1.6 Quality Cost Program

A Brief Overview of Quality Costs

By Jim Hartman, GMP Institute consultant

"Understanding and effectively managing Quality Costs is such a difficult issue that we don't even try.  We just do what is right for the customer."

So, what is "right for the customer?"  Over-specified raw materials or finished product that adds no consumer benefit or noticeability?  Expensive sampling and test systems that are designed to catch and sift out non-conforming product? Major product recalls that result from system failure? Or none of the above?

If you checked the last item, you are right on target.  What is "right for the customer" is that we analyze and manage all aspects of quality cost.  So much has been written on this that a few hundred words cannot come close to doing any justice to the subject.  

For a basic understanding, however, let me offer a few definitions and suggestions.  First of all it is generally accepted that we can divide the universe of quality costs into these areas:

1. Preventive - costs involved in programs that are designed to reduce appraisal and failure costs.  (Example:  training programs, pre-product quality assurance, work with suppliers, etc.)
2. Appraisal - costs resulting from our need to measure quality. (Example:  laboratory facilities, equipment, calibration programs, salaries and benefits for inspectors and managers, data and record systems, etc.)
3. Failure - costs that become evident when things go wrong.  (Example: scrap, rework, inventory expenses for unshipable product, advertising to buy back customer loyalty, product liability suits, etc.)

The last of these is the most difficult to measure and because of this it is often used as the excuse for not doing anything at all in establishing control of quality costs.

The costs of these elements is the Total Cost of Quality and has been estimated to run as high as 20% of the value of product sold.  The tragedy is that many companies invests far too little in the Preventive area and lose the opportunity for dramatic savings in the total figure.  

Figure 1 is a simple chart that illustrates the experience of some companies who have addressed this problem.  (Note that in years 1 and 2, the top of the bar is shown as a broken line indicating uncertainty regarding the time value of Failure costs.)

As the chart indicates, total quality cost is reduced over time by prudent investments in Preventive activities.

For those who wish to study this further, I recommend a variety of references available from the American Society for Quality.  These references include: Guide for Reducing Quality Costs; Guide for Managing Supplier Quality Costs; Principles of Quality Costs, John T. Hagen, editor; and Quality Costs:  Ideas and Applications, Andrew F. Grimm, editor.