQ tactic. The search for an optimum CoQ is difficult because the job cycle changes often (every 2 years or less) product lines are released in phases, and component obsolescence and two-fold engineering changes are kind of common. Every change causes a new search for an optimum CoQ moreover, different product lines require separate review, and variable volumes reduce optimization opportunities. Company A uses an activity based management approach, which means that it uses activity-based costing (first principle) to determine cost categories. It maps financial categories into activity costs, and activities performed at cost centers are rolled up to aggregate quality costs and percentages.In this way, the company obtains exact information about every category prevention costs, appraisal costs, as well as internal and external failure costs. An example of activity costs is given in hedge I, and the resulting CoQ map is shown in Figure 1. Table I Example of activity costs in Company A Activity primary OPD exchange Management Internal Quality Issues External Quality Issues DFX, NPI support Proto Support PLC Deliverables Mfg Tools Quality coverage Other Cost of quality category harm Internal Prevention Failure Internal Failure External Prevention Prevention Appraisal Prevention Appraisal Cost of Business Totals Activity % 8% 12% 17% 9% 4% 6% 22% 6% 10% 6% vitamin C% Cost categories Salaries Depreciation Suppliers OthersCompany A uses other metrics for performance comparisons, such as new versus mature product or part number based CoQ ratio. CoQ is measured at mortal test stages, which allows trend analysis and comparison using mature product as the benchmark for new product. Figure 2 shows the decreasing trend of CoQ for manufacturing operations. The graph shows a decrease for all CoQ components however, it is failure costs which show the biggest reduction, about 40 % over 18 mon ths. The breakdown of CoQ and its cost values are measured quarterly.%Figure 2 CoQ in manufacturing operations for Company A shown on a relative cost scale.Company A has been using their CoQ methodology successfully. The company declares savings in quality costs, has quality improvement in every part of their process, and achieves very aggressive improvement targets. Moreover, the end customer directly benefits from the inhouse quality initiative. As a result, customer satisfaction is increasing.Company B Company B is a multinational microelectronics company, which dedicates a lot of effort to quality improvement. Their far-reaching and successful quality improvement program is the main bloc of their quality initiatives. The program includes continuous improvement focused on process as well as extensive education and training on quality for all employees. Despite the fact that there is a great interest in reducing non-conformance cost, Company B does not measure, report or chart Co Q. It does not use any formal CoQ model and does not try to optimize cost of quality. Nevertheless, it does reduce cost due to poor quality through its continuous improvement activities. The company has a solid operations and process focus, where emphasis is put on process yield and cycle time improvement. It believes that a continuous quality improvement program focused on process will provide the opportunities for quality improvement and thus reduction in cost of quality.Company C Company C is in the aerospace industry and emphasizes products with near zero defects. Company C describes its cost of poor quality model as an iceberg philosophy, where just a few categories for poor quality cost are measured and monitored. This is, however, just the tip of the iceberg, since most of the cost factors leading to poor quality are non-visible or completely privy (and non-quantifiable). Company C has implemented a process that allows tracking of all non-quality events and associated root causes as well as corrective actions and lessons learned. It puts full attention into measuring the cost of poor quality.It has 4 main quality ratings, which measure nonconformities (scrap, rework, etc.), poor adherence to specifications (internal, external, customers, suppliers), number of defective parts in parts per million, and on-time delivery. Their cost of non-quality is consistently reduced through a corporate-wide initiative based on continuous improvement. It also uses a train IT system for tracking quality. Although Company C has had success in improving the value of non-conforming quality costs, it does not use any CoQ model, and it does not include the cost of quality among its calculation elements.Company D Company D is a manufacturer of home products. It has set its quality level at a dictated warranty rate, and it attempts to optimize its quality effort to achieve this target. At the time of the benchmarking session, the company did not measure CoQ however, it was planning to do so and was building a CoQ model. The envisioned CoQ program was based on a P-A-F model. The strategy of Company D was to directly attack failure costs in an attempt to postulate them down, to invest in the right prevention activities to bring about improvements, to reduce appraisal costs according to achieved results, and to continuously evaluate and redirect prevention efforts to gain further improvements.Discussion Table II shows a comparison of the quality initiatives and CoQ effort carried out by the four companies. The following discussion is focused on the relation between the quality strategies and the industrial sectors, on the kinds of CoQ models used, on the satisfaction with company efforts, the results stemming from the quality costing programs, and the recommendations by the authors of this paper. Table II Comparison of quality initiatives of four companies Company A B C D COC CONC P-A-F ABCQuality costsCONC + COC CONC CONC CONCFormal CoQ model P-A-F + A BC none none noneQuality efforts intensive intensive intensive moderateProgram satisfaction high high high moderate cost of conformance cost of non-conformance traditional model including prevention + appraisal + failure costs activity-based costingQuality Strategies The business environment, which is the industry sector and product line, dictates the strategy adopted by the companies to come across achievement of the required level of quality. Companies A, B and C all work in high-tech industries that require very high levels of quality, and therefore, they all have quite expatiate quality and productivity improvement systems with the objective to achieve zero or near zero defects. Company D, which serves home product markets, uses a frozen rate of return through its warranty policy as its quality limit. The company, however, does have a continuous improvement program. Quality Costs Table II suggests that Company A is the only one that in fact measures both kinds of quality cost s, conformance and non-conformance.This allows the company to search for the right balance between the amount spent on quality and the resulting benefits. Companies B and C both regard reducing non-conformance cost as a high priority, and therefore, they exert substantial efforts in measuring and monitoring failures and other nonconformances. At the selfsame(prenominal) time, they use elaborate, systematic quality improvement programs in point to reach a zero defect quality level. The direction of these initiatives is consistent with the industry quality environment, which tolerates absolutely no defect, no matter what the cost is. Conformance costs are consequently given much less attention in the quality management programs and measuring them together with the cost of non-conformance is therefore disregarded.The situation for Company D is however quite different. Even though the company also does not measure conformance costs, the nature of its own quality strategy suggests that it would benefit greatly if it started doing so. Identification and measurement of both kinds of the quality costs would certainly improve the quality policy that Company D follows. The policy has a determined rate of return as its quality limit. Being able to find an appropriate trade-off between conformance and non-conformance costs would serve well Company D determine an optimal level of effort towards achieving quality. Formal CoQ Methods Literature (for example, Porter and Rayner, 1992 Schiffauerova and Thomson, 2004) suggests that, if quality costs are measured by companies, then the classical P-A-F model is the one most often used in practice. Even within the limited sample of four companies, P-A-F was the only model encountered. Company A is currently calculating its quality costs according to the traditional categorization of prevention, appraisal and failure costs.Moreover, Company D claims that it is planning to utilize this model in the near future as well. The resul ts of this research therefore confirm other researchers findings on the frequency of the use of the P-A-F method in industry. Focus by companies on the classical P-A-F methodology is not surprising however, there are several other alternatives useable for monitoring CoQ. Other quality costing methods, such as Crosbys model or process cost model, are being used with success (Schiffauerova and Thomson, 2004). Every company has to choose an appropriate CoQ method that suits its fatalitys and its situation best. For a detailed checklist of the issues to be considered when deciding on a CoQ approach, see Dale and Plunkett (1995) Activity-based costing (ABC) is considered to be more compatible with quality cost measurement systems than traditional accounting. Although most CoQ measurement methods are activity/process oriented, traditional cost accounting establishes cost accounts by the categories of expenses instead of activities.Thus, many CoQ elements need to be estimated or collected by other methods. There is no consensus method on how to share overheads to CoQ elements and no adequate method to trace quality costs to their sources (Tsai, 1998). The use of ABC for a CoQ calculation is therefore an appealing alternative, and Company A is benefiting from this powerful combination. The employment of a CoQ approach together with ABC enables Company A to obtain exact information about every CoQ category prevention costs, appraisal costs as well as internal and external failure costs. Companies B and C do not utilize any formal quality costing system. This is in agreement with the common intimation that the CoQ approach is not fully appreciated by organizations and the practical use of formal quality costing in industry is quite rare.Satisfaction with Quality Efforts The quality initiatives of companies A, B, and C are very elaborate and the amount of effort is intensive. Whether they use a formal CoQ method or they solely aim at a reduction in the cost of poor qu ality, the companies obtain excellent results from their quality programs. All trey companies mentioned a high satisfaction with their quality efforts during the benchmarking session. Judging by the success of Company A with its CoQ program, we suggest that companies B and C would benefit from measuring CoQ, and that they would be surprised if they knew their real quality costs. These companies should select an appropriate CoQ model that suits the companys situation and implement the quality costing methodology in order to improve the efficiency of their quality initiatives. Monitoring quality costs would allow them to transgress identify target areas for cost reduction and quality improvement.Moreover, sufficient savings should occur to justify CoQ measurement expenses. Company D has a continuous improvement program that brings it moderate results and is already looking to improve it by implementing a CoQ strategy. As mentioned above, the implementation of a suitable CoQ method w ould secure reduced costs and improved quality benefits for Company D. Summary Even though quality is nowadays considered to be a critical success factor for achieving competitiveness, the CoQ approach is not fully appreciated by organizations, and only a minority of them use formal quality costing methods. The four companies that participated in the benchmarking session with McGill University on cost of quality have systematic quality initiatives, and have been successful in improving quality and reducing the cost of nonconformance. However, the only company that measures cost of quality and uses a formalized CoQ model is Company A. Company D is at the point of starting to use this quality measurement tool as well however, it is at the fount of this path.On the other hand, Company B and Company C focus their quality efforts solely on continuous quality improvement. They measure, monitor and work mostly with the cost of non-conformance, and do not formally include cost of conforman ce in their analysis. It was recommended that companies B, C and D set up a suitable formal quality costing system compatible with the needs and the situation of each company. For companies B and C this program will mainly facilitate identification of the target areas for quality improvement and cost reduction in quality effort. For Company D it would also help balance its quality costs and establish an optimal level of effort towards achieving quality. CoQ programs should be part of any quality management program. The methodology is not complex and is well documented. CoQ programs provide a good method for identification and measurement of quality costs, and thus allow targeted action for reducing CoQ.Further education on the practical level is needed for managers to understand better the CoQ concept in order to appreciate fully the benefits of the approach, to increase their ability to implement a CoQ measurement system and to save money.ReferencesCrosby, P.B. (1979), Quality is F ree, New York McGraw-Hill Dale, B.G. and Plunkett, J.J. (1995), Quality Costing, 2nd edition, Chapman and Hall, London Dale, B.G. and Plunkett, J.J. (1999), Quality Costing,3rd edition, Gower Press, Aldershot Feigenbaum, A.V. (1956), Total quality control, Harvard Business Review, Vol.34, Hesford, M.G. and Dale, B.G. (1991), Quality costing at British Aerospace Dynamics, Proceedings of the Institution of mechanised Engineers, Vol.205 (G5), p.53 Juran, J.M. (1951), Quality Control Handbook, 1st edition, McGraw-Hill, New York Marsh, J. 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